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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR COMMISSION FILE NUMBER
ENDED NOVEMBER 30, 1998 0-22972
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CELLSTAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 75-2479727
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1730 BRIERCROFT COURT
CARROLLTON, TEXAS 75006
TELEPHONE (972) 466-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
RIGHTS TO PURCHASE SERIES A PREFERRED STOCK
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On February 23, 1999, the aggregate market value of the voting stock held by
nonaffiliates of the Company was approximately $465,274,573, based on the
closing sale price of $11.75 as reported by the NASDAQ/NMS. (For purposes of
determination of the above stated amount, only directors, executive officers
and 10% or greater stockholders have been deemed affiliates).
On February 23, 1999, there were 59,541,096 outstanding shares of Common
Stock, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders of
the Company to be held during 1999 are incorporated by reference into Part III
of this Form 10-K.
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CELLSTAR CORPORATION INDEX TO FORM 10-K
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PAGE
NUMBER
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PART I.
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 12
Item 3. Legal Proceedings............................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............. 14
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................ 15
Item 6. Selected Consolidated Financial Data............................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 24
Item 8. Consolidated Financial Statements and Supplementary Data........ 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 25
PART III.
Item 10. Directors and Executive Officers of the Registrant............. 26
Item 11. Executive Compensation......................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management. 26
Item 13. Certain Relationships and Related Transactions................. 26
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K...................................................................... 27
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PART I.
ITEM 1. BUSINESS
GENERAL
CellStar Overview
CellStar Corporation ("CellStar" or the "Company") is a global company
focused on providing distribution and value-added services to wireless
carriers and manufacturers in direct relationships. With operations in the
North American Region, the Asia-Pacific Region, the Latin American Region and
the European Region, CellStar is one of the world's largest non-carrier
wholesale distributors of wireless handsets for major manufacturers. The
"North American Region" currently consists of the United States. The "Asia-
Pacific Region" consists of the People's Republic of China, including Hong
Kong ("PRC"), Singapore, Malaysia, Taiwan and The Philippines. The "Latin
American Region" consists of Mexico, Colombia, Venezuela, Chile, Argentina,
Brazil and Peru. The "European Region" consists of the United Kingdom, Sweden
and Poland.
The Company's distribution services include purchasing, selling,
warehousing, picking, packing, shipping and "just-in-time" delivery of
wireless handsets and accessories. In addition, the Company offers its
customers value-added services, including inventory management, marketing,
prepaid wireless, product fulfillment, kitting and customized packaging,
private labeling, light assembly, accounts receivable management and end-user
support services, including customized "1-800" fulfillment. The Company
recently entered into agreements with several providers of global satellite
communication services to distribute wireless handsets and accessories and
provide certain value-added fulfillment services. The Company is also a
retailer of wireless communications products in certain markets.
The Company's revenues grew at a 48.6% compound annual rate for the five
fiscal years ended November 30, 1998, and increased 34.6% for the year ended
November 30, 1998, compared to the prior fiscal year. Net income for fiscal
1998 was $14.4 million, compared to net income of $53.6 million for fiscal
1997. This decrease was primarily due to the Company's recognition of the net
loss of Topp Telecom, Inc. ("Topp") to the extent of the Company's entire debt
and equity investment in Topp; the settlement of the Company's class action
lawsuit; and the costs of de-emphasizing or eliminating certain businesses,
including the Company's reseller and U.S. retail operations and other
operations that are non-essential to the Company's core business.
In the fourth quarter, CellStar reviewed all operations, particularly non-
strategic and poorly performing operations, and focused its growth strategy on
providing value-added services to wireless carriers and manufacturers in
direct relationships. As a result, the Company is:
. De-emphasizing or eliminating businesses, and writing off related
assets, that do not support its growth strategy;
. Targeting for sale its reseller operations, retail operations in the
United States and other operations that are non-essential to its core
business;
. Intensifying its focus on cost control; and
. Continuing to invest in operations that strengthen its direct
relationships with wireless carriers and manufacturers.
CellStar believes that successful implementation of these strategic
initiatives should generate consistently improved results, beginning in 1999,
and should enhance the long-term value of its stockholders' investments in the
Company.
The Company, a Delaware corporation, was formed in 1993 to hold the stock of
a company that is now an operating subsidiary. The operating subsidiary was
originally formed in 1981 to distribute and install automotive aftermarket
products. In 1984, the Company began offering wireless communications products
and services, and
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in 1989, the Company became an authorized distributor of Motorola, Inc.
("Motorola") wireless handsets in certain portions of the United States. The
Company entered into similar arrangements with Motorola in the Latin American
Region in 1991, the Asia-Pacific Region in 1994 and the European Region in
1996. The Company has also entered into similar distributor agreements with
other manufacturers, including Nokia Mobile Phones, Inc. ("Nokia"), Ericsson
Inc. ("Ericsson") and QUALCOMM Incorporated ("QUALCOMM").
The Company's rapid growth has placed a significant strain on its
management, employees, systems and financial resources. The Company's
continued growth will depend upon, among other things, the Company's ability
to maintain its operating margins, continue to secure an adequate supply of
competitive products on a timely basis and on commercially reasonable terms,
continually turn its inventories and accounts receivable, successfully manage
growth (including monitoring operations, controlling costs and maintaining
effective inventory and credit controls), manage operations that are
geographically dispersed, achieve significant penetration in existing and new
geographic markets and hire, train and retain qualified employees who can
effectively manage and operate its business.
Industry Overview
Wireless communications technology encompasses wireless communications
devices such as handheld, mobile and transportable handsets, pagers and two-
way radios. Since its inception in 1983, the wireless handset market has grown
rapidly. The Company believes that the wireless communications industry will
continue to grow for a number of reasons. Economic growth, increased service
availability and the lower cost of wireless service compared to conventional
landline telephone systems in emerging markets will, the Company believes,
continue to create demand for wireless communications products. The Company
also believes that the change from analog to digital technology will increase
overall market growth and encourage consumers to purchase the next generation
of products. In addition, advanced digital technologies have led to increases
in the number of network operators and resellers, which have promoted greater
competition for subscribers and, the Company believes, have resulted in
increased demand for wireless communications products. Finally, the
proliferation of new manufacturers is expected to lower prices, increase
product selection and expand sales channels.
NORTH AMERICAN REGION
Industry
In the United States, wireless handset service was developed as an
alternative to conventional landline systems and existing mobile handset
service and has been one of the fastest growing market segments in the
communications industry. The number of U.S. wireless subscribers has grown
significantly since the inception of the wireless handset industry in 1983.
The Company believes that the U.S. market for wireless services will continue
to expand due to the increasing affordability and availability of such
services and shorter development cycles for new products and enhancements. In
addition, many wireless service providers are upgrading their existing systems
from analog to digital technology as a result of capacity constraints in many
of the larger wireless markets and in order to respond to competition. Digital
technology increases system capacity and offers other advantages, such as
improved overall average signal quality, improved call security, lower
incremental costs for additional subscribers and the ability to provide data
transmission services.
Wholesale Operations
General. Approximately 96% of the Company's North American Region revenues
during fiscal 1998 were derived from wholesale operations, compared to 93% for
fiscal 1997 (excluding the Company's Miami, Florida operations, which are
included in the Latin American Region). In the United States, manufacturers
such as Motorola, Nokia, Ericsson and NEC Corporation ("NEC") sell wireless
handsets directly to large wireless carriers, such as AT&T Wireless Services,
Inc., and large mass merchandisers, such as Best Buy Co., Inc. and Circuit
City Stores, Inc. The Company's wholesale operations complement these
manufacturers' distribution channels, in that these manufacturers generally
also sell to wholesale distributors such as the Company in order
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to access smaller volume purchasers. The Company also acts as a wholesale
distributor of wireless accessories manufactured by original equipment
manufacturers ("OEMs") and other suppliers to large wireless carriers and mass
merchandisers, as well as to smaller volume purchasers.
During fiscal 1998, the Company sold its products to over 2,500 U.S.
wholesale customers, the ten largest of which accounted for approximately 15%
of the Company's consolidated revenues in fiscal 1998, of which approximately
10% are attributable to the Company's agreement to provide fulfillment and
other distribution services to Pacific Bell Mobile Services ("PBMS"). The
Company offers wireless handsets and accessories manufactured by OEMs, such as
Motorola, Ericsson, Nokia, QUALCOMM, Sony Electronics Inc. ("Sony") and NEC,
and aftermarket accessories manufactured by a variety of suppliers.
Accessories include, among others, boosters, hands-free kits, handheld
accessories, antennas, batteries, battery packs, battery eliminators, leather
cases and battery chargers. The Company sells handsets and accessories under
private labels to wireless carriers such as Southwestern Bell Wireless Inc.,
GTE Mobilnet, Western Wireless, PBMS and U.S. Cellular.
The Company offers a broad product mix in the United States, including
products that are compatible with digital and analog systems. The Company
anticipates that its product offerings will continue to expand with the
evolution of new technologies as they become commercially viable.
In addition to its distribution services, the Company provides various
value-added facilitation and fulfillment services, including aftermarket and
OEMs product packaging and configuration, inventory management, order
processing, return and repair management, marketing and design, credit and
collections and handset sales. The Company believes that opportunities
continue to exist for it to assist wireless communications carriers in meeting
their supply and distribution needs by providing complete order-fulfillment
services. The Company anticipates an increased demand for such services as new
and existing wireless carriers and manufacturers desire to outsource these
activities in order to reduce costs and focus on their own core businesses.
The Company's primary distribution facility, a 120,000 square foot warehouse
facility, is located at its corporate headquarters in the Dallas/Fort Worth
metropolitan area. The Company also operates a 58,900 square foot wholesale
distribution facility in Chino, California to support the Company's west coast
customers.
Sales and Marketing. The Company markets its products nationally to
wholesale purchasers, using, among other methods, direct sales strategies, the
Internet, strategic account management, trade shows and trade journal
advertising. The Company offers advertising allowances, ready-to-use
advertising materials and displays, easy access to hard-to-find products,
credit terms, a variety of name brand products and highly-responsive customer
service.
Retail Operations
General. Approximately 4% of the Company's North American Region revenues
during fiscal 1998 were derived from retail operations, compared to 7% for
fiscal 1997 (excluding the Company's Miami, Florida operations, which are
included in the Latin American Region). As of November 30, 1998, the Company
conducted its U.S. retail operations through 13 stand-alone retail stores in
three states. In January 1999, the Company sold its six retail stores located
in the Dallas-Fort Worth area to Southwestern Bell Wireless Inc. and announced
its intent to dispose of its remaining seven retail locations in the United
States in the near term.
The Company's retail stores generate revenues from three sources: the sale
of wireless handsets and other products, activation commissions and, in most
cases, residual payments. An activation commission is paid by a wireless
carrier when a customer initially subscribes for wireless service. The amount
of the activation commission paid by a wireless carrier is based on the
service plans and promotional marketing programs offered by that particular
wireless carrier. The Company's carrier contracts also provide for a residual
payment, which is a monthly payment made by a wireless carrier to the Company
based on the wireless handset usage by a customer activated by the Company.
Sales and Marketing. The Company promotes its stand-alone retail stores
through direct mailings and local media, including newspapers.
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ASIA-PACIFIC REGION
Industry
Whereas demand for wireless service in major industrialized countries has
been driven primarily by automobile and business travel, the Company believes
that in the Asia-Pacific Region, primarily in the PRC, demand for such
services has been and will continue to be driven by an unsatisfied demand for
basic phone service due to the lack of adequate landline service and to
limited wireless penetration. The Company believes that wireless systems in
this region offer a more attractive alternative to landline systems because
wireless systems do not require the substantial amount of time and investment
in infrastructure (in the form of buried or overhead cables) associated with
landline systems. Based on these factors, as well as the large population
bases and economic growth in this region, the Company believes that phone
users will increasingly utilize wireless systems.
Operations
General. The key to the Company's expansion in the Asia-Pacific Region has
been its relationships with wireless equipment manufacturers. The Company
historically has entered a new market with the support of a manufacturer. The
Company distributes products in the Asia-Pacific Region for Motorola, Nokia
and Ericsson. Throughout the Asia-Pacific Region, CellStar acts as a wholesale
distributor of wireless handsets to large and small volume purchasers.
CellStar (Asia) Corporation Limited ("CellStar Asia"), the oldest of the
Company's business units in the region, derives its revenue principally from
wholesale sales of wireless products to Hong Kong-based companies that ship
wireless products to the remainder of the PRC and Taiwan.
Shanghai CellStar International Trading Company, Ltd. ("CellStar Shanghai"),
a wholly-owned, limited liability foreign trade company established in
Shanghai, PRC, commenced domestic wholesale operations in the PRC in 1997
using a local commodities exchange market as an intermediary, pursuant to an
experimental initiative permitting market access as authorized by the Shanghai
municipal government. CellStar Shanghai purchases wireless handsets locally
manufactured by Motorola and Nokia and wholesales those products to
distributors and retailers located throughout the PRC. CellStar Shanghai has
also entered into cooperative arrangements with certain local distributors
that allow them to establish wholesale and retail operations utilizing
CellStar's trademarks. Under the terms of such arrangements, CellStar Shanghai
provides services, sales support, training and access to promotional materials
for use in their operations. In exchange, those distributors agree to purchase
most of their requirements of wireless handsets from CellStar Shanghai and
further agree to allow CellStar Shanghai to purchase up to 50% of their
operation if and when foreign ownership of domestic retail operations is
allowed by the PRC government. CellStar Shanghai currently deals with numerous
local distributors, including distributors located in the ten largest
metropolitan areas in the PRC. CellStar Shanghai leases warehouse, showroom
and office space in the Pudong district of Shanghai.
Although the Company's business in the Asia-Pacific Region is predominantly
wholesale, operations within a particular country may be either wholesale,
retail, or both, and may be owned solely by the Company or jointly with local
partners, depending on the market and regulatory environment in the host
country.
The following table outlines the Company's entry into the Asia-Pacific
Region:
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TYPE OF OPERATION
YEAR (AS OF NOVEMBER 30,
COUNTRY ENTERED 1998)
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Hong Kong/China............................... 1993 Wholesale
Singapore..................................... 1995 Wholesale and Retail
The Philippines............................... 1995 Wholesale and Retail
Malaysia...................................... 1995 Wholesale and Retail
Taiwan........................................ 1995 Wholesale and Retail
</TABLE>
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At November 30, 1998, the Company sold its products to over 250 wholesale
customers in the Asia-Pacific Region (excluding customers of the Company's
Malaysian joint venture), the ten largest of which accounted for approximately
25% of the Company's consolidated revenues in fiscal 1998. The Company offers
wireless handsets and accessories manufactured by OEMs, such as Motorola,
Nokia and Ericsson, and aftermarket accessories manufactured by a variety of
suppliers. Accessories include, among others, batteries, hands-free kits,
chargers, carkits, battery eliminators and leather cases.
The Company offers a broad product mix in the Asia-Pacific Region, including
products that are compatible with digital and analog systems. The Company
anticipates that its product offerings will continue to expand with the
evolution of new technologies as they become commercially viable.
The Company's operations and sales in the Asia-Pacific Region are subject to
political and economic risks, including the following: political instability;
currency controls; currency devaluations; exchange rate fluctuations;
potentially unstable channels of distribution; increased credit risks; export
control laws that might limit the markets the Company can enter; inflation;
changes in laws related to foreign ownership of businesses abroad; foreign tax
laws; changes in import/export regulations, including enforcement policies;
and tariff and freight rates. Political and other factors beyond the control
of the Company, including trade disputes among nations, currency fluctuations
or internal instability in any nation where the Company conducts business,
could have a materially adverse effect on the Company.
Sales and Marketing. The Company markets its products to a variety of
wholesale purchasers, including retailers, exporters and wireless carriers,
through its direct sales force and through trade shows and television
advertising. To penetrate local markets in The Philippines, the Company has
made use of subagent and license relationships.
LATIN AMERICAN REGION
Industry
As in the Asia-Pacific Region, the Company believes that demand for wireless
services in the Latin American Region has been and will continue to be driven
by an unsatisfied demand for basic phone service due to the lack of adequate
landline service and to limited wireless penetration. The Company believes
that wireless systems in this region offer a more attractive alternative to
landline systems because wireless systems do not require the substantial
amount of time and investment in infrastructure (in the form of buried or
overhead cables) associated with landline systems. Based on these factors, as
well as the large population bases and economic growth in this region, the
Company believes that phone users will increasingly utilize wireless systems.
Operations
General. The key to the Company's expansion in the Latin American Region has
been its relationships with wireless equipment manufacturers and wireless
service carriers. The Company distributes products in the Latin American
Region for manufacturers such as Motorola, Nokia and Ericsson. CellStar acts
as a wholesale distributor of wireless communications products in the Latin
American Region to large volume purchasers, such as the large wireless
carriers (e.g., Telcel, the wireless subsidiary of Telmex), as well as to
smaller volume purchasers. The Company operates a wholesale distribution
facility in, and offers facilitation services out of, Miami, Florida to serve
customers in the Latin American Region. As a result, the Company's Miami,
Florida operations are included in the Latin American Region.
Although the Company's business in the Latin American Region is
predominantly wholesale, operations within a particular country may be either
wholesale, retail or both. The Company has historically acted through wholly-
owned subsidiaries in each of the countries in this region. In 1998, the
Company entered into a majority owned joint venture to conduct its operations
in Brazil. The Company's largest wholesale customers in the region are
wireless carriers. As of November 30, 1998, the Company operated 50 retail
locations (including kiosks) in the Latin American Region--43 in Mexico, three
in Colombia, three in Chile and one in Argentina.
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The following table outlines the Company's entry into the Latin American
Region:
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TYPE OF OPERATION
YEAR (AS OF NOVEMBER 30,
COUNTRY ENTERED 1998)
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Mexico........................................ 1991 Wholesale and Retail
Venezuela..................................... 1993 Wholesale
Brazil........................................ 1993 Wholesale
Chile......................................... 1993 Wholesale and Retail
Colombia...................................... 1994 Wholesale and Retail
Argentina..................................... 1995 Wholesale and Retail
Peru.......................................... 1998 Wholesale
</TABLE>
At November 30, 1998, the Company sold its products to over 1,650 wholesale
customers in the Latin American Region, the ten largest of which accounted for
approximately 20% of the Company's consolidated revenues in fiscal 1998. The
Company offers wireless communications handsets and accessories manufactured
by OEMs, such as Motorola, Nokia and Ericsson, and aftermarket accessories
manufactured by a variety of suppliers to mass merchandisers and other
retailers. Accessories include, among others, batteries, hands-free kits,
chargers, leather cases, power supplies and antennas.
The Company offers a broad product mix in the Latin American Region,
including products that are compatible with digital and analog systems. The
Company anticipates that its product offerings will continue to expand with
the evolution of new technologies as they become commercially viable.
The Company's operations and sales in the Latin American Region are subject
to political and economic risks, including the following: political
instability; currency controls; currency devaluations; exchange rate
fluctuations; potentially unstable channels of distribution; increased credit
risks; export control laws that might limit the markets the Company can enter;
inflation; changes in laws related to foreign ownership of businesses abroad;
foreign tax laws; changes in import/export regulations, including enforcement
policies; and tariff and freight rates. Political and other factors beyond the
control of the Company, including trade disputes among nations, currency
fluctuations or internal instability in any nation where the Company conducts
business, could have a materially adverse effect on the Company.
Sales and Marketing. The Company markets its products through direct sales
and advertising. In those markets where it conducts retail operations, the
Company primarily utilizes direct mailings and newspapers to promote its
retail operations. To penetrate local markets, the Company has made use of
subagent relationships in Mexico, Venezuela and Colombia. In addition, the
Company offers prepaid wireless programs in Venezuela and Peru. On February
18, 1999, the Company entered into an agreement to sell its Venezuelan prepaid
wireless business.
EUROPEAN REGION
The Company's U.K. subsidiary sells wireless handsets, pagers, mobile radio
and other wireless communications equipment and related accessory products
throughout Europe, Africa and the Middle East. The Company's subsidiaries in
Sweden and Poland distribute products in their respective countries and in
other European markets for several manufacturers, including Ericsson, Nokia
and Motorola.
The Company's operations and sales in the European Region are subject to
political and economic risks, including the following: political instability;
currency controls; currency devaluations; exchange rate fluctuations; risks
related to the Euro conversion; potentially unstable channels of distribution;
increased credit risks; export control laws that might limit the markets the
Company can enter; inflation; changes in laws related to foreign ownership of
businesses abroad; foreign tax laws; changes in import/export regulations,
including enforcement policies; and tariff and freight rates. Political and
other factors beyond the control of the Company, including trade disputes
among nations, currency fluctuations or internal instability in any nation
where the Company conducts business, could have a materially adverse effect on
the Company.
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INDUSTRY RELATIONSHIPS
The Company has established relationships with leading wireless equipment
manufacturers and wireless service carriers. These alliances have been key to
the Company's market and product expansion.
Although the Company purchased its products from more than 20 primary
suppliers in fiscal 1998, substantially all of the Company's purchases were
from Motorola, Nokia, Ericsson and NEC. For the year ended November 30, 1998,
Motorola accounted for approximately 67% of the Company's product purchases,
including CellStar branded products. In addition, revenues attributable to the
Company's fulfillment agreement with PBMS accounted for approximately 10% of
consolidated revenues for fiscal 1998.
The Company has various supply contracts with terms of approximately one
year with Motorola, Nokia, Ericsson, QUALCOMM and Sony that specify
territories, minimum purchase levels, pricing and payment terms. These
contracts typically provide that the Company will receive the benefit of price
decreases on products in the Company's inventory if such products were shipped
to the Company within a specified period of time prior to the price decrease.
The Company's expansion has been due to several factors, one of which is its
relationship with Motorola, historically one of the largest manufacturers of
wireless products in the world and the Company's largest supplier. In July
1995, Motorola purchased a split adjusted 2,089,312 shares of the outstanding
common stock of the Company. The Company believes that its relationship with
its suppliers will enable it to continue to offer a wide variety of wireless
communications products in the marketplace. While the Company believes that
its relationship with Motorola and other significant vendors is satisfactory,
there can be no assurance that these relationships will continue.
The Company has recently formed several new relationships with various
providers of global satellite communication services. In September and
November 1998, the Company entered into agreements with Iridium LLC and
Iridium North America, respectively, to distribute wireless handsets and
accessories for the Iridium World Product Care and Iridium World Roaming
Service programs. The Company will also act as a non-exclusive global
distribution vendor to provide certain value-added fulfillment services,
including terrestrial wireless product provisioning and programming. In
January 1999, the Company entered into agreements with affiliates of ORBCOMM
Global, L.P ("ORBCOMM"), pursuant to which the Company will establish a
program to distribute subscriber communicators and related accessories to
ORBCOMM system customers throughout the world. In February 1999, the Company
entered into an agreement with AirTouch Satellite Services, Inc. under which
CellStar will distribute wireless handsets, fixed terminals and accessories
and will provide procurement, fulfillment, packaging and returns management
services within the United States.
The Company experiences, from time to time, shortages in supply for certain
products that are in high demand, and no assurance can be given that product
shortages will not occur in the future. The loss of Motorola or any other
significant vendor or a substantial price increase imposed by any vendor or a
shortage of product available from its vendors could have a materially adverse
impact on the Company.
ASSET MANAGEMENT
Information Technology
The Company continues to invest in and focus on technology to improve
financial and information technology control systems. During 1998, the Company
made significant progress on several information technology initiatives: (i)
implementation and rollout of data mart and decision support applications to
improve sales and inventory analysis, (ii) upgrades to the corporate
headquarter network backbone to improve reliability and performance, (iii)
implementation of a common electronic mail and groupware solution worldwide,
(iv) implementation of remote access and computing for all traveling
workforce, and (v) upgrade of all internet security and electronic commerce
platforms. In addition, the Company, through the rollout of a common
application suite, provided improvements in work flow at various sites and
positioned the Company to be
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Year 2000 compliant. Key efforts for 1999 include: (1) rollout of a single
multi-currency/language platform to support the satellite business and global
carriers; (2) completion of Year 2000 preparation; and (3) further rollout of
internet based computing and commerce applications.
Inventory
The Company purchases its products from more than 20 primary suppliers that
ship directly to the Company's warehouse or distribution facilities. Inventory
purchases are based on quality, price, service, market demand, product
availability and brand recognition. Certain of the Company's major vendors
provide favorable purchasing terms to the Company, including price protection
credits, stock balancing, increased product availability and cooperative
advertising and marketing allowances. The Company provides stock balancing to
certain of its customers.
Inventory control is important to the Company's ability to maintain margins
while offering its customers competitive prices and rapid delivery of a wide
variety of products. The Company uses its integrated management information
technology systems, specifically its inventory management, electronic purchase
order and sales modules, to help manage inventory and sales margins.
During fiscal 1998, the Company continued implementation of its program to
reengineer its materials management processes, including configuration of its
main warehouse layout to optimize cycle times and reduce inventory handling
costs. The Company has also continued to expand on technologies such as Radio
Frequency (to capture outbound serial numbers into the Company's AS/400
system) and integration of the Company's major shipping partner into the
AS/400 system.
Typically, the Company ships its products within 24 hours from receipt of
customer orders and, therefore, backlog is not considered material to the
Company's business.
The market for wireless products is characterized by rapidly changing
technology and frequent new product introductions, often resulting in product
obsolescence or short product life cycles. The Company's success depends in
large part upon its ability to anticipate and adapt its business to such
technological changes. There can be no assurance that the Company will be able
to identify, obtain and offer products necessary to remain competitive or that
competitors or manufacturers of wireless communications products will not
market products that have perceived advantages over the Company's products or
that render the products sold by the Company obsolete or less marketable. The
Company maintains a significant investment in its product inventory and,
therefore, is subject to the risks of inventory obsolescence and excessive
inventory levels. The Company attempts to limit these risks by managing
inventory turns and by entering into arrangements with its vendors, including
price protection credits and return privileges for slow-moving products. The
Company's significant inventory investment in its international operations
exposes it to certain political and economic risks. See "Item7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
International Operations."
SIGNIFICANT TRADEMARKS
The Company markets certain of its products under the trade name CellStar.
The Company has registered its trade name on the Principal Register of the
United States Patent and Trademark Office and has registered or applied for
registration of its trade name in certain foreign jurisdictions. The Company
also has filed for registrations of its other trade names in the United States
and other jurisdictions where it does business.
COMPETITION
The Company operates in a highly competitive environment and believes that
such competition will intensify in the future. The Company competes primarily
on the basis of inventory availability and selection, delivery time, service
and price. Many of the Company's competitors are larger and have greater
capital and
10
<PAGE>
management resources than the Company. In addition, potential users of
wireless systems may find their communications needs satisfied by other
current and developing technologies. For example, advanced digital systems are
being developed to compete with analog systems. The Company's ability to
remain competitive will therefore depend upon its ability to anticipate and
adapt its business to such technological changes. There can be no assurance
that the Company will be successful in anticipating and adapting to such
technological changes.
In the current U.S. wholesale wireless communications products markets, the
Company's primary competitors are manufacturers, wireless carriers and other
independent distributors such as Brightpoint, Inc. ("Brightpoint"). The
Company also competes with logistics companies. The Company's major
competitors in the United States in the retail wireless communications
products markets are other agents and resellers and wireless carriers that
have retail outlets.
Competitors of the Company in the European, Asia-Pacific and Latin American
Regions include manufacturers, national carriers that have retail outlets with
direct end-user access, and U.S. and foreign-based exporters and distributors,
including Brightpoint. The Company is also subject to competition from gray
market activities by third parties that are legal, but are not authorized by
manufacturers, or that are illegal (e.g., activities that avoid applicable
duties or taxes). In addition, the Company competes for activation fees and
residual fees with agents and subagents for the wireless carriers.
EMPLOYEES
As of November 30, 1998, the Company had approximately 1,100 employees
worldwide. In Mexico, approximately 150 employees are subject to labor
agreements. The Company has never experienced any material labor disruption
and is unaware of any efforts or plans to organize additional employees.
Management believes that its labor relations are satisfactory.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers of the Company:
<TABLE>
<S> <C> <C>
Alan H. Goldfield....... 55 Chief Executive Officer and Chairman of the Board
Richard M. Gozia........ 54 President, Chief Operating Officer and Director
A.S. Horng.............. 41 Chairman, Chief Executive Officer and General Manager of
CellStar (Asia) Corporation Limited
Evelyn Henry Miller..... 41 Senior Vice President--Finance and Chief Financial Officer
Daniel T. Bogar......... 39 Senior Vice President--Latin American Region and Director
Timothy L. Maretti...... 45 Senior Vice President--Brazil Region
Elaine Flud Rodriguez... 42 Vice President, General Counsel and Secretary
</TABLE>
Alan H. Goldfield is a founder of the Company and has been the Chairman of
the Board and Chief Executive Officer of the Company since its formation. Mr.
Goldfield served as President of the Company from its formation until March
1995, when Terry S. Parker was appointed President, and from August 1996 until
December 1996, when Richard M. Gozia was appointed President. Mr. Goldfield
serves as an officer and director of the Company pursuant to his employment
agreement.
Richard M. Gozia has been the President and Chief Operating Officer of the
Company since December 1996. Mr. Gozia joined CellStar as Executive Vice
President--Administration and Chief Financial Officer in June 1996. He has
been a member of the Board of Directors since June 1996. Mr. Gozia serves as
an officer and director of the Company pursuant to his employment agreement.
From 1994 to 1996, Mr. Gozia served as Executive Vice President of
SpectraVision, Inc. ("SpectraVision"), a provider of in-room hotel movies. In
June 1995, SpectraVision filed for protection under the federal bankruptcy
laws. From 1991 to 1994, Mr. Gozia was Chairman and Chief Executive Officer of
Wyatt Cafeterias, Inc. In June 1995, Triangle FoodService Corporation,
formerly Wyatt Cafeterias, Inc., filed for protection under the federal
bankruptcy laws.
11
<PAGE>
A.S. Horng has served as Chairman of CellStar Asia since January 1998 and
has also served as Chief Executive Officer of such company since April 1997
and General Manager since 1993. From April 1997 until January 1998, Mr. Horng
served as Vice Chairman of CellStar Asia, and from April 1997 until October
1997, Mr. Horng served as President of CellStar Asia. From 1991 to 1993, Mr.
Horng was President of C-Mart USA Corporation, a distributor and manufacturer
of aftermarket wireless phone accessory products. Mr. Horng serves the Company
pursuant to an employment agreement.
Evelyn Henry Miller has served as Senior Vice President--Finance and Chief
Financial Officer since January 1999. From November 1995 until January 1999,
she was Vice President--Corporate Controller of the Company. From August 1993
until October 1995, Ms. Miller served as Director, Corporate Accounting of
Aviall, Inc. ("Aviall"), the world's largest independent overhauler of turbine
engines and distributor of airplane parts. From April 1988 until August 1993,
Ms. Miller served in various other capacities for Aviall. Prior to joining
Aviall, Ms. Miller served as Assistant Controller, Accounting Operations for
Dallas Market Center (a Trammell Crow Company) and held several positions with
KPMG LLP. Ms. Miller is a certified public accountant.
Daniel T. Bogar has served as Senior Vice President--Latin American Region
since January 1998 and as a director of the Company since July 1994. Mr. Bogar
served as Vice President of Latin American Operations from April 1997 to
January 1998. From 1993 to 1997, Mr. Bogar served as Vice President of South
American Operations. From 1991 to 1992, Mr. Bogar managed the Company's
operations in Mexico, and from 1987 to 1991, Mr. Bogar was General Manager of
the Company's Houston operations. Mr. Bogar has been responsible for the
Company's Latin American Region operations since 1992.
Timothy L. Maretti has served as Senior Vice President--Brazil Region since
November 1998. From January 1998 until November 1998, he was Senior Vice
President--U.S. Region of the Company and has been a Vice President of the
Company since October 1993. From March 1992 to 1993, Mr. Maretti served as
general director of the Company's Mexican operations. From 1987 to 1992, Mr.
Maretti served as Vice President-- Regional General Manager of Southwestern
Bell Mobile Systems, Inc., Dallas.
Elaine Flud Rodriguez joined the Company in September 1993 and has been Vice
President, General Counsel and Secretary since October 1993. From October 1991
to August 1993, she was General Counsel and Secretary of Zoecon Corporation, a
pesticide manufacturer and distributor owned by Sandoz Ltd. Prior thereto she
was engaged in the private practice of law with Atlas & Hall and Akin, Gump,
Strauss, Hauer & Feld. Ms. Rodriguez is licensed to practice in the states of
Texas and Louisiana.
The Company's success is substantially dependent on the efforts of Alan H.
Goldfield, its Chief Executive Officer, and certain other of the Company's
executive officers and key employees. The loss or interruption of the
continued full-time service of Mr. Goldfield or other of the Company's
executive officers and key employees could materially and adversely affect the
Company's business. Although the Company has entered into employment
agreements with Mr. Goldfield and several other officers and employees, there
can be no assurance that the Company will be able to retain their services.
The Company does not maintain key man insurance on the life of Mr. Goldfield
or any other officer of the Company. In addition, the Company would be in
default under the terms of its Multicurrency Revolving Credit Facility if both
Mr. Goldfield and the Company's President, Richard M. Gozia, cease to be
involved in the Company's management. To support its continued growth, the
Company will be required to effectively recruit, develop and retain additional
qualified management. The inability of the Company to attract and retain such
necessary personnel could also have a materially adverse effect on the
Company.
ITEM 2. PROPERTIES
As of November 30, 1998, the Company had a total of 19 operating facilities
in the United States of which 17 were leased. In December 1998, the Company
sold six of its 13 retail store operations in the North American Region and
intends to sell the remaining seven retail store operations in the near term.
As of November 30, 1998, the Company had a total of 32 operating facilities in
the Asia-Pacific Region (including kiosks, but not
12
<PAGE>
including facilities of the Company's Malaysian joint venture), 31 of which
were leased, and a total of 60 operating facilities in the Latin American
Region (including kiosks), 59 of which were leased. These facilities serve as
offices, warehouses, distribution centers or retail locations. The Company
leased one of its former U.S. stand-alone retail stores from its Chief
Executive Officer, Alan H. Goldfield.
The Company's corporate headquarters and distribution facility, located at
1730 and 1728 Briercroft Court in Carrollton, Texas, are owned by the Company.
The corporate headquarters contains approximately 43,000 square feet and is
utilized as the Company's primary corporate offices and as a product return
center. The distribution facility contains approximately 120,000 square feet
and is used as the Company's primary warehouse and distribution center, as
well as for corporate offices.
The Company leases two distribution facilities in Miami, Florida, which
contain approximately 22,500 square feet and 60,000 square feet, respectively,
and are used to serve customers in the Latin American Region. In addition, the
Company has a lease for a 58,900 square feet distribution facility located in
Chino, California.
The Company believes that suitable additional space will be available, if
necessary, to accommodate future expansion of its operations.
ITEM 3. LEGAL PROCEEDINGS
During the period from May 1996 through July 1996, four purported class
action lawsuits were filed in the United States District Court for the
Northern District of Texas, Dallas Division, styled as follows: (1) Sidney
Gluck, John Dolcemaschio, James Miller and Nancy L. Miller v. CellStar
Corporation, Alan H. Goldfield, Terry S. Parker, John S. Bain, Kenneth W.
Sanders, and KPMG Peat Marwick, L.L.P.; (2) Diane Larson against CellStar
Corporation, Alan H. Goldfield, Terry S. Parker and Evelyn M. Henry; (3) Elvia
H. Goggin and R. Heath Larry vs. CellStar Corporation, Alan H. Goldfield and
Terry S. Parker; and (4) Reed and Lillian Riemer v. CellStar Corporation, Alan
H. Goldfield, Terry S. Parker, John S. Bain, Kenneth W. Sanders and KPMG Peat
Marwick, L.L.P.
These four lawsuits were consolidated into the case styled State of
Wisconsin Investment Board, Diane Larson, Martin Katz, Mostafa Aboul-Fetouh,
Ahmed Aboul-Fetouh and Enass Aboul-Fetouh on behalf of themselves and others
similarly situated v. Alan H. Goldfield, Terry S. Parker, Kenneth W. Sanders,
John S. Bain, Evelyn M. Henry, Michael S. Hedge, Kenneth E. Kerby, Daniel T.
Bogar, Leonard C. Ratley, James L. Johnson, Ronald J. Kramer, CellStar
Corporation and KPMG Peat Marwick LLP, Civil Action No. 3:96-CV-1353-R. The
State of Wisconsin Investment Board was appointed lead plaintiff in the
consolidated action and filed a Consolidated Amended Complaint asserting
claims against the Company and certain of its present and former officers and
directors for violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and Rule 10b-5
promulgated thereunder, Section 27.01 of the Texas Civil Statutes, common law
fraud, negligent misrepresentation, and breach of fiduciary duty to disclose
under Delaware common law. The Consolidated Amended Complaint alleged, among
other things, that the defendants misrepresented or failed to disclose
material facts regarding the business, financial condition, performance and
future prospects of the Company and that, as a result of such statements or
omissions, the value of the Company's Common Stock was artificially inflated.
Claims were also asserted against the Company's auditors, KPMG Peat Marwick
L.L.P. The plaintiffs sought compensatory damages, exemplary damages and costs
and expenses, including attorneys' fees and expert fees. Although the
plaintiffs did not specify the amount of damages sought, they argued that the
alleged class sustained damages in excess of $50 million.
In December 1996, defendants filed motions to dismiss all claims asserted in
the Consolidated Amended Complaint. By orders dated in August and September
1998, the Court (i) dismissed all claims as to defendants KPMG Peat Marwick
L.L.P., Michael S. Hedge, Kenneth E. Kerby, Daniel T. Bogar, James L. Johnson
and Ronald J. Kramer; (ii) dismissed the claim alleging breach of fiduciary
duty as to all defendants; and (iii) denied the motions to dismiss all other
claims as to all other defendants.
Although the Company believes it had meritorious defenses to these claims,
on November 19, 1998, the Company entered into a Stipulation of Settlement
resolving all claims pending in the suit. The settlement was approved by the
Court on January 25, 1999 and all remaining claims were dismissed.
13
<PAGE>
On August 3, 1998, the Company announced that the Securities and Exchange
Commission is conducting an investigation of the Company relating to its
compliance with federal securities laws. The Company believes that it has
fully complied with all securities laws and regulations and is cooperating
with the Commission staff in their investigation.
The Company is a party to various other claims, legal actions and complaints
arising in the ordinary course of business. Management believes that the
disposition of these other matters will not have a materially adverse effect
on the consolidated financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the fiscal quarter ended November 30, 1998.
14
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ Stock Market under the
symbol "CLST." The following table sets forth, on a per share basis for the
periods indicated, the high and low closing sale prices for the common stock
as reported by the NASDAQ Stock Market. Sales prices have been adjusted to
give effect to a three-for-two stock split on June 17, 1997 and a two-for-one
stock split on June 23, 1998.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fiscal Year ended November 30, 1998
Quarter Ended:
February 28, 1998......................................... $16.156 9.438
May 31, 1998.............................................. 18.391 12.938
August 31, 1998........................................... 17.875 6.625
November 30, 1998......................................... 9.563 3.063
Fiscal Year ended November 30, 1997
Quarter Ended:
February 28, 1997......................................... $ 8.750 3.813
May 31, 1997.............................................. 11.958 6.917
August 31, 1997........................................... 16.813 11.208
November 30, 1997......................................... 24.469 12.938
</TABLE>
As of February 23, 1999, there were 267 stockholders of record, although the
Company believes that the number of beneficial owners is significantly greater
than that number because a large number of shares are held of record by CEDE &
Co.
The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain all earnings to finance the continued
growth and development of its business and does not anticipate paying cash
dividends on the common stock in the foreseeable future. Any future
determination as to the payment of cash dividends will depend on a number of
factors, including future earnings, capital requirements, the financial
condition and prospects of the Company and any restrictions under the
Company's credit agreements existing from time to time, as well as other
factors the Board of Directors may deem relevant. The Company's current
revolving credit facility restricts the payment of dividends by the Company to
its stockholders. There can be no assurance that the Company will pay any
dividends in the future.
15
<PAGE>
ITEM 6.SELECTED CONSOLIDATED FINANCIAL DATA
The financial data presented below, as of and for each of the years in the
five-year period ended November 30, 1998, were derived from the Company's
audited financial statements. The selected consolidated financial data should
be read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Company's Consolidated
Financial Statements and Notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND
OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues.............. $1,995,850 1,482,814 947,601 811,915 518,422
Cost of sales......... 1,823,075 1,325,488 810,000 702,074 448,780
---------- --------- ------- ------- -------
Gross profit.......... 172,775 157,326 137,601 109,841 69,642
---------- --------- ------- ------- -------
Operating expenses:
Selling, general and
administrative
expenses........... 116,747 81,319 135,585 76,553 44,598
Lawsuit settlement.. 7,577 -- -- -- --
---------- --------- ------- ------- -------
Total operating
expenses............. 124,324 81,319 135,585 76,553 44,598
---------- --------- ------- ------- -------
Operating income...... 48,451 76,007 2,016 33,288 25,044
Other income
(expense):
Interest expense.... (14,446) (7,776) (8,350) (6,144) (1,016)
Other, net.......... (27,059) 2,725 (532) 3,194 1,248
---------- --------- ------- ------- -------
Total other income
(expense)............ (41,505) (5,051) (8,882) (2,950) 232
---------- --------- ------- ------- -------
Income (loss) before
income taxes......... 6,946 70,956 (6,866) 30,338 25,276
Income taxes.......... (7,418) 17,323 (453) 7,442 9,028
---------- --------- ------- ------- -------
Net income (loss)..... $ 14,364 53,633 (6,413) 22,896 16,248
========== ========= ======= ======= =======
Net income (loss) per
share:(1)
Basic............... $ 0.24 0.92 (0.11) 0.41 0.29
Diluted............. $ 0.24 0.89 (0.11) 0.41 0.29
Weighted average
number of shares
outstanding and
effect of dilutive
securities:
Basic............... 58,865 58,144 57,821 56,466 55,324
Diluted............. 60,656 60,851 57,821 56,466 55,324
OPERATING DATA:
International
revenues, including
export sales, as a
percentage of
revenues............. 76.3% 66.7% 64.0% 63.5%(2) 45.0%(2)
<CAPTION>
AT NOVEMBER 30,
---------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....... $ 259,923 259,954 71,365 74,410 63,668
Total assets.......... $ 775,525 497,111 298,551 314,921 186,354
Notes payable to
financial
institutions and
current portion of
long-term debt....... $ 85,023 -- 56,704 99,187 12,735
Long-term debt, less
current portion...... $ 150,000 150,000 6,285 6,880 3,095
Stockholders' equity.. $ 177,791 160,865 104,263 111,295 76,642
</TABLE>
- --------
(1) Common stock amounts have been retroactively adjusted to give effect to a
two-for-one stock split, which was made in the form of a stock dividend
distributed on June 23, 1998.
(2) Includes export sales of $90.2 million and $59.8 million in 1995 and 1994,
respectively, to CellStar Asia prior to June 3, 1995 when it became a
wholly-owned subsidiary of the Company.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
CellStar is a global company focused on providing distribution and value-
added services to wireless carriers and manufacturers in direct relationships.
From 1994 through 1998, the Company's revenues grew from $518.4 million to
$1,995.9 million. The Company accomplished this growth in both U.S. and
international sales by focusing its efforts on the wireless handset industry.
Sales of wireless communications products have increased primarily as a result
of greater market penetration due in part to decreasing unit prices.
The Company's diluted net income per share in 1998 decreased to $0.24 from
$0.89 in 1997. This decrease was primarily due to the Company's recognition of
Topp's net loss to the extent of the Company's entire debt and equity
investment in Topp; the settlement of the class action lawsuit; and the cost
of de-emphasizing or eliminating certain businesses, including the Company's
reseller and U.S. retail operations and other operations that are non-
essential to the Company's core business.
The Company derives revenues from three categories: net product sales,
activation income and residual income. Substantially all of the Company's
revenues are net product sales, which include sales of handsets and other
wireless communications products, revenues from fulfillment services and
revenues from other value-added services. Activation income includes
commissions paid by a wireless carrier when a customer initially subscribes
for wireless service through the Company. Residual income includes payments
received from carriers based on the wireless handset usage by a customer
activated by the Company. The Company expects its activation and residual
income to decrease as it implements its plan to de-emphasize or eliminate
certain businesses.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the captions "Business,"
"Properties," "Legal Proceedings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Quantitative and Qualitative
Disclosures about Market Risk," and elsewhere in this report may constitute
"forward-looking" statements for purposes of the Securities Act and 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," "will," "continues," "expects," "intends," "may," "might,"
"would," "could," and similar expressions are intended to be among the
statements that identify forward-looking statements. Various factors that
could cause the actual results, performance or achievements of the Company to
differ materially from the Company's expectations are disclosed in this report
("Cautionary Statements"), including, without limitation, those statements
made in conjunction with the forward-looking statements included under the
captions identified above and otherwise herein. All written and oral forward-
looking statements attributable to the Company are expressly qualified in
their entirety by the Cautionary Statements.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of operations
data for the Company expressed as a percentage of revenues for the past three
fiscal years:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0%
Cost of sales.......................................... 91.3 89.4 85.5
----- ----- -----
Gross profit......................................... 8.7 10.6 14.5
Selling, general and administrative expenses........... 5.8 5.5 14.3
Lawsuit settlement..................................... 0.4 -- --
----- ----- -----
Operating income..................................... 2.5 5.1 0.2
Other income (expense):
Interest expense..................................... (0.7) (0.5) (0.9)
Other, net........................................... (1.4) 0.2 --
----- ----- -----
Total other income (expense)....................... (2.1) (0.3) (0.9)
----- ----- -----
Income (loss) before income taxes.................... 0.4 4.8 (0.7)
(Benefit) provision for income taxes................... (0.3) 1.2 --
----- ----- -----
Net income (loss)...................................... 0.7% 3.6% (0.7)%
===== ===== =====
</TABLE>
The amount of revenues and the approximate percentages of revenues
attributable to the Company's operations for the past three fiscal years are
shown below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
North American Region...... $ 472,837 23.7% 493,585 33.3% 341,352 36.0%
Asia-Pacific Region........ 513,869 25.7 422,751 28.5 248,493 26.2
Latin American Region...... 705,624 35.4 497,336 33.6 347,188 36.7
European Region............ 303,520 15.2 69,142 4.6 10,568 1.1
---------- ----- --------- ----- ------- -----
Total...................... $1,995,850 100.0% 1,482,814 100.0% 947,601 100.0%
========== ===== ========= ===== ======= =====
</TABLE>
Revenues from the Company's Miami, Florida operations ("Miami") have been
classified as Latin American Region revenues as these revenues are primarily
exports to South American countries, either by the Company or exporter
customers.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues. Revenues increased $513.1 million, or 34.6%, from $1,482.8 million
in 1997 to $1,995.9 million in 1998.
North American Region revenues decreased 4.2% from $493.6 million in 1997 to
$472.8 million in 1998. The decrease was due to a decrease in net product
sales of $10.8 million and continued decreases in both activation and residual
income. The decrease in net product sales was largely due to decreasing unit
sales prices, which was partially offset by increases in revenues from
distribution and fulfillment contracts for the provision of products and
value-added services.
Revenues in the Asia-Pacific Region increased $91.1 million, or 21.5%, from
$422.8 million in 1997 to $513.9 million in 1998. The Company's operations in
the PRC provided $404.9 million in revenues, an increase of $85.2 million, or
26.6%, from $319.7 million. This increase was due to continued strong demand
in the PRC, a broadened source of product manufactured there and the impact of
tighter customs controls beginning in
18
<PAGE>
August 1998. The Company's operations in Taiwan provided $68.4 million of
revenues, an increase of $52.3 million, or 324.8%, from $16.1 million. The
increase was due to higher demand resulting from the entry of several new
carriers into the wireless market in the first fiscal quarter of 1998.
Revenues from the Company's Singapore operations decreased $46.4 million, or
53.3%, from $87.0 million to $40.6 million. This decrease was due to decreased
demand for wireless products as a result of the general economic, financial
and currency conditions in the Southern Asia-Pacific area.
The Company's operations in the Latin American Region provided $705.6
million of revenues in 1998, compared to $497.3 million in 1997, or a 41.9%
increase. Revenues in Brazil, Mexico, Venezuela, Peru and Chile increased
$92.4 million, $76.7 million, $37.3 million, $13.1 million, and $11.5 million,
respectively. The increase in Brazil was due to revenue growth in the
Company's majority-owned joint venture, which benefited from the privatization
of the telecommunications industry and the entry of additional carriers into
the wireless market during the latter half of 1998. Subsequent to November 30,
1998, the Brazilian government allowed the value of the real to float freely
against other foreign currencies, which resulted in a significant devaluation
of the real against the U.S. dollar. See "--International Operations." The
increase in Mexico was due to an extension of a promotion by the principal
wireless carrier, which began the promotion in the fourth quarter of 1997. The
increase in Venezuela was a result of the Company's prepaid wireless business,
which the Company entered into an agreement to sell on February 18, 1999. In
connection with the agreement, the Company was awarded an exclusive two-year
contract to supply services for prepaid phone kits. The Company began its
operations in Peru through the Company's acquisition of a prepaid wireless
business in the second quarter of 1998. The increase in Chile was due to
carrier promotions, which started in the second quarter of 1998 and lasted
through the third quarter of 1998. Revenues in the remainder of the region
decreased $22.7 million, primarily in Miami and Argentina. The decrease in
Miami was largely due to an increase in demand for digital handsets and
increased product availability from in-country suppliers thereby reducing
export sales from Miami. The decrease in revenues in Argentina was caused by
significant subscriber cancellations and excess inventory held by the
carriers.
Revenues from the Company's European Region were $303.5 million in 1998
compared to $69.1 million in 1997, an increase of $234.4 million, or 339.2%.
This increase reflects the continued growth of the Company's U.K. operation,
arising primarily from sales in international markets, and revenues from
operations acquired in Sweden and Poland earlier in the year.
Gross Profit. Gross profit increased $15.5 million, or 9.9%, from $157.3
million in 1997 to $172.8 million in 1998, while gross profit as a percentage
of revenues decreased from 10.6% in 1997 to 8.7% in 1998. The increase in
gross profit was due to the increase in wholesale revenues, which revenues
were comprised primarily of net product sales. The decrease in gross profit as
a percentage of revenues was due primarily to a decrease in U.S. retail
revenues, which have a higher gross profit margin than wholesale revenues, to
the impact of lower margins in the PRC as compared to those historically
recognized in Hong Kong and to an increase in international sales by the U.K.
operations, which have lower margins than the Company's other regions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $35.4 million, or 43.5%, from $81.3 million
in 1997 to $116.7 million in 1998. This increase was principally due to costs
incurred from the continued build-out of infrastructure, costs associated with
business expansion activities and costs to de-emphasize or eliminate certain
businesses. Overall selling, general and administrative expenses as a
percentage of revenues increased to 5.8% in 1998 from 5.5% in 1997. Bad debt
expense as a percentage of revenues increased to 0.7% in 1998 from 0.2% in
1997.
Lawsuit Settlement. The Company recorded a charge of $7.6 million, which
primarily represents the Company's portion of the settlement of the class
action lawsuit.
Interest Expense. Interest expense increased to $14.4 million in 1998 from
$7.8 million in 1997. The increase was due to the addition of long-term debt
at the end of 1997 and an increase in debt related to the Company's operations
in Brazil.
19
<PAGE>
Equity in (Loss) Income of Affiliated Companies, Net. The significant equity
in loss of affiliated companies in 1998 was primarily a result of the
Company's recognition of a $29.2 million loss on its entire debt and equity
investment in Topp. Beginning in the third quarter of 1998, the Company became
the primary source of funding for Topp through the supply of handsets and,
therefore, recognized Topp's net loss to the extent of the Company's entire
debt and equity investment. In February 1999, the Company sold part of its
equity investment in Topp to a wholly-owned subsidiary of Telefonos de Mexico
S.A. de C.V. At the closing, the Company also sold a portion of its debt
investment to certain other shareholders of Topp. As a result of these
transactions, the Company received cash in the amount of $7.0 million and
retained a 19.5% equity ownership interest in Topp.
Other, Net. Other, net, decreased $0.9 million, from income of $2.3 million
in 1997 to $1.4 million in 1998. This decrease was primarily due to foreign
currency transaction losses from the European Region's financing activities.
(Benefit) Provision for Income Taxes. The Company's effective tax rate and
income tax expense decreased due to higher losses before income taxes in
countries, primarily in the United States, for which the benefits are
recordable, and increases in income before taxes in foreign countries where
tax rates are low or tax holidays are in effect.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Revenues increased $535.2 million, or 56.5%, from $947.6 million
in 1996 to $1,482.8 million in 1997.
North American Region revenues increased $152.2 million, or 44.6%, from
$341.4 million in 1996 to $493.6 million in 1997. The increase was due to an
increase in net product sales of $213.7 million, which was partially offset by
decreases in activation and residual income. The increase in net product sales
was largely due to the increase in revenues from distribution and fulfillment
contracts for the provision of products and value added services. As expected
for 1997, activation and residual income decreased, primarily as a result of
the sale of substantially all the Company's Communication Centers on November
26, 1996.
Revenues in the Asia-Pacific Region increased $174.3 million, or 70.1%, from
$248.5 million in 1996 to $422.8 million in 1997. The Company's operations in
the PRC, primarily Hong Kong, provided $319.7 million in revenues in 1997, an
increase of $120.0 million when compared to $199.7 million in 1996. The higher
revenue levels resulted from the expansion in overall demand for wireless
handsets in the region, particularly in the PRC, coupled with the increased
availability of product during the year. Revenues provided by the Company's
Singapore operations increased $40.2 million, from $46.8 million in 1996 to
$87.0 million in 1997. This increase was primarily due to increased demand in
The Philippines and Indonesia. The Company's operations in Taiwan, which
commenced in the second quarter of 1996, provided $16.1 million of revenues in
1997, an increase of $14.1 million when compared to $2.0 million in 1996.
The Company's operations in the Latin American Region provided $497.3
million of revenues in 1997 compared to $347.2 million in 1996, an increase of
$150.1 million, or 43.2%. The increase in revenues was primarily due to an
increase of $145.9 million in sales by the Company's Miami, Florida warehouse
to customers exporting into South American countries, principally Brazil. This
increase resulted from the Company's shift in strategy from in-country product
sales by the Company's South American subsidiaries to reduce currency,
accounts receivable, and inventory risks. The increase in revenues was also
attributable to increases in Mexico, Argentina, and Venezuela of $23.7
million, $7.8 million, and $7.1 million, respectively. The increase in Mexico
was the result of a change in promotional strategy by the principal wireless
carrier, which began subsidizing units. The increase in Argentina was due to
improved market penetration and a new pricing strategy by local wireless
carriers whereby the calling party pays for the call. The increase in
Venezuela was fueled by the
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Company's prepaid wireless business. Brazil and the remainder of the region
had decreases of $23.1 million and $11.3 million, respectively. The sharp
decline in Brazil was principally due to actions of the Brazilian government,
which limited the authorization of additional wireless lines.
Revenues from the Company's European operation in the United Kingdom, which
commenced in the second quarter of 1996, were $69.1 million in 1997, an
increase of $58.5 million compared to $10.6 million in 1996.
Gross Profit. Gross profit increased $19.7 million, or 14.3%, from $137.6
million in 1996 to $157.3 million in 1997, while gross profit as a percentage
of revenues decreased from 14.5% in 1996 to 10.6% in 1997. The increase in
gross profit was primarily due to the increase in CellStar Asia's net product
sales of high-end products and due to the increase in sales from the Company's
Miami, Florida, warehouse to customers exporting into South American
countries. A reduction in the provision for inventory obsolescence of $3.9
million, from $8.7 million in 1996 to $4.8 million in 1997, also contributed
to the increase in gross profit. These increases were partially offset by a
significant decrease in U.S. retail revenues of $92.0 million, from $127.9
million in 1996 to $35.9 million in 1997. Retail revenues have a higher gross
profit as a percentage of revenues than wholesale net product sales. Gross
profit as a percentage of revenues decreased primarily due to the sale of
substantially all of the Company's Communication Centers in November 1996 and
due to the higher percentage of revenues from distribution and fulfillment
contracts, which have lower gross profit margins than the Company's
traditional wholesale business. Net foreign currency transaction losses in
1997 were $1.4 million compared to $1.8 million in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $54.3 million, or 40.0%, from $135.6 million
in 1996 to $81.3 million in 1997. Approximately $22.6 million, or 41.6%, of
the decrease was attributable to the reduction of employees related to the
sale of the Communication Centers. The sale of the Communication Centers also
gave rise to other decreases in selling, general and administrative expenses
totaling approximately $8.9 million. A reduction in bad debt expense of $24.8
million, or 45.7% of the total decrease, was primarily attributable to the
continuing strategy of increasing sales from the Company's Miami, Florida
warehouse to customers exporting into South American countries, which has
resulted in the Company's ability to enhance its controls over the extension
of credit. Bad debt expense as a percentage of total revenues decreased from
2.9% in 1996 to 0.2% in 1997. These decreases were partially offset by an
increase of $7.5 million in 1997 in employee-related costs incurred in
connection with the increase in net product sales. Overall, the Company
reduced selling, general and administrative expenses as a percentage of
revenues from 14.3% in 1996 to 5.5% in 1997.
Interest Expense. Interest expense declined to $7.8 million in 1997 from
$8.4 million in 1996. The decrease in interest expense resulted primarily from
the maintenance of lower balances under the Company's revolving credit
agreement.
Other, Net. Other, net increased $2.6 million, from an expense of $0.3
million in 1996 to income of $2.3 million in 1997, primarily as a result of an
increase in interest income of $1.2 million, from $0.9 million to $2.1
million, and a decrease in minority interest of $0.7 million due to the
acquisition of the remaining 20.0% interest of the Company's Singapore
subsidiary on May 30, 1997.
Provision (Benefit) for Income Taxes. The Company's income tax expense
increased $17.8 million in 1997. The increase was primarily due to higher
income before income taxes for the year ended November 30, 1997. The effective
tax rate is higher for the year ended November 30, 1997 compared to the same
period a year earlier, primarily due to higher proportional taxable income in
both the United States and the Latin American Region, which have statutory tax
rates of approximately 35%.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended November 30, 1998, the Company relied primarily on
cash available at November 30, 1997, cash generated from operations and on
borrowings under its $135.0 million Multicurrency Revolving
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Credit Facility (the "Facility") to fund working capital, capital expenditures
and expansions. At November 30, 1998 and February 22, 1999, the Company had
available $41.0 million and $54.7 million of borrowing capacity, respectively,
under the Facility.
At November 30, 1998, the Company had $48.0 million of cash and cash
equivalents, a decrease of $26.7 million since November 30, 1997. Cash was
primarily used to fund global working capital requirements and acquisitions in
Sweden, Poland and Peru. Accounts receivable increased primarily from
significantly higher sales activity related to South America and the PRC, both
of which typically have longer credit terms than those experienced by the
Company elsewhere. Inventories have increased primarily as a result of
increases in inventories of high-end wireless handsets in the PRC and Taiwan.
As of November 30, 1998, the Company's Brazilian operations had borrowed
$11.5 million, including accrued interest, under credit facilities with
several Brazilian banks. Of these borrowings, $7.0 million was denominated in
U.S. dollars. In conjunction with these credit facilities, the Company issued
$7.0 million of letters of credit against its Facility to guarantee the
repayment of the principal plus interest and all other contractual obligations
of its Brazilian operations to one of the Brazilian banks. Annual interest
rates on borrowings in Brazil ranged from approximately 36% to 48%.
In January 1999, the Brazilian government allowed the value of the real to
float freely against other foreign currencies, which resulted in a significant
devaluation against the U.S. dollar. See "--International Operations." As of
January 31, 1999, the Company's Brazilian operations had borrowed $9.7
million, including accrued interest, $5.7 million of which was denominated in
U.S. dollars and recorded on the Company's majority-owned Brazilian joint
venture. On February 18, 1999, the joint venture recognized a currency
transaction loss of approximately $4.0 million upon the conversion of the U.S.
dollar denominated debt into a Brazilian real credit facility.
As of November 30, 1998, the Company's guarantee for bank borrowings by its
Malaysian joint venture was MYR13.2 million (Malaysian ringgits), or $3.5
million.
The Company anticipates that available cash, amounts available under the
Facility and cash generated from operations will be sufficient to satisfy the
Company's working capital, capital expenditures and expansion plans for the
1999 fiscal year.
INTERNATIONAL OPERATIONS
The Company's international operations are subject to political and economic
risks, including but not limited to political instability, increased credit
risks, changing tax and trade regulations, and currency devaluations and
controls; however, the Company has not experienced any material foreign
currency transaction gains or losses during the last three fiscal years. The
Company manages the risk of foreign currency devaluation by attempting to
increase prices of products sold at or above the anticipated rate of local
currency devaluation relative to the U.S. dollar, by indexing certain of its
receivables to exchange rates in effect at the time of their payment and by
entering into foreign currency non-deliverable forward ("NDF") contracts in
certain instances.
During the latter half of 1998, the Company's sales from Miami to customers
exporting into South American countries began to decline as a result of an
increase in demand for digital handsets and increased in-country product
availability in Latin America. The Company expects to focus its efforts on
servicing large, financially-sound carrier partners from the Company's Latin
American subsidiaries.
The Company's Brazilian operations are principally conducted through a
majority-owned joint venture. The primary supplier of handsets to the joint
venture is a Brazilian importer who is serviced from Miami. Sales to the
importer are excluded from the Company's consolidated revenues, and the
related gross profit is deferred until the handsets are sold by the Brazilian
joint venture to customers. At November 30, 1998, the Company had Brazilian
real NDF contracts, with maturities through January 29, 1999, to manage
currency exposure risk related
22
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to these transactions. Subsequent to November 30, 1998, the Company entered
into additional NDF contracts with expiration dates through March 10, 1999.
Currently, the Brazilian joint venture is assessing other methods of limiting
its exposure to movements in the Brazilian real against the U.S. dollar. In
agreements made in January 1999, the Brazilian joint venture will be paid by
certain major customers at the current value of the real against the U.S.
dollar on the date of payment. The Company may be exposed to foreign currency
losses from the time the Brazilian joint venture remits payment to the
importer in Brazilian reals and the importer pays the Company in U.S. dollars.
The ability of the importer to remit U.S. dollar payments to the Company may
be restricted if the Brazilian government imposes currency controls. As of
February 22, 1999, the Company had $34.8 million in accounts receivable due
from the importer.
Certain currencies in the Asia-Pacific Region have lost value relative to
the U.S. dollar as a result of economic volatility. Although the Company has
experienced no material foreign currency transaction losses, the Company's
operations in its Asia-Pacific Region have experienced a higher degree of
economic instability, especially in the southern portion of the region, which
includes the Company's operations in Singapore, The Philippines and Malaysia.
Additionally, the Company maintains a growing presence in Europe, and with
the creation of the euro currency on January 1, 1999, the Company's operations
in Europe may be exposed to more currency volatility and economic instability
than has historically been the case.
YEAR 2000
Since June 1997, the Company has been implementing a plan to assess and
resolve Year 2000 issues that may affect it. The Company believes that the
Year 2000 issues it must address include ensuring (i) that its information
technology systems (hardware and software) enable it to manage and operate its
business and (ii) that its non-information technology systems (including
heating and air conditioning systems and warehouse equipment) will continue to
operate.
The phases and timetable for the Company's plans are as follows:
Phase I. Create awareness of and identify Year 2000 issues (June 1997-July
1997)
Phase II. Assess and renovate existing systems (July 1997-July 1999)
Phase III. Validate and test systems (July 1998-July 1999)
Phase IV. Complete Year 2000 compliance (March 1999-August 1999)
The Company is currently on schedule for implementing this plan. Phases II.
and III. of the original plan conveyed in the Company's Form 10-Q dated August
31, 1998 have been extended to include the latest operating system releases
for the Company's file servers and installations of financial and sales order
systems at approximately one-half of the Company's international sites. The
Company does not believe it has material, potential liability to third parties
if its systems are not Year 2000 compliant.
The Company has made substantial progress in assessing Year 2000 issues that
affect third parties with which it has material relationships. It has sent
questionnaires to its major suppliers and has received written responses from
a majority of them. The responses received to date indicate that the suppliers
have or will timely resolve their Year 2000 issues. Because the Company does
not believe that its customers' Year 2000 compliance issues will have a
significant impact on the Company, to date the Company has only conducted
informal conversations about Year 2000 issues with its customers. Each
electronic data interchange or trading partner is being reviewed and upgraded
to Year 2000 standards.
The Company's costs of compliance with Year 2000 requirements are immaterial
because it was in the process of upgrading or establishing systems to keep
pace with its growth.
The Company believes that it and its material suppliers will resolve their
Year 2000 issues in a timely fashion. However, if the Company or its material
suppliers do not become Year 2000 compliant, the Company
23
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could suffer a material adverse effect on its business, results of operations
and financial condition. The Company believes that it is unlikely that any of
these events will result, but there can be no such assurance. The Company
currently has no contingency plans to handle the occurrence of these events
and does not currently intend to create one.
IMPACT OF INFLATION
Historically, inflation has not had a significant impact on the Company's
overall operating results. However, the effects of inflation in volatile
economies in foreign markets could have an adverse impact on the Company.
SEASONALITY AND CYCLICALITY
The effects of seasonal fluctuations have not historically been apparent in
the Company's operating results due to the Company's rapid growth in revenues.
However, the Company's sales are influenced by 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. Seasonality did contribute to the increase in the
Company's sales during the fourth quarter of 1996 due to the Company's retail
operations, most of which the Company has divested. 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.
ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"), which will become effective for the Company for its interim
and annual periods commencing December 1, 1999. Given the Company's current
and anticipated derivative activities, management does not believe the
adoption of Statement 133 will have a material effect on the Company's
consolidated financial position and results of operations.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RISK
The Company's international operations are subject to foreign currency risk;
however, the Company has not experienced any material foreign currency
transaction gains or losses during the last three fiscal years. Foreign
currency translation adjustments for subsidiaries domiciled in non-highly
inflationary countries are recorded to consolidated stockholders' equity under
accumulated other comprehensive income. In highly inflationary countries, the
Company records remeasurement gains and losses to the consolidated statements
of operations. For the year ended November 30, 1998, the Company's
international subsidiaries in Mexico and Venezuela had recorded immaterial
foreign currency remeasurement losses because the economies of those countries
were considered to be highly inflationary. Effective January 1, 1999, Mexico
is no longer considered to be a highly inflationary economy.
The Company manages foreign currency risk by attempting to increase prices
of products sold at or above the anticipated exchange rate of the local
currency relative to the U.S. dollar, by indexing certain of its accounts
receivable to exchange rates in effect at the time of their payment, and by
entering into foreign currency NDF contracts in certain instances.
As of November 30, 1998, the Company's Brazilian operations had borrowed
$11.5 million, including accrued interest, under credit facilities with
several Brazilian banks. Of these borrowings, $7.0 million was denominated in
U.S. dollars, $1.3 million of which was repaid in December 1998. In January
1999, the Brazilian government allowed the value of the real to float freely
against other foreign currencies, which resulted in a significant devaluation
of the real against the U.S. dollar. On February 18, 1999, the remaining $5.7
million U.S. dollar denominated debt in Brazil was converted into a Brazilian
real denominated credit facility by the Company's majority-owned Brazilian
joint venture. Upon conversion, the joint venture realized a foreign currency
transaction loss of approximately $4.0 million.
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DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative instruments for trading purposes and the
Company has procedures in place to monitor and control derivative use. As of
November 30, 1998, the Company had Brazilian real NDF contracts aggregating
$44.8 million with maturities from January 11, 1999 through January 29, 1999
and at strike prices ranging from 1.2325 to 1.2405 between the Brazilian real
and the U.S. dollar. The Company's counterparty to these contracts was Chase
Bank of Texas, N.A. ("Chase"). The Company continues to use contracts of this
nature and it monitors the credit rating of Chase on a regular basis.
INTEREST RATE RISK
The interest rate of the Company's Facility is a market rate at the time of
borrowing plus an applicable margin on certain borrowings. The interest rate
is based on either the bank's prime lending rate or the London Interbank
Offered Rate. Additionally, the applicable margin is subject to increases if
the Company's ratio of consolidated funded debt to consolidated cash flow is
greater than or equal to 3.0 to 1.0, which ratio is determined at the end of
each fiscal quarter. During the year ended November 30, 1998, the interest
rates of borrowings under the Facility ranged from 6.56% to 8.5%. The Company
manages its borrowings under the Facility each business day to minimize
interest expense.
The borrowings of the Company's Brazilian operations are short time in
nature, typically less than six months. Through November 30, 1998, annual
interest rates on borrowings by the Brazilian operations ranged from
approximately 36% to 48%. As a result of the recent devaluation of the
Brazilian real against the U.S. dollar, annual interest rates have increased
to approximately 38% to 53% in Brazil. Through January 31, 1999, the Brazilian
operations have decreased their borrowings from $11.5 million to $9.7 million.
The Company is evaluating financing alternatives to reduce interest expense
for its Brazilian operations.
The Company's $150.0 million in long-term debt has a fixed coupon interest
rate of 5.0%.
ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on Page F-1 of this Form 10-
K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding Directors of the Company is
set forth in the Proxy Statement (the "Proxy Statement") to be delivered to
the Company's stockholders in connection with the Company's 1999 Annual
Meeting of Stockholders under the heading "Election of Directors," which
information is incorporated herein by reference. The information required by
this item regarding executive officers of the Company is set forth under the
heading "Executive Officers of the Registrant" in Part I of this Form 10-K,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the Proxy Statement
under the heading "Executive Compensation," which information is incorporated
herein by reference. Information contained in the Proxy Statement under the
captions "Executive Compensation--Report of the Compensation Committee of the
Board of Directors on Executive Compensation" and "Comparative Performance
Graph" is not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in the Proxy Statement
under the heading "Security Ownership of Certain Beneficial Owners and
Management," which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the Proxy Statement
under the caption "Certain Transactions," which information is incorporated
herein by reference.
26
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PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. CONSOLIDATED FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements on page F-1 of this Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements on page F-1.
3. EXHIBITS
<TABLE>
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NUMBER DESCRIPTION
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3.1 Amended and Restated Certificate of Incorporation of CellStar
Corporation (the "Certificate of Incorporation"). (1)
3.2 Certificate of Amendment to Certificate of Incorporation. (16)
3.3 Amended and Restated Bylaws of CellStar Corporation. (14)
4.1 The Certificate of Incorporation, Certificate of Amendment to
Certificate of Incorporation and Amended and Restated Bylaws of
CellStar Corporation filed as Exhibits 3.1, 3.2 and 3.3 are
incorporated into this item by reference. (1)(16)(14)
4.2 Specimen Common Stock Certificate of CellStar Corporation. (2)
4.3 Rights Agreement, dated as of December 30, 1996, by and between
CellStar Corporation and Chase Mellon Shareholder Services, L.L.C., as
Rights Agent ("Rights Agreement"). (3)
4.4 First Amendment to Rights Agreement, dated as of June 18, 1997. (4)
4.5 Form of Certificate of Designation, Preferences and Rights of Series A
Preferred Stock of CellStar Corporation ("Certificate of Designation").
(3)
4.6 Form of Rights Certificate. (3)
4.7 Certificate of Correction of Certificate of Designation. (4)
4.8 Indenture, dated as of October 14, 1997, by and between CellStar
Corporation and The Bank of New York, as Trustee. (13)
10.1 Employment Agreement, effective as of December 1, 1994, by and between
CellStar Corporation and Alan H. Goldfield. (2)(19)
10.2 Employment Agreement, effective as of May 24, 1996, by and between
CellStar, Ltd., CellStar Corporation and Richard M. Gozia. (5)(19)
10.3 Employment Agreement by and between CellStar, Ltd., CellStar
Corporation and Mark Q. Huggins, effective as of January 15, 1997.
(6)(19)
10.4 Employment Agreement, effective January 22, 1998, by and between
CellStar (Asia) Corporation Limited, CellStar Corporation and Hong An-
Hsien. (14)(19)
10.5 Agreement by and between Motorola Inc., by and through its Pan American
Cellular Subscriber Group, and CellStar, Ltd., effective January 1,
1997 (United States). (7)(20)
10.6 Master Agreement for the Purchase of Products and Inventory
Maintenance, Assembly and Fulfillment (IAF) Services between Pacific
Bell Mobile Services and CellStar, Ltd., effective September 20, 1996.
(6)(20)
10.7 Agreement by and between National Auto Center, Inc. and the Pan
American Cellular Subscriber Division of Motorola Inc., dated as of
January 1, 1995 (Latin American and Caribbean Territory). (8)
10.8 Lease by and between Alan H. Goldfield and National Auto Center, Inc.
regarding 605 West Airport Freeway, Irving, Texas. (10)(19)
10.9 Exclusive Cellular Subagent Agreement by and between National Auto
Center and Alan H. Goldfield d/b/a National Tape. (10)(19)
10.10 Registration Rights Agreement by and between the Company and Audiovox
Corporation. (10)
</TABLE>
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<TABLE>
<CAPTION>
NUMBER DESCRIPTION
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<C> <S>
10.11 Form of Warrant for the purchase of shares of common stock to be issued
to Ladenburg, Thalmann & Co., Inc. and Raymond James & Associates, Inc.
(10)
10.12 Stock Purchase Agreement by and between the Company and Motorola Inc.,
dated as of July 20, 1995. (1)
10.13 Registration Rights Agreement by and between the Company and Motorola
Inc., dated as of July 20, 1995. (1)
10.14 Credit Agreement, dated as of October 15, 1997, among CellStar
Corporation, each of the banks or other lending institutions signatory
thereto, The First National Bank of Chicago and National City Bank, as
co-agents, and Texas Commerce Bank National Association, as agent. (14)
10.15 CellStar Corporation 1993 Amended and Restated Long-Term Incentive
Plan. (14)(19)
10.16 CellStar Corporation Amended and Restated Annual Incentive Compensation
Plan. (6)(19)
10.17 CellStar Corporation 1994 Amended and Restated Director Nonqualified
Stock Option Plan. (11)
10.18 Registration Rights Agreement, dated as of June 2, 1995, between Hong
An Hsien and CellStar Corporation. (14)(19)
10.19 Registration Rights Agreement, entered into as of May 30, 1997, between
Leap International PTE LTD and CellStar Corporation. (12)
10.20 Purchase Agreement, dated October 7, 1997, by and among CellStar
Corporation and Bear, Stearns & Co. Inc. and Chase Securities Inc. (13)
10.21 Registration Rights Agreement, dated as of October 14, 1997, by and
among CellStar Corporation and Bear, Stearns & Co. Inc. and Chase
Securities Inc. (13)
10.22 Agreement, dated as of April 28, 1995, by and between CellStar, Ltd.
and Motorola, Inc., Greater China Cellular Subscriber Division
(People's Republic of China). (9)
10.23 First Amendment, dated as of February 20, 1998, to Credit Agreement
dated as of October 15, 1997, among CellStar Corporation, each of the
banks or other lending institutions signatory thereto, The First
National Bank of Chicago and National City Bank, as co-agents, and
Chase Bank of Texas, National Association (formerly known as Texas
Commerce Bank National Association). (15)
10.24 1993 Amended and Restated Long-Term Incentive Plan (as amended through
May 19, 1998). (16)
10.25 Second Amendment to Credit Agreement, dated as of July 24, 1998, among
CellStar Corporation, each of the banks or other lending institutions
signatory thereto, The First National Bank of Chicago and National City
Bank, as co-agents, and Chase Bank of Texas, National Association, as
agent. (17)
10.26 Stock Purchase Agreement, effective November 1, 1997, by and among Topp
Telecom, Inc., CellStar Telecom, Inc., David Topp and Frederick J.
Pollak. (17)
10.27 Shareholders' Agreement, dated as of November 4, 1997, by and among
Topp Telecom, Inc., CellStar Telecom, Inc., David Topp, F.J. Pollak and
Dora Topp. (17)
10.28 Letter Agreement, dated September 1, 1998, by and among CellStar, Ltd.,
Topp Telecom, Inc., David Topp and Frederick J. Pollak. (17)
10.29 Amendment to Stock Purchase Agreement, dated as of September 1, 1998,
by and among Topp Telecom, Inc., CellStar Telecom, Inc., and Frederick
J. Pollak. (17)
10.30 Promissory Note dated as of September 1, 1998 in the amount of
$26,990,000, executed by Topp Telecom, Inc., in favor of CellStar, Ltd.
(17)
10.31 Amendment to Shareholders Agreement, dated as of September 1, 1998, by
and among Topp Telecom, Inc., CellStar Telecom, Inc., David Topp,
Frederick J. Pollak and Dora Topp. (17)
10.32 Security Agreement, dated as of September 1, 1998, by and between Topp
Telecom, Inc. and CellStar Ltd. (17)
10.33 Warrant to Subscribe for and Purchase Voting Common Stock and Nonvoting
Common Stock of Topp Telecom, Inc., dated September 1, 1998. (17)
10.34 Stock Option Agreement, dated as of September 1, 1998, by and between
CellStar Telecom, Inc. and Topp Telecom, Inc. (17)
10.35 Third Amendment to Credit Agreement, dated as of September 11, 1998,
among CellStar Corporation, each of the banks or other lending
institutions signatory thereto, The First National Bank of Chicago
National City Bank, as co-agents, and Chase Bank of Texas, National
Association, as agent. (17)
</TABLE>
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<TABLE>
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NUMBER DESCRIPTION
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<C> <S>
10.36 Amendment to September 1st letter Agreement, dated December 18, 1998 by
and among CellStar, Ltd., CellStar Telecom, Inc., Topp Telecom, Inc.,
David Topp, Dora Topp, Risia Topp Wine, Mark Topp and F.J. Pollak. (18)
10.37 Stock Purchase Agreement dated as of February 5, 1999 by and among
Inmobiliaria Aztlan, S.A. de C.V., Telefonos de Mexico, S.A. de C.V.,
David Topp, Dora Topp, Risia Topp Wine, Mark Topp, CellStar Telecom,
Inc. and Topp Telecom, Inc. (18)
10.38 Shareholders' Agreement dated as of February 12, 1999, by and among
Topp Telecom, Inc., Telefonos de Mexico, S.A. de C.V., Inmobiliaria
Aztlan, S.A. de C.V., CellStar Telecom, Inc., David Topp, Dora Topp,
Risia Wine Topp, Mark Topp, F.J. Pollak and Richard P. Anderson. (18)
10.39 Dividend Replacement Note Number One dated February 12, 1999 in the
amount of $22,507,537, executed by Topp Telecom, Inc. in favor of
CellStar, Ltd. (18)
10.40 Amended and Restated Letter Agreement dated as of February 5, 1999, by
and among CellStar, Ltd., CellStar Telecom, Inc., Topp Telecom, Inc.,
David Topp, Dora Topp, Risia Topp Wine, Mark Topp and F.J. Pollak. (18)
10.41 Third Amendment to Distribution and Fulfillment Agreement dated as of
February 12, 1999, by and between CellStar, Ltd. and Topp Telecom, Inc.
(18)
21.1 Subsidiaries of the Company. (18)
23.1 Consent of KPMG LLP. (18)
27.1 Financial Data Schedule. (18)
27.2 Restated Financial Data Schedule. (18)
99.1 Shareholders Agreement by Alan H. Goldfield to Motorola Inc., dated as
of July 20, 1995. (1)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1995, and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1995, and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form 8-A (File No. 000-22972), filed January 3, 1997, and incorporated
herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form 8-A/A, Amendment No. 1 (File No. 000-22972), filed June 30, 1997, and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1996, and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1996, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1997, and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1994, and incorporated herein by
reference.
(9) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1995, and incorporated herein by
reference.
(10) Previously filed as an exhibit to the Company's Registration Statement No.
33-70262 on Form S-1 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended February 28, 1995, and incorporated herein by
reference.
(12) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1997 and incorporated herein by
reference.
(13) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated October 8, 1997, filed October 24, 1997, and incorporated herein by
reference.
(14) Previously filed as an exhibit to the Company's Annual Report on Form10-K
for the fiscal year ended November 30, 1997, and incorporated herein by
reference.
29
<PAGE>
(15) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended February 28, 1998, and incorporated herein by
reference.
(16) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1998, and incorporated herein by
reference.
(17) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1998, and incorporated herein by
reference.
(18) Filed herewith.
(19) The exhibit is a management contract or compensatory plan or arrangement.
(20) Certain provisions of this exhibit are subject to a request for
confidential treatment filed with the Securities and Exchange Commission.
4. REPORTS ON FORM 8-K
On November 10, 1998, the Company filed a Current Report on Form 8-K dated
November 10, 1998, to report, under Item 5 therein, the settlement of claims in
its pending class action litigation.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CELLSTAR CORPORATION
By /s/ Alan H. Goldfield
-----------------------------------
Alan H. Goldfield
Chairman of the Board and
Chief Executive Officer
Date: February 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Alan H. Goldfield Date: February 24,
----------------------------------- 1999
Alan H. Goldfield
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
By /s/ Richard M. Gozia Date: February 24,
----------------------------------- 1999
Richard M. Gozia
President, Chief Operating Officer
and Director
By /s/ Evelyn Henry Miller Date: February 24,
----------------------------------- 1999
Evelyn Henry Miller
Senior Vice President-Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
By /s/ Daniel T. Bogar Date: February 24,
----------------------------------- 1999
Daniel T. Bogar
Senior Vice President--Latin
American Region and Director
By /s/ James L. Johnson Date: February 24,
----------------------------------- 1999
James L. Johnson
Director
By /s/ Sheldon I. Stein Date: February 24,
----------------------------------- 1999
Sheldon I. Stein
Director
By /s/ John T. Stupka Date: February 24,
----------------------------------- 1999
John T. Stupka
Director
By /s/ Terry S. Parker Date: February 24,
----------------------------------- 1999
Terry S. Parker
Director
31
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of November 30, 1998 and 1997.............. F-3
Consolidated Statements of Operations for the years ended November 30,
1998, 1997 and 1996...................................................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) for the years ended November 30, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Cash Flows for the years ended November 30,
1998, 1997 and 1996...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Schedule II--Valuation and Qualifying Accounts for the years ended Novem-
ber 30, 1998, 1997 and 1996.............................................. S-1
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CellStar Corporation:
We have audited the consolidated financial statements of CellStar
Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CellStar
Corporation and subsidiaries as of November 30, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-
year period ended November 30, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Dallas, Texas
January 12, 1999
F-2
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 47,983 74,646
Accounts receivable (less allowance for doubtful accounts
of $33,361 and $23,857, respectively)................... 360,048 176,032
Inventories.............................................. 274,438 190,404
Deferred income tax assets............................... 18,670 2,457
Prepaid expenses......................................... 6,518 2,661
--------- -------
Total current assets................................... 707,657 446,200
Property and equipment, net................................ 27,858 22,877
Goodwill (less accumulated amortization of $4,032 and
$2,378, respectively)..................................... 32,910 17,616
Other assets............................................... 7,100 10,418
--------- -------
$ 775,525 497,111
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 311,326 160,614
Notes payable to financial institutions.................. 85,023 --
Accrued expenses......................................... 39,395 13,545
Income taxes payable..................................... 8,601 11,044
Deferred income tax liabilities.......................... 3,389 1,043
--------- -------
Total current liabilities.............................. 447,734 186,246
Long-term debt............................................. 150,000 150,000
--------- -------
Total liabilities...................................... 597,734 336,246
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued................................. -- --
Common stock, $.01 par value, 200,000,000 shares
authorized; 58,963,218 and 58,498,840 shares issued and
outstanding, respectively............................... 590 293
Additional paid-in capital............................... 76,962 72,985
Common stock warrant..................................... 4 4
Accumulated other comprehensive income--foreign currency
translation adjustments................................. (8,181) (6,469)
Retained earnings........................................ 108,416 94,052
--------- -------
Total stockholders' equity............................. 177,791 160,865
--------- -------
$ 775,525 497,111
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- -------
<S> <C> <C> <C>
Revenues....................................... $1,995,850 1,482,814 947,601
Cost of sales.................................. 1,823,075 1,325,488 810,000
---------- --------- -------
Gross profit................................. 172,775 157,326 137,601
Selling, general and administrative expenses... 116,747 81,319 135,585
Lawsuit settlement............................. 7,577 -- --
---------- --------- -------
Operating income............................. 48,451 76,007 2,016
Other income (expense):
Interest expense............................. (14,446) (7,776) (8,350)
Equity in (loss) income of affiliated compa-
nies, net................................... (28,448) 465 (219)
Other, net................................... 1,389 2,260 (313)
---------- --------- -------
Total other income (expense)............... (41,505) (5,051) (8,882)
---------- --------- -------
Income (loss) before income taxes............ 6,946 70,956 (6,866)
(Benefit) provision for income taxes........... (7,418) 17,323 (453)
---------- --------- -------
Net income (loss)............................ $ 14,364 53,633 (6,413)
========== ========= =======
Net income (loss) per share:
Basic........................................ $ 0.24 0.92 (0.11)
========== ========= =======
Diluted...................................... $ 0.24 0.89 (0.11)
========== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
YEARS ENDED NOVEMBER 30, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL COMMON OTHER
------------- PAID-IN STOCK COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL WARRANT INCOME EARNINGS TOTAL
------ ------ ---------- ------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30,
1995.................. 57,821 $193 68,167 4 (3,901) 46,832 111,295
Comprehensive loss:
Net loss........... -- -- -- -- -- (6,413) (6,413)
Foreign currency
translation
adjustment........ -- -- -- -- (619) -- (619)
-------
Total
comprehensive
loss............ (7,032)
------ ---- ------ --- ------ ------- -------
Balance at November 30,
1996.................. 57,821 193 68,167 4 (4,520) 40,419 104,263
Comprehensive income:
Net income......... -- -- -- -- -- 53,633 53,633
Foreign currency
translation
adjustment........ -- -- -- -- (1,949) -- (1,949)
-------
Total
comprehensive
income.......... 51,684
Common stock issued
under stock option
plan................ 334 2 2,167 -- -- -- 2,169
Common stock issued
for acquisition of
minority interest... 344 1 2,748 -- -- -- 2,749
Three-for-two stock
split............... -- 97 (97) -- -- -- --
------ ---- ------ --- ------ ------- -------
Balance at November 30,
1997.................. 58,499 293 72,985 4 (6,469) 94,052 160,865
Comprehensive income:
Net income......... -- -- -- -- -- 14,364 14,364
Foreign currency
translation
adjustment........ -- -- -- -- (1,712) -- (1,712)
-------
Total
comprehensive
income.......... 12,652
Common stock issued
under stock option
plan................ 464 5 4,269 -- -- -- 4,274
Two-for-one common
stock split......... -- 292 (292) -- -- -- --
------ ---- ------ --- ------ ------- -------
Balance at November 30,
1998.................. 58,963 $590 76,962 4 (8,181) 108,416 177,791
====== ==== ====== === ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $ 14,364 53,633 (6,413)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating ac-
tivities:
Provision for doubtful accounts............ 14,120 4,239 32,561
Provision for inventory obsolescence....... 12,434 4,830 8,718
Depreciation and amortization.............. 11,426 5,063 5,799
Gain on sale of assets..................... -- -- (128)
Equity in loss (income) of affiliated com-
panies, net............................... 28,448 (465) 219
Deferred income taxes...................... (13,073) 1,754 (1,116)
Changes in certain operating assets and li-
abilities:
Accounts receivable...................... (214,833) (50,408) (40,660)
Inventories.............................. (90,164) (100,761) 6,067
Prepaid expenses......................... (2,407) (1,148) 611
Other assets............................. (116) 241 318
Accounts payable......................... 119,360 44,523 36,162
Accrued expenses......................... 19,760 2,624 3,361
Income taxes payable..................... (2,109) 9,192 (7,397)
--------- --------- --------
Net cash (used in) provided by operat-
ing activities........................ (102,790) (26,683) 38,102
--------- --------- --------
Cash flows from investing activities:
Purchases of property and equipment.......... (12,498) (6,212) (6,139)
Acquisitions of businesses, net of cash...... (13,526) -- --
Proceeds from sale of assets................. -- -- 6,903
Acquisitions of minority interests........... (900) (502) --
Purchases of equity investments in affiliated
companies................................... -- (3,412) --
--------- --------- --------
Net cash (used in) provided by invest-
ing activities........................ (26,924) (10,126) 764
--------- --------- --------
Cash flows from financing activities:
Net borrowings (payments) on notes payable to
financial institutions...................... 82,030 (56,136) (42,467)
Checks not presented for payment............. 17,719 -- --
Net proceeds from issuance of long-term debt. -- 144,979 --
Principal payments on long-term debt......... -- (6,853) (611)
Net proceeds from issuance of common stock... 3,302 2,169 --
--------- --------- --------
Net cash provided by (used in) financ-
ing activities........................ 103,051 84,159 (43,078)
--------- --------- --------
Net (decrease) increase in cash and cash equiv-
alents........................................ (26,663) 47,350 (4,212)
Cash and cash equivalents at beginning of year. 74,646 27,296 31,508
--------- --------- --------
Cash and cash equivalents at end of year....... $ 47,983 74,646 27,296
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis for Presentation
CellStar Corporation and subsidiaries (the "Company") is a global company
focused on providing distribution and value-added services to wireless
carriers and manufacturers in direct relationships. With operations in the
North American Region, the Asia-Pacific Region, the Latin American Region and
the European Region, the Company is one of the world's largest non-carrier
wholesale distributors of wireless handsets for major manufacturers.
All significant intercompany balances and transactions have been eliminated
in consolidation. Certain prior year amounts have been reclassified to conform
to the current year presentation.
(b) Use of Estimates
Management of the Company has made a number of estimates and assumptions
related to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities in preparation of these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(c) Inventories
Inventories are stated at the lower of cost (primarily on a moving average
basis) or market.
(d) Property and Equipment
Property and equipment are recorded at cost. Depreciation of equipment is
provided over the estimated useful lives of the respective assets, which range
from three to thirty years, on a straight-line basis. Leasehold improvements
are amortized over the shorter of their useful life or the related lease term.
Major renewals are capitalized, while maintenance, repairs and minor renewals
are expensed as incurred.
(e) Goodwill
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is amortized using the straight-line method over 20
years. The Company assesses the net realizable value of this intangible asset
by determining the estimated future cash flows related to such assets. In the
event that assets are found to be carried at amounts which are in excess of
estimated future operating cash flows, then the intangible assets will be
adjusted for impairment to a level commensurate with a discounted cash flow
analysis of the underlying assets.
(f) Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
F-7
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(g) Equity Investments in Affiliated Companies
The Company accounts for its investments in common stock of affiliated
companies using the equity method or the modified equity method, if required.
The investments are included in other assets in the accompanying consolidated
balance sheets.
(h) Revenue Recognition
For the Company's wholesale business, revenue is recognized when product is
shipped. 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 upon 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 upon the wireless
service providers' acceptance of subscriber contracts and residual commissions
when earned and provides an allowance for estimated wireless service
deactivations, which is reflected as a reduction of accounts receivable and
revenues in the accompanying consolidated financial statements.
(i) Foreign Currency
Assets and liabilities of the Company's foreign subsidiaries have been
translated at the rate of exchange at the end of each period. Revenues and
expenses have been translated at the weighted average rate of exchange in
effect during the respective period. Gains and losses resulting from
translation are accumulated as a separate component of stockholders' equity,
except for subsidiaries located in countries whose economies are considered
highly inflationary. In such cases, translation adjustments are included
primarily in other income (expense) in the accompanying consolidated
statements of operations. Net transaction gains or (losses) for the years
ended November 30, 1998, 1997 and 1996 were $0.3 million, ($1.4) million and
($1.8) million, respectively. The currency exchange rates of the Latin
American countries in which the Company conducts operations have historically
been volatile. The Company manages the risk of foreign currency devaluation by
attempting to increase prices of products sold at or above the anticipated
rate of local currency devaluation relative to the U.S. dollar, by indexing
certain of its receivables to exchange rates in effect at the time of their
payment and by entering into non-deliverable foreign currency forward
contracts in certain instances.
(j) Derivative Financial Instruments
The Company uses foreign currency non-deliverable forward contracts to
manage certain foreign exchange risks. These contracts do not qualify as
hedges against financial statement exposure. Gains or losses on these
contracts represent the difference between the forward rate available on the
underlying currency against the U.S. dollar for the remaining maturity of the
contracts as of the balance sheet date and the contracted forward rate and are
included in the consolidated statements of operations.
(k) Preopening Costs
Labor and certain other costs related to the opening of new retail locations
are expensed as incurred.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
F-8
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(m) Net Income (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("Statement 128"), effective December 1, 1997. Statement
128 replaces "primary" and "fully diluted" net income per share with "basic"
and "diluted" net income per share. Basic net income per common share is based
on the weighted average number of common shares outstanding for the relevant
period. Diluted net income per common share is based on the weighted average
number of common shares outstanding plus the dilutive effect of potentially
issuable common shares pursuant to stock options, warrants, and convertible
debentures. Net income (loss) per share for prior periods has been restated to
reflect Statement 128.
A reconciliation of the numerators and denominators of the basic and diluted
net income per share computations for the years ended November 30, 1998, 1997,
and 1996 follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Basic:
Net income (loss).................................... $14,364 53,633 (6,413)
Weighted average number of shares outstanding........ 58,865 58,144 57,821
------- ------ ------
Net income (loss) per share........................ $ 0.24 0.92 (0.11)
======= ====== ======
Diluted:
Net income (loss).................................... $14,364 53,633 (6,413)
Interest on convertible notes, net of tax effect..... -- 567 --
------- ------ ------
Adjusted net income (loss)......................... $14,364 54,200 (6,413)
Weighted average number of shares outstanding........ 58,865 58,144 57,821
Effect of dilutive securities:
Stock options and warrants......................... 1,791 2,024 --
Convertible notes.................................. -- 683 --
------- ------ ------
Weighted average number of shares outstanding and
effect of dilutive securities....................... 60,656 60,851 57,821
------- ------ ------
Net income (loss) per share........................ $ 0.24 0.89 (0.11)
======= ====== ======
</TABLE>
(n) Comprehensive Income (Loss)
On December 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement 130"), which
establishes standards for reporting and presentation of comprehensive income
(loss) and its components. Comprehensive income (loss) consists of net income
(loss) and foreign currency translation adjustments and is presented in the
consolidated statements of stockholders' equity and comprehensive income
(loss). Statement 130 does not affect the Company's consolidated financial
position or results of operations. The Company does not tax effect its foreign
currency translation adjustments since it considers the unremitted earnings of
its foreign subsidiaries to be indefinitely reinvested.
F-9
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(o) Consolidated Statements of Cash Flow Information
For purposes of the consolidated statements of cash flows, the Company
considers all highly-liquid investments with an original maturity of 90 days
or less to be cash equivalents. The Company paid approximately $13.0 million,
$7.1 million and $8.7 million of interest for the years ended November 30,
1998, 1997 and 1996, respectively. The Company paid approximately $8.7
million, $6.4 million and $7.8 million of income taxes for the years ended
November 30, 1998, 1997 and 1996, respectively.
(p) Stock Option Plans
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("Opinion 25"), and related interpretations, in
accounting for its fixed stock option plans. As such, compensation expense
would be recorded on the date of grant of options only if the current market
price of the underlying stock exceeded the exercise price.
(2)RELATED PARTY TRANSACTIONS
(a) Transactions with Motorola
Motorola purchased 2.1 million shares of the Company's common stock in July
1995 and is a major supplier of handsets and accessories. Total purchases from
Motorola approximated $1,276.1 million, $1,057.2 million and $609.7 million
for the years ended November 30, 1998, 1997 and 1996, respectively. Included
in accounts payable at November 30, 1998 and 1997 was approximately $200.3
million and $109.2 million, respectively, due to Motorola for purchases of
inventory.
(b) Transactions with E.A. Eletronicos e Componentes Ltda.
The Company's Brazilian operations are primarily conducted through a
majority-owned joint venture. The primary supplier of handsets to the joint
venture is a Brazilian importer, E.A. Eletronicos e Componentes Ltda.
("E.A."), who is a customer of the Company. Sales to E.A. are excluded from
the Company's consolidated revenues, and the related gross profit is deferred
until the handsets are sold by the Brazilian joint venture to customers. At
November 30, 1998, the Company had accounts receivable of $58.5 million due
from E.A. and accounts payable of $50.9 million due to E.A. from the Brazilian
joint venture.
(3)FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of current assets and liabilities as of November 30,
1998 and 1997 approximate fair value due to the short maturity of these
instruments. The fair value of the Company's long-term debt represents quoted
market prices as of November 30, 1998 and 1997 as set forth in the table below
(in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Long-term debt............................ $150,000 91,500 150,000 122,250
======== ====== ======= =======
</TABLE>
F-10
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4)PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at November 30, 1998 and
1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land and building........................................ $ 9,298 8,559
Furniture, fixtures and equipment........................ 23,895 18,208
Jet aircraft............................................. 4,454 4,306
Leasehold improvements................................... 4,159 2,936
------- -------
41,806 34,009
Less accumulated depreciation and amortization........... (13,948) (11,132)
------- -------
$27,858 22,877
======= =======
</TABLE>
(5)INVESTMENTS IN AFFILIATED COMPANIES
At November 30, 1998 and 1997, investments in affiliated companies consisted
of an 18% voting interest in the common stock of Topp Telecom, Inc. ("Topp")
and a 49% interest in CellStar Amtel Sdn. Bhd. ("Amtel"), a Malaysian company,
respectively. Topp is a reseller of wireless airtime through the provision of
prepaid wireless services, and Amtel is a distributor of wireless handsets.
In November 1997, the Company made a $3.0 million equity investment in Topp,
which represented an 18% voting interest in its common stock, and began
supplying Topp with handsets.
F-11
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Topp incurred substantial operating losses associated with the acquisition
costs of expanding its customer base. Beginning in the Company's third fiscal
quarter of 1998, the Company became Topp's primary source of funding through
the Company's supply of handsets. Accordingly, the Company then began to
account for its debt and equity investment in Topp under the modified equity
method. Under this method, the Company recognized Topp's net loss to the
extent of the Company's entire debt and equity investment, or $29.2 million.
Subsequent to November 30, 1998, the Company sold a portion of its debt and
equity investment (note 14). Summary financial information for Topp follows:
TOPP TELECOM, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current assets................................... $13,303 11,435
Total assets..................................... 16,575 13,869
Current liabilities.............................. 34,062 20,358
Total liabilities................................ 58,852 20,358
Stockholders' deficit............................ (42,277) (6,489)
</TABLE>
TOPP TELECOM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED YEAR ENDED
NOVEMBER 30, 1998 DECEMBER 31, 1997
------------------- -----------------
<S> <C> <C>
Revenues............................. $34,491 30,850
Gross margin......................... 8,183 6,545
Net loss............................. (35,788) (10,207)
</TABLE>
The Company's investment in Amtel approximates that of the Company's
ownership percentage of Amtel's net assets. It is not practicable for the
Company to estimate the fair value of its investments in Topp and Amtel, since
there are no quoted market prices available.
(6)DEBT
Notes payable to financial institutions consisted of the following at
November 30, 1998 (in thousands):
<TABLE>
<S> <C>
Multicurrency revolving credit facility........................... $73,500
Brazilian credit facilities....................................... 11,523
-------
$85,023
=======
</TABLE>
On October 15, 1997, the Company entered into a $135.0 million Multicurrency
Revolving Credit Facility (the "Facility") with a syndicate of banks. The
Facility has a term of approximately five years and provides the ability to
borrow up to $25.0 million in certain currencies that are customarily offered
to banks in the London interbank market and are convertible into dollars in
the international bank market. Fundings under the Facility are limited by an
asset coverage test, which is measured quarterly. Borrowings under the
Facility are made under
F-12
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
London Interbank Offered Rate contracts, generally for 30 days, or at the
bank's prime lending rate. Total interest charged on those borrowings may
include an applicable margin that is subject to increases if the Company's
ratio of consolidated funded debt to consolidated cash flow is greater than or
equal to 3.0 to 1.0, which is determined at the end of each fiscal quarter. At
November 30, 1998, the interest rates on Facility borrowings ranged from 6.56%
to 7.75%. The Facility is secured by the Company's accounts receivable,
property, plant and equipment and all other real property. 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 dispositions of assets. At November 30,
1998, the Company had available $41.0 million of borrowing capacity.
As of November 30, 1998, the Company's Brazilian operations had borrowed
$11.5 million, including accrued interest, under credit facilities with
several Brazilian banks. Of these borrowings, $7.0 million was denominated in
U.S. dollars. Annual interest rates on borrowings in Brazil range from
approximately 36% to 48%. In conjunction with these credit facilities, the
Company issued $7.0 million of letters of credit against its Facility to
guarantee the repayment of the principal plus interest and all other
contractual obligations of its Brazilian operations to one of the Brazilian
banks.
The weighted average interest rate on short-term borrowings at November 30,
1998 was 7.3%.
At November 30, 1998 and 1997, long-term debt consisted of $150.0 million of
the Company's 5% Convertible Subordinated Notes Due October 15, 2002 (the
"Notes"), which are convertible into 5.4 million shares of common stock at
$27.668 per share at any time prior to maturity. Subsequent to October 18,
2000, the Notes are redeemable at the option of the Company, in whole or in
part, initially at 102% and thereafter at prices declining to 100% at
maturity, together with accrued interest. The Notes were initially issued
pursuant to an exempt offering and were subsequently registered under the
Securities Act, along with the common stock into which the Notes are
convertible.
F-13
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7)INCOME TAXES
The Company's income (loss) before income taxes was comprised of the
following for the years ended November 30, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ -------
<S> <C> <C> <C>
United States.................................... $(48,413) 22,539 (22,354)
International.................................... 55,359 48,417 15,488
-------- ------ -------
Total............................................ $ 6,946 70,956 (6,866)
======== ====== =======
</TABLE>
(Benefit) provision for income taxes for the years ended November 30, 1998,
1997 and 1996 consisted of the following (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- -------
<S> <C> <C> <C>
Year ended November 30, 1998:
United States:
Federal.................................. $ (3,005) (14,831) (17,836)
State.................................... 1,067 (849) 218
International.............................. 7,141 3,059 10,200
-------- ------- -------
$ 5,203 (12,621) (7,418)
======== ======= =======
Year ended November 30, 1997:
United States:
Federal.................................. $ 4,408 1,736 6,144
State.................................... 1,134 89 1,223
International 10,027 (71) 9,956
-------- ------- -------
$ 15,569 1,754 17,323
======== ======= =======
Year ended November 30, 1996:
United States:
Federal.................................. $ (4,682) (1,383) (6,065)
State.................................... (366) (78) (444)
International.............................. 5,711 345 6,056
-------- ------- -------
$ 663 (1,116) (453)
======== ======= =======
</TABLE>
(Benefit) provision for income taxes differed from the amounts computed by
applying the U.S. Federal income tax rate of 35% to income (loss) before
income taxes as a result of the following for the years ended November 30,
1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Expected tax expense (benefit).................. $ 2,431 24,835 (2,403)
International and U.S. tax effects attributable
to international operations.................... (11,207) (7,022) 2,658
State income taxes, net of Federal benefits..... 142 795 (289)
Equity in (loss) income of affiliated companies,
net............................................ 781 (163) 77
Other, net...................................... 435 (1,122) (496)
-------- ------ ------
Actual tax (benefit) expense.................... $ (7,418) 17,323 (453)
======== ====== ======
</TABLE>
F-14
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As a result of certain activities undertaken by the Company, income in
certain foreign countries is subject to reduced tax rates, and in some cases
is wholly exempt from taxes, primarily through 1999. The income tax benefits
attributable to the tax status of these subsidiaries are estimated to be $5.3
million, $1.5 million and zero for 1998, 1997 and 1996, respectively.
The tax effect of temporary differences underlying significant portions of
deferred income tax assets and liabilities at November 30, 1998 and 1997, is
presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Deferred income tax assets:
United States:
Accounts receivable.................................. $12,744 2,845
Inventory adjustments for tax purposes............... 3,425 755
Class action lawsuit settlement...................... 2,498 --
Other, net........................................... 340 (1,323)
International:
Accounts receivable.................................. 189 28
Net operating loss carryforwards..................... 1,913 1,405
Other, net........................................... 135 152
------- ------
21,244 3,862
Valuation allowance.................................... (2,574) (1,405)
------- ------
$18,670 2,457
======= ======
Deferred income tax liabilities:
International:
Other, net........................................... $(3,389) (1,043)
======= ======
</TABLE>
In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that the deferred income tax
assets will be realized. The ultimate realization of deferred income tax
assets is dependent upon the generation of future taxable income in the
originating tax jurisdiction during the periods in which those temporary
differences become deductible. The valuation allowance for deferred income tax
assets as of December 1, 1997 and 1996 was $1.4 million and $1.5 million,
respectively. The net change in the total valuation allowance for the years
ended November 30, 1998 and 1997 was an increase of $1.2 million and a
decrease of $0.1 million, respectively. Management considers the scheduled
reversal of deferred income tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred income tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. The amount of the deferred income tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
The Company does not provide for U.S. Federal income taxes or tax benefits
on the undistributed earnings and/or losses of its international subsidiaries
because earnings are reinvested and, in the opinion of management, will
continue to be reinvested indefinitely. At November 30, 1998, the Company had
not provided U.S. Federal income taxes on earnings of international
subsidiaries of approximately $104.5 million. Upon distribution of these
earnings in the form of dividends or otherwise, the Company would be subject
to both U.S. income taxes and certain withholding taxes in the various
international jurisdictions. Determination of the related amount of
unrecognized deferred U.S. income tax liability is not practicable because of
the complexities associated with this hypothetical calculation.
F-15
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Because many types of transactions are susceptible to varying
interpretations under foreign and domestic income tax laws and regulations,
the amounts recorded in the accompanying consolidated financial statements may
be subject to change upon final determination by the respective taxing
authorities. Management believes it has provided an adequate tax provision.
(8)LEASES
The Company leases certain warehouse and office facilities, equipment and
retail stores under operating leases which range from two to ninety-nine years
and which facility and retail store leases generally contain renewal options.
Rental expense for operating leases was $5.6 million, $4.3 million and $4.3
million for the years ended November 30, 1998, 1997 and 1996, respectively.
Future minimum lease payments under operating leases as of November 30, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
ENDING
NOVEMBER
30, AMOUNT
-------- -------
<S> <C>
1999............................. $4,312
2000............................. 3,842
2001............................. 2,060
2002............................. 1,616
2003............................. 889
Thereafter......................... 1,498
-------
$14,217
=======
</TABLE>
(9)CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMER INFORMATION
Pacific Bell Mobile Services, a North American Region customer, accounted
for 9.7%, or $194.6 million, and 12.0%, or $178.2 million, of consolidated
revenues for the years ended November 30, 1998 and 1997, respectively. No
other customer accounted for 10% or more of consolidated revenues in any of
the years ended November 30, 1998, 1997 or 1996.
(10)SEGMENT AND RELATED INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"). Segment information for the years ended November 30, 1997
and 1996 has been restated to conform to the new presentation.
The Company operates predominantly within one industry, wholesale and retail
sales of wireless telecommunications products. The Company's management
evaluates operations primarily on income before interest and income taxes in
the following reportable geographical regions: North America, primarily the
United States, Asia-Pacific, Latin America, which includes Mexico and the
Company's Miami, Florida operations ("Miami"), and Europe. Revenues and
operating results of Miami are included in Latin America since Miami's
activities are primarily for export to South American countries, either by the
Company or through its exporter customers. The Corporate segment includes
headquarter operations, income and expenses not allocated to reportable
segments, and interest expense on the Company's Facility and Notes. The
accounting policies of the reportable segments are the same as those described
in note (1). Intersegment sales and transfers are not significant.
F-16
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Segment information for the years ended November 30, 1998, 1997 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
NORTH ASIA- LATIN
AMERICA PACIFIC AMERICA EUROPE CORPORATE TOTAL
-------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
November 30, 1998:
Revenues from external
customers............. $472,837 13,869 705,624 303,520 -- 1,995,850
Lawsuit settlement..... -- -- -- -- 7,577 7,577
Operating income
(loss)................ 527 38,727 28,541 5,226 (24,570) 48,451
Equity in (loss) income
of affiliated compa-
nies, net............. (29,216) 768 -- -- -- (28,448)
(Loss) income before
interest and income
taxes................. (28,437) 37,804 27,959 6,482 (25,337) 18,471
Income tax (benefit)
provision............. (15,264) 4,448 11,840 1,489 (9,931) (7,418)
Net (loss) income...... (13,173) 36,345 13,964 3,582 (26,354) 14,364
Total assets........... 152,004 235,147 319,944 54,659 13,771 775,525
Depreciation and amor-
tization.............. 3,197 2,012 3,742 670 1,805 11,426
November 30, 1997:
Revenues from external
customers............. $493,585 422,751 497,336 69,142 -- 1,482,814
Operating income
(loss)................ 5,475 44,535 41,446 (145) (15,304) 76,007
Equity in income of af-
filiated company...... -- 465 -- -- -- 465
Income (loss) before
interest and income
taxes................. 7,219 45,437 41,216 (215) (17,055) 76,602
Income tax provision
(benefit)............. 678 7,449 17,481 -- (8,285) 17,323
Net income (loss)...... 6,541 39,424 22,974 (92) (15,214) 53,633
Total assets........... 183,687 120,728 168,532 15,438 8,726 497,111
Depreciation and amor-
tization.............. 1,691 1,417 715 152 1,088 5,063
November 30, 1996:
Revenues from external
customers............. $341,352 248,493 347,188 10,568 -- 947,601
Bad debt expense in ex-
cess of historical
levels................ -- -- 23,933 -- -- 23,933
Operating income
(loss)................ 154 20,808 (3,462) (379) (15,105) 2,016
Equity in loss of af-
filiated company...... -- (219) -- -- -- (219)
Income (loss) before
interest and income
taxes................. 348 19,615 (3,506) (217) (15,668) 572
Income tax (benefit)
provision............. (479) 4,615 2,042 -- (6,631) (453)
Net income (loss) 827 15,479 (5,585) (213) (16,921) (6,413)
Total assets........... 126,985 81,556 73,798 12,152 4,060 298,551
Depreciation and amor-
tization.............. 2,890 1,172 719 48 970 5,799
</TABLE>
F-17
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Bad debt expense in excess of historical levels represents an increase in
the trade accounts receivable reserves to reflect a deterioration in the Latin
American Region's trade accounts receivable portfolio, primarily for Brazil-
related receivables. In 1996, substantially all of the Company's customers in
Brazil were significantly and adversely impacted by actions taken by the
Brazilian government's wireless carrier, which unexpectedly limited the number
of wireless lines made available for activation. Beginning in late 1995 and
continuing through 1996, this carrier announced plans to activate significant
numbers of wireless lines on a monthly basis to meet the large demand for
wireless service in major metropolitan areas. Many of the Company's customers
rapidly expanded their operations and incurred corresponding increases in
inventory and overhead. Since this carrier failed to release the number of
lines it announced, the Company's customers were unable to pay and,
accordingly, the Company increased its trade accounts receivable reserves.
Geographical information for the years ended November 30, 1998, 1997 and
1996 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- -------------------- -------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
---------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States........... $ 834,521 17,336 866,866 14,409 568,644 14,110
People's Republic of
China, including Hong
Kong................... 404,883 1,770 319,703 2,004 191,491 591
United Kingdom.......... 209,439 372 69,142 466 10,568 344
All other countries..... 547,007 8,380 227,103 5,998 176,898 5,089
---------- ------ --------- ------ ------- ------
$1,995,850 27,858 1,482,814 22,877 947,601 20,134
========== ====== ========= ====== ======= ======
</TABLE>
(11)ACQUISITIONS
(a) Businesses Acquired
The Company acquired three companies during 1998: 1) TA Intercall AB
(Sweden), January 1998; 2) Digicom Spoka zo.o. (Poland), March 1998; and 3)
ACC del Peru (Peru), May 1998. Each of these transactions was accounted for as
a purchase and, accordingly, the consolidated financial statements include the
operating results of each business from the date of acquisition. The aggregate
of the purchase prices was $18.2 million, which resulted in $18.1 million of
goodwill with an estimated life of 20 years. Additional payments based upon
future operating results of the applicable businesses over the next two years
may be paid either in cash or common stock at the Company's option. Contingent
payments, if paid, will be accounted for as goodwill. The impact of these
acquisitions was not material in relation to the Company's consolidated
financial position or results of operations.
(b) Acquisition of Minority Interest in CellStar Pacific
On May 30, 1997, the Company acquired the remaining 20% minority interest of
CellStar Pacific, the Company's Singapore subsidiary, which conducts
operations in Singapore, The Philippines, and Malaysia, for common stock
valued at $2.7 million and $0.5 million in cash.
F-18
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(12)STOCKHOLDERS' EQUITY
(a) Stock Options
The Company has a stock option plan ("the Plan") covering 8.3 million shares
of common stock of the Company. Options under the Plan expire ten years from
the date of grant unless earlier terminated due to the death, disability,
retirement or other termination of service of the optionee. Options primarily
have vesting schedules of 25% per year commencing on the first anniversary of
the date of grant. The exercise price is equal to the fair market value of the
common stock on the date of grant.
The Company also has a stock option plan for non-employee directors
("Directors' Option Plan"). The Directors' Option Plan provides that each non-
employee director of the Company as of the date the Directors' Option Plan was
adopted and each person who thereafter becomes a non-employee director will
automatically be granted an option to purchase 2,500 shares of common stock.
The exercise price is equal to the fair market value of the common stock on
the date of grant. A total of 150,000 shares of common stock is authorized for
issuance pursuant to the Directors' Option Plan. Each option granted under the
Directors' Option Plan will become exercisable six months after its date of
grant and will expire ten years from the date of grant unless earlier
terminated due to the death, disability, retirement or other termination of
service of the optionee.
The per share weighted-average fair market value of stock options granted
during the years ended November 30, 1998, 1997 and 1996 was $6.375, $7.249 and
$3.431, respectively, on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Dividend yield........................................... 0.0% 0.0% 0.0%
Volatility............................................... 83.0% 77.0% 77.0%
Risk-free interest rate.................................. 5.4% 6.0% 5.2%
Expected term of options (in years)...................... 3.2 3.7 2.6
</TABLE>
The Company applies Opinion 25 in accounting for its plans and, accordingly,
no compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
Statement 123, the Company's net income (loss) would have been the pro forma
amounts below for the years ended November 30, 1998, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Net income (loss) as reported....................... $14,364 53,633 (6,413)
Pro forma........................................... 10,136 51,380 (8,068)
Pro forma diluted net income (loss) per share....... 0.17 0.87 (0.14)
</TABLE>
Pro forma net income (loss) reflects only options granted after November 30,
1995. Therefore, the full impact of calculating compensation cost for stock
options under Statement 123 is not reflected in the pro forma net income
(loss) amounts presented above because compensation cost is reflected over the
options' vesting period of four years and compensation cost for options
granted prior to December 1, 1995 is not considered.
F-19
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity during the years ended November 30, 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICES OF SHARES PRICES OF SHARES PRICES
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Granted................. 2,095,458 $11.491 2,448,500 $12.499 1,415,002 $6.944
Exercised............... 464,378 7.110 334,406 6.484 -- --
Forfeited............... 1,075,062 19.680 162,500 6.988 1,213,272 6.349
Outstanding, end of
year................... 4,690,028 8.704 4,134,010 9.965 2,182,416 6.366
Exercisable, end of
year................... 1,417,757 6.531 1,192,876 6.374 541,408 6.990
Reserved for future
grants under the Plan.. 2,797,314
Reserved for future
grants under the
Directors' Option Plan. 112,500
</TABLE>
For options outstanding and exercisable as of November 30, 1998, the
exercise prices and remaining lives were:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICES EXERCISABLE PRICES
- ------------------------ ----------- -------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.170--4.063........... 225,754 7.6 $ 3.440 116,254 $ 3.344
$5.000--7.670........... 2,342,128 7.3 6.397 1,170,253 6.291
$8.670--12.940.......... 1,933,980 9.0 11.352 109,375 10.243
$13.630--19.880......... 188,166 9.1 16.522 21,875 17.790
--------- ---------
4,690,028 8.1 8.704 1,417,757 6.531
========= =========
</TABLE>
(b) Stockholder Rights Plan
The Company adopted a Stockholder Rights Plan, which provides that the
holders of the Company's common stock receive one-third of a right ("Right")
for each share of the Company's common stock they own. Each Right entitles the
holder to buy one one-thousandth of a share of Series A Preferred Stock, par
value $.01 per share, at a purchase price of $80.00 per one one-thousandth of
a share, subject to adjustment. The Rights are not currently exercisable, but
would become exercisable if certain events occurred relating to a person or
group acquiring or attempting to acquire 15% or more of the outstanding shares
of common stock of the Company. Under those circumstances, the holders of
Rights would be entitled to buy shares of the Company's common stock or stock
of an acquiror of the Company at a 50% discount. The Rights expire on January
9, 2007, unless earlier redeemed by the Company.
(c) Stock Split
On May 19, 1998 the Board of Directors approved a two-for-one common stock
split, which was effected in the form of a stock dividend that was distributed
on June 23, 1998 to stockholders of record on June 5, 1998. All historical
common stock, weighted average number of shares, dilutive securities and net
income (loss) per share amounts have been retroactively adjusted for the stock
split.
F-20
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(13)COMMITMENTS AND CONTINGENCIES
(a) Class Action Lawsuit Settlement
During the period from May 14, 1996 through July 22, 1996, four separate
purported class action lawsuits were filed in the United States District
Court, Northern District of Texas, Dallas Division, against the Company;
certain of the Company's current and former officers, directors and employees;
and the Company's independent auditors. The four lawsuits were consolidated,
and the State of Wisconsin Investment Board was appointed lead plaintiff in
the consolidated action. On November 19, 1998, the Company entered into a
Stipulation of Settlement that resolved all claims pending in the suit. The
settlement was approved by the Court on January 25, 1999 and all remaining
claims were dismissed.
(b) SEC Investigation
On August 3, 1998, the Company announced that the Securities and Exchange
Commission is conducting an investigation of the Company relating to its
compliance with Federal securities laws. The Company believes that it has
fully complied with all securities laws and regulations and is cooperating
with the Commission in its investigation.
(c) Litigation
The Company is a party to various other claims, legal actions and complaints
arising in the ordinary course of business. Management believes that the
disposition of these matters will not have a materially adverse effect on the
consolidated financial condition or results of operations of the Company.
(d) Financial Guarantee
The Company has guaranteed up to MYR13.2 million (Malaysian ringgits), or
$3.5 million as of November 30, 1998, for bank borrowings of its Malaysian
joint venture.
(e) Foreign Currency Non-deliverable Forward Contracts
In connection with product sales in Brazil, the Company entered into
Brazilian real non-deliverable forward ("NDF") contracts aggregating $44.8
million with maturities from January 11, 1999 through January 29, 1999. These
NDF contracts are used to manage the Company's foreign currency exposure to
the Brazilian real with respect to credit sales made to E.A. Payment is
remitted by E.A. at the Brazilian real rate of exchange against the U.S.
dollar on the day the Company recorded the sale to E.A. A net mark-to-market
gain of $0.1 million through November 30, 1998, with respect to these
transactions has been recorded in the consolidated statements of operations.
(f) 401(k) Savings Plan
The Company established a savings plan for employees in 1994. Employees are
eligible to participate if they were full-time employees as of July 1, 1994 or
upon completing ninety days of service. The plan is subject to the provisions
of the Employee Retirement Income Security Act of 1974. Under provisions of
the plan, eligible employees are allowed to contribute as much as 15% of their
compensation, up to the annual maximum allowed by the Internal Revenue
Service. The Company may make a discretionary matching contribution based on
the Company's profitability. During the years ended November 30, 1998 and
1997, the Company made contributions of approximately $0.3 million to the
plan.
F-21
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(14)SUBSEQUENT EVENTS (UNAUDITED)
(a) Devaluation of the Brazilian Real
In January 1999, the Brazilian government allowed the value of the real to
float freely against other foreign currencies, which resulted in a significant
devaluation against the U.S. dollar. The Company's majority-owned Brazilian
joint venture had $5.7 million in U.S. dollar denominated debt outstanding in
Brazil at January 31, 1999. On February 18, 1999, the Company's majority-owned
Brazilian joint venture recognized a currency transaction loss of
approximately $4.0 million upon the conversion of the U.S. dollar denominated
debt into a Brazilian real credit facility. The Company has NDF contracts to
manage its foreign currency exposure to the Brazilian real with respect to
credit sales made to E.A. The Company may incur additional foreign currency
transaction losses related to its Brazilian operations.
(b) Topp Telecom, Inc.
In February 1999, the Company sold part of its equity investment in Topp to
a wholly-owned subsidiary of Telefonos de Mexico S.A. de C.V. At the closing,
the Company also sold a portion of its debt investment to certain other
shareholders of Topp. As a result of these transactions, the Company received
cash in the amount of $7.0 million, and retained a 19.5% equity ownership
interest in Topp.
(c) Sale of Prepaid Operation in Venezuela
On February 18, 1999, the Company agreed to sell its Movil Amigo prepaid
cellular operation in Venezuela to Movilnet del Venezuela. The Company expects
to close the transaction on March 20, 1999.
F-22
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Revenues................................ $406,745 445,660 501,750 641,695
Gross profit............................ 41,410 44,902 41,025 45,438
Net income (loss)....................... 14,248 16,599 2,390(a) (18,873)(b)
Net income (loss) per share:
Basic................................. 0.24 0.28 0.04 (0.32)
Diluted............................... 0.23 0.27 0.04 (0.32)
1997
Revenues................................ $256,645 377,562 442,106 406,501
Gross profit............................ 31,851 40,646 43,916 40,913
Net income.............................. 5,982 14,209 16,170 17,272
Net income per share:
Basic................................. 0.10 0.25 0.28 0.30
Diluted............................... 0.10 0.24 0.26 0.28
</TABLE>
- --------
(a) In the third quarter of 1998, the Company's operations were affected by
the Company's adoption of the modified equity method of accounting for its
investment in Topp, which method increased recognition of Topp's net loss.
(b) In the fourth quarter of 1998, the Company's operations were affected by
its recognition of Topp's net loss to the extent of the Company's entire
debt and equity investment in Topp; the settlement of the class action
lawsuit; and the cost of de-emphasizing or eliminating certain businesses.
F-23
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS, BALANCE AT
BEGINNING OF COSTS AND ACTIVATION NET OF END OF
PERIOD EXPENSES INCOME (A) RECOVERIES PERIOD
------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
November 30, 1998..... $23,857 13,639 481 (4,616) 33,361
November 30, 1997..... 29,023 3,131 1,108 (9,405) 23,857
November 30, 1996..... 3,738 27,951 4,610 (7,276) 29,023
Reserve for inventory
obsolescence:
November 30, 1998..... $ 2,795 12,434 -- (3,147) 12,082
November 30, 1997..... 8,322 4,830 -- (10,357) 2,795
November 30, 1996..... 804 8,718 -- (1,200) 8,322
</TABLE>
- --------
(a) The Company, under agent agreements, earns activation commissions from
wireless service providers upon engaging subscribers for wireless handset
services in connection with the Company's retail operations. The agent
agreements also provide for the reduction or elimination of activation
commissions if the subscribers deactivate service within a stipulated
period. The Company reduces activation income for increases in the
allowance for estimated deactivations.
S-1
<PAGE>
EXHIBIT 10.36
CellStar, Ltd.
CellStar Telecom, Inc.
December 18, 1998
Mr. David Topp
Ms. Dora Topp
Ms. Risia Topp Wine
Mr. Mark Topp
Mr. Frederick J. Pollak
Topp Telecom, Inc.
8200 N.W. 27th Street
Suite 118
Miami, Florida 33122
Re: Amendment to September 1st Letter Agreement
Dear F.J.:
This amendment ("Amendment") to the Letter of Agreement dated September 1,
1998, (together with each of the documents, instruments and agreements executed
and delivered in connection therewith, the "September 1st Letter Agreement") is
entered into by and among CellStar, Ltd. ("CellStar"), CellStar Telecom, Inc.
("CellStar Telecom") (CellStar and CellStar Telecom are hereinafter sometimes
collectively referred to as the "CellStar Parties"), Topp Telecom, Inc. ("Topp
Telecom"), David Topp, Dora Topp, Risia Topp Wine, Mark Topp and F. J. Pollak
(Topp Telecom, David Topp, Dora Topp, Risia Topp Wine and Mark Topp and F. J.
Pollak are hereinafter sometimes collectively referred to as the ("Topp
Parties"). The CellStar Parties and the Topp Parties hereinafter collectively
referred to as the "Amendment Parties"). Each capitalized term contained but
not defined herein shall have the meaning ascribed to it in the September 1st
Letter Agreement.
In consideration of the mutual promises contained herein, the execution of
a separate letter agreement of even date herewith executed by the Amendment
Parties and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, each of the undersigned Amendment Parties
hereby agree as follows:
<PAGE>
Amendment
December 18, 1998
Page 2 of 5
1. The Distribution and Fulfillment Agreement by and between CellStar and
Topp Telecom dated as of the 15th day of September 1997 (the "Distribution
Agreement") as amended by that certain Amendment to Distribution and Fulfillment
Agreement dated as of September 1, 1998 between CellStar and Topp Telecom (the
"Amendment to Distribution Agreement") is hereby further amended so as to permit
CellStar to sell cellular telephone products incorporating the Handset
Technology (as hereinafter defined), on a royalty free basis directly to any
purchasers or customers, including, without limitation, to customers to which
Topp Telecom has sold cellular telephone products in the past (the Distribution
Agreement, as amended by the Amendment to Distribution Agreement, hereinafter
referred to as the "Amended Distribution Agreement"). For purposes of this
Amendment, "Handset Technology" shall mean certain technology developed by Topp
Telecom by which cellular telephone handsets can be programmed with software for
operating the handset on a prepaid basis and Topp Telecom is the owner of all
copyrights and all other intellectual property rights in connection therewith.
CellStar agrees to provide Topp Telecom with copies of all customer invoices
within three (3) business days of date of invoice, identifying the purchase
order to which each invoice relates.
The sale price for each cellular telephone sold by CellStar pursuant to
this Section 1 shall be set solely by Topp Telecom and shall include a
guaranteed profit margin for CellStar of the greater of (i) eight percent of
CellStar's net cost after all rebates, mdf, co-op or other incentives that are
paid to CellStar by the manufacturer in connection with the purchase of each
such telephone, or (ii) $9.00 for each telephone (such profit margin hereinafter
referred to as the "CellStar Fee"). The CellStar Fee is compensation for the
costs of freight-in, freight-out, packaging, welcome kit insertion and labeling.
Topp Telecom shall pay to CellStar a separate reasonable compensation for any
other services CellStar performs with respect to each such telephone as may be
mutually agreed to by Topp Telecom and CellStar. CellStar shall receive and
process cellular telephones returned by Topp Telecom customers for no additional
charge to Topp Telecom; provided, however that any costs incurred by CellStar
for disposal or return to the manufacturer (including, but not limited to
freight costs) which are not otherwise reimbursed by the manufacturer shall be
reimbursed by Topp Telecom promptly upon presentation by CellStar to Topp
Telecom of an invoice therefor. CellStar and Topp agree to use reasonable
efforts to obtain reimbursement from the manufacturer for all such costs. If
the number of returned telephones exceeds fifteen percent (15%) of the total
number of telephones sold by CellStar to Topp customers during any calendar
quarter, CellStar and Topp will meet to discuss returns and both parties agree
to work in good faith to either reduce the number of returns to a mutually
acceptable level or agree on a new CellStar Fee to reflect the increased receipt
and processing costs. CellStar and Topp agree to jointly define and execute a
process to notify Topp of returned phones.
Upon reasonable notice from Topp Telecom, CellStar shall make available to
Topp Telecom for inspection CellStar's invoices from its suppliers of the
telephones sold under this Section. Topp Telecom agrees that any such
disclosure of CellStar's suppliers' invoices shall be maintained by it in the
strictest confidence and that it shall not disseminate any of such information
to anyone at any time, unless otherwise required by law. Any amount received by
CellStar from the customer which exceeds CellStar's net cost for such telephone
plus the CellStar Fee shall be for Topp Telecom's credit and shall be credited
once a month, but only for those sales for which CellStar actually receives
payment from the telephone purchaser. In the event the amount received by
CellStar from the customer is less than CellStar's net cost plus the CellStar
Fee, CellStar shall debit Topp Telecom for the difference between the amount
received and CellStar's net cost plus the CellStar Fee. CellStar shall send
Topp Telecom a detailed invoice after the close of each calendar month,
providing all credits and debits related to this Section and if the net result
is a credit to Topp, then
<PAGE>
Amendment
December 18, 1998
Page 3 of 5
CellStar shall send Topp Telecom a check for the amount of such credit by the
end of the calendar month in which such detailed invoice is rendered. In the
event the net result is a debit, then Topp Telecom shall pay such amount by the
end of the calendar month in which such detailed invoice is rendered.
The Amendment Parties agree that in consideration of CellStar's agreement
to sell cellular telephone products incorporating the Handset Technology
directly to purchasers and thereby conserve Topp Telecom's cash, Topp Telecom
agrees that, during the term of the Distribution Agreement, all telephones that
will be activated on its Tracfone program will originate from shipments by
CellStar, excluding Motorola and Nokia OEM cellular or PCS telephones that are
sold by Radio Shack. CellStar and Topp agree to adjust the CellStar Fee from
time to time to reflect competitive rates provided by comparable distributors in
the marketplace for comparable services.
2. The Amendment Parties agree to settle any and all disputes relating to
pricing adjustments on sales of cellular telephone products through November 30,
1998 made by CellStar to Topp pursuant to the Amended Distribution Agreement,
including, without limitation, the Outstanding Claims (as that term is defined
in that certain Amendment to Distribution Agreement), by CellStar crediting the
sum of US$1,647,000 against the outstanding principal under the Note. The
Amendment Parties hereby agree that this principal reduction shall be credited
retroactively against the principal balance as of September 1, 1998. CellStar
also agrees to credit US$100,000 against interest due as of November 15, 1998.
3. Topp Telecom acknowledges that CellStar is currently holding in
inventory certain pre-paid pagers having a cost of approximately $554,000 and
certain pre-paid re-charge cards having a cost of approximately $191,000 which
were ordered by CellStar as dedicated inventory for Topp Telecom (the
"Dedicated Inventory"). Topp Telecom hereby agrees to use its best reasonable
efforts to assist CellStar in obtaining a purchaser for the Dedicated Inventory.
In the event CellStar is unable to sell the Dedicated Inventory or return such
Dedicated Inventory to the manufacturer for a refund in an amount equal to its
cost for such product within 120 days following the date of this Amendment, Topp
agrees to reimburse CellStar for fifty percent (50%) of the loss incurred by
CellStar on such sale or return within fifteen (15) days following such sale or
return.
4. CellStar hereby agrees that, to the extent that a Performance Event (as
such term is defined in the Promissory Note (the "Note") dated as of September
1, 1998 executed by Topp Telecom and payable to CellStar) has or may be deemed
to have occurred, or may occur prior to February 15, 1999, it shall waive its
right to act upon any such Performance Event until February 15, 1999.
CellStar's agreement herein shall not be deemed to constitute a waiver of any
such Performance Event or other default under the terms of the Note.
5. The Topp Parties agree that Topp Telecom and its operations and
business may be reviewed and audited from time to time by CellStar's internal
auditors and by independent certified public accountants appointed by CellStar,
whether in complete or partial audits or reviews, upon five (5) days written
notice to Topp Telecom, and the Topp Parties agree to cooperate fully with any
such audits and provide any documents, records, personnel and other information
and cooperation as may be reasonably requested by CellStar to effect such
reviews and audits.
<PAGE>
Amendment
December 18, 1998
Page 4 of 5
6. This Amendment shall be governed by and construed in accordance with
the laws of the State of Florida, without regard to the principles of conflicts
of laws thereunder.
7. Except as expressly modified or amended hereby, the September 1st
Letter Agreement and each of the agreements, instruments and documents executed
in connection therewith, are hereby ratified and reaffirmed, and remain in full
force and effect. To the fullest extent possible, this Amendment shall be
interpreted to be consistent with the September 1st Letter Agreement; however,
to the extent they are in conflict, the provisions of this Amendment shall
control.
8. This Amendment shall be binding upon and inure to the benefit of each
of the parties hereto and each of their respective successors and permitted
assigns.
9. This Amendment may be executed in any number of counterparts, with each
counterpart constituting an original, but altogether constituting but one and
the same agreement.
10. In the event that there shall be any dispute relating to or arising
out of or in connection with this Amendment, the prevailing party shall be
entitled to recover from each of the other adverse parties thereto, jointly and
severally, attorneys fees and costs incurred, at all levels.
11. This Amendment has been drafted with the suggestions and revisions of
all parties hereto and should not be construed more strictly against one party
than against any other.
12. Each party hereto agrees to execute and deliver, upon the request of
any other party hereto and in addition to the documents to be delivered pursuant
hereto, such documents as may be reasonably necessary to evidence or effectuate
the terms and conditions of this Amendment and to comply with applicable law.
13. This writing recites the Amendment Parties' entire understanding of
all of the terms of their agreement to amend the September 1st Letter Agreement.
14. This Amendment may not be amended or modified except pursuant to a
written instrument executed by all parties hereto.
15. CellStar and Topp Telecom have executed this Amendment on the date
first set forth above. The Amendment Parties agree that each of the Topp Parties
shall execute and deliver fully executed counterpart originals of this Amendment
to CellStar within three (3) business days from the date hereof, failing which
this Amendment shall be null and void and of no further effect.
<PAGE>
Amendment
December 18, 1998
Page 5 of 5
If the foregoing terms and conditions are acceptable to you, please
indicate your acknowledgment and agreement by executing this Amendment in the
space provided therefor below.
Very truly yours,
CellStar, Ltd. CellStar Telecom, Inc.
By: National Auto Center, Inc.
Its: General Partner
/s/ RICHARD M. GOZIA /s/ RICHARD M. GOZIA
- ---------------------------------- -----------------------------------
By: Richard M. Gozia By: Richard M. Gozia
Its: President Its: President
Accepted and Agreed to this
18th day of December, 1998, by:
Topp Telecom, Inc.
/s/ F. J. POLLAK
- ----------------------------------
By: F. J. Pollak
Its: President and CEO
/s/ DAVID TOPP
- ----------------------------------
David Topp
/s/ DORA TOPP
- ----------------------------------
Dora Topp
/s/ RISIA TOPP WINE
- ----------------------------------
Risia Topp Wine
/s/ MARK TOPP
- ----------------------------------
Mark Topp
/s/ F. J. POLLAK
- ----------------------------------
F. J. Pollak
<PAGE>
EXHIBIT 10.37
STOCK PURCHASE AGREEMENT
------------------------
This STOCK PURCHASE AGREEMENT, dated as of February 5th, 1999 (this
"Agreement"), is made by and among Inmobiliaria Aztlan, S.A. de C.V.,
- ----------
("Purchaser") a wholly owned subsidiary of Telefonos de Mexico, S.A. de C.V.,
- -----------
("Telmex"), a company organized under the laws of Mexico, Telmex, David Topp,
- --------
Dora Topp, Risia Topp Wine and Mark Topp, CellStar Telecom, Inc., a Delaware
corporation ("CellStar") and Topp Telecom, Inc., a Florida corporation (the
--------
"Company"). Unless otherwise indicated, capitalized terms used herein are used
- --------
as defined in Section 16.9.
W I T N E S S E T H
-------------------
WHEREAS, the Company is engaged in the business of the provision of
national prepaid wireless telephone services in the United States (the
"Business");
--------
WHEREAS, upon the terms and subject to the conditions hereinafter set
forth, the Company desires to issue and sell 5,555 shares (the "Class A Shares")
--------------
of the Company's Class A common stock, par value $0.01 per share, to Purchaser,
and Purchaser desires to purchase and acquire from the Company the Class A
Shares;
WHEREAS, upon the terms and subject to the conditions hereinafter set
forth, the Company desires to issue and sell 117,796 shares (the "Class B
-------
Shares") of the Company's Class B common stock having identical rights and
preferences to the Class A Shares except for the absence of voting rights to
Purchaser, and Purchaser desires to purchase and acquire from the Company the
Class B Shares (the Class A Shares and Class B Shares being herein collectively
referred to as the "Company Shares");
--------------
WHEREAS, upon the terms and subject to the conditions hereinafter set
forth, Topp (as defined herein) desires to sell 1,528 Class A Shares and 32,394
Class B Shares to Purchaser, and Purchaser desires to purchase and acquire from
Topp the Class A Shares and Class B Shares (such Class A Shares and Class B
Shares to be sold by Topp being herein collectively referred to herein as the
"Topp Shares");
- ------------
WHEREAS, upon the terms and subject to the conditions hereinafter set
forth, CellStar desires to sell 625 Class A Shares and 13,252 Class B Shares to
Purchaser, and Purchaser desires to purchase and acquire from CellStar the Class
A Shares and Class B Shares (such Class A Shares and Class B Shares to be sold
by CellStar being herein collectively referred to herein as the "CellStar
--------
Shares" and the Company Shares, the Topp Shares and the CellStar Shares being
collectively referred to herein as the "Shares");
------
WHEREAS, Purchaser is unwilling to enter into this Agreement, unless
contemporaneously with the execution and delivery of this Agreement, each of the
Company, Topp, CellStar and the shareholders listed on Schedule I hereto
(collectively, the "Shareholders") enters into a shareholders' agreement with
------------
Purchaser in substantially the form attached hereto as Exhibit A (the
"Shareholders' Agreement");
- ------------------------
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, and agreements hereinafter set forth,
the parties hereto hereby agree as follows:
ARTICLE I
SALE AND PURCHASE OF THE SHARES
1.1. Sale and Purchase of the Shares. In reliance upon the
---- -------------------------------
representations, warranties, covenants, and agreements contained herein and upon
the terms and subject to the conditions hereinafter set forth, at the Closing
(as defined below) (i) the Company shall issue and sell to Purchaser, and
Purchaser shall purchase and acquire from the Company, the Company Shares, (ii)
Topp shall sell to Purchaser, and Purchaser shall purchase and acquire from
Topp, the Topp Shares and (iii) CellStar shall sell to Purchaser, and Purchaser
shall purchase and acquire from CellStar, the CellStar Shares.
1.2. Amount and Form of Consideration. (a) The consideration to be paid
---- --------------------------------
by Purchaser to the Company in consideration of the Company Shares shall be an
aggregate amount equal to U.S. $40,000,000 (the "Company Share Purchase Price");
----------------------------
(b) the consideration to be paid by Purchaser to Topp in consideration
of the Topp Shares shall be an aggregate amount in cash equal to U.S.
$13,000,000 (the "Topp Share Purchase Price"); and
-------------------------
(c) the consideration to be paid by Purchaser to CellStar in
consideration of the CellStar Shares shall be an aggregate amount in cash equal
to U.S. $4,500,000 (the "CellStar Share Purchase Price").
-----------------------------
ARTICLE II
THE CLOSING
2.1. Closing Dates. Except as hereinafter provided, the closing of the sale of
- ---- -------------
the Shares (the "Closing") shall take place at the offices of Cleary, Gottlieb,
-------
Steen & Hamilton, One Liberty Plaza, New York, New York 10006, on February 5,
1999, or if all applicable waiting periods and consents in respect of the
transactions contemplated by this Agreement have not expired or been terminated
or received, as the case may be, by such date (including without limitation the
consent described in Section 12.5 hereof), on the day following the date on
which such waiting periods have expired or terminated, or at such other place
and at such other time and date as may be mutually agreed upon by Purchaser,
CellStar and the Company. The date of the Closing is referred to herein as the
"Closing Date."
------------
2.2. Proceedings at Closings. All proceedings to be taken and all
---- -----------------------
documents to be executed and delivered by the Company in connection with the
consummation of the transactions contemplated at the Closing shall be reasonably
satisfactory in form and substance to Purchaser and its counsel, and all
proceedings to be taken and all documents
2
<PAGE>
to be executed and delivered by Purchaser in connection with the consummation of
the transactions contemplated at the Closing shall be reasonably satisfactory in
form and substance to the Company and its counsel and CellStar and its counsel
and Topp and its counsel. All proceedings to be taken and all documents to be
executed and delivered by all parties at the Closing, including without
limitation all proceedings to be taken and all documents to be executed and
delivered pursuant to the Amended and Restated Letter Agreement, shall be deemed
to have been taken and executed simultaneously, and no proceedings shall be
deemed taken nor any documents executed or delivered until all have been taken,
executed, and delivered.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Disclosure Schedule, dated as of the date hereof
and delivered concurrently herewith (the "Disclosure Schedule"), the Company
-------------------
hereby represents and warrants to Purchaser and Telmex as of the date hereof as
follows:
3.1. Organization, Standing and Corporate Power. Each of the Company and each
- ---- ------------------------------------------
Subsidiary is an entity duly organized, validly existing, and in good standing
under the laws of the jurisdiction in which it is organized and has the
requisite corporate power and authority to own, lease and operate its property
and assets and to carry on its business as it is now being conducted. Except as
set forth in Section 3.1 of the Disclosure Schedule, each of the Company and
each Subsidiary is duly qualified, authorized or licensed to do business and is
in good standing in each jurisdiction in which the conduct of its business or
the ownership or leasing of its properties requires such qualification,
authorization or license, except where such failure to be qualified or licensed
would not have a Material Adverse Effect. In those jurisdictions indicated in
Section 3.1 of the Disclosure Schedule where the Company is not currently in
good standing, the Company's good standing may be reinstated without material
cost to the Company. The Company has delivered or made available to Purchaser
complete and correct copies of its Articles of Incorporation, By-laws, as
amended to the date of this Agreement and stock register. In all material
respects, the minute books of the Company and each Subsidiary contain accurate
records of all meetings and accurately reflect all other actions taken by the
shareholders, the boards of directors (or other governing bodies), and all
committees of the boards of directors (or other governing bodies) of the Company
and such Subsidiaries. Complete and accurate copies of the minute books, bylaws,
and of the stock register of the Company and each Subsidiary have been made
available by the Company to Purchaser.
3.2. Capital Structure. (a) The authorized capital stock of the Company
---- -----------------
consists of 10,000,000 shares of common stock, $0.01 par value per share, of
which 5,000,000 shares are voting common stock ("Class A Shares") and 5,000,000
--------------
shares are non-voting common stock ("Class B Shares") and 19,031 shares of
--------------
preferred stock, $.0l par value per share, of which 1,043 shares are Class A
shares of Preferred Stock, ("Class A Preferred Shares") and l7,988 shares are
------------------------
Class B shares of Preferred Stock ("Class B
-------
3
<PAGE>
Preferred Shares"). At the close of business on January 31, 1999, (i) 6,100
- ----------------
shares of Class A Shares and 133,643 shares of Class B Shares were issued and
outstanding, (ii) 100 shares of Class A Preferred Shares and 100 shares of Class
B Preferred Shares, were issued and outstanding, and (iii) options and warrants
to purchase shares of Stock as set forth on Section 3.2 of the Disclosure
Schedule were issued and outstanding (such options and warrants being herein
collectively referred to as the "Company Stock Options"). Except as set forth
---------------------
above, at the close of business on January 31, 1999, no shares of capital stock
or other equity securities of the Company were issued, reserved for issuance, or
outstanding. Except as set forth in Section 3.2 of the Disclosure Schedule, all
outstanding shares of capital stock of the Company are, and all shares which may
be issued pursuant to any outstanding Company Stock Options will be, when
issued, duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights. Except as contemplated by this Agreement or as set
forth in Section 3.2 of the Disclosure Schedule, no bonds, debentures, notes, or
other indebtedness of the Company or any Subsidiary having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matters on which the shareholders of the Company or any Subsidiary may vote
are issued or outstanding. Except as disclosed in Section 3.2 of the Disclosure
Schedule, all the outstanding shares of capital stock of each Subsidiary have
been validly issued and are fully paid and nonassessable and are owned by the
Company, by one or more Subsidiaries, or by the Company and one or more such
Subsidiaries, free and clear of all Liens, excluding any Taxes assessed against
Purchaser and Liens securing the obligations of Purchaser. Except as
contemplated by this Agreement or as set forth above or in Section 3.2 of the
Disclosure Schedule, neither the Company nor any Subsidiary has any outstanding
option, warrant, subscription, or other right, agreement, or commitment which
(i) obligates the Company or any Subsidiary to issue, sell or transfer,
repurchase, redeem, or otherwise acquire or vote any shares of the capital stock
of the Company or any Subsidiary, (ii) restricts the transfer of shares of stock
of the Company or any Subsidiary, or (iii) grants the right to participate in
any equity appreciation of the Company or any Subsidiary.
(b) When issued in accordance with the terms of this Agreement, the
Company Shares will be duly authorized, validly issued, fully paid, and non-
assessable, will not be issued in violation of any preemptive rights granted by
the Company and will be free and clear of any and all Taxes or Liens. The
issuance and delivery by the Company to Purchaser at the Closing of the
certificates representing the Company Shares in the name of Purchaser will vest
Purchaser on the Closing Date with good title to all of the Company Shares, free
and clear of any Liens.
3.3. Authorization of Agreement. The Company has the requisite corporate
---- ---------------------------
power and authority to enter into this Agreement and each other agreement,
document, instrument, or certificate contemplated by this Agreement to be
executed by the Company in connection with the consummation of the transactions
contemplated hereby and thereby (all such agreements, documents, instruments,
and certificates required to be executed by the Company being hereinafter
referred to, collectively, as the "Company
-------
4
<PAGE>
Documents") and to consummate the transactions contemplated by this Agreement
- ---------
and the Company Documents. The execution and delivery of this Agreement and the
Company Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby have been (or at the time of
execution will be) duly authorized by all necessary corporate action on the part
of the Company. This Agreement has been (and the Company Documents will be) duly
executed and delivered by the Company and, assuming this Agreement and the
Company Documents to be executed by the parties hereto other than the Company
constitute the valid and binding agreements of such other parties, each
constitutes the legal, valid, and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
similar laws affecting rights of creditors generally and to general principles
of equity.
3.4. Conflicts; Consents of Third Parties. Except as disclosed in Section
---- ------------------------------------
3.4 of the Disclosure Schedule, and assuming the execution, delivery and filing
(if appropriate) of the agreements and documents contemplated to occur prior to
or simultaneous with the execution of this Agreement, the execution and delivery
of this Agreement does not (and the Company Documents will not), and the
consummation of the transactions contemplated by this Agreement and the Company
Documents and compliance with the provisions hereof and thereof will not, (i)
conflict with any of the provisions of the Articles of Incorporation or By-laws
of the Company or the comparable documents of any Subsidiary, (ii) subject to
the governmental filings and other matters referred to in the following
sentence, conflict with, result in a breach of or default (with or without
notice or lapse of time, or both) under, or give rise to a right of termination,
cancellation, or acceleration of any obligation or loss of a material benefit
under, or require the consent of any Person under, any indenture or other
agreement, permit, concession, franchise, license, or similar instrument or
undertaking to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries or any of their assets is bound or
affected, or (iii) subject to the governmental filings and other matters
referred to in the following sentence, contravene any Law of any state or of the
United States or any political subdivision thereof or therein, or any order,
writ, judgment, injunction, decree, determination, or award currently in effect
except, in the case of subsections (ii) and (iii) above, where such failure,
conflict or contravention would not have a Material Adverse Effect. Except as
disclosed in Section 3.4 of the Disclosure Schedule, no consent, approval, or
authorization of, or declaration or filing with, or notice to, any Person which
has not been received or made, is required by or with respect to the Company or
any of its Subsidiaries in connection with the execution and delivery of this
Agreement and the Company Documents by the Company or the consummation by the
Company of the transactions contemplated hereby and thereby, except where such
failure to obtain or file would not a Material Adverse Effect. The parties to
the agreements identified in paragraph 2 of Section 3.4 to the Disclosure
Schedule will not terminate their respective agreements or exercise any of their
respective rights thereunder as a result of any failure by the Company to obtain
the consents required by such agreements.
5
<PAGE>
3.5. Financial Statements. The Company has delivered to Purchaser copies
---- --------------------
of the unaudited consolidated financial statements of the Company consisting of
a balance sheet as of December 31, 1997 and the related consolidated statements
of income and of cash flows of the Company for the period then ended including
the related notes and schedules thereto (the "1997 Financial Statements"). The
-------------------------
Company has also delivered an unaudited balance sheet and statement of income as
at, and for the eleven months ended November 30, 1998 and schedule of reserves
as at November 30, 1998 (the "Interim Financial Statements" and together with
----------------------------
the 1997 Financial Statements, the "Financial Statements"). The Financial
--------------------
Statements are complete in all material respects, and, except as set forth in
Section 3.5 of the Disclosure Schedule, have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved and present fairly in all material respects the
consolidated financial position, results of operations of the Company and its
Subsidiaries as at the dates and for the periods indicated.
3.6. No Undisclosed Liabilities. The Company does not have as of the date
---- --------------------------
hereof, and will not have as of the Closing Date, any material indebtedness,
obligations or liabilities of any kind (whether accrued, absolute, contingent or
otherwise, and whether due or to become due or asserted or unasserted), and, to
the best knowledge of the Company, there is as of the date hereof and will be as
of the Closing Date no basis for the assertion of any material claim or
liability of any nature against the Company, except in case, (a) to the extent
reflected in the Financial Statements, (b) liabilities described in this
Agreement, Section 3.6 of the Disclosure Schedule or elsewhere in Section 3 of
the Disclosure Schedules, (c) those liabilities incurred in the ordinary course
of business since the date of the balance sheet in the Interim Financial
Statements, and (d) as of the Closing Date, liabilities arising from actions
that do not violate the provisions of Section 7.2. Except as disclosed in
Section 3.6 of the Disclosure Schedule, since November 30, 1998, the Company has
not incurred any material indebtedness, obligations or liabilities of any kind
(whether accrued, absolute, contingent or otherwise, and whether due or to
become due or asserted or unasserted) other than those incurred in the ordinary
course of business consistent with past practice.
3.7. Absence of Certain Changes or Events. Except as disclosed in Section
---- ------------------------------------
3.7 of the Disclosure Schedule, or as contemplated by this Agreement, since
November 30, 1998, the Company and its Subsidiaries have conducted their
business only in the ordinary course, and there has not been (a) any
declaration, setting aside, or payment of any dividend or other distribution
(whether in cash, stock, or property) with respect to any of the Company's
outstanding capital stock, (b) any split, combination, or reclassification of
any of its outstanding capital stock or any issuance or the authorization of any
issuance of any capital stock or other securities in respect of, in lieu of or
in substitution for shares of its outstanding capital stock, (c) (x) any
granting by the Company or any of its Subsidiaries to any executive officer or
other employee of the Company or any of its Subsidiaries of any material
increase in compensation, except in the ordinary course of business consistent
with prior practice or as was required under employment agreements
6
<PAGE>
in effect as of the date of the Financial Statements (y) any granting by the
Company or any of its Subsidiaries to any such executive officer or other
employee of any material increase in severance or termination pay, except in the
ordinary course of business consistent with prior practice or as was required
under any employment, severance, or termination agreements in effect as of the
date of the Financial Statements or (z) any entry by the Company or any of its
Subsidiaries into any material employment, severance, or termination agreement
with any such executive officer or other employee, or (d) any change in
accounting methods, principles or practices by the Company or any of its
Subsidiaries materially affecting its assets, liabilities, or businesses, except
insofar as may have been required by a change in generally accepted accounting
principles.
3.8. Absence of Changes in Benefit Plans. Except as disclosed in Section
---- -----------------------------------
3.8 of the Disclosure Schedule, since the date of the Financial Statements,
there has not been any adoption or amendment in any material respect by the
Company or any of its Subsidiaries of any collective bargaining agreement or any
Benefit Plan or waiver of any significant right in respect thereof. Except as
disclosed in Section 3.8 of the Disclosure Schedule, there exist no material
employment, consulting, severance, termination or indemnification agreements,
arrangements, or understandings between the Company or any of its Subsidiaries
and any current or former employee, officer or director of the Company or any of
its Subsidiaries.
3.9. Benefit Plans. Except as set forth in Section 3.9(a) of the
---- -------------
Disclosure Schedule, (a) Neither the Company nor any of its Subsidiaries
maintains or contributes to, or has any obligation to contribute to or has any
liability (including a liability arising out of an indemnification, guarantee,
hold harmless or similar agreement) with respect to any plan, program,
arrangement, agreement or commitment which is an employment, consulting or
deferred compensation agreement, or an executive compensation, incentive bonus
or other bonus, employee pension, profit-sharing, savings, retirement, stock
option, stock purchase, stock appreciation rights, severance pay, life, health,
disability or accident insurance plan, or other employee benefit plan, program,
arrangement, agreement or commitment, including any "employee benefit plan" as
defined in Section 3(3) of ERISA (individually, a "Plan," or collectively, the
----
"Plans"). Each such Plan is identified on Schedule 3.9(a) to the extent
-----
applicable, as one or more of the following: an "employee pension plan" (as
defined in Section 3(2) of ERISA) or an "employee welfare plan" (as defined in
Section 3(1) of ERISA).
(b) Neither the Company nor any ERISA Affiliate (as defined herein)
contributes to, or has any obligation to contribute to, and has not within the
preceding five years contributed to, maintained or had any obligation to
contribute to, any plan subject to Title IV of ERISA or to Section 412 of the
Code; "ERISA Affiliate" means any trade or business (whether or not
---------------
incorporated) that would be treated together with the Company as a single
employer under Title IV or Section 302 of ERISA or Section 412 of the Code.
7
<PAGE>
(c) No event has occurred, and, to the best knowledge of the Company,
no circumstance exists, in connection with which either the Company, its
Subsidiaries or any Plan, directly or indirectly, could be subject to any
material liability under ERISA, the Code or any other law, regulation or
governmental order applicable to any Plan, including Section 406, 409, 502(i) or
502(l) of ERISA, or Part 6 of Title I of ERISA, or Section 4971, 4972, 4975,
4976, 4977 or 4980B of the Code, or under any agreement, instrument, statute,
rule of law or regulation pursuant to or under which the Company or any of its
Subsidiaries have agreed to indemnify or are required to indemnify any person
against liability incurred under, or for a violation or failure to satisfy the
requirements of, any such statute, regulation or order.
(d) With respect to each Plan, (i) all payments due from the Company
or any of its Subsidiaries to date have been timely made; (ii) each such Plan
which is an "employee pension benefit plan" (as defined in Section 3(2) of
ERISA) and intended to qualify under Section 401 of the Code has received a
favorable determination letter from the Internal Revenue Service with respect to
such qualification, its related trust has been determined to be exempt from
taxation under Section 501(a) of the Code, and, to the knowledge of the Company,
nothing has occurred since the date of such letter that has or is likely to
adversely affect such qualification or exemption; (iii) there are no actions,
suits or claims pending (other than routine claims for benefits) or, to the
knowledge of the Company, threatened with respect to such Plan or against the
assets of such Plan and (iv) the Company has complied with, and such Plan
conforms in form and operation to, all applicable laws and regulations,
including ERISA and the Code, in all material respects.
(e) No Plan is under audit or, to the best knowledge of the Company,
is the subject of an investigation by the Internal Revenue Service, the U.S.
Department of Labor, the Pension Benefit Guaranty Corporation or any other
federal or state governmental agency, nor is any such audit or investigation
pending or threatened.
(f) The consummation of the transactions contemplated by this
Agreement (alone or together with any other event) will not (i) accelerate the
time of payment or vesting, or increase the amount, of any compensation due from
the Company to any person under any Plan or otherwise, (ii) entitle any person
to any benefit under any Plan or otherwise or (iii) result in the payment or
series of payments by the Company or any of its Subsidiaries to any person of
any "excess parachute payment" within the meaning of Section 280G of the Code,
or any other payment which would not be deductible for federal income tax
purposes under the Code, determined without regard to the exclusion for
reasonable compensation for services rendered. No payment made to any employee
or former employee of the Company or any Subsidiary of the Company will be
nondeductible by reason of Section 162(m) of the Code.
(g) Neither the Company nor any of its Subsidiaries has any liability
with respect to an obligation to provide benefits, including death or medical
benefits
8
<PAGE>
(whether or not insured) with respect to any person beyond their retirement or
other termination of service other than (i) coverage mandated by Part 6 of Title
I of ERISA or Section 4980B of the Code, (ii) retirement or death benefits under
any employee pension plan, (iii) disability benefits under any employee welfare
plan that have been fully provided for by insurance or otherwise, (iv) deferred
compensation benefits accrued as liabilities on the books of the Company or its
Subsidiary, or (v) benefits in the nature of severance pay.
(h) The Company shall deliver to the Purchaser with respect to
each Plan for which the following exists:
(i) a copy of the Form 5500 with respect to each Plan for the two
most recent Plan years;
(ii) a copy of the summary plan description, together with each
summary of material modifications, required under ERISA with respect to such
Plan in the past two years, all material employee communications relating to
such Plan and a true and complete copy of such Plan;
(iii) if the Plan is funded through a trust or any third party
funding vehicle (other than an insurance policy), a copy of the trust or other
funding agreement; and
(iv) the most recent determination letter received from the
Internal Revenue Service with respect to each Plan that is intended to be a
"qualified plan" under Section 401 of the Code.
(i) With respect to each Plan for which financial statements are
required by ERISA, there has been no material adverse change in the financial
status of such Plan since the date of the most recent such statements.
(j) With respect to each Plan that is funded wholly or partially
through an insurance policy, all amounts of the premiums required to have been
paid to date under the insurance policy have been paid, all amounts of the
premiums required to be paid under the insurance policy through the Closing Date
will have been paid on or before the Closing Date and, as of the Closing Date,
there will be no liability of the Company or its Subsidiaries under any such
insurance policy or ancillary agreement with respect to such insurance policy in
the nature of a retroactive rate adjustment, loss sharing arrangement or other
actual or contingent liability arising wholly or partially out of events
occurring prior to the Closing Date
(k) Neither the Company nor any of its Subsidiaries has any
announced plan or legally binding commitment to create any additional Plans or
to amend or modify any existing Plan, other than amendments required by law.
9
<PAGE>
(l) Neither the Company nor any of its Subsidiaries is a party to any
collective bargaining agreements. There are no labor unions or other
organizations representing, purporting to represent or attempting to represent,
any employee of the Company or any of its Subsidiaries.
(m) Neither the Company nor any of its Subsidiaries has violated any
statute, law, ordinance, rule or regulation, or any order, ruling, decree,
judgment or arbitration award of any court, arbitrator or any government agency
regarding the terms and conditions of employment of employees, former employees
or prospective employees or other labor related matters, including laws, rules,
regulations, orders, rulings, decrees, judgments and awards relating to
discrimination, fair labor standards and occupational health and safety,
wrongful discharge or violation of the personal rights of employees, former
employees or prospective employees which, taken alone or together with any other
such violation or violations, could reasonably be expected to have a Material
Adverse Effect.
(n) Neither the Company nor any Subsidiary of the Company has any
material liability, whether absolute or contingent, including any obligation
under any employee benefit plans with respect to any misclassification of a
person as an independent contractor rather than as an employee and no individual
has been treated by the Company or any Subsidiary of the Company as a "leased
employee" (within the meaning of Section 414(n) of the Code).
(o) The Company does not maintain any Plan and is not a party to any
contract that provides any benefits or provides for payments to any person based
on or measured by the value of any equity security of the Company.
3.10. Taxes. Except as disclosed in Section 3.10 of the Disclosure
----- -----
Schedule:
(a)
(i) the Company has timely filed (taking into account all
available extensions) all Tax Returns concerning Taxes (or such Tax Returns have
been filed on behalf of the Company) required to be filed by applicable law and
have paid all amounts due in respect of Taxes (whether or not actually shown on
such Tax Returns); all such Tax Returns are true, correct and complete in all
material respects and accurately set forth all items to the extent required to
be reflected or included in such Tax Returns by applicable federal, state, local
or foreign Tax laws, regulations or rules;
10
<PAGE>
(ii) as of the date hereof, the Company has not executed
any outstanding waivers or comparable consents regarding the application of the
statute of limitations with respect to any material Taxes or Tax Returns; and
the period during which any assessment against the Company may be made by the
IRS or other appropriate authority has expired without waiver or extension of
any such period for each such authority;
(iii) the Company is not engaged in business in any Tax
jurisdiction in which it does not file Tax Returns for sales and use, income or
other Taxes.
(iv) to the best knowledge of the Company, no claim has
ever been made by any authority in a jurisdiction where the Company does not
file Tax Returns that it is or may be subject to taxation by that jurisdiction;
(v) as of the date hereof, there are no Liens with respect
to any material Taxes upon any of the assets and properties of the Company;
(vi) the Company has paid in full or set up reserves in
accordance with GAAP in respect of all Taxes for the periods covered by such Tax
Returns, as well as all other Taxes, penalties, interest, fines, deficiencies,
assessments and governmental charges that have become due or payable (including,
without limitation, all Taxes that the Company is obligated to withhold from
amounts paid or payable to or benefits conferred upon employees, creditors and
third parties). As of the date hereof, there is no proposed liability for any
material Tax to be imposed upon the Company for the year ended 1998 and all
prior years for which there is not an adequate reserve; and
(b) The Company is not a party to any agreements relating to
allocating or sharing of Taxes exist among the shareholders or the Company.
(c) Set forth in Section 3.10 of the Disclosure Schedule is a
complete list of income and other Tax Returns filed by the Company pursuant to
the laws or regulations of any federal, state, local or foreign Tax authority
that have been examined or audited by the IRS or other appropriate authority
during the preceding three years, and a list of all adjustments resulting from
each such examination or audit. Except as set forth in Section 3.10 of the
Disclosure Schedule, no such examination or audit is in progress. Except as set
forth in Section 3.10 of the Disclosure Schedule, all deficiencies proposed as a
result of such examinations or audits have been paid or finally settled and no
issue has been raised in any such examination or audit that, by application of
similar principles, reasonably can be expected to result in the assertion of a
deficiency for any other year not so examined or audited. Except for Taxes
payable with Tax Returns not yet due and filed, to the best knowledge of the
Company, there are no grounds for any further Tax liability, beyond amounts
accrued with respect to the years that have not been examined or audited.
11
<PAGE>
(d) The Company is not a United States Real Property Holding
Corporation (a "USRPHC") within the meaning of section 897 of the code and was
------
not a USRPHC on any "determination date" (as defined in (S)1.897-2(c) of the
United States Treasury Regulations promulgated under the Code (the "Treasury
--------
Regulations")) that occurred in the five-year period preceding the Closing Date.
- -----------
(e) The Company has not executed any closing agreement pursuant to
section 7121 of the Code or any predecessor provision thereof, or any similar
provision of state or local law.
(f) The Company has disclosed on its federal income Tax Returns all
positions taken therein that could give rise to a substantial understatement of
federal income Tax within the meaning of Code section 6662;
(g) The Company has not filed a consent pursuant to section 341(f)
of the Code or agreed to have section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as such term is defined in section
341(f)(4) of the Code) owned by the Company.
(h) None of the assets owned by the Company is property that is
required to be treated as owned by any other person pursuant to section
168(f)(8) of the Internal Revenue Code of 1954, as amended, as in effect
immediately prior to the enactment of the Tax Reform Act of 1986 or is "tax-
exempt use property" within the meaning of section 168(h) of the Code.
(i) The Company has not agreed and is not required to make any
adjustments pursuant to section 481(a) of the Code or any similar provision of
state or local law by reason of a change in accounting method initiated by it or
any other relevant party and the Company does not have any knowledge that the
IRS has proposed any such adjustment or change in accounting method, nor has any
application pending with any governmental or regulatory authority requesting
permission for any changes in accounting methods that relate to the business or
assets of the Company.
(j) Except as set forth in Section 3.10 of the Disclosure Schedule,
the Company has not been included in any "consolidated" "unitary" or "combined"
Tax Return provided for under the laws of the United States, any foreign
jurisdiction or any state or locality with respect to Taxes for any taxable
period for which the statute of limitations has not expired. The Company does
not have any liability for the Taxes of any person as defined in section
7701(a)(1) of the Code or under Treasury Regulation section 1.1502-6 (or any
similar provision of state, local or foreign law), as a transferee or successor,
by contract, or otherwise;
12
<PAGE>
(k) The Company has not filed an election under Rev. Proc. 91-11,
1991-1 C.12. 470, as modified by Rev. Proc. 91-39, 1991-2 C.12. 694, Treas. Reg.
(S) 1.1502-20(g) or Rev. Proc. 95-39, 1995-2 C.12. 399.
(l) The Company has maintained in all material respects the books
and records required to be maintained pursuant to section 6001 of the Code and
the rules and regulations thereunder, and comparable laws, rules and regulations
of the countries, states, counties, provinces, localities and other political
divisions wherein it is required to file Tax Returns and other reports relating
to Taxes.
(m) Except as disclosed in Section 3.10 of the Disclosure Schedule,
the Company was not acquired in a "qualified stock purchase" under section
338(d)(3) of the Code, and the Company is not subject to any constructive
elections under Code section 338 or the Treasury Regulations thereunder.
(n) No indebtedness of the Company consists of "corporate
acquisition indebtedness" within the meaning of section 279 of the Code.
(o) There currently are no excess loss accounts, deferred
intercompany gains or losses or other like items pertaining to the Company that
could result in any Tax liability for the Company.
3.11. Compliance with Applicable Laws. Each of the Company and its
----- -------------------------------
Subsidiaries has in effect all federal, state, local, and foreign governmental
approvals, authorizations, certificates, filings, franchises, licenses, notices,
permits, and rights ("Permits") necessary for it to own, lease, or operate its
-------
properties and assets and to carry on its business as now conducted, except
where the failure to have in effect would not have a Material Adverse Effect,
and there has occurred no material default under any such Permit. Each of the
Company and its Subsidiaries is in compliance with all Laws and Orders
promulgated by any Governmental Body applicable to the Company or its
Subsidiaries or to the operation of their respective businesses except where the
failure to comply would not have a Material Adverse Effect. Except as disclosed
in Section 3.11 of the Disclosure Schedule, as of the date of this Agreement, to
the knowledge of the Company, no investigation by any Governmental Body with
respect to the Company or any of its Subsidiaries is pending or threatened.
3.12. Environmental Matters. Except as set forth in Section 3.12 of the
----- ---------------------
Disclosure Schedule, (i) the Company is in compliance with all Environmental
Laws, (ii) the Company has all necessary Environmental Permits and is in
compliance with such Environmental Permits, (iii) there is no Legal Proceeding
pending or, to the knowledge of the Company, threatened before any Governmental
Body or other forum in which the Company or any Company Property (as defined in
Section 3.3) has been, or with respect to threatened Legal Proceedings would
reasonably be expected to be, named as a defendant or potential responsible
party (A) for alleged noncompliance (including by any
13
<PAGE>
predecessor) with any Environmental Law, or (B) relating to the presence,
Release or threatened Release into the environment of any Hazardous Material,
whether or not occurring at or on a site owned, leased or operated by the
Company and (iv) to the knowledge of the Company, no asbestos-containing
material, electrical equipment containing polychlorinated biphenyls or
underground storage tanks are present at any Company Property.
3.13. Real Property.
----- -------------
(a) All real property leased by the Company is listed in Section
3.13 of the Disclosure Schedule. All leases under which the Company is the
lessee of real property requiring lease payments in excess of $50,000 annually
(the "Real Property Leases") are listed in Section 3.13 of the Disclosure
--------------------
Schedule (including in the case of leased properties, the annual rental, renewal
and purchase option, if any, and lease termination date). The Company owns no
Real Property. The Company has made available to Purchaser true, correct and
complete copies of each Real Property Lease. Except as set forth in Section 3.13
of the Disclosure Schedule, there does not exist any actual or, to the knowledge
of the Company, threatened condemnation or eminent domain proceeding or mortgage
foreclosure (or comparable) proceeding that materially affects or might
materially affect any real property owned by the Company. The real property
owned by the Company complies in all material respects with all applicable
zoning, building code or other municipal or governmental requirements. Except as
set forth in Section 3.13 of the Disclosure Schedule, the Company has not
received notice of any material default under any of the Real Property Leases,
and the Company and, to the knowledge of the Company, the relevant landlords are
not in default in any material respect under any of the Real Property Leases
and, to the knowledge of the Company, no event, including without limitation the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, has transpired which, with notice or the
passage of time, would constitute a material default under any of the Real
Property Leases. The Company Properties are, in the aggregate, adequate in all
material respects for the uses for which they are currently employed.
(b) Except as set forth on Schedule 3.14(d), the Company has good
and marketable title in all other property and assets which it purports to own,
free and clear of all Liens other than Permitted Liens (including in the case of
leased properties, annual rental, renewal and purchase option, if any, and lease
termination date), except for such defects in title and Liens which would not
singly or in the aggregate have a Material Adverse Effect.
(c) The Real Property Leases and the Personal Property Leases are
valid and binding obligations of the parties thereto and are enforceable in
accordance with their terms, except as enforcement may be limited by applicable
bankruptcy, insolvency or similar laws affecting the enforcement of creditors'
rights generally or by general
14
<PAGE>
principles of equity except, in each case, for such exceptions which would not
reasonably be expected to have a Material Adverse Effect.
3.14. Tangible Personal Property.
----- --------------------------
(a) Section 3.14(a) of the Disclosure Schedule sets forth (i) all
leases of personal property (the "Personal Property Leases") relating to
------------------------
personal property used in or necessary to the operation of the Business
requiring lease payments equal to or exceeding $50,000 per annum and (ii) any
Liens relating thereto. The Company has delivered to the Purchaser a true,
correct and complete copy of each Personal Property Lease, including all written
amendments, modifications, supplements, side letters or consents affecting the
obligations of any party thereunder.
(b) Except as set forth on Section 3.14(b) of the Disclosure
Schedule hereto:
(i) Each Personal Property Lease is in full force and effect
and is valid and enforceable in accordance with its terms, and there is no
default under any Personal Property Lease either by the Company or, to the
best knowledge of the Company, by any other party thereto, and no event has
occurred that, with the lapse of time or the giving of notice or both,
would constitute a material default thereunder.
(ii) No previous or current party to any Personal Property Lease
has given notice of or made a claim with respect to any breach or default
thereunder.
(c) With respect to any Personal Property Leases that were assigned
or subleased to the Company by a third party, all necessary consents required by
the Company to such assignments or subleases have been obtained.
(d) Except as set forth on Section 3.14(d) of the Disclosure
Schedule hereto, the Company has good and marketable title to each item of owned
equipment, free and clear of any and all Liens, other than Permitted Liens and
except for such defects in title and Liens which would not singly or in the
aggregate have a Material Adverse Effect. Each such item of equipment which,
individually or in the aggregate, is material to the operation of the Business
is in good condition and in a state of good maintenance and repair and is
suitable for the purposes in the operation of the Business.
3.15. Intangible and Intellectual Property.
----- ------------------------------------
(a) Section 3.15(a) of the Disclosure Schedule hereto separately
lists (i) material computer programs owned by the Company (the "Owned
-----
Software"), and (ii) material computer data bases owned by the Company (the
- --------
"Owned Data Bases") (collectively, the "Owned Intellectual Property"). Except as
---------------- ---------------------------
separately listed on Section
15
<PAGE>
3.15(a) of the Disclosure Schedule hereto, the Company has full and exclusive
right, title and ownership, freely transferable, in all of the Owned
Intellectual Property, including all Intellectual Property Rights (as
hereinafter defined) associated therewith, free and clear of any Liens or any
other rights of others or adverse claims. In addition to the items listed on
Section 3.15(a) of the Disclosure Schedule hereto, the Owned Intellectual
Property includes as of the date hereof and will include as of the Closing Date
all work in process relating to corrections, modifications or enhancements of
the Owned Intellectual Property as well as all current and existing prior
versions of the Owned Intellectual Property. Except as separately listed on
Section 3.15(a) of the Disclosure Schedule hereto, there are no contracts or
commitments in effect for the conversion, modification or enhancement of any of
the Owned Intellectual Property. No copy of any of the Owned Intellectual
Property is subject to or held in escrow. There are no works upon which the
Owned Intellectual Property is based or from which any of it is derived. To the
best knowledge of the Company, no derivative works of any of the Owned
Intellectual Property exist separate and apart from such Owned Intellectual
Property.
(b) Section 3.15(b) of the Disclosure Schedule hereto separately
lists all of the following owned in whole or in part or used by the Company: (i)
all material unregistered trade or service marks or names, and all trade or
service mark registrations (and any applications therefor), (ii) all material
copyrights, copyright registrations and copyright applications, (iii) all patent
rights, including, without limitation, issued patents, applications, divisions,
continuations and continuations-in-part, reissues, patents of additions, utility
models and inventors' certificates, and (iv) proprietary manufacturing
information and know-how, processes, inventions, inventors' notes, drawings and
designs, (v) goodwill associated with any of the foregoing (collectively, the
"Intellectual Property Rights"). Except as separately listed on Section 3.15(b)
----------------------------
of the Disclosure Schedule hereto, the Company has full and exclusive right,
title and ownership, freely transferable, in all of the Intellectual Property
Rights, including all rights associated therewith, free and clear of any Liens
or any other rights of others or adverse claims.
(c) Section 3.15(c) of the Disclosure Schedule hereto separately
lists, all (i) material computer programs licensed to the Company, (ii) material
computer data bases licensed to the Company (the "Licensed Software" and,
-----------------
together with the Owned Intellectual Property and the Intellectual Property
Rights, the "Intellectual Property"). Except as set forth on Section 3.15(c) of
---------------------
the Disclosure Schedule hereto, the Company has been granted a perpetual,
irrevocable, exclusive license to use all of the Licensed Software.
(d) Except as separately listed on Section 3.15(d) of the Disclosure
Schedule, to the best knowledge of the Company, all of the Owned Intellectual
Property complies with the necessary requirements to function after the Year
2000 and is otherwise Year 2000 Compliant. A description of any known non-
compliance and an estimate of the capital expenditures necessary to make such
Owned Intellectual Property Year 2000 Compliant is set forth in Section 3.15(d)
of the Disclosure Schedule. The
16
<PAGE>
Intellectual Property will be sufficient and adequate to permit the Company to
continue to conduct Business in the manner that it shall have been conducted
immediately prior to the Closing, including the meeting of the contractual
obligations of the Company entered into prior to the Closing.
(e) Except as set forth on Section 3.15(e) of the Disclosure
Schedule hereto, the Company has taken all reasonable measures necessary to
protect the Intellectual Property. All independent contractors who are currently
participating in the creation or development of any portion of the Intellectual
Property have executed an agreement with the Company assigning all right, title
and interest in such portion of the Intellectual Property to the Company. To the
extent that any of the Intellectual Property has been designed or developed by
the Company's management information or development staff or by independent
consultants on the Company's behalf, to the best knowledge of the Company, such
Intellectual Property is original and capable of copyright protection in the
United States and the Company has complete rights to and ownership of such
Intellectual Property. To the best knowledge of the Company, no part of any such
Intellectual Property is an imitation or copy of, or infringes upon, the
Intellectual Property or Intellectual Property Rights of any other person or
entity, including without limitation, rights relating to defamation, contractual
rights, copyrights, trade secrets, and rights of privacy or publicity. The
Company has not caused any of the Intellectual Property to enter the public
domain, sold assigned, licensed, distributed or in any other way disposed of or
encumbered any of the Owned Intellectual Property or taken any action which has
in any way affected its absolute and unconditional ownership of any portion of
the Owned Intellectual Property or Intellectual Property Rights or its use of
any portion of the Licensed Software.
(f) Except as set forth on Section 3.15(f) of the Disclosure
Schedule hereto, no licensing fees, royalties or payments are due and payable in
connection with the use of any of the Intellectual Property except for (i) those
due and payable with respect to the Licensed Software which shall have been paid
by the Company or are accrued on the Balance Sheet in accordance with past
practice and (ii) those incurred by the Company in the ordinary course of its
business between December 31, 1998 and the Closing Date. The consummation of the
transactions contemplated hereby will not alter or impair any rights of the
Company in or to use any of the Intellectual Property.
(g) Except as set forth on Section 3.15(g) of the Disclosure
Schedule hereto, the Company has the right to bring actions for infringement of
the Owned Intellectual Property and none of the Owned Intellectual Property
infringes the rights of any Person. The Company has not asserted any claim of
infringement, misappropriation or misuse and no claims have been asserted by any
Person against the Company with respect to its use of the Intellectual Property
or challenging or questioning the validity or effectiveness of any license or
agreement relating thereto; the Company has no knowledge that any Person might
make such an assertion.
17
<PAGE>
3.16. Contracts. Except as set forth on Section 3.16(a) of the Disclosure
----- ---------
Schedule hereto and except for, contracts that can be terminated by the Company
without liability or penalty on not more than 90 days notice and contracts under
which the executory obligation involves less than $100,000, the Company is not a
party to any: (a) material contract not made in the ordinary course of
business; (b) contract for the employment of any officer or employee; (c)
advertising agreement; (d) distribution agreement or license agreement; (e)
agreement with any telecommunications carrier for the provision of
telecommunication services; (f) contract with retailers; (g) agreement for the
sale of any of its assets other than in the ordinary course of business; (h)
contract or commitment for capital expenditures; (i) mortgage, pledge,
conditional sales contract, security agreement, factoring agreement or other
similar agreement with respect to any of its personal property; (j) consulting
agreement; (k) non-competition agreement with any Person, including any current
or former officer or employee of the Company; (l) contract for the payment or
receipt of royalties; (m) contract relating to any indebtedness for borrowed
money, guaranty, surety, line of credit or other loan or financing arrangement;
or (n) contract to which a Governmental Body is a party. The contracts set
forth in Section 3.16 of the Disclosure Schedule are collectively referred to
herein as "Material Contracts". Except as set forth on Section 3.16 of the
------------------
Disclosure Schedule, the Company has performed in all material respects all of
the obligations required to be performed by it to date, and is not in material
default under, any of its Material Contracts. Except as set forth on Section
3.16 of the Disclosure Schedule, to the best knowledge, of the Company no party
with whom the Company has a Material Contract is in material default thereunder
and the Company has not received from any such party (i) any notice that any
such party intends to terminate any Material Contract or (ii) any material claim
for indemnification from such party with respect to the performance of services
pursuant to Material Contract. The Company has not knowingly waived any of its
rights under, or modified the terms of, any Material Contract orally or by a
pattern of practice or otherwise. Each Material Contract constitutes as of the
date hereof, and will constitute as of and after the Closing Date, the legal,
valid and binding obligation of each party thereto, enforceable in accordance
with its terms, except as enforcement may be limited by applicable bankruptcy,
insolvency or similar laws affecting the enforcement of creditors' rights
generally or by general principles of equity, except, in each case, for such
exceptions which would not reasonably be expected to have a Material Adverse
Effect.
3.17. Litigation. There is no Legal Proceeding pending or, to the best
----- ----------
knowledge of the Company, threatened that questions the validity of this
Agreement, any Company Document or any action taken or to be taken by the
Company in connection with, or which seeks to enjoin or obtain monetary damages
in respect of, the consummation of the transactions contemplated hereby or
thereby. Section 3.17 of the Disclosure Schedule hereto sets forth a true,
correct and complete list of all pending or, to the best knowledge, of the
Company, threatened, Legal Proceedings in which the Company is a party or which
affects the Business, at law or in equity, and, to the best knowledge of the
Company there is no basis for any such Legal Proceeding against the
18
<PAGE>
Company which is not so listed, in each case, if adversely determined, would
have a Material Adverse Effect. There is no outstanding or, to the best
knowledge of the Company, threatened Order of any Governmental Body against,
affecting or naming the Company or affecting any of its properties or the
Business.
3.18. Insurance.
----- ---------
(a) Section 3.18 of the Disclosure Schedule hereto sets forth a list
of all policies of insurance of any kind or nature covering the Company or any
of its employees or properties, including, without limitation, policies of
errors and omissions, life, disability, fire, theft, workers compensation,
employee fidelity and other casualty and liability insurance. Each such policy
is in full force and effect, and, assuming compliance by the Company of its
obligations thereunder, will continue to provide coverage following the Closing
Date to the same extent provided prior to the Closing Date for claims arising in
connection with the operation of the Business on or prior to the Closing Date.
The Company has delivered to the Purchaser true, correct and complete copies of
each such policy, including all amendments, modifications or supplements
relating to such policies.
(b) To the best knowledge of the Company, the Company has maintained
insurance policies or agreements covering all risks customarily insured against,
in amounts reasonable and customary for the Business and are sufficient to meet
the requirements of applicable Laws. Section 3.18 of the Disclosure Schedule
hereto sets forth for each policy of insurance maintained by the Company at any
time since January 1, 1998, (i) the name and address of the provider thereof,
(ii) the property or casualty covered thereby and (iii) the amount of coverage
provided thereby (including the deductible thereof).
3.19. Receivables.
----- -----------
All accounts receivable of the Company have arisen from bona fide
transactions in the ordinary course of business consistent with past practice.
Except as otherwise noted thereon, all accounts receivable reflected on Section
3.19 of the Disclosure Schedule have been recorded on the Company's Financial
Statements in accordance with GAAP.
3.20. Ownership of Necessary Assets and Rights; Condition. Except as set
----- ---------------------------------------------------
forth on Section 3.20 of the Disclosure Schedule:
(a) The assets owned by the Company as of the date hereof and as of
the Closing Date are sufficient to conduct the Business as currently conducted;
(b) The assets owned by the Company on the date hereof and on the
Closing Date (i) are suitable in all material respects for the operation of the
Business as currently conducted, (ii) are in a good state of repair and
operating condition (reasonable
19
<PAGE>
wear and tear excepted), (iii) meet all requirements of applicable Permits and
technical standards, rules, regulations and orders of applicable federal, state
and local governing and regulatory authorities except where the failure to meet
such requirements would not have a Material Adverse Effect and (iv) are fit for
their intended purposes; and
(c) No Affiliate of the Company owns, controls or has custody of any
material asset, property or right used in, or necessary to, the operation of the
Business.
3.21. Insolvency Proceedings. No attachments, executions, assignments for
----- ----------------------
the benefit of creditors, receiverships, conservatorships or voluntary or
involuntary proceedings in bankruptcy or actions pursuant to any other debtor
relief laws or actions by any state or federal regulatory authorities are
pending against the Company or any of its Affiliates.
3.22. Transactions with Affiliates. Section 3.22 of the Disclosure
----- ----------------------------
Schedule sets forth a complete and correct listing of all funds paid by the
Company to any shareholder holding greater than 5% of the Company's voting
securities since January 1, 1998, other than (i) expense reimbursements made in
the ordinary course of business consistent with the Company's historic policies,
(ii) payments to any Employee Benefit Plans in accordance with the terms thereof
and consistent with past practices, and (iii) payments under employment
agreements. As of the Closing Date, after giving effect to the transactions
contemplated hereby, the Company is not required to make any payment to or
perform any services for any of its shareholders except as set forth on Section
3.22 of the Disclosure Schedule hereto.
3.23. Outside Financial Interests. Except as disclosed on Section 3.23 of
----- ---------------------------
the Disclosure Schedule, neither the Company nor, to the best knowledge of the
Company, any executive officers of the Company have any material direct or
indirect financial interest in any competitor, supplier or customer of the
Company, except for ownership of publicly traded securities of any supplier or
customer whose shares are publicly traded on any securities exchange.
3.24. Active Subscribers. As at November 30, 1998 and December 31, 1998,
----- ------------------
the Company had approximately 123,800 and 151,600 Active Subscribers,
respectively.
3.25. No Misrepresentation. No representation or warranty of the Company
----- --------------------
contained in this Agreement (including the Annexes, Exhibits and Schedules
hereto) or in any Company Document furnished to the Purchaser pursuant to the
terms hereof contains any untrue statement of a material fact or omits to state
a material fact necessary to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading. The
Company does not know of any fact (other than facts of a general economic or
political nature and industry-wide developments generally affecting companies in
the telecommunications industry) which now or in the future is
20
<PAGE>
reasonably likely to have a Material Adverse Effect with respect to the Business
as currently conducted, which has not been disclosed herein or in a Schedule
hereto.
3.26. Brokers. All negotiations relative to this Agreement and the
----- -------
transactions contemplated hereby have been carried out by the Company directly
with Purchaser, Topp and CellStar, without the intervention of any Person on
behalf of the Company in such manner as to give rise to any valid claim by any
Person against Purchaser, the Company or any Subsidiary, Topp or CellStar for a
finder's fee, brokerage commission, or similar payment.
3.27. HSR Act Filings. The Company has filed a notification and report
----- ---------------
form pursuant to the HSR Act with respect to the purchase by Purchaser of the
Shares pursuant to this Agreement.
3.28. Undisclosed Agreements. The Company does not have as of the date
----- ----------------------
hereof and will not have as of the Closing Date, any written agreements with
respect to the transactions contemplated by this Agreement with any other party
to this Agreement that have not been fully disclosed to all of the parties to
this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TOPP
Topp hereby represents and warrants to Purchaser and Telmex as of the
date hereof as follows:
4.1. Authority; Noncontravention. Topp has the requisite legal capacity to
- ---- ---------------------------
enter into this Agreement and each other agreement, document, instrument, or
certificate contemplated by this Agreement to be executed by Topp in connection
with the consummation of the transactions contemplated hereby and thereby (all
such agreements, documents, instruments, and certificates required to be
executed by Topp being hereinafter referred to, collectively, as the "Topp
----
Documents") and to consummate the transactions contemplated by this Agreement
- ---------
and the Topp Documents. This Agreement has been (and the Topp Documents will
be) duly executed and delivered by Topp and, assuming this Agreement and the
Topp Documents to be executed by the parties hereto other than Topp constitute
the valid and binding agreements of such other parties, each constitutes the
legal, valid, and binding obligation of Topp, enforceable against Topp in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws affecting
rights of creditors generally and to general principles of equity.
4.2. Conflicts; Consents of Third Parties. Assuming the execution,
---- ------------------------------------
delivery and filing (if appropriate) of the agreements and documents
contemplated to occur prior to or simultaneous with this Agreement, the
execution and delivery of this Agreement does not (and the Topp Documents will
not), and the consummation of the transactions
21
<PAGE>
contemplated by this Agreement and the Topp Documents and compliance with the
provisions hereof and thereof will not, (i) conflict with any of the provisions
of the Articles of Incorporation or By-laws of the Company or the comparable
documents of any Subsidiary or of any Topp Entity, (ii) subject to governmental
filings and other matters referred to in the following sentence, conflict with,
result in a breach of or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation, or
acceleration of any obligation or loss of a material benefit under, or require
the consent of any Person under, any indenture or other agreement, permit,
concession, franchise, license, or similar instrument or undertaking to which
any Topp Entity or Topp individually is bound or to which any Topp Shares or
other securities of the Company owned by Topp or any Topp Entity are subject, or
result in the creation or imposition of any securities interest, lien, charge or
encumbrance upon any such securities, or (iii) subject to governmental filings
and other matters referred to in the following sentence, contravene any Law of
any state or of the United States or any political subdivision thereof or
therein, or any order, writ, judgment, injunction, decree, determination, or
award currently in effect except, in the case of subsections (ii) and (iii)
above, where such failure, conflict or contravention would not have a Material
Adverse Effect.
4.3. Ownership. Topp owns the Topp Shares and on the Closing Date Topp
---- ---------
will own the Topp Shares free and clear of any and all Liens and is in rightful
possession of duly and validly authorized and issued certificates evidencing his
ownership of record of the Topp Shares, and has full right, legal capacity to
sell, transfer, convey and deliver to Purchaser, in accordance with the terms of
this Agreement, good, valid and marketable title, beneficially and of record, to
all of said shares of Topp Shares, free and clear of all restrictions, claims,
liens, charges, encumbrances and right of others. Topp holds the Topp Shares as
his sole and separate property, and none of such shares constitutes community
property. Except as set forth on Section 4.3 of the Disclosure Schedule, there
are no agreements or understanding with respect to the voting, sale or transfer
of any of the shares of Topp Shares. The delivery by Topp to Purchaser at the
Closing of the certificates representing the Topp Shares duly endorsed in blank
or accompanied by stock powers endorsed in blank will vest Purchaser on the
Closing Date with good title to all of the Topp Shares.
4.4. Disclosure. No representation or warranty of Topp made in this
---- ----------
Agreement contains any untrue statement of a material fact, or omits to state a
material fact necessary to make the statements or facts contained therein not
misleading.
4.5. Litigation. There is no Legal Proceeding pending, or to the
---- ----------
knowledge of Topp, threatened against Topp or any Topp Entity that questions the
validity of this Agreement or any action to be taken by Topp in connection with
this Agreement.
4.6. Brokers. All negotiations relative to this Agreement and the
---- -------
transactions contemplated hereby have been carried out by Topp directly with
Purchaser and Telmex,
22
<PAGE>
the Company and CellStar, as the case may be, without the intervention of any
Person on behalf of Topp or any Topp Entity in such manner as to give rise to
any valid claim by any Person against Topp, Purchaser or Telmex, the Company,
any Subsidiary, or CellStar, or any of their respective Affiliates for a
finder's fee, brokerage commission, or similar payment.
4.7. Undisclosed Agreements. Topp does not have as of the date hereof and
---- ----------------------
will not have as of the Closing Date, any written agreements with respect to the
transactions contemplated by this Agreement with any other party to this
Agreement that have not been fully disclosed to all of the parties to this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CELLSTAR
CellStar hereby represents and warrants to Purchaser and Telmex as of the
date hereof as follows:
5.1. Organization and Good Standing. CellStar is a corporation, duly
- ---- ------------------------------
organized, validly existing, and in good standing under the laws of its state of
organization.
5.2. Authority; Noncontravention. Except for the consent of the agent
---- ---------------------------
required pursuant to that certain Credit Agreement, dated as of October 15, 1997
(the "Credit Agreement") among CellStar Corporation and certain lenders,
----------------
CellStar has the requisite power and authority to enter into this Agreement and
each other agreement, document, instrument, or certificate contemplated by this
Agreement to be executed by CellStar in connection with the consummation of the
transactions contemplated hereby and thereby (all such agreements, documents,
instruments, and certificates required to be executed by CellStar being
hereinafter referred to, collectively, as the "CellStar Documents") and to
------------------
consummate the transactions contemplated by this Agreement and the CellStar
Documents. This Agreement has been (and the CellStar Documents will be) duly
executed and delivered by CellStar and, assuming this Agreement and the CellStar
Documents to be executed by the parties hereto other than CellStar constitute
the valid and binding agreements of such other parties, each constitutes the
legal, valid, and binding obligation of CellStar, enforceable against CellStar
in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws affecting
rights of creditors generally and to general principles of equity.
5.3. Conflicts; Consents of Third Parties. Assuming the execution,
---- ------------------------------------
delivery and filing (if appropriate) of the agreements and documents
contemplated to occur prior to or simultaneous with this Agreement, the
execution and delivery of this Agreement does not (and the CellStar Documents
will not), and the consummation of the transactions contemplated by this
Agreement and the CellStar Documents and compliance with the provisions hereof
and thereof will not, (i) conflict with any of the provisions of the
23
<PAGE>
Articles of Incorporation or By-laws of the Company or the comparable documents
of any CellStar Subsidiary, (ii) subject to governmental filings and other
matters referred to herein, conflict with, result in a breach of or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation, or acceleration of any obligation or loss of
a material benefit under, or require the consent of any Person under, any
indenture or other agreement, permit, concession, franchise, license, or similar
instrument or undertaking to which any CellStar or any Affiliate is bound or to
which any CellStar Shares or other securities of the Company owned by CellStar
or any Affiliate are subject, except for compliance with the applicable
requirements of the Exchange Act, or result in the creation or imposition of any
securities interest, lien, charge or encumbrance upon any such securities, or
(iii) subject to governmental filings and other matters referred to herein,
including without limitation the Exchange Act, contravene any Law of any state
or of the United States or any political subdivision thereof or therein, or any
order, writ, judgment, injunction, decree, determination, or award currently in
effect, except that in the case of clause (ii) the consent of the agent under
the Credit Agreement is required for the sale of the CellStar Shares by
CellStar.
5.4. Ownership. CellStar owns the CellStar Shares and on the Closing
---- ---------
Date, CellStar will own the CellStar Shares, free and clear of any and all Liens
and will be in rightful possession of duly and validly authorized and issued
certificates evidencing its ownership of record of the CellStar Shares, and will
have full right, power and authority to sell, transfer, convey and deliver to
Purchaser, in accordance with the terms of this Agreement, good, valid and
marketable title, beneficially and of record, to all of said shares of CellStar
Shares, free and clear of all restrictions, claims, liens, charges, encumbrances
and right of others. The delivery by CellStar to Purchaser at the closing of the
certificates representing the CellStar Shares duly endorsed in blank or
accompanied by stock powers endorsed in blank will vest Purchaser on the Closing
Date with good title to all of the CellStar Shares, free and clear of any Liens.
Except as set forth on Section 5.4 of the Disclosure Schedule, there are no
agreements or understanding with respect to the voting, sale or transfer of any
of the shares of CellStar Shares.
5.5. Disclosure. No representation or warranty of CellStar made in this
---- ----------
Agreement contains any untrue statement of a material fact, or omits to state a
material fact necessary to make the statements or facts contained therein not
misleading.
5.6. Litigation. There is no Legal Proceeding pending, or to the
---- ----------
knowledge of CellStar, threatened against CellStar that questions the validity
of this Agreement or any action to be taken by CellStar in connection with this
Agreement.
5.7. Brokers. All negotiations relative to this Agreement and the
---- -------
transactions contemplated hereby have been carried out by CellStar directly with
Purchaser and Telmex, the Company and Topp, as the case may be, without the
intervention of any Person on behalf of CellStar or its Affiliates in such
manner as to give rise to any valid claim by any Person against CellStar,
Purchaser or Telmex, the Company, any
24
<PAGE>
Subsidiary, or Topp, or any of their respective Affiliates for a finder's fee,
brokerage commission, or similar payment.
5.8. Undisclosed Agreements. CellStar does not have as of the date hereof
---- ----------------------
and will not have as of the Closing Date, any written agreements with respect to
the transactions contemplated by this Agreement with any other party to this
Agreement that have not been fully disclosed to all of the parties to this
Agreement.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND TELMEX
Each of Purchaser and Telmex hereby represents and warrants to each of the
Company, Topp and CellStar as of the date hereof as follows:
6.1. Organization and Good Standing. Each of Purchaser and Telmex is a
- ---- ------------------------------
corporation, duly organized, validly existing, and in good standing under the
laws of Mexico.
6.2. Authorization; Enforceability.
---- -----------------------------
(a) Each of Purchaser and Telmex has the power to execute and
deliver this Agreement and each other agreement, document, instrument, or
certificate contemplated by this Agreement or to be executed by Purchaser or
Telmex, as the case may be, in connection with the consummation of the
transactions contemplated hereby and thereby (all of such agreements, documents,
instruments, and certificates required to be executed by Purchaser or Telmex
being hereinafter referred to, collectively, as the "Purchaser Documents"), and
-------------------
to perform fully its obligations hereunder and thereunder.
(b) The execution, delivery and performance by Purchaser or Telmex
of this Agreement and each of the Purchaser Documents has been duly authorized
by all necessary corporate or other action on the part of Purchaser or Telmex,
as the case may be.
(c) This Agreement has been, and each of the Purchaser Documents
will be, on or prior to the Closing Date, duly executed and delivered by
Purchaser, and if applicable, by Telmex and (assuming due authorization,
execution, and delivery by the other parties hereto) this Agreement constitutes,
and each of the Purchaser Documents when so executed and delivered will
constitute, the legal, valid, and binding obligation of Purchaser, and if
applicable, of Telmex, enforceable against Purchaser or Telmex, as the case may
be, in accordance with its terms, except as such enforceability may be limited
by applicable bankruptcy, insolvency, and similar Laws affecting creditors'
rights generally and to general principles of equity (whether considered in a
proceeding in equity or at law).
6.3. Consents of Third Parties. No consent, waiver, approval, or
---- -------------------------
authorization of, or declaration or filing with, or notification to, any Person
is required on the part of
25
<PAGE>
Purchaser or Telmex in connection with the execution and delivery of this
Agreement or the Purchaser Documents, the consummation by Purchaser or Telmex of
the transactions contemplated hereby and thereby, or the compliance by Purchaser
or Telmex with any of the provisions hereof or thereof, except as may be
required by Purchaser or Telmex in connection with any confidentiality agreement
by which it is bound and except for compliance with the applicable requirements
of the Exchange Act and the HSR Act. The execution and delivery by each of
Purchaser and Telmex of this Agreement, the Purchaser Documents, the
consummation by Purchaser and Telmex of the transactions contemplated hereby and
thereby, and the compliance by Purchaser and Telmex with any of the provisions
hereof or thereof will not conflict with, or result in the breach of, any
provision of the estatutos of Purchaser or Telmex.
6.4. Litigation. There is no Legal Proceeding pending, or to the
---- ----------
knowledge of Purchaser and Telmex, threatened against Purchaser or Telmex that
questions the validity of this Agreement or any action to be taken by Purchaser
or Telmex in connection with this Agreement.
6.5. Financial Capability. Purchaser has sufficient available funds on
---- --------------------
hand to purchase the Company Shares, the Topp Shares and the CellStar Shares,
respectively, on the terms and conditions contained in this Agreement.
6.6. Brokers. All negotiations relative to this Agreement and the
---- -------
transactions contemplated hereby have been carried out by Purchaser and Telmex
directly with the Company, Topp and CellStar, as the case may be, without the
intervention of any Person on behalf of Purchaser or Telmex or their respective
Affiliates in such manner as to give rise to any valid claim by any Person
against Purchaser, the Company, any Subsidiary, Topp or CellStar or any of their
respective Affiliates for a finder's fee, brokerage commission, or similar
payment.
6.7. Securities Matters.
---- ------------------
(a) Purchaser understands and acknowledges that the Shares have not
been registered under the Securities Act, or the securities laws of any state or
foreign jurisdiction and, unless so registered, may not be offered, sold,
transferred, or otherwise disposed of except pursuant to an exemption from, or
in a transaction not subject to, the registration requirements of the Securities
Act and any applicable securities laws of any state or foreign jurisdiction.
(b) Purchaser is acquiring the Securities for its own account for
investment purposes and not with a view to, or for offer or sale for the Company
in connection with, the distribution or resale thereof.
26
<PAGE>
(c) The Purchaser understands that the Securities purchased pursuant
to this Agreement will be in unregistered form only and that any certificates
delivered to it in respect of the Securities will bear a legend substantially to
the following effect:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND SUCH SECURITIES MAY NOT BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED, OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR PURSUANT TO AN EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.
6.8. HSR Act Filings. Telmex has filed a notification and report form
---- ---------------
pursuant to the HSR Act with respect to the purchase by Purchaser of the Shares
pursuant to this Agreement.
6.9. Disclosure. No representation or warranty of the Purchaser or Telmex
---- ----------
made in this Agreement contains any untrue statement of a material fact, or
omits to state a material fact necessary to make the statements or facts
contained therein not misleading.
6.10. Undisclosed Agreements. Neither Telmex nor the Purchaser has, as of
----- ----------------------
the date hereof and will not have as of the Closing Date, any written agreements
with respect to the transactions contemplated by this Agreement with any other
party to this Agreement that have not been fully disclosed to all of the parties
to this Agreement.
ARTICLE VII
COVENANTS OF THE COMPANY
7.1. Access to Documents; Opportunity to Ask Questions. The Company shall make
- ---- -------------------------------------------------
available for inspection by the Purchaser and CellStar and their respective
directors, officers, employees, counsel, representatives, accountants and
auditors (collectively, "Representatives"), during normal business hours,
---------------
corporate records, books of accounts, contracts and all other documents
requested by the Purchaser and CellStar, as the case may be, and shall permit
the Purchaser and CellStar and their respective Representatives reasonable
access to the properties of the Company, upon reasonable advance notice to the
Company, in order to permit the Purchaser, CellStar and such Representatives to
make reasonable inspection and examination of the business, operations and
affairs of the Company. The Company shall further cause its Representatives to
be available upon reasonable notice to answer questions of the Purchaser's and
CellStar's Representatives concerning the business, operations and affairs of
the Company and to make available all relevant books and records in connection
with such inspection and examination. No
27
<PAGE>
investigation by the Purchaser or its Representatives prior to or after the date
of this Agreement shall diminish or obviate any of the representations,
warranties, covenants or agreements of the Company contained in this Agreement
or any Company Document.
7.2. Conduct of the Company. (a) From the date hereof until the Closing
---- ----------------------
Date, each of the Company and its Subsidiaries shall:
(i) conduct its business in the ordinary course, consistent with
past practice, and shall use its best efforts to preserve its business
organization, to keep available the services of its employees, independent
contractors and consultants currently employed, to preserve the present
relationships with customers, suppliers (including carriers), retailers,
distributors and other Persons with whom it has significant business relations,
to maintain books and records in the usual and ordinary manner, and to preserve
the goodwill and ongoing business;
(ii) maintain in force all insurance policies in force on the date
hereof, maintain all of its tangible assets in good operating condition,
maintain, in the ordinary course of business, all inventories and other similar
items owned by it and take all reasonable steps to maintain in the ordinary
course all intangible assets owned by it; and
(iii) promptly advise Purchaser and CellStar of any change in its
condition (financial or otherwise), assets, liabilities, and operations.
(b) Without limiting the generality of the foregoing, other than
in the ordinary course of business, consistent with past practice, or with the
written consent of Purchaser, from the date hereof until the Closing Date, the
Company will not, and will not permit any of its Subsidiaries to:
(i) declare, set aside, or pay any dividend or other distribution
with respect to any shares of capital stock of the Company, or enter into any
agreement or understanding with respect to any repurchase, redemption, or other
acquisition by the Company or any Subsidiary of any outstanding shares of
capital stock or other securities of, or other ownership interests in, the
Company or any Subsidiary;
(ii) amend the Articles of Incorporation or Bylaws or other
governing documents or any outstanding security of the Company or any
Subsidiary;
(iii) incur, assume, or guarantee by the Company or any Subsidiary
of any indebtedness for borrowed money;
(iv) create or assume any Lien on any assets of the Company or any
Subsidiary;
(v) make any loan, advance, or capital contribution to or invest
in any Person;
28
<PAGE>
(vi) cause or willfully permit any damage, destruction, or other
casualty loss (whether or not covered by insurance) affecting the business or
assets of the Company or any Subsidiary;
(vii) enter into any transaction, commitment, contract, or agreement
by the Company or any Subsidiary relating to their assets or businesses
(including the acquisition or disposition of any assets) or relinquish any
contract or other right;
(viii) pay, discharge, or satisfy any material claims, liabilities,
or other obligations (whether absolute, accrued, asserted or unasserted,
contingent, or otherwise) except in the ordinary course of business consistent
with past practice;
(ix) change any method of accounting or accounting practice by the
Company or any Subsidiary, except for any such change required by reason of a
concurrent change in generally accepted accounting principles in the United
States, consistently applied and changes disclosed in Section 3.5 of the
Disclosure Schedule;
(x) (A) grant any severance or termination pay to any director,
officer, or employee of the Company or any Subsidiary, (B) enter into any
employment, deferred compensation, or other similar agreement (or any amendment
to any such existing agreement) with any director, officer, or employee of the
Company or any Subsidiary, (C) increase the benefits payable under any existing
severance or termination pay policies or employment agreements or (D) increase
the compensation, bonus, or other benefits payable to any director, officer, or
employee of the Company or any Subsidiary;
(xi) authorize any of, or commit or agree to take any of, the
foregoing actions except as otherwise permitted by this Agreement;
(xii) not enter into, amend or extend any collective bargaining or
other labor agreement; or
(xiii) not adopt, enter into, amend in any material respect, announce
any intention to adopt or terminate, any employee benefit plan, program or
arrangement of general applicability.
7.3. Consents and Conditions. The Company shall use its best efforts to
---- -----------------------
obtain the consent of any third party or Governmental Body which is required
under any instrument, contract, lease, Permit or other agreement or arrangement
or any claim, right or benefit arising thereunder or resulting therefrom as a
result of the transactions contemplated by this Agreement, including, without
limitation, any notifications and approvals required under the HSR Act and the
consents, approvals and waivers set forth in Section 3.4 of the Disclosure
Schedule. Nothing in this Agreement shall be construed as an attempt to assign
any contract, lease, Permit or other agreement or arrangement that is by its
terms non-assignable without the consent of the other party thereto. This
Section 7.3 is not intended to limit the Purchaser's right under Section 11.2
not to consummate
29
<PAGE>
the transactions contemplated by this Agreement in the event the condition
contained therein is not satisfied. The Company shall use its best efforts to
cause each of the conditions to the obligations of the Purchaser to be
satisfied.
7.4. HSR Act Filings. The Company will provide promptly any supplemental
---- ---------------
information that may be requested in connection with the notification and report
form pursuant to the HSR Act filed by the Company with respect to the purchase
by Purchaser of the Shares pursuant to this Agreement. The Company will comply
with all reasonable requests of the other parties for information necessary in
connection with the preparation by such other party of its notification and
report form.
7.5. Disclosure. From and after the date hereof and until the Closing,
---- ----------
the Company hereby covenants and agrees that before the Company shall disclose
any information concerning this Agreement or the transactions contemplated
hereby, the Company shall so advise and cooperate with each of Telmex and
CellStar and shall not disclose such information without the consent of Telmex
and CellStar, respectively (which consent shall not be unreasonably withheld or
delayed), unless such information is otherwise publicly available or the
disclosure thereof is required by Law.
7.6. Confidentiality. The Company will treat as confidential and keep
---- ---------------
secret the affairs of each of Purchaser, Telmex and CellStar and their
respective Affiliates (including, without limitation, information about
processes, procedures, techniques, know-how and other similar proprietary and
confidential information) and, at any time before or after the Closing Date,
will not, without the prior written consent of Telmex or CellStar, as the case
may be, disclose, furnish or make known or accessible to or use for the benefit
of anyone, any information of a confidential nature relating in any way to the
business of the Purchaser, Telmex or CellStar, except as may be required by Law
or by Order of any Governmental Body.
7.7. No Shop Provision. Except as provided for in this Agreement from and
---- -----------------
after the date hereof until the earlier of the Closing Date or the date on which
this Agreement shall have been terminated in accordance with the provisions of
Article XV, neither the Company nor any officer, director, agent, or
representative of the Company will, nor will they authorize or permit any
investment banker, attorney, accountant, or other representative retained by any
of the foregoing in any manner, directly or indirectly, to, (a) effect or seek,
or offer (including by way of providing information) or propose (whether
publicly or otherwise) to effect, (i) any issuance or sale of any shares of the
Company's capital stock or securities convertible into or exercisable for
capital stock other than issuances pursuant to the exercise of options
outstanding on the date hereof and disclosed in Section 3.2 of the Disclosure
Schedule; (ii) any tender or exchange offer or merger or other business
combination involving the Company or any Subsidiary; or (iii) any
recapitalization, restructuring, liquidation, dissolution, or other
extraordinary transaction with respect to the Company or any Subsidiary; (each,
an "Acquisition
-----------
30
<PAGE>
Proposal") or (b) enter into any discussions or arrangements with any third
- --------
party (or provide any information to any third party) with respect to any
Acquisition Proposal.
7.8. No Breach of Representations and Warranties. The Company shall not
---- -------------------------------------------
take any action, and shall use its best efforts not to permit any event to
occur, which would result in any of the representations and warranties of the
Company contained in this Agreement not being true and correct on and as of the
Closing Date with the same force and effect as if such representations and
warranties had been made on and as of the Closing Date.
7.9. Updating of Information. The Company shall promptly deliver to
---- -----------------------
Purchaser and CellStar any information concerning any event subsequent to the
date of this Agreement which is necessary to supplement the information
contained in or made a part of the representations and warranties contained
herein, including the Disclosure Schedule hereto, or delivered by the Company
pursuant to any of the covenants contained herein, in order that the information
contained herein or so delivered be complete and accurate in all material
respects, it being understood and agreed that the delivery of such information
shall not in any manner constitute a waiver by the Purchaser of any of the
conditions precedent to the Closing hereunder, including, without limitation,
the conditions contained in Section 11.1 hereof.
7.10. Periodic Financial Statements. The Company shall furnish or cause to
----- -----------------------------
be furnished to the Purchaser and CellStar: (i) within 120 days after the end of
each fiscal year of the Company, financial statements as at the close of such
year, audited by independent public accountants selected by the Company, and
(ii) within 45 days after the end of each quarter, financial statements as at
the end of such period for such quarter. In addition, the Company shall provide
to Purchaser monthly financial statements within a reasonable period after such
financial statements become available.
7.11. Certain Notifications. At all times prior to the Closing Date, the
----- ---------------------
Company shall promptly notify each other party in writing of the occurrence of
any event which will or may result in the failure of any of the conditions
contained in Article XI hereof to be satisfied. Such notice shall be in
addition to and not in lieu of the other notices and communications provided for
herein.
7.12. Efforts to Consummate; Further Actions. Subject to the terms and
----- --------------------------------------
conditions herein provided, the Company agrees to proceed diligently and in good
faith to consummate the transactions contemplated hereby and to use its best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable to consummate and make effective
the Agreement and the transactions contemplated hereby.
31
<PAGE>
ARTICLE VIII
COVENANTS OF TOPP
8.1. Ancillary Agreements. Effective as of the Closing Date, Topp shall (A)
- ---- --------------------
terminate (i) the Prior Shareholders' Agreements to which he is a party, (ii)
the CellStar Letter Agreement, (iii) the CellStar Proxy Agreement, and (B)
execute and deliver (i) the Shareholders' Agreement to each of the parties
thereto, (ii) the Amended and Restated CellStar Note, (iii) the Amended and
Restated Letter Agreement to each of the parties thereto, (iv) the Topp Notes to
the Company and (v) the Topp Employment Agreement to the Company.
8.2. Performance of Covenants by the Company. Topp shall use his best
---- ---------------------------------------
efforts to cause the Company to fulfill the covenants contained in Article VII.
8.3. HSR Act Filings. Topp will provide promptly any supplemental
---- ---------------
information that may be requested in connection with the filing of a
notification and report form under the HSR Act in connection with the
acquisition by Purchaser of the Shares. Topp will comply with all reasonable
requests of the other parties for information necessary in connection with the
preparation by such other party of its notification and report form.
8.4. Certain Notifications. At all times prior to the Closing Date, Topp
---- ---------------------
shall promptly notify each other party in writing of the occurrence of any event
which will or may result in the failure of any of the conditions contained in
Article XI hereof to be satisfied. Such notice shall be in addition to and not
in lieu of the other notices and communications provided for herein.
8.5. Efforts to Consummate; Further Actions. Subject to the terms and
---- --------------------------------------
conditions herein provided, Topp agrees to proceed diligently and in good faith
to consummate the transactions contemplated hereby and to use his best efforts
to take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective the
Agreement and the transactions contemplated hereby.
8.6. Non-Competition; Non Solicitation, etc. Topp agrees to be bound by
---- ---------------------------------------
and subject to the obligations imposed on him under the Topp Employment
Agreement, which obligations Topp has agreed to assume in consideration for the
Topp Share Purchase Price.
ARTICLE IX
COVENANTS OF CELLSTAR
9.1. Ancillary Agreements. Effective as of the Closing Date, CellStar shall
- ---- --------------------
(A) terminate (i) the Prior Shareholders' Agreements to which it is a party (ii)
the CellStar Letter Agreement, (iii) the CellStar Proxy Agreement, (iv) the
CellStar License
32
<PAGE>
Agreement, (v) the CellStar Security Documents and (B) execute and deliver (i)
the Shareholders' Agreement to each of the parties thereto, (ii) the Amended and
Restated CellStar Note to the Company, (iii) the Amended and Restated Letter
Agreement to each of the parties thereto and (iv) the Third Amendment to the
CellStar Distribution Agreement to the Company.
9.2. Certain Notifications. At all times prior to the Closing Date,
---- ---------------------
CellStar shall promptly notify the other party in writing of the occurrence of
any event which will or may result in the failure of any of the conditions
contained in Article XI hereof to be satisfied. Such notice shall be in addition
to and not in lieu of the other notices and communications provided for herein.
9.3. Efforts to Consummate; Further Actions. Subject to the terms and
---- --------------------------------------
conditions herein provided, CellStar agrees to proceed diligently and in good
faith to consummate the transactions contemplated hereby and to used its best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable to consummate and make effective
the Agreement and the transactions contemplated hereby.
ARTICLE X
COVENANTS OF PURCHASER AND TELMEX
10.1. Public Disclosure and Confidentiality. Each of Purchaser and Telmex
----- -------------------------------------
hereby agrees that, except as required by applicable law, no press release or
public announcement or communication will be made or caused to be made
concerning the execution or performance of this Agreement, the terms hereof or
the transactions contemplated hereby unless specifically approved in advance by
each of the parties hereto. In the event that Purchaser or Telmex views
disclosure as required by applicable law as contemplated by the previous
sentence, Purchaser or Telmex shall provide a copy of such disclosure to the
other parties within a reasonable period of time prior to such disclosure.
10.2. HSR Act Filings. Each of Purchaser and Telmex covenants and agrees
----- ---------------
to provide promptly any supplemental information that may be requested in
connection with the notification and report form filed pursuant to the HSR Act
with respect to the purchase by Purchaser of the Shares. Purchaser and Telmex
will comply with all reasonable requests of the other parties for information
necessary in connection with the preparation by such other party of its
notification and report form.
10.3. Consents and Conditions. From and after the date hereof and until
----- -----------------------
the Closing, each of Purchaser and Telmex hereby covenants and agrees that
Purchaser will use its commercially reasonable efforts (i) to obtain any
required governmental consents to the transactions contemplated hereby required
to be obtained by it and (ii) to cause each of the conditions precedent set
forth in Article XII to be satisfied.
33
<PAGE>
10.4. Certain Notifications. At all times prior to the Closing Date, each
----- ---------------------
of Purchaser and Telmex shall promptly notify each other party in writing of the
occurrence of any event which will or may result in the failure of any of the
conditions contained in Article XII hereof to be satisfied. Such notice shall be
in addition to and not in lieu of the other notices and communications provided
for herein.
10.5. Efforts to Consummate; Further Actions. Subject to the terms and
----- --------------------------------------
conditions herein provided, each of Purchaser and Telmex agrees to proceed
diligently and in good faith to consummate the transactions contemplated hereby
and to used its best efforts to take, or cause to be taken, all actions and to
do, or cause to be done, all things necessary, proper or advisable to consummate
and make effective the Agreement and the transactions contemplated hereby.
ARTICLE XI
CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
The obligation of Purchaser and Telmex to consummate the purchase of the
Company Shares from the Company, the Topp Shares from Topp and the CellStar
Shares from CellStar, each as contemplated hereby on the Closing Date is subject
to the satisfaction or waiver on each such date by Purchaser of the following
conditions:
11.1. Performance of Covenants. Each of the Company, Topp and CellStar shall
- ----- ------------------------
have performed and complied, in all material respects, with the covenants and
provisions of this Agreement required to be performed or complied with by it
between the date hereof and the Closing Date.
11.2. Consents; HSR Act. All consents, approvals or Orders of any
----- -----------------
Governmental Body or other third party the granting of which is required for the
consummation of the transactions contemplated hereby or to the Company to
conduct its businesses after the Closing Date substantially in the same manner
as currently conducted shall have been obtained and all applicable waiting
periods, if any, in respect of the transactions contemplated by this Agreement
under the HSR Act shall have expired or been terminated.
11.3. Litigation; Other Events.
----- ------------------------
(a) No preliminary or permanent injunction or other order of any
court restraining or prohibiting the consummation of the transactions
contemplated hereby shall be in effect.
(b) There shall not be pending, nor shall there have been
threatened, any inquiry by any Governmental Body or Legal Proceeding that seeks,
nor any Law that would have the effect, to:
34
<PAGE>
(i) challenge, restrain, prohibit or delay the sale or
purchase of the Company Shares, the Topp Shares or the CellStar Shares
pursuant to this Agreement or any of the transactions contemplated hereby
or obtain damages as a result thereof;
(ii) make the sale or purchase of the Company Shares, the Topp
Shares or the CellStar Shares pursuant to this Agreement illegal or in
violation of any duty; or
(iii) impose or result in material limitations on the ability
of Purchaser or any of its Affiliates to exercise full rights of ownership
of the Company Shares, the Topp Shares or the CellStar Shares purchased by
it hereunder, including, without limitation, the right to vote such Shares
purchased by it hereunder on all matters properly presented to the
shareholders of the Company.
11.4. Ancillary Agreements. The respective parties thereto shall have
----- --------------------
executed and delivered the Shareholders' Agreement, the Amended and Restated
CellStar Note, the Amended and Restated Letter Agreement (and the funds,
instruments and documents to be delivered thereto), Third Amendment to
Distribution and Fulfillment Agreement, the Topp Notes, the Topp Employment
Agreement, Pollak Employment Agreement, the Amendments to Employment Agreements,
notice for exercise of the CellStar Warrants and CellStar Options.
11.5. Termination of Certain Agreements. Purchaser shall have received
----- ---------------------------------
duly executed instruments necessary to evidence the termination of all Prior
Shareholders' Agreements, the CellStar License Agreement, the CellStar Security
Documents and of the consent by the lenders under the Credit Agreement to the
consummation of the transactions contemplated by this Agreement.
11.6. Exercise of Warrants and Options. CellStar shall have exercised in
----- --------------------------------
full all warrants and options with respect to the Class A Shares and Class B
Shares, respectively, on the terms and in the amounts set forth in the Amended
and Restated Letter Agreement.
11.7. Certificates. Purchaser shall have received certificates from each
----- ------------
of the Company, Topp and CellStar as to compliance with the conditions set forth
in Sections 11.1 (as to performances of its covenants only) and 11.3 (as to
matters affecting it only), dated the Closing Date, executed by a duly
authorized officer of the Company and CellStar, respectively and by Topp.
11.8. Directors. Purchaser shall have received the written resignation of
----- ---------
those directors of the Company designated by Purchaser as necessary to fulfill
the requirements of Article V of the Shareholders' Agreement.
35
<PAGE>
11.9. Credit Agreement. Purchaser shall have received evidence
----- ----------------
satisfactory to it that CellStar has received consent of the lenders under the
Credit Agreement to the transactions contemplated by this Agreement.
11.10. Amendments to Employment Agreements. Purchaser shall have received
------ -----------------------------------
the Amendments to Employment Agreements, duly executed by the parties hereto.
11.11. Conversion of Preferred Shares. CellStar shall have converted its
------ ------------------------------
A Convertible Preferred Stock and B Convertible Preferred Stock, respectively,
on the terms and in the amounts set forth in Exhibit B hereto.
11.12. Articles of Incorporation. At the Closing, the Company shall have
------ -------------------------
filed an Amendment to the Articles of Incorporation of the Company with the
Secretary of State of Florida, substantially in the form of Exhibit C hereto.
ARTICLE XII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY,
TOPP AND CELLSTAR
The obligation of each of the Company, Topp and CellStar to consummate the
issuance and sale of the Company Shares, the Topp Shares and the CellStar
Shares, respectively, to Purchaser contemplated hereby on the Closing Date
subject to the satisfaction or waiver by each of the Company, Topp and CellStar
of the following conditions:
12.1. Performance of Covenants. Purchaser shall have performed and complied,
- ----- ------------------------
in all material respects, with the covenants and provisions in this Agreement
required herein to be performed or complied with by it between the date hereof
and the Closing Date.
12.2. HSR Act. All applicable waiting periods, if any, in respect of the
----- -------
transactions contemplated by this Agreement under the HSR Act shall have expired
or been terminated.
12.3. Litigation; Other Events.
----- ------------------------
(a) No preliminary or permanent injunction or other order of any
court restraining or prohibiting the consummation of the transactions
contemplated hereby shall be in effect.
(b) There shall not be pending, nor shall there have been
threatened, any inquiry or Legal Proceeding that seeks, nor any Law that would
have the effect, to:
(i) challenge, restrain, prohibit or delay the sale and
purchase of the Shares pursuant to this Agreement or any of the
transactions contemplated hereby or obtain damages as a result thereof;
36
<PAGE>
(ii) make the sale or purchase of the Shares pursuant to this
Agreement illegal or in violation of any duty; or
(iii) impose or result in material limitations on the ability
of Purchaser or any of its Affiliates to exercise full rights of ownership
of the portion of the Shares purchased by it hereunder, including, without
limitation, the right to vote the Shares purchased by it hereunder on all
matters properly presented to the shareholders of the Company.
12.4. Officer's Certificate. Each of the Company, Topp and CellStar shall
----- ---------------------
have received a certificate from Purchaser as to compliance with the conditions
set forth in Sections 12.1 and 12.3, dated the Closing Date, executed by a duly
authorized officer of Purchaser.
12.5. Credit Agreement. In the case of CellStar only, CellStar shall have
----- ----------------
received an appropriate consent to the transactions contemplated by this
Agreement pursuant to the Credit Agreement.
12.6. Amended and Restated Letter Agreement. Each of the parties thereto
----- -------------------------------------
shall have performed and complied, in all material respects, with the covenants
and provisions n the Amended and Restated Letter Agreement required therein to
be performed or complied with by it.
ARTICLE XIII
PRELIMINARY AND CLOSING DELIVERIES
13.1. Deliveries by the Company to Purchaser and Telmex. At the Closing, the
- ----- -------------------------------------------------
Company shall deliver, or shall cause to be delivered, to Purchaser the
following:
(a) the certificates representing all of the Company Shares;
(b) the Shareholders' Agreement, duly executed by the Company and
each of the Shareholders (other than Purchaser);
(c) the certificate referred to in Section 11.7;
(d) evidence of the resignation of such of the present directors and
officers of the Company as Purchaser may request;
(e) an opinion of Greenberg Traurig, P.A., special counsel to the
Company with respect to the matters set forth in the first two sentences of
Section 3.1, Section 3.2, 3.3 and Section 3.4;
(f) the Amendments to Employment Agreements duly executed by each of
Stephan J. Ritter and Robert Dandrea; and
37
<PAGE>
(g) the statement described in Treasury Regulation section 1.1445-
2(c)(3) certifying that none of the Shares in the Company are U.S. real property
interests for purposes of section 1445 of the Code; such statement will be
complete, accurate and valid on the Closing Date; if such statement is not
received by or on the Closing Date. the Company shall withhold all amounts
required to be withheld by section 1445 of the Code;
(h) any other certificates and documents reasonably requested by the
Purchaser or its counsel relating to the transfer of the Company Shares.
13.2. Deliveries by Topp to Purchaser and Telmex. At the Closing, Topp
----- ------------------------------------------
shall deliver, or shall cause to be delivered, to Purchaser the following:
(a) the certificates for the Topp Shares, duly endorsed and in form
for transfer to Purchaser or accompanied by stock powers endorsed in blank;
(b) an opinion of Greenberg Traurig P.A., special counsel to Topp
with respect to the matters set forth in Section 4.1, 4.2 and 4.3;
(c) all other such assignments and other instruments or documents
(including certificates of title) as shall be necessary in the judgment of
Purchaser to evidence the sale, assignment, transfer and conveyance by Topp to
Purchaser of the Topp Shares in accordance with the terms hereof;
(d) the certificate referred to in Section 11.7 hereof signed by
Topp; and
(e) any other certificates and documents reasonably requested by the
Purchaser or its counsel.
13.3. Deliveries by CellStar to Purchaser and Telmex. At the Closing,
----- ----------------------------------------------
CellStar shall deliver, or shall cause to be delivered, to Purchaser and Telmex
the following:
(a) the certificates for the CellStar Shares, duly endorsed and in
form for transfer to Purchaser or accompanied by stock powers endorsed in blank;
(b) all other such assignments and other instruments or documents
(including certificates of title) as shall be necessary in the judgment of
Purchaser and Telmex to evidence the sale, assignment, transfer and conveyance
by CellStar to Purchaser of the CellStar Shares in accordance with the terms
hereof;
(c) an opinion of Steel Hector Davis LLP, special counsel to
CellStar with respect to the matters set forth in Section 5.1, 5.2, 5.3 and 5.4;
(d) the certificate referred to in Section 11.7 hereof signed by
CellStar; and
38
<PAGE>
(e) certificates of the Secretary or an Assistant Secretary of
Purchaser attesting as to the incumbency and signature of each officer of
CellStar who shall execute this Agreement; and
13.4. Deliveries by Purchaser and Telmex to the Company. At the Closing,
----- -------------------------------------------------
the Purchaser and Telmex shall deliver to the Company the following:
(a) a wire transfer in immediately available funds in the amount
equal to U.S.$ 35,000,000;
(b) the certificate referred to in Section 12.4 hereof signed by a
duly authorized officer of Purchaser; and
(c) the Telmex Note marked "Cancelled";
(d) certificates of the Secretary or an Assistant Secretary of
Purchaser attesting as to the incumbency and signature of each officer of
Purchaser who shall execute this Agreement;
(e) an opinion of Franck, Galicia, Duclaud y Robles, S.C., special
Mexican counsel to Purchaser and Telmex with respect to the matters set forth in
Sections 6.1 and 6.2; and
(f) any other certificates and documents reasonably requested by the
Company or its counsel relating to the transfer of the Company Shares.
13.5. Deliveries by Purchaser and Telmex to Topp. At the Closing, the
----- ------------------------------------------
Purchaser and Telmex shall deliver to Topp the following:
(a) a wire transfer in immediately available funds in the amount
equal to the Topp Share Purchase Price;
(b) the certificate referred to in Section 12.4;
(c) certificates of the Secretary or an Assistant Secretary of
Purchaser attesting as to the incumbency and signature of each officer of
Purchaser who shall execute this Agreement; and
(d) any other certificates and documents reasonably requested by
Topp or his counsel relating to the transfer of the Topp Shares.
13.6. Deliveries by Purchaser and Telmex to CellStar. At the Closing, the
----- ----------------------------------------------
Purchaser and Telmex shall deliver to CellStar the following:
(a) a wire transfer immediately available funds in the amount equal
to the CellStar Share Purchase Price;
39
<PAGE>
(b) an opinion of Franck, Galicia, Duclaud y Robles, S.C., special
Mexican counsel to Purchaser and Telmex with respect to the matters set forth in
Sections 6.1 and 6.2;
(c) the certificate referred to in Section 12.4;
(d) certificates of the Secretary or an Assistant Secretary of
Purchaser attesting as to the incumbency and signature of each officer of
Purchaser who shall execute this Agreement; and
(e) any other certificates and documents reasonably requested by
CellStar or its counsel relating to the transfer of the CellStar Shares.
ARTICLE XIV
INDEMNIFICATION AND RELATED MATTERS
14.1. Indemnification for Company Losses.
- ----- ----------------------------------
(a) The Company, Topp and CellStar hereby agree that Purchaser shall
be indemnified and held harmless pursuant to the provisions of paragraphs (b),
(c) and (d) of this Section 14.1 from and against any and all claims, judgments,
causes of action, liabilities, obligations, damages, losses, deficiencies,
costs, penalties, interest and expenses (including, without limitation,
reasonable fees and expenses of counsel) (collectively, "Losses") arising out
------
of, based upon, attributable to, or resulting from (i) any inaccuracy of any
representation or any breach of any warranty on the part of the Company
contained in this Agreement or any Company Document, other than an Indemnifiable
Tax Cost, (ii) any Indemnifiable Patent Loss or any Indemnifiable Tax Cost and
(iii) all claims, actions, suits, proceedings, investigations, demands and
assessments incident to any of the foregoing, in each case net of any insurance
recovery (collectively, "Company Losses"); provided, however, that no claim
-------------- -------- -------
based upon a breach of a representation or warranty may be asserted under this
Section 14.1 following the termination of such representation or warranty.
(b) 18% of the amount of any Company Losses (i) shall be applied to
reduce the principal amount outstanding under each of the Topp Notes pro rata
among such notes until such principal amount has been reduced to zero and (ii)
if the principal amount outstanding under the respective Topp Notes has been
reduced to zero, shall be payable by Topp to Telmex; provided, however, that the
total amount to be applied or paid pursuant to this paragraph (b) shall not
exceed the Topp Purchase Price.
(c) 12% of the amount of any Company Losses (i) shall be applied to
reduce the principal amount outstanding under the CellStar Note until such
principal amount has been reduced to zero and (ii) if the principal amount
outstanding under the CellStar Note has been reduced to zero, shall be payable
by CellStar to Telmex; provided,
40
<PAGE>
however, that the total amount to be applied or paid pursuant to this paragraph
(c) shall not exceed the CellStar Purchase Price.
(d) The Company shall issue to the Purchaser a number of additional
Shares equal to the amount of Company Losses in excess of the amounts applied or
paid pursuant to paragraphs (b) and (c) of this Section 14.1 divided by U.S.$
324. If at the time of issuance the Purchaser holds more than one class of
Shares, the additional Shares to be issued pursuant to this paragraph shall be
Shares of each such class in proportion to the number of Shares of each class
Purchaser holds.
14.2. Non-Indemnifiable Patent Outcome. If any Patent Outcome requires
----- --------------------------------
the Company to pay on an ongoing basis a royalty in excess of 1% of revenues on
a material portion of its products or services or requires the Company to make
changes to its line of products or services that will have a material adverse
effect on the financial prospects of the Company, then the Purchaser shall be
entitled to require the Company to issue to the Purchaser 77,094 additional
Shares for aggregate consideration of $25,000. If at the time of issuance the
Purchaser holds more than one class of Shares, the additional Shares to be
issued pursuant to this paragraph shall be Shares of each such class in
proportion to the number of Shares of each class Purchaser holds. The Purchaser
shall not have any rights under Section 14.1 with respect to any Patent Outcome
for which the Purchaser exercises its rights under this Section 14.2.
14.3. Other Indemnification.
----- ---------------------
(a) The Company hereby agrees to indemnify and hold Purchaser, its
Affiliates and the officers, directors, employees, partners, and agents thereof,
harmless (on an after-tax basis) from and against any and all Losses arising out
of, based upon, attributable to, or resulting from:
(i) any breach of any agreement or covenant on the part of the
Company contained in this Agreement; and
(ii) all claims, actions, suits, proceedings, investigations,
demands, and assessments incident to any of the foregoing.
(b) Topp hereby agrees to indemnify and hold Purchaser, its
Affiliates and the officers, directors, employees, partners, and agents thereof,
harmless (on an after-tax basis) from and against any and all Losses arising out
of, based upon, attributable to, or resulting from:
(i) any inaccuracy of any representation, any breach of
warranty or breach of any agreement or covenant on the part of Topp
contained in this Agreement; and
41
<PAGE>
(ii) all claims, actions, suits, proceedings, investigations,
demands, and assessments incident to any of the foregoing;
(c) CellStar hereby agrees to indemnify and hold Purchaser, its
Affiliates and the officers, directors, employees, partners, and agents thereof,
harmless (on an after-tax basis) from and against any and all Losses arising out
of, based upon, attributable to, or resulting from:
(i) any inaccuracy of any representation, any breach of
warranty or breach of any agreement or covenant on the part of CellStar
contained in this Agreement; and
(ii) all claims, actions, suits, proceedings, investigations,
demands, and assessments incident to any of the foregoing;
(d) Each of Purchaser and Telmex hereby agrees to indemnify and hold
each of the Company, Topp and CellStar harmless (on an after-tax basis) from and
against any and all Losses arising out of, based upon, attributable to, or
resulting from:
(i) any inaccuracy of any representation, any breach of
warranty or breach of any agreement or covenant on the part of Purchaser
and Telmex contained in this Agreement; and
(ii) all claims, actions, suits, proceedings, investigations,
demands, and assessments incident to the foregoing.
(c) CellStar hereby agrees to indemnify and hold Purchaser, its
Affiliates and the officers, directors, employees, partners, and agents thereof,
harmless (on an after-tax basis) from and against any and all Losses arising out
of, based upon, attributable to, or resulting from:
(i) any inaccuracy of any representation, any breach of
warranty or nonfulfillment of any agreement or covenant on the part of
CellStar contained in this Agreement or any CellStar Document; and
(ii) all claims, actions, suits, proceedings, investigations,
demands, and assessments incident to any of the foregoing;
(d) Each of Purchaser and Telmex hereby agrees to indemnify and hold
each of the Company, Topp and CellStar harmless (on an after-tax basis) from and
against any and all Losses arising out of, based upon, attributable to, or
resulting from:
(i) any inaccuracy of any representation, any breach of
warranty or nonfulfillment of any agreement or covenant on the part of
Purchaser and Telmex contained in this Agreement or any Purchaser Document;
and
42
<PAGE>
(ii) all claims, actions, suits, proceedings, investigations,
demands, and assessments incident to the foregoing.
14.4. Procedures for Indemnification. (a) Whenever a claim shall arise
----- ------------------------------
for indemnification under Sections 14.1, 14.2 and 14.3, with the exception of
claims for litigation expenses in respect of litigation as to which a notice of
claim, as provided in this Section 14.4, has previously been given, which
expenses shall be funded on an ongoing basis, the party entitled to
indemnification (the "Indemnified Party") shall promptly notify the party from
-----------------
which indemnification is sought (the "Indemnifying Party") of such claim and,
------------------
when known, the facts constituting the basis for such claim; provided, however,
-------- -------
that in the event of any claim for indemnification hereunder resulting from or
in connection with any claim or legal proceeding by a third party, the
Indemnified Party shall give such notice thereof to the Indemnifying Party not
later than ten business days prior to the time any response to the asserted
claim is required, if possible, and in any event within five business days
following receipt of notice thereof. Failure to give timely notice or to include
any specified information in any notice required by this Section 14.4 will not
effect the rights or obligations of any party hereunder except and only to the
extent that, as a result of such failure, any party which was entitled to
receive such notice was deprived of its right to recover any payment under its
applicable insurance coverage or was otherwise damaged as a result of such
failure. In the event of any such claim for indemnification resulting from or in
connection with a claim or legal proceeding by a third party, the Indemnifying
Party may, at its sole cost and expense, assume the defense thereof using
counsel who is reasonably satisfactory to the Indemnified Party; provided,
--------
however, that the Indemnifying Party shall first have agreed in writing that it
- -------
does not and will not contest its responsibility for indemnifying the
Indemnified Party in respect of Losses attributable to such claim or proceeding;
and provided, however, that if the defendants in any such actions include both
-------- -------
the Indemnified Party and the Indemnifying Party and the Indemnified Party shall
have reasonably concluded that there may be legal defenses or rights available
to it which have not been waived and are in actual or potential conflict with
those available to the Indemnifying Party, the Indemnified Party shall have the
right to select one law firm to act as separate counsel, on behalf of such
Indemnified Party, at the expense of the Indemnifying Party. Subject to the
second proviso of the immediately preceding sentence, if an Indemnifying Party
assumes the defense of any such claim or legal proceeding, the Indemnifying
Party shall be entitled to select counsel and take all steps necessary in the
defense thereof; provided, however, that no settlement shall be made without the
-------- -------
prior written consent of the Indemnified Party, which consent shall not be
unreasonably withheld (and if the Indemnified Party shall withhold its consent
to any monetary settlement proposed by the Indemnifying Party and which the
other party to the action has indicated it is prepared to accept, the
Indemnified Party shall in no event be deemed for purposes of this Agreement to
have suffered Losses in connection with such claim or proceeding in excess of
the proposed amount of such settlement); and provided, further, that subject to
-------- -------
the second proviso of the immediately preceding sentence, the
43
<PAGE>
Indemnified Party may, at its own expense, participate in any such proceeding
with the counsel of its choice without any right of control thereof. So long as
the Indemnifying Party is in good faith defending such claim or proceeding, the
Indemnified Party shall not compromise or settle such claim without the prior
written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld. If the Indemnifying Party does not assume the defense of
any such claim or litigation in accordance with the terms hereof, the
Indemnified Party may defend against such claim or litigation in such manner as
it may deem appropriate, including, without limitation, settling such claim or
litigation (after giving prior written notice of the same to the Indemnifying
Party and obtaining the prior written consent of the Indemnifying Party, which
consent shall not be unreasonably withheld) on such terms as the Indemnified
Party may deem appropriate, and the Indemnifying Party will promptly indemnify
the Indemnified Party in accordance with the provisions of this Section 14.4.
Notwithstanding the foregoing, at any time after the Indemnifying Party has
failed to discharge its liability for legal and other expenses pursuant to this
Section 14.4, which failure shall not have been cured, or at any time the
Indemnifying Party is subject to a bankruptcy case pursuant to Chapter 7 or
Chapter 11 of the U.S. Bankruptcy Code, if the Indemnified Party shall propose
to settle a claim as to which it intends to seek indemnity, it shall provide the
Indemnifying Party with 21 days' written notice of such proposed settlement, and
the Indemnifying Party shall, within such period either (i) consent to the terms
of the proposed settlement or (ii) provide the Indemnified Party with (A) a
written notice of objection to the proposed settlement, with a statement of
reason, (B) reasonable evidence that the financial condition of the Indemnifying
Party is sufficient to permit it to pay a judgment for the full amount being
sought by the third party claimant (or, at the Indemnified Party's request, a
letter of credit in such amount) and (C) an undertaking to satisfy any such
judgment.
(b) Notwithstanding anything to the contrary herein contained, in
the event the Company is an Indemnifying Party, the Company may settle any
third-party claim against an Indemnified Party as long as it obtains an
unconditional release from such third party for the benefit of such Indemnified
Party.
14.5. Calculation and Allocation of Damages. No party to this Agreement
----- -------------------------------------
shall assert against any other party any claim for exemplary, punitive, special,
indirect or consequential damages arising out of the performance of this
Agreement and the transactions contemplated hereby (or any conduct which
constitutes a breach of this Agreement or any other theory of liability arising
out of or relating to this Agreement or the performance hereof or any
transaction contemplated hereby).
14.6. Limitation on Indemnification. The Purchaser shall have no rights
----- -----------------------------
under Section 14.1 or Section 14.3 (a) unless the aggregate amount of Losses to
be indemnified under such Sections exceeds U.S.$ 2,500,000.
44
<PAGE>
ARTICLE XV
TERMINATION
15.1. Termination. This Agreement may be terminated as follows:
- ----- -----------
(a) with respect to the issuance and sale of the Company Shares by
the Company, and the sale of the CellStar Shares by CellStar and the Topp Shares
by Topp, respectively, to Purchaser, by the written agreement of each of
Purchaser, the Company and Topp;
(b) with respect to the sale of the CellStar Shares by CellStar to
Purchaser, by the written agreement of Purchaser and CellStar;
(c) by any of the parties on or after March 1, 1999, if the Closing
has not occurred prior to such date;
(d) by any party in the event of a material breach by any other
party of this Agreement, which breach is not cured within seven days after
receipt of written notice thereof by the breaching party from the non-breaching
party; or
(e) by any party if there shall have been entered a final, non-
appealable order or injunction by any Governmental Body against any party hereto
that prohibits the consummation of the transactions contemplated hereby or any
material part hereof; or
15.2. Liabilities After Termination. Upon any termination of this
----- -----------------------------
Agreement pursuant to Section 15.1, no party hereto shall thereafter have any
further liability or obligation hereunder; provided, however, that this Section
-------- -------
15.2, Section 16.3, Section 16.4 and Section 16.6 shall each remain in full
force and effect and the parties shall remain liable hereunder and thereunder to
the extent indicated herein and therein and; provided further, that no such
termination shall relieve any party hereto of any liability for any intentional
breach of this Agreement prior to the date of such termination.
ARTICLE XVI
MISCELLANEOUS
16.1. Survival of Representations and Warranties. The parties hereto hereby
- ----- ------------------------------------------
agree that the representations and warranties contained in this Agreement
(except as expressly provided in the second sentence of this Section 16.1) shall
terminate at the close of business on the earlier to occur of two years from the
date hereof or one month following the receipt by the Purchaser of the audited
financial statements of the Company for the year ended December 31, 1999.
Notwithstanding the foregoing, representations, warranties, covenants and
agreements relating to Taxes and the provisions of Article XIV and Article XVI
shall survive the Closing and shall not terminate until the expiration of any
applicable statutes of limitation.
45
<PAGE>
16.2. Entire Agreement. This Agreement (together with the Annexes and
----- ----------------
Exhibits attached hereto), the Shareholders' Agreement, the Amended and Restated
CellStar Note, the Amended and Restated Letter Agreement, the Topp Notes, the
Topp Employment Agreement, the Third Amendment to Distribution and Fulfillment
Agreement, the Telmex Note and each release and waiver thereunder contains, and
is intended as, a complete statement of all of the terms and the arrangements
between the parties hereto with respect to the matters provided for herein, and
supersedes any previous agreements and understandings between the parties hereto
with respect to those matters.
16.3. VENUE. THE PARTIES HERETO CONSENT AND AGREE THAT THE FEDERAL COURTS
----- -----
LOCATED IN MIAMI-DADE COUNTY, FLORIDA SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR
AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE PARTIES PERTAINING TO THIS
AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT,
PROVIDED, NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE
PARTIES HERETO FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF SUCH PARTY.
THE PARTIES HERETO HEREBY WAIVE PERSONAL SERVICE OF THE SUMMONS, COMPLAINTS AND
OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO SUCH PARTY AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED
UPON THE EARLIER OF ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN
THE U.S. MAIL, PROPER POSTAGE PREPAID.
16.4. WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE, BETWEEN THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH,
RELATED TO, OR INCIDENTAL TO THIS AGREEMENT OR THE TRANSACTIONS RELATED HERETO
OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR
WRITTEN) OR ACTIONS OF EITHER PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE PARTIES HERETO ENTERING INTO THIS AGREEMENT.
16.5. Expenses. Except as otherwise expressly provided in this Agreement,
----- --------
each party hereto shall pay its own expenses incidental to the preparation of
this
46
<PAGE>
Agreement, the carrying out of the provisions hereof and the consummation of the
transactions contemplated hereby.
16.6. Headings. The article and section headings of this Agreement are
----- --------
for reference purposes only and are to be given no effect in the construction or
interpretation of this Agreement. Unless the context otherwise requires, all
references to Articles and Sections are to Articles and Sections of this
Agreement.
16.7. Notices. All notices and other communications under this Agreement
----- -------
shall be in writing and shall be deemed given when delivered personally or by
overnight mail, or four days after being mailed by registered mail, return
receipt requested, to a party at the following address:
If to the Company, to:
Topp Telecom, Inc.
8390 N.W. 25th Street
Miami, FL 33122
Attention: F.J. Pollak
Facsimile: (305) 640 2070
with a copy to:
Greenberg Traurig, P.A.
1221 Brickell Avenue
Miami, FL 33131
Attention: Rebecca R. Orand, Esq.
Facsimile: (305) 579 0717
If to Purchaser, to:
Inmobiliaria Aztlan, S.A. de C.V.
c/o Telefonos de Mexico, S.A. de C.V.
Parque Via 198
Colonia
06599 Mexico, D.F.
Mexico
Attention: Chief Financial Officer
Facsimile: (011) 525 255 1576
If to Telmex, to:
47
<PAGE>
Telefonos de Mexico, S.A. de C.V.
Parque Via 198
Colonia
06599 Mexico, D.F.
Mexico
Attention: Chief Financial Officer
Facsimile: (011) 525 255 1576
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
Attention: Nicolas Grabar, Esq.
Facsimile: (212) 225 2000
If to Topp, to:
Topp Telecom, Inc.
8390 N.W. 25th Street
Miami, FL 33122
Attention: David Topp
Facsimile: (305) 640 2070
If to CellStar, to:
CellStar Telecom, Inc.
c/o CellStar Corporation
1730 Briercroft Court
Carrollton, TX 75006
Attention: General Counsel
Facsimile: (972) 466-5030
48
<PAGE>
with a copy to:
Steel Hector & Davis LLP
200 S. Biscayne Blvd.
Suite 4000
Miami, FL 33131
Attention: Barry G. Craig
Facsimile: (305) 577-7001
16.8. Severability. The invalidity or unenforceability of any provision
----- ------------
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, each of which shall remain in full force and
effect.
16.9. Binding Effect; No Assignment. This Agreement shall be binding upon
----- -----------------------------
and inure to the benefit of the parties and their respective successors and
assigns. Nothing in this Agreement shall create or be deemed to create any third
party beneficiary rights in any Person not party to this Agreement. No
assignment of this Agreement or of any rights or obligations hereunder may be
made by any party (by operation of law or otherwise) without the prior written
consent of each of the other parties hereto and any attempted assignment without
such required consents shall be void; provided, however, that Purchaser may
-------- -------
assign its right hereunder to purchase all or any portion of the Shares to
Telmex or any Affiliate of Telmex; further provided, that (i) no such assignment
------- --------
shall relieve Purchaser of its obligations hereunder, and (ii) any such assignee
shall have executed and delivered to the Company an agreement satisfactory to
the Company which shall provide that such assignee will become a party to this
Agreement and be bound by all of the obligations of Purchaser hereunder as if
such assignee were "Purchaser" hereunder.
16.10. Certain Definitions. The following terms shall have the following
------ -------------------
meanings for the purpose of this Agreement.
"Active Subscribers" means, at any date, the number of customers who
------------------
have either activated a TracFone for the first time in the last 60 days or
redeemed an airtime card in the last 60 days (60 days is the period over which
the Company provides service before the customer needs to redeem another card to
continue that service).
"Affiliate" means, as to any Person, (i) any Subsidiary of such
---------
Person, and (ii) any other Person which, directly or indirectly, controls, is
controlled by, or is under common control with, such Person and includes, in the
case of a Person other than an individual, each officer or director or general
partner of such Person, and each Person who is the beneficial owner of ten
percent (10%) or more of such Person's outstanding stock having ordinary voting
power of such Person. For the purposes of this definition, "control" means the
-------
possession of the power to direct or cause the direction of
49
<PAGE>
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
"Acquisition Proposal" has the meaning provided in Section 7.7.
--------------------
"Agreement" has the meaning provided in the preamble of this
---------
Agreement.
"Amended and Restated CellStar Note" means the U.S.$ 22,507,537
----------------------------------
aggregate principal amount promissory note, dated as of the Closing Date, to be
issued by the Company to CellStar, substantially in the form of Exhibit D
hereto.
"Amended and Restated Letter Agreement" means the Letter Agreement,
-------------------------------------
dated as of the date hereof, to be entered into among CellStar, Ltd., CellStar,
the Company, Topp, Dora Topp, Risia Topp Wine, Mark Topp and F.J. Pollak,
substantially in the form of Exhibit E hereto.
"Amendments to Employment Agreements" mean (i) the Amendment to the
-----------------------------------
Employment Agreement between the Company and Stephan J. Ritter, dated as of
September 21, 1998, as amended as of December 7, 1998 and (ii) the Amendment to
the Employment Agreement of Robert Dandrea, dated as of November 1, 1998, in
each case dated as of the Closing Date, and in the form of Exhibit F-A and F-B
hereto.
"Benefit Plan" has the meaning provided in Section 3.9.
------------
"best knowledge of the Company" shall mean the best knowledge of
-----------------------------
officers of the Company at the vice president level or above.
"Business" has the meaning provided in the preamble of this
--------
Agreement.
"CellStar" has the meaning provided in the preamble of this
--------
Agreement.
"CellStar Documents" has the meaning provided in Section 5.2.
------------------
"CellStar License Agreement" means the Amended and Restated License
--------------------------
Agreement, dated as of September 1, 1998, by and between the Company and
CellStar.
CellStar Letter Agreement" means the Letter Agreement, dated as of
-------------------------
September 1, 1998, as amended as of December 18, 1998, by and among CellStar,
Ltd., CellStar, the Company, Topp, Dora Topp, Risia Topp Wine, Mark Topp and
F.J. Pollak.
"CellStar Proxy Agreements" means (i) the Irrevocable Proxy
-------------------------
Agreement, dated as of September 1, 1998, between CellStar and Topp and (ii) the
Irrevocable Proxy Agreement, dated as of September 1, 1998, between CellStar and
F.J. Pollak.
50
<PAGE>
"CellStar Security Documents" means the agreements and documents
---------------------------
referred to in Sections 2 and 3 of the CellStar Letter Agreement.
"CellStar Share Purchase Price" has the meaning provided in Section
-----------------------------
1.2 of this Agreement.
"CellStar Shares" has the meaning provided in the preamble of this
---------------
Agreement.
"Class A Preferred Shares" has the meaning provided in Section 3.2.
------------------------
"Class B Preferred Shares" has the meaning provided in Section 3.2.
------------------------
"Class A Shares" has the meaning provided in the preamble of this
--------------
Agreement.
"Class B Shares" has the meaning provided in the preamble of this
--------------
Agreement.
"Closing" has the meaning provided in Section 2.1.
-------
"Closing Date" has the meaning provided in Section 2.1.
------------
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Company" has the meaning provided in the preamble of this Agreement.
-------
"Company Documents" has the meaning provided in Section 3.3.
-----------------
"Company Losses" has the meaning provided in Section 14.1.
--------------
"Company Property" means any real property of which the Company is a
----------------
fee owner or in which the Company has a leasehold interest.
"Company Share Purchase Price" has the meaning provided in Section
----------------------------
1.2.
"Company Shares" has the meaning provided in the preamble of this
--------------
Agreement.
"Company Stock Options" has the meaning provided in Section 3.2.
---------------------
"Credit Agreement" has the meaning provided in Section 5.2.
----------------
"Disclosure Schedule" has the meaning provided in Article III.
-------------------
51
<PAGE>
"Environmental Law" means any Law concerning (i) Releases into the
-----------------
natural environment, (ii) protection or cleanup of the natural environment of
any Hazardous Materials, or (iii) protection of employee health and safety, and
includes, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") (42 U.S.C. (S) 9601 et seq.), the
------
Hazardous Materials Transportation Act (49 U.S.C. (S) 1801 et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. (S) 6901 et seq.), the Federal
Water Pollution Control Act (33 U.S.C. (S) 1251 et seq.), the Clean Water Act
(33 U.S.C. (S) 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. (S)
------
2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C.
(S) 136 et seq.), and the Occupational Safety and Health Act (29 U.S.C. (S) 651
et seq.), as such laws have been or hereafter may be amended or supplemented,
and the regulations promulgated pursuant thereto, and any and all analogous
state or local statutes and the regulations promulgated pursuant thereto.
"Environmental Permit" means any Permit, variance or permission
--------------------
required under any applicable Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"ERISA Affiliate" has the meaning provided in Section 3.9.
---------------
"Excess Company Losses" has the meaning provided in Section 14.1.
---------------------
"Financial Statements" has the meaning provided in Section 3.5.
--------------------
"GAAP" means generally accepted accounting principles in the United
----
States of America as in effect from time to time set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Board, or in such other statements by such other
entity as may be in general use by significant segments of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"Governmental Body" means any government or governmental or
-----------------
regulatory body thereof, or political subdivision thereof, whether federal,
state, local or foreign, or any agency or instrumentality thereof, or any court
or arbitrator (public or private).
"Hazardous Material" means any substance, material or waste, or any
------------------
constituent thereof, which is regulated by or forms the basis of liability under
any Environmental Law, including, without limitation, any material or substance
which is defined as a "hazardous waste," "hazardous material," "hazardous
substance," "extremely hazardous waste" or "restricted hazardous waste,"
"subject waste," "contaminants,"
52
<PAGE>
"toxic waste" or "toxic substance" under any provision of Environmental Law,
including, without limitation, petroleum products, asbestos and polychlorinated
biphenyls.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
-------
1976 and the rules and regulations promulgated thereunder.
"Indemnifiable Patent Loss" shall mean the cost to the Company (not
-------------------------
including any royalties payable in the future) of any Patent Outcome, net of (a)
any insurance recovery, (b) any indemnification received from Debitec and (c)
the portion of the $2,000,000 reserve for costs of the Telemac litigation on the
Company's balance sheet at November 30, 1998 that is not required to cover legal
fees and expenses and other costs of defending the Patent Claims.
"Indemnifiable Tax Cost" shall mean the cost to the Company of any
----------------------
taxes referred to in Section 3.10 of the Disclosure Schedules that have not been
paid as of November 30, 1998 or any interest, penalties or fines relating to
such unpaid taxes, net of the U.S.$ 5,823,000 reserve for such unpaid taxes on
the Company's balance sheet as of November 30, 1998.
"Indemnified Party" has the meaning provided in Section 14.2.
-----------------
"Indemnifying Party" has the meaning provided in Section 14.2.
------------------
"Intellectual Property" has the meaning provided in Section 3.15.
---------------------
"Intellectual Property Rights" has the meaning provided in Section
----------------------------
3.15.
"IRS" means the United States Internal Revenue Service.
---
"Law" means any federal, state, local or foreign law (including
---
common law), statute, code, ordinance, rule, regulation, order, decree,
arbitration, award, judgment or other requirement of any Governmental Body.
"Legal Proceeding" means any judicial, administrative or arbitration,
----------------
suit, proceeding (public or private), examination, audit, claim or governmental
proceeding.
"Licensed Software" has the meaning provided in Section 3.15.
-----------------
"Legal Proceeding" means any judicial, administrative or arbitral
----------------
action, suit, proceeding (public or private), claim or governmental proceeding.
"Lien" means any lien, pledge, mortgage, deed of trust, security
----
interest, easement or similar encumbrance.
"Losses" has the meaning provided in Section 14.1.
------
53
<PAGE>
"Material Adverse Effect" means with respect to any Person any
-----------------------
material adverse effect on the business, properties, results of operations or
financial condition of the Person and if applicable, its subsidiaries, taken as
a whole.
"Material Contracts" has the meaning provided in Section 3.16.
------------------
"Order" means any order, injunction, judgment, decree, ruling, writ,
-----
assessment or arbitration award.
"Owned Data Bases" has the meaning provided in Section 3.15.
----------------
"Owned Intellectual Property" has the meaning provided in Section
---------------------------
3.15.
"Owned Software" has the meaning provided in Section 3.15.
--------------
"Patent Claims" shall mean the claims asserted in Telemac Cellular
-------------
Corporation v. Topp Telecom, Inc., civil action No. C-98-00022-CW-ENE in the
United States Federal Court for the Northern District of California or any other
claim based on U.S. patent no. 5,577,100 or any claims based on any patent
granted to Prepaid Systems or Omni disclosing prepaid cellular telephone
technology.
"Patent Outcome" shall mean any interlocutory or final judgment
--------------
(including any injunction that is not stayed) against the Company arising out of
the Patent Claims, a settlement of the Patent Claims, or an obligation of the
Company to indemnify a third party as a result of the Patent Claims.
"Permits" has the meaning provided in Section 3.11.
-------
"Permitted Liens" are (i) any Liens reflected in the Financial
---------------
Statements, (ii) any Liens that do not materially interfere with the use by the
Company of the property subject thereto or affected thereby (including, without
limitation, any easements, rights of way, restrictions, installations of public
utilities, title imperfections and restrictions, reservations in land patents,
zoning ordinances or other similar Liens) and that are otherwise immaterial to
the financial condition or operations of the Company, (iii) the interests of
lessors in any property leased to the Company, or (iv) any Liens for taxes and
assessments not yet past due or which are being contested in good faith.
"Person" means any individual, corporation, partnership, limited
------
liability company, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, Governmental Body or other entity.
"Personal Property Leases" has the meaning provided in Section 3.13.
------------------------
"Plan" has the meaning provided in Section 3.9.
----
54
<PAGE>
"Pollak Employment Agreement" means the Amended and Restated
---------------------------
Employment Agreement, dated as of the Closing Date, between the Company and F.J.
Pollak, substantially in the form of Exhibit G hereto.
"Prior Shareholders' Agreements" means (i) the Shareholders'
------------------------------
Agreement, dated as of May 15, 1996, among the Company, F.J. Pollak and Topp;
(ii) the Subscription and Shareholders' Agreement, dated as of June 17, 1997,
between the Company and Richard P. Anderson; and (iii) the Shareholders'
Agreement, dated as of November 4, 1997 and as amended as of September 1, 1998,
by and among the Company, CellStar, Topp and F.J. Pollak.
"Purchaser" has the meaning provided in the first paragraph of this
---------
Agreement.
"Purchaser Documents" has the meaning provided in Section 6.2.
-------------------
"Real Property Leases" has the meaning provided in Section 3.13.
--------------------
"Release" means any release, spill, emission, leaking, pumping,
-------
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the environment including, without limitation, the movement of any Hazardous
Material or other substance through or in the air, soil, surface water,
groundwater or property.
"Representatives" has the meaning provided in Section 7.1.
---------------
"Restricted Period" has the meaning provided in Section 8.6.
-----------------
"Restrictive Covenants" has the meaning provided in Section 8.9.
---------------------
"Shareholders' Agreement" has the meaning provided in the preamble of
-----------------------
this Agreement.
"Shareholders" has the meaning provided in the preamble of this
------------
Agreement.
"Shares" has the meaning provided in the preamble of this Agreement.
------
"Stock Option Agreement" means the form of Stock Option Agreement,
----------------------
substantially in the form of Exhibit H hereto.
"Stock Option Plan" means the form of Topp Telecom, Inc. 1999 Stock
-----------------
Option Plan, substantially in the form of Exhibit I hereto.
"Subsidiary" means, with respect to any Person, any corporation of
----------
which a majority of the outstanding voting securities are owned, directly or
indirectly, by such Person.
55
<PAGE>
"Tax" or "Taxes" shall mean all federal, state, local or foreign
--- -----
income, gross receipts, windfall profits, severance, property, production,
sales, use, license, excise, franchise, employment, withholding, transfer,
payroll, goods and services, value-added or minimum tax, or any other tax,
custom, duty, governmental fee, or other like assessment or charge of any kind
whatsoever, together with any interest, penalties, fines, related liabilities or
additions to tax that may become payable in respect thereof imposed by any
Governmental Body.
"Tax Return" shall mean any return, report or similar statement
----------
required to be filed with respect to any Taxes (including any attached
schedules), including, without limitation, any information return, claim or
refund, amended return and declaration of estimated Tax.
"Telmex" has the meaning provided in the preamble of this Agreement.
------
"Telmex Note" means the U.S. $5,000,000 principal amount promissory
-----------
note, dated as of the date hereof, issued by the Company to Telmex.
"Third Amendment to Distribution and Fulfillment Agreement" means the
---------------------------------------------------------
Third Amendment, dated as of the Closing Date, to the Distribution and
Fulfillment Agreement, dated as of September 15, 1997, as amended on September
1, 1998 and as further amended as set forth in the CellStar Letter Agreement.
"Topp" means David Topp, Dora Topp, Risia Wine Topp and Mark Topp.
----
"Topp Employment Agreement" means the Amended and Restated Employment
-------------------------
Agreement, dated as of the Closing Date, between the Company and David Topp,
substantially in the form of Exhibit K hereto.
"Topp Entity" means any Person owned or controlled by Topp.
-----------
"Topp Family Group" means Topp and/or Topp's spouse, parents,
-----------------
brothers, sisters and descendants (including natural and adopted children and
step children and their respective spouses) and any trust formed and maintained
solely for the benefit of Topp and/or such persons.
"Topp Notes" means the U.S.$ 2,499,000 aggregate principal amount
----------
promissory notes, each dated as of the Closing Date, issued by the Company to
several members of the Topp Family Group.
"Topp Shares" has the meaning provided in the preamble of this
-----------
Agreement.
"Topp Share Purchase Price" has the meaning provided in Section 1.2.
-------------------------
56
<PAGE>
"Topp Documents" has the meaning provided in Section 4.1.
--------------
"Year 2000 Compliant" means, (i) the functions, calculations and
-------------------
other computing processes of the Intellectual Property perform and will perform
in a consistent manner, whether before, on or after January 1, 2000; the
software accepts, calculates, sorts, extracts, sequences and otherwise processes
date inputs and date values, in a consistent manner, whether before, on or after
January 1, 2000; the Intellectual Property will function without interruptions
whether before, on or after January 1, 2000; the Intellectual Property accepts
and responds to two-digit year-date input in a manner that resolves any
ambiguities as to the century in a defined, predetermined and appropriate
manner; and the Intellectual Property stores and displays date information in
ways that are unambiguous as to the determination of the century.
16.11. Governing Law. This Agreement shall be governed by and shall
------ -------------
be construed and enforced in accordance with the laws of the State of Florida.
16.12. Post-Closing Covenants. (a) The Company agrees that as soon
------ ----------------------
as practicable following the Closing, it will approve the Stock Option Plan and
enter into Stock Option Agreements with each of Richard P. Anderson, Amnon Carr,
John J. Wiesehan, Jr. and Victor Maldonado;
(b) The Company agrees that as soon as practicable following the
Closing, it will file with the Secretary of State of Florida, Amendment to the
Articles of Incorporation of the Company.
16.13. Amendments. This Agreement may be amended, supplemented or
------ ----------
modified, and any provision hereof may be waived, only pursuant to a written
instrument making specific reference to this Agreement signed by each of the
parties hereto.
16.14. Counterparts. This Agreement may be executed in any number
------ ------------
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
57
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
TOPP TELECOM, INC.
By: /s/ F. J. POLLAK
------------------------------
Name: F. J. Pollak
Title: President
INMOBILIARIA AZTLAN, S.A. de C.V.
By: /s/ ADOLFO CEREZO
------------------------------
Name: Adolfo Cerezo
-----------------------------
Title: C.F.O.
----------------------------
TELEFONOS DE MEXICO, S.A. de C.V.
By: /s/ ADOLFO CEREZO
------------------------------
Name: Adolfo Cerezo
-----------------------------
Title: C.F.O.
----------------------------
DAVID TOPP
By: /s/ DAVID TOPP
------------------------------
CELLSTAR TELECOM, INC.
By: /s/ ELAINE FLUD RODRIGUEZ
------------------------------
Name: Elaine Flud Rodriguez
-----------------------------
Title: Vice President
----------------------------
58
<PAGE>
/s/ DAVID TOPP
---------------------------------
David Topp, as attorney-in-fact for Dora Topp
/s/ DAVID TOPP
---------------------------------
David Topp, as attorney-in-fact for Risia Topp
Wine
/s/ DAVID TOPP
---------------------------------
David Topp, as attorney-in-fact for Mark Topp
59
<PAGE>
EXHIBIT 10.38
SHAREHOLDERS' AGREEMENT
-----------------------
THIS SHAREHOLDERS' AGREEMENT ("Agreement") is made and entered into as of
this 12th day of February, 1999, by and among each of the individuals and the
entities listed on Schedule I hereto (individually a "Shareholder" and
collectively the "Shareholders"), Telefonos de Mexico, S.A. de C.V., a
corporation organized under the laws of Mexico ("Telmex"), and Topp Telecom,
Inc., a Florida corporation (the "Corporation").
Preliminary Statements
----------------------
A. The Corporation has (after giving effect to the filing of the Articles
of Amendment) authorized capital of 5,000,000 shares of Voting Common Stock and
5,000,000 shares of Non-Voting Common Stock.
B. This Agreement is entered into in connection with that certain Purchase
Agreement, dated as of the date hereof (the "Acquisition Agreement"), among the
Corporation, certain of the Shareholders and Inmobiliaria Aztlan, S.A. de C.V.
("Telmex Investor"), a wholly owned subsidiary of Telefonos de Mexico, S.A. de
C.V. ("Telmex"), whereby Telmex Investor has purchased a controlling interest in
the Corporation.
C. After giving effect to the consummation of the Acquisition Agreement,
the Corporation shall have issued shares of Common Stock to the Shareholders as
set forth on Schedule I.
D. This Agreement shall amend and replace all Prior Shareholders'
Agreements.
E. The Corporation and the Shareholders believe that it would be in the
best interest of the Corporation to place certain restrictions upon the right of
transfer of the Shareholder Stock.
F. The directors of the Corporation, having considered the provisions of
this Agreement, have resolved that in their opinion the restrictions upon the
transfer of the Shareholders' Stock, the provisions for the redemption and/or
purchase of certain of the Shareholders' Stock and the establishment of rights
and obligations upon the occurrence of certain events, all as hereinafter set
forth, are in the best interest of the Corporation and the Shareholders.
Agreement
---------
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth in this Agreement, and such other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, each Shareholder and
the Corporation agree as follows:
<PAGE>
ARTICLE ONE
Definitions and Interpretation
------------------------------
1.1 Definitions. As used herein, the following terms when used in this
-----------
Agreement have the meanings set forth below:
"Acquisition Agreement" shall have the meaning given to it in the
---------------------
Preliminary Statements to this Agreement.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
---------
promulgated under the Securities Exchange Act of 1934, as amended; provided,
that, for purposes of Section 7.1, neither Southwestern Bell nor France Telecom
shall be deemed an Affiliate of the Telmex Investor or Telmex.
"Agreement" means this Shareholders' Agreement and all exhibits and
---------
schedules hereto.
"Approved Sale" shall have the meaning given to it in Section 4.1 of this
-------------
Agreement.
"Articles of Amendment" shall mean the Articles of Amendment to Articles of
---------------------
Incorporation of the Corporation filed (or to become effective) on the date
hereof.
"Block Sale" shall mean a sale by Topp or CellStar after a Qualified Public
----------
Offering of more than 50% of such Shareholder's Stock (representing at least 1%
of the Corporation's then outstanding Common Stock) in a private sale to an
independent third party (excluding sales for estate or tax planning purposes)
not pursuant to Rule 144 under the Securities Act or as a result of the exercise
of registration rights under ARTICLE SIX hereof.
"Board" means the Board of Directors of the Corporation.
-----
"CellStar Note" shall mean the Amended and Restated Promissory Note, dated
-------------
the date hereof, payable to CellStar, Ltd. by the Corporation.
"CellStar Shareholder" shall mean the shares of Common Stock held by
--------------------
CellStar Telecom, Inc. or its Affiliate.
"CellStar Shareholder Stock" shall mean the Shareholder Stock owned by
--------------------------
CellStar.
"Class A Common Stock" means the Corporation's Voting Common Stock, par
--------------------
value $0.01 per share.
"Class B Common Stock" means the Corporation's Non-Voting Common Stock, par
--------------------
value $0.01 per share.
"Commission" shall mean the Securities and Exchange Commission.
----------
2
<PAGE>
"Common Stock" means, collectively, the Class A Common Stock and the Class
------------
B Common Stock (or, if the Class A Common Stock and Class B Common Stock are
combined, the combined class of common stock resulting therefrom).
"Corporation" shall have the meaning given to it in the first sentence of
-----------
this Agreement.
"Demand Registration" shall have the meaning given to it in Section 6.1 of
-------------------
this Agreement.
"Excess Offered Stock" shall have the meaning given to it in Section 3.3(c)
--------------------
of this Agreement.
"Excluded Stock" means (i) the Common Stock issuable pursuant to currently
--------------
outstanding options or options granted under the Corporation's Stock Option
Plan, (ii) securities issuable as a stock dividend or upon any subdivision of
shares of Common Stock, as the case may be, provided that the securities issued
pursuant to such stock dividend or subdivision are limited to additional shares
of Common Stock, (iii) securities issuable pursuant to a Qualified Public
Offering, (iv) nonconvertible debt securities, and (v) securities issued in
connection with equipment or debt financing or leases (including securities
issued in consideration of guarantees of such financing or leases).
"Exit Notice One" shall have the meaning given to it in Section 4.1 of this
---------------
Agreement.
"Exit Notice Two" shall have the meaning given to it in Section 4.2 of this
---------------
Agreement.
"Family Group" means the Shareholder and/or the Shareholder's spouse,
------------
parents, brothers, sisters and descendants (including natural and adopted
children and step children and their spouses) and any trust formed and
maintained solely for the benefit of the Shareholder and/or the such other
Persons.
"First Refusal Notice Date" shall have the meaning given to it in Section
-------------------------
3.3(a) of this Agreement.
"Independent Third Party" shall have the meaning given to it in Section 4.1
-----------------------
of this Agreement.
"Long-Form Registration Demand" shall have the meaning given to it in
-----------------------------
Section 6.1 of this Agreement.
"Management Shareholder" shall mean the shareholders listed on Schedule I
----------------------
as Management Shareholders.
"New Issuance" shall have the meaning given to it in Section 8.1 of this
------------
Agreement.
"Offered Stock" shall have the meaning given to it in Section 3.3(a)(i) of
-------------
this Agreement.
3
<PAGE>
"Offered Terms" shall have the meaning given to it in Section 3.3(a)(ii) of
-------------
this Agreement.
"Offer Price" shall have the meaning given to it in Section 3.3(a)(ii) of
-----------
this Agreement.
"Offerees" shall have the meaning given to it in Section 8.1 of this
--------
Agreement.
"Other Shareholders" shall have the meaning given to it in Section 3.3(c)
------------------
of this Agreement.
"Permitted Family Group Transferee" means any permitted transferee of a
---------------------------------
Management Shareholder that is a member of such Shareholder's Family Group.
"Person" means an individual, a partnership, a corporation, a limited
------
liability Corporation, an association, a joint stock Corporation, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Prior Shareholders' Agreements" shall mean the following agreements: (i)
------------------------------
Shareholders' Agreement, dated May 15, 1996, among the Corporation, FJ Pollak
and David Topp; (ii) Subscription and Shareholders' Agreement, dated June 17,
1997, between the Corporation and Richard P. Anderson; and (iii) Shareholders'
Agreement, dated as of November 4, 1997, by and among the Corporation, CellStar
Telecom, Inc., David Topp and FJ Pollak, as amended on September 1, 1998.
"Qualified Public Offering" means the initial public offering of the
-------------------------
Corporation's Common Stock to the public pursuant to a registration statement
filed and declared effective under the Securities Act.
"Registration Expenses" shall have the meaning given to it in Section 6.5
---------------------
of this Agreement.
"Representatives" shall have the meaning given to it in Section 7.2 of this
---------------
Agreement.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Selling Shareholder" shall have the meaning given to it in Section 3.3 of
-------------------
this Agreement.
"Shareholder" means the Telmex Investor, the CellStar Shareholder and each
-----------
Management Shareholder.
"Shareholder Stock" shall have the meaning given to it in Section 11.12 of
-----------------
this Agreement.
4
<PAGE>
"Short-Form Registration Demand" shall have the meaning given to it in
------------------------------
Section 6.1 of this Agreement.
"Subsidiary" means any corporation with respect to which the Corporation
----------
(or a Subsidiary thereof) owns, directly or indirectly, a majority of the common
stock or has the power to vote or direct the voting of sufficient securities to
elect a majority of the directors.
"Telmex" shall have the meaning given to it in the first sentence of this
------
Agreement.
"Telmex Investor" shall have the meaning given to it in the first sentence
---------------
of this Agreement.
"Topp" shall mean David Topp and members of his Family Group that own
----
Shareholder Stock as set forth on Schedule I.
"Topp Family Agreement" shall have the meaning given to it in Section 11.8
----------------------
hereof.
"Topp Notes" shall mean the Promissory Notes, dated the date hereof,
----------
payable to Topp by the Corporation.
"Topp Shareholder Stock" shall mean the Shareholder Stock owned by Topp.
----------------------
1.2 Interpretation. The words "herein," "hereof," "hereunder" and other
--------------
words of similar import refer to this Agreement as a whole, as the same from
time to time may be amended or supplemented and not any particular section,
paragraph, subparagraph or clause contained in this Agreement. Wherever from
the context it appears appropriate, each term stated in either the singular or
plural shall include the singular and the plural, and pronouns stated in
masculine, feminine or neuter gender shall include the masculine, feminine and
the neuter.
ARTICLE TWO
Put Option for Topp Stock
-------------------------
If at any time prior to a Qualified Public Offering the Corporation has
reported positive net earnings for at least two consecutive fiscal quarters and
Topp notifies Telmex of his desire to sell all or a substantial portion of the
Topp Shareholder Stock, Telmex agrees that it will negotiate in good faith
toward the purchase of those shares on reasonable price and other terms to be
agreed by both parties.
5
<PAGE>
ARTICLE THREE
Restrictions Imposed Upon the
Transfer of Stock by the Shareholders Other Than Telmex Investor
----------------------------------------------------------------
3.1 General Prohibition on Transfers. Except as is specifically permitted
--------------------------------
by the provisions of this ARTICLE THREE, the sale, assignment, pledge, gift,
transfer or other disposition of any Shareholder Stock, either directly or
indirectly, to any person or entity other than the Corporation, the Telmex
Investor, Telmex or any Affiliate of Telmex, is prohibited.
3.2 Permitted Transfers. The following transfers of Shareholder Stock
-------------------
shall be permitted transfers which do not require the giving of a Notice of
Right of First Refusal under Section 3.3 of this ARTICLE THREE.
(a) Transfers to Family Members. Notwithstanding the provisions of
---------------------------
Section 3.1, each Management Shareholder shall be permitted to transfer (whether
by purchase, assignment, gift, bequest, devise, levy, execution or other means
of transfer) all or any portion of his Shareholder Stock to a Permitted Family
Group Transferee; provided that Permitted Family Group Transferee executes a
written acknowledgment that (i) all Shareholder Stock held by the Permitted
Family Group Transferee will, notwithstanding the transfer to such Permitted
Family Group Transferee, be deemed for all purposes of this Agreement to be
owned by the transferring Shareholder, and (ii) the transferee agrees to be
bound by all of the terms of this Agreement as a Management Shareholder by
written instrument reasonably satisfactory to the Corporation.
(b) Transfers Among the Management Shareholders. Notwithstanding the
-------------------------------------------
provisions of Section 3.1, each Management Shareholder shall be permitted to
transfer Shareholder Stock to any other Management Shareholder (as long as such
Management Shareholder is employed by the Corporation) without complying with
the Right of First Refusal provisions of this ARTICLE THREE.
(c) Transfers by CellStar to Affiliates. Notwithstanding the
-----------------------------------
provisions of Section 3.1, CellStar shall be permitted to transfer (whether by
purchase, assignment, gift, bequest, devise, levy, execution of other means of
transfer) all or any portion of such Shareholder's Shareholder Stock to an
Affiliate of CellStar; provided that such transferee executes a written
acknowledgment that (i) all Shareholder Stock held by the transferee will,
notwithstanding the transfer to such transferee, be deemed for all purposes of
this Agreement to be owned by the transferring Shareholder, and (ii) such
transferee agrees to be bound by all of the terms of this Agreement by written
instrument reasonably satisfactory to the Corporation.
(d) Pledge of CellStar Shareholder Stock to Creditors.
-------------------------------------------------
Notwithstanding the provisions of Section 3.1, CellStar shall be permitted to
pledge and grant a security interest in all or any portion of the CellStar
Shareholder Stock (i) to any Person who is a party to that certain Credit
Agreement dated as of October 15, 1997 (the "Credit Agreement") among CellStar
Corporation and certain banks; (ii) to any Person who becomes a party to the
Credit Agreement; and (iii) to any Person who extends credit to CellStar in
replacement or amendment of the Credit
6
<PAGE>
Agreement, including without limitation replacements or amendments that extend
additional credit. Any such pledge or grant of a security interest shall be free
of the provisions of this Agreement and any realization of the value of that
pledge or security interest, whether by private sale of the securities that are
the subject matter of the transfer or otherwise, shall be free of this Agreement
and the transferee shall not be bound hereby, except that any such transferee
shall succeed to the rights and obligations of CellStar contained in ARTICLES
FOUR, SIX, SEVEN and EIGHT hereof.
(e) Transfers Under Other Articles. Notwithstanding the provisions of
------------------------------
Section 3.1, a transfer pursuant to any other provisions of this Agreement shall
be permitted without complying with the Right of First Refusal provisions of
this ARTICLE THREE.
3.3 Transfers to Third Parties.
--------------------------
(a) Notice of Right of First Refusal. Notwithstanding the provisions
--------------------------------
of Section 3.1, and absent the right to make a transfer of Shareholder Stock
pursuant to Section 3.2, if any Shareholder other than the Telmex Investor (the
"Selling Shareholder") receives a bona fide offer from a party unrelated to the
Selling Shareholder to purchase, assign, transfer or otherwise dispose of
Shareholder Stock owned by such Selling Shareholder, or any interest therein,
and the Selling Shareholder desires to accept such offer, the Selling
Shareholder shall cause such offer to be reduced in writing and the Selling
Shareholder shall, not less than 30 days prior to the date of the proposed sale,
assignment, transfer or other disposition, deliver a Notice of Right of First
Refusal to the Corporation and the Shareholders other than the Selling
Shareholder containing the following information:
(i) the number of shares of Shareholder Stock proposed to be so
transferred (the "Offered Stock");
(ii) the terms and conditions of the proposed transfer,
including the identity of the proposed transferee(s) and the per share
price to be charged (if any) for the shares of Shareholder Stock to be
transferred and the type and nature of the consideration to be received
therefor (the "Offered Terms"); and
(iii) an affirmative offer made by the Selling Shareholder to
transfer the Offered Stock to the Corporation at a price (the "Offer
Price") equal to the total cash price plus the fair market value of any
consideration other than cash offered in the proposed transfer for the
Offered Stock as indicated in the Notice of Right of First Refusal (i.e.,
----
the number of shares multiplied by the per share price, if any, to be
charged for the shares of Offered Stock to be transferred).
The date that the Notice of Right of First Refusal is received by the
Corporation shall constitute the First Refusal Notice Date.
(b) Primary Right of First Refusal by the Telmex Investor. The Telmex
-----------------------------------------------------
Investor shall have the sole and exclusive option to acquire all or any portion
of the shares of
7
<PAGE>
Shareholder Stock offered for transfer in accordance with the provisions of the
Notice of Right of First Refusal for a period of 15 days from the First Refusal
Notice Date. The Telmex Investor may exercise such option by giving written
notice of exercise to the Selling Shareholder prior to the termination of its
exclusive option period. Such notice of exercise shall refer to the Notice of
Right of First Refusal and shall set forth the number of shares to be acquired
by the Corporation.
(c) Secondary Right of First Refusal by the Corporation. The
---------------------------------------------------
Corporation shall have the exclusive option from the 16th day to the 30th day
following the First Refusal Notice Date to acquire the Offered Stock not to be
acquired by the Telmex Investor. The Corporation may exercise such option by
giving written notice of exercise to the Selling Shareholder prior to the
termination of its exclusive option period. Such notice shall refer to the
Notice of Right of First Refusal and shall set forth the number of shares to be
acquired by the Corporation.
(d) Tertiary Right of First Refusal by Shareholders. The Shareholders
-----------------------------------------------
other than the Selling Shareholder and the Telmex Investor (the "Other
Shareholders") shall have an exclusive option from the thirty-first day to the
fiftieth day following the First Refusal Notice Date to acquire the Offered
Stock in accordance with the procedure described in this Section 3.3. The Other
Shareholders may, by agreement, allocate among themselves the right to acquire
such part of the Offered Stock that will not be acquired by the Corporation.
In the absence of such an agreement, each Other Shareholder will be
entitled to give written notice to the Selling Shareholder, to the Corporation,
and to the Other Shareholders, within fifty days from the First Refusal Notice
Date, of such Shareholder's election to acquire all or any part of such Offered
Stock that is not being acquired by the Corporation ("Excess Offered Stock").
If the Shareholders' offers to purchase exceed the amount of Excess Offered
Stock, the option to acquire such Stock shall be allocated among the
Shareholders desiring to purchase it as follows:
(i) Each Shareholder shall be absolutely entitled to acquire
any number of shares of Excess Offered Stock that is equal to or less than
his proportionate part of such Excess Offered Stock, based upon the number
of shares owned by each Shareholder electing to acquire any of the Excess
Offered Stock;
(ii) Each Shareholder electing to acquire more than his
proportionate part of the Excess Offered Stock under the previous
allocation step may acquire a proportionate part of the remainder of the
Excess Offered Stock which is not previously allocated to Other
Shareholders (i.e., because some acquiring Shareholders did not elect to
----
acquire their entire ratable portion under the preceding allocation step),
based upon the number of shares owned by each such acquiring Shareholder
who has elected to acquire more than his proportionate part of the Excess
Offered Stock;
(iii) The allocation procedure described in Paragraph (ii) shall
be repeated until all of the Excess Offered Stock has been allocated among
all of the Shareholders electing to acquire such Excess Offered Stock and
no such acquiring
8
<PAGE>
Shareholder has been allocated more than his proportionate share of the
remaining Excess Offered Stock under the last such allocation step.
If a husband and wife are both Shareholders, the Shareholder Stock owned by
each such spouse shall be limited to the Stock actually registered in a spouse's
name plus one-half of the Stock registered in the joint names of both spouses
for the limited purpose of determining each Shareholder's proportionate part of
the Offered Stock.
If the Corporation and Other Shareholders have not given written notice of
election to acquire all of the Offered Stock within fifty days of the First
Refusal Notice Date, then between the fifty-first and sixtieth day following the
First Refusal Notice Date, the Corporation, the Telmex Investor or any of the
Other Shareholders may give written notice to the Selling Shareholder, to the
Corporation, and to the Other Shareholders of an election to purchase any or all
of the Offered Stock that the Corporation or Other Shareholders have not
previously agreed to purchase. Such additional shares shall be allocated on a
first-to-give-notice basis determined as of the date written notice is received
by the Corporation.
(e) Requirement to Purchase All Offered Stock. Notwithstanding the
-----------------------------------------
provisions of the preceding Sections, the option to purchase shares of
Shareholder Stock described in the Notice of Right of First Refusal may be
exercised and the Closing (as hereinafter defined) consummated only if the
Corporation, the Telmex Investor and the Other Shareholders, if applicable,
collectively agree to purchase all of the shares of the Offered Stock.
(f) Closing and Tender Requirements. The closing shall be held at the
-------------------------------
principal office of the Corporation, at 10:00 a.m. on the sixty-fifth day
subsequent to the date of giving of the Notice of Right of First Refusal. At
the closing, the Selling Shareholder shall present to the Corporation and/or the
acquiring Shareholders, as the case may be, all share certificates for
Shareholder Stock required to be sold in proper form for transfer. Such
Shareholder Stock shall be transferred free of all liens and encumbrances or
adverse claims of any kind or character. At the closing, the Corporation and/or
the acquiring Shareholders, as the case may be, upon receipt of proper tender of
the Shareholder Stock, shall tender full payment of the Offer Price in
conformity with the Offered Terms as set forth in the Notice of Right of First
Refusal, or upon such other terms and conditions as favorable or more favorable
to the Offered Terms.
(g) Permitted Transfer Following Right of First Refusal. If all of
---------------------------------------------------
the Shareholder Stock identified in the Notice of Right of First Refusal is not
purchased by the Corporation and/or the acquiring Shareholders prior to the
sixty-sixth day subsequent to the First Refusal Notice Date, then all of such
Shareholder Stock (including any Shareholder Stock for which a proper tender was
made) may be transferred by the Selling Shareholder at any time during the
ensuing thirty days in strict conformity with the Offered Terms set forth in the
Notice of Right of First Refusal; provided, however, the purchaser(s) of such
Shareholder Stock must execute a written acknowledgment that he or they have
become a Shareholder as if he or they had
9
<PAGE>
been original signatory parties to this Agreement and that he or they agree to
be bound by the terms of this Agreement.
3.4 Notification to Board of Solicited Offers. In addition to the other
-----------------------------------------
provisions of this ARTICLE THREE, in the event any Shareholder desires to
solicit third parties to purchase such Shareholder's Shareholder Stock, such
Shareholder shall notify the Board in writing at least 30 days prior to making
any such solicitation. After such notice has been given, the Shareholder shall
then be subject to the right of first refusal provisions contained elsewhere in
this ARTICLE THREE if a bona fide offer is received from any third party.
3.5 Transfers Include Foreclosure. For purposes of this ARTICLE THREE, a
-----------------------------
transfer of Shareholder Stock by a Shareholder shall be deemed to include, but
shall not be limited to, any transfer of legal or beneficial ownership by reason
of foreclosure under any pledge, hypothecation or similar credit transactions,
other than (a) as expressly contemplated by the Acquisition Agreement, or (b)
the pledge by CellStar of its Shareholder Stock pursuant to the provisions of
this Agreement.
3.6 Compliance Required. Absent the right to make a transfer of
-------------------
Shareholder Stock pursuant to Sections 3.2 or 3.3 hereof, any transfer described
in this ARTICLE THREE of a Shareholder's Stock without complying with the giving
of a Notice of Right of First Refusal shall be void, and the Corporation shall
issue a Notice of Right of First Refusal upon discovery of such transfer, a copy
of which shall be sent to the person making such transfer and his transferee.
The duty of the Corporation to cause the issuance of such Notice of Right of
First Refusal shall not be considered to be elective, but shall be mandatory.
Upon the giving of the Notice of Right of First Refusal, the time periods for
the exercise of the options specified in Section 3.3 shall commence running. If
a Notice of Right of First Refusal had already been given to the Corporation,
but the Corporation is required to issue a new Notice of Right of First Refusal
under this Section 3.6, the prior Notice of Right of First Refusal shall have no
effect and the time periods under the Notice of Right of First Refusal issued by
the Corporation shall apply.
3.7 Additional Restrictions on Transfer.
-----------------------------------
(a) Legend. The certificates representing Shareholder Stock will bear
------
the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER
AGREEMENTS SET FORTH IN A SHAREHOLDERS' AGREEMENT AMONG THE COMPANY
AND ITS SHAREHOLDERS, DATED _______ __, 1999, A COPY OF WHICH MAY BE
OBTAINED BY THE HOLDER OF THIS CERTIFICATE AT THE COMPANY'S PRINCIPAL
PLACE OF BUSINESS WITHOUT CHARGE.
10
<PAGE>
(b) Opinion of Counsel. No holder of Shareholder Stock may sell, pledge or
------------------
otherwise directly or indirectly transfer (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) any Shareholder
Stock (except pursuant to an effective registration statement under the
Securities Act) without first delivering to the Corporation an opinion of
counsel (reasonably acceptable in form and substance to the Corporation) that
neither registration nor qualification under the Securities Act and applicable
state securities laws is required in connection therewith.
3.8 Private Sales After a Qualified Public Offering. In the event Topp or
-----------------------------------------------
CellStar desires to make a Block Sale after a Qualified Public Offering, the
Telmex Investor shall have a right of first refusal to purchase all, but not
less than all, of the shares to be sold in the Block Sale. The party making
such Block Sale shall notify the Telmex Investor in writing of its intention to
make a Block Sale at least five Business Days prior to the date on which such
Block Sale is priced, and shall include in such notice the price for such
Shares. The Telmex Investor shall notify the party making such Block Sale of
its intention to exercise its right of first refusal within three Business Days
from the date of receipt of written notice by Topp or CellStar, as the case may
be, and shall tender payment for such Shares within three Business Days of
giving of such notice. In the event the Telmex Investor does not exercise its
rights hereunder, Topp or CellStar, as the case may be, may proceed with such
Block Sale; provided that, if such sale is consummated within three Business
Days of the date the Telmex Investor was required to provide notification of its
intent to exercise its rights, such sale must be at the same price as identified
in the original notice to the Telmex Investor.
3.9 Restrictions of Transfer not Applicable to Telmex Investor, Telmex or
---------------------------------------------------------------------
Affiliate of Telmex. Other than the restrictions set forth in Section 3.7, or
- -------------------
as otherwise provided in this Section 3.9, the restrictions on transfer set
forth in this ARTICLE THREE hereof shall not apply to the Telmex Investor,
Telmex or an Affiliate of Telmex; provided, that, (x) the transferee of any
such Shareholder Stock executes a written acknowledgement that (i) all stock so
transferred shall be deemed to remain Shareholder Stock hereunder and will,
notwithstanding the transfer to such transferee, be deemed for all purposes of
this Agreement to be Shareholder Stock owned by the transferring Shareholder,
and (ii) the transferee agrees to be bound as if the transferee were the Telmex
Investor by all of the terms of this Agreement pursuant to a written instrument
reasonably satisfactory to the Other Shareholders, and (y) in the event the
Telmex Investor exercises its "drag-a-long" rights set forth in Section 4.2
hereof, the Other Shareholders shall have an exclusive option for a period of
ten Business Days from the receipt of the Exit Notice Two to acquire the
Shareholder Stock of the Telmex Investor identified in such notice, such option
to purchase to be allocated among the Other Shareholders as set forth in Section
3.3(d) hereof. This option to purchase the shares of the Telmex Investor may be
exercised only if the Other Shareholders collectively agree to purchase all of
such shares identified in the Exit Notice Two and, if not so purchased prior to
the 11th Business Day subsequent to the receipt of the Exit Notice Two, the
Other Shareholders will be subject to the drag-a-long rights set forth in
Section 4.2 hereof.
11
<PAGE>
ARTICLE FOUR
Participation Rights of All Shareholders
----------------------------------------
4.1 Tag-Along. If Telmex or the Telmex Investor proposes to sell or
---------
convey, in a single transaction or a series of transactions, all or
substantially all of the shares of Common Stock owned by it, or any interest
therein (other than a transfer of a security interest therein as collateral
security for any obligation of the Telmex Investor), to an independent third
party (including, without limitation, a sale of the Corporation by merger,
consolidation, sale of all or substantially all of its assets, sale of all of
the outstanding Common Stock or otherwise) (an "Approved Sale"), the Telmex
Investor shall give written notice (the "Exit Notice One") to the holders of
Shareholder Stock setting forth the terms and conditions of the proposed
transfer, including the identity of the independent third party, the number of
shares of Common Stock to be transferred, the per share price to be paid for the
shares of Common Stock to be transferred and the type and nature of the
consideration to be received therefor. If the Telmex Investor shall issue an
Exit Notice One with respect to an Approved Sale, the other holders of
Shareholder Stock, by written notice to the Telmex Investor delivered within 20
days after the date of such Exit Notice One, shall be entitled to require that
the Telmex Investor include in the proposed sale to the independent third party
in the same transaction all of their shares of Common Stock and rights to
acquire shares of Common Stock (or, if the Telmex Investor is selling less than
all of its Common Stock, a percentage of each such holder's shares of Common
Stock and rights to acquire shares of Common Stock equivalent to the percentage
of Common Stock and rights to acquire shares of Common Stock to be sold by the
Telmex Investor), on the same terms and conditions set forth in the Exit Notice
One. For purposes of this Section 4.1, an "independent third party" is any
person who, prior to such sale, does not own in excess of 5% of the
Corporation's Common Stock on a fully-diluted basis, who is not controlling,
controlled by or under common control with any such 5% owner of the
Corporation's Common Stock and who is not the spouse, ancestor or descendant (by
birth or adoption) of any such 5% owner of the Corporation's Common Stock.
4.2 Drag-A-Long. If Telmex or the Telmex Investor proposes to sell or
-----------
convey, in a single transaction or a series of transactions, all or
substantially all the shares of Common Stock owned by it, or any interest
therein (other than a transfer of a security interest therein as collateral
security for any obligation of the Telmex Investor), to an independent third
party (including, without limitation, an Approved Sale), the Telmex Investor
shall give written notice (the "Exit Notice Two") to the holders of Shareholder
Stock setting forth the terms and conditions of the proposed transfer, including
the identity of the independent third party, the number of shares of Common
Stock to be transferred, the per share price to be paid for the shares of Common
Stock to be transferred and the type and nature of the consideration to be
received therefor. By so indicating in the Exit Notice Two, the Telmex Investor
shall be entitled to require the holders of Shareholder Stock to sell to the
independent third party in the same transaction all of their shares of Common
Stock and rights to acquire shares of Common Stock, on the same terms and
conditions set forth in the Exit Notice Two.
12
<PAGE>
ARTICLE FIVE
Election of Directors
---------------------
5.1 Voting for Directors. During the term of this Agreement, each
--------------------
Shareholder agrees (i) to use its best efforts to cause the Corporation's Board
of Directors to fix the number of their members at seven (7), (ii) to vote all
shares of Shareholder Stock owned by such Shareholder to elect seven (7)
directors of the Corporation; and (iii) that at each meeting of the shareholders
of the Corporation for the election of directors, each Shareholder shall vote
all shares of Shareholder Stock owned by such Shareholder for the election of
the seven (7) persons as provided in Section 5.2.
5.2 Nominations. (i) As long as Topp owns at least 8% of the outstanding
-----------
shares of Common Stock, Topp shall be entitled to designate one (1) nominee for
election as director, (ii) as long as FJ Pollak is employed by the Corporation
and owns at least 1% of the outstanding shares of Common Stock, FJ Pollak shall
be entitled to designate one (1) nominee for election as director, (iii) as long
as the CellStar Shareholder owns at least 8% of the outstanding shares of Common
Stock, CellStar Shareholder shall be entitled to designate one (1) nominee for
election as director, and (iv) Telmex Investor shall be entitled to designate
the remaining nominees for election as director. Each Shareholder agrees to
vote such Shareholder's shares of Stock in favor of the election of the nominees
designated above.
5.3 Vacancies. During the term of this Agreement, should a vacancy in the
---------
Board of Directors be caused by death, resignation, or removal for any other
reason, each of the Shareholders agrees to vote all shares of Shareholder Stock
owned by such Shareholder, and each Shareholder who is then a director agrees,
insofar as it is consistent with his fiduciary duties as a director, to vote as
director to appoint the persons designated as follows:
(i) In the event of a vacancy in the Board caused by the death,
resignation or removal for any reason of a director nominated by Telmex
Investor, the nominee for that vacancy shall be designated by Telmex
Investor. Such nominee shall hold office until the next meeting of the
Corporation's shareholders at which directors are elected.
(ii) In the event of a vacancy in the Board caused by the death,
resignation or removal for any reason of a director nominated by David
Topp, the nominee for that vacancy shall be designated by David Topp. Such
nominee shall hold office until the next meeting of the Corporation's
shareholders at which directors are elected.
(iii) In the event of a vacancy in the Board caused by the
death, resignation or removal for any reason of a director nominated by FJ
Pollak, the nominee for that vacancy shall be designated by FJ Pollak.
Such nominee shall hold office until the next meeting of the Corporation's
shareholders at which directors are elected.
13
<PAGE>
(iv) In the event of a vacancy in the Board caused by the death,
resignation or removal for any reason of a director nominated by CellStar
Shareholder, the nominee for that vacancy shall be designated by CellStar
Shareholder. Such nominee shall hold office until the next meeting of the
Corporation's shareholders at which directors are elected.
5.4 Removal of Directors. If at any time any Shareholder proposes to
--------------------
remove any director, each Shareholder agrees to vote all of the Shareholder
Stock held by such Shareholder for such removal if removal has been approved by
the Shareholder which designated such director.
5.5 Written Consent. Notwithstanding any reference herein to votes cast
---------------
at a meeting of the Corporation's shareholders, nominees for election as
directors may be designated by the Shareholders acting by written consent
without a meeting to the extent permitted by law and by the articles of
incorporation and the bylaws of the Corporation; provided, however, that nothing
in this Subsection 5.5 shall authorize the designation, election or removal of
directors other than in accordance with the requirements set forth in this
Agreement.
5.6 Indemnification. The Corporation shall at all times maintain
---------------
provisions in its Bylaws and/or Articles of Incorporation indemnifying all
directors against liability and absolving all directors from liability to the
Corporation and its shareholders to the maximum extent permitted under the law
of the State of Florida. The Corporation shall not amend the indemnification
provisions of the Corporation's Articles of Incorporation or Bylaws to eliminate
or reduce the indemnification provided for all directors and officers and such
provisions as so written shall be deemed to be a contract with each director
regarding his or her indemnification by the Corporation. The Corporation shall
also enter into separate indemnification agreements with each director and each
Management Shareholder in his capacity of an officer of the Corporation or any
of its Subsidiaries in substantially the form of Exhibit A attached hereto.
---------
5.7 Committees. For so long as Topp, F.J. Pollak, CellStar or Telmex
----------
Investor is entitled to designate a nominee for election as a director pursuant
to Section 5.2, such party shall also be entitled to designate his or its
representative to any committee of the Board.
ARTICLE SIX
Registration Rights
-------------------
6.1 Demand Registrations.
--------------------
(a) Requests for Registration. At any time at least six months after
-------------------------
the Corporation has completed a Qualified Public Offering under the Securities
Act, each Management Shareholder, CellStar Shareholder and Telmex Investor (in
each case, as long as such Shareholder could not otherwise dispose of such
Shares under Rule 144(k) of the Securities Act) may request registration under
the Securities Act of the underwritten public offering of all
14
<PAGE>
or part of their Shareholder Stock on Form S-1 or any similar long-form
registration (a "Long-Form Registration Demand"). In addition, at any time after
the Corporation qualifies for use of a Form S-2 or S-3 under the Act, or any
similar short-form registration, each Management Shareholder, CellStar
Shareholder and Telmex Investor (in each case, as long as such Shareholder holds
at least one percent (1%) of the then outstanding Common Stock) may request
registration under the Act of the underwritten public offering of all or part of
their Stock on such short-form registration statement (a "Short-Form
Registration Demand", which together with a Long-Form Registration Demand is
sometimes collectively referred to as a "Demand Registration"). Each request for
a Demand Registration shall specify the approximate number of shares of
Shareholder Stock requested to be registered. Within ten days after receipt of
any such request, the Corporation will give written notice of such requested
registration to all other holders of Shareholder Stock and will include in such
registration all Shareholder Stock with respect to which the Corporation has
received written requests for inclusion therein in accordance with this Section
6.1(a) and Section 6.2, in each case subject to the pro rata reduction
provisions of Section 6.3.
(b) Number of Demand Registrations. In no event shall the Corporation
------------------------------
be required to effect in the aggregate (i) more than one Long-Form Registration
or one Short-Form Registration pursuant to this Section 6.1 for any one
Shareholder, or (ii) more than one (1) Demand Registration in any one 12-month
period. A registration will not count as a Demand Registration until it has
become effective and the Shareholder requesting inclusion in the Demand
Registration is able to include at least 75% of the Shareholder Stock requested
to be included in such registration. The Corporation will pay all Registration
Expenses as provided in Section 6.5 hereof in connection with any registration
initiated as a Demand Registration whether or not it has become effective.
(c) Selection of Underwriters. The Corporation will select the
-------------------------
investment banker(s) and manager(s) to administer the offering.
6.2 Piggyback Rights. If at any time the Corporation proposes to file a
----------------
registration statement under the Securities Act for any underwritten sales of
shares of any of the Corporation's equity securities (or any warrants, units,
convertibles, rights or other securities related or linked to any shares of the
Corporation's equity securities), whether for a secondary offering or for a
primary offering of equity securities by the Corporation, including a Qualified
Public Offering, except for any registration statement (i) on Form S-8 or any
successor form to such form, (ii) on Form S-4 or any successor form to such
form, (iii) filed in connection with an exchange offer or an offering of Common
Stock or of securities convertible or exchangeable into Common Stock made solely
to its existing stockholders in connection with a rights offering or solely to
the Corporation's employees, or (iv) a post-effective amendment to any then
effective registration statement. the Corporation shall give written notice of
such registration no later than 15 days before its filing with the Commission to
each Shareholder. If any of the Shareholders so request within 10 days, the
Corporation shall include in any registration the Shareholder Stock of such
Shareholder requested to be included in such registration.
15
<PAGE>
6.3 Pro Rata Reduction and Other Limitations.
----------------------------------------
(a) Pro Rata Reduction. The Corporation shall not be obligated to so
------------------
include the Shareholder Stock of any Shareholder (including any Shareholder
initiating a Demand Registration pursuant to Section 6.1) to the extent the
underwriter or underwriters of such securities being otherwise registered by the
Corporation shall determine in good faith that the inclusion of such
Shareholder's Stock would jeopardize the successful sale at the desired price of
such other securities proposed to be sold by such underwriter or underwriters,
in which case the Shareholders requesting to participate in such registration
shall be entitled to participate in any such reduced number of shares of
Shareholder Stock (if any) which may be included in such registration along with
any other Shareholders exercising demand or piggyback rights with respect to
such registration on a pro rata basis in proportion to their relative holdings
of shares of Shareholder Stock (including shares of Shareholder Stock issuable
upon exercise of any vested and immediately exercisable options held by such
Shareholder), in the aggregate.
(b) Other Limitations on Obligations of the Corporation.
---------------------------------------------------
Notwithstanding the provisions of Sections 6.1 and 6.2 hereof, (i) the
Corporation shall not be required to file a Demand Registration if the
Corporation intends in good faith to conduct a primary offering of its capital
stock within three months of receipt of the notice from the Shareholder
exercising such Shareholder's rights for a Demand Registration; provided, that,
(x) if the Corporation fails to file a registration statement within such three-
month period, then the Corporation shall be obligated to file a Demand
Registration pursuant to Section 6.1 hereof; and (y) if the Corporation files a
registration statement within such three-month period, the Shareholder shall be
entitled to the piggyback registration rights set forth in Section 6.2 hereof;
and (ii) the Corporation may postpone filing of any registration statement
hereunder for a reasonable period of time (not to exceed 90 days) if the
Corporation has been advised by legal counsel that such filing would require a
special audit or if the Corporation determines reasonably and in good faith that
filing would result in a material detriment to the Corporation.
6.4 Registration Procedures. Whenever any Shareholder has requested that
-----------------------
any Shareholder Stock be registered pursuant to this ARTICLE SIX, the
Corporation will use its best efforts to effect the registration and the sale of
such Shareholder Stock in accordance with the intended method of disposition
thereof and pursuant thereto the Corporation will as expeditiously as possible:
(i) prepare and file with the Commission a registration statement
with respect to such Shareholder Stock and use its best efforts to cause
such registration statement to become effective (provided that before
filing a registration statement or prospectus or any amendments or
supplements thereto, the Corporation will furnish to the counsel selected
by each of the holders of Shareholder Stock covered by such registration
statement copies of all such documents proposed to be filed, which
documents will be subject to the review of such counsel);
16
<PAGE>
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of not less than 90 days and comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof
set forth in such registration statement;
(iii) furnish to each seller of Shareholder Stock such number of
copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including
each preliminary prospectus) and such other documents as such seller may
reasonably request in order to facilitate the disposition of the
Shareholder Stock owned by such seller;
(iv) notify each seller of such Shareholder Stock, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue
statement of a material fact or omits any fact necessary to make the
statements therein not misleading and, at the request of any such seller,
the Corporation will prepare a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of such Shareholder
Stock, such prospectus will not contain an untrue statement of a material
fact or omit to state any fact necessary to make the statements therein not
misleading;
(v) use its best efforts to cause all such Shareholder Stock
to be listed on each securities exchange on which similar securities issued
by the Corporation are then listed and, if not so listed, to be listed on
the NASD automated quotation system and, if listed on the NASD automated
quotation system, use its best efforts to secure designation of all such
Shareholder Stock covered by such registration statement as a NASDAQ
"national market system security" within the meaning of Rule 11Aa2-1 of the
Commission or, failing that, to secure NASDAQ authorization for such Common
Stock;
(vi) provide a transfer agent and registrar for all such
Shareholder Stock not later than the effective date of such registration
statement;
(vii) enter into such customary agreements (including
underwriting agreements in customary form) and take all such other actions
as the holders of a majority of the Shareholder Stock being sold or the
underwriters, if any, reasonably request in order to expedite or facilitate
the disposition of such Shareholder Stock (including, without limitation,
effecting a stock split or a combination of shares);
(viii) make available for inspection by any seller of
Shareholder Stock any underwriter participating in any disposition pursuant
to such registration statement and any attorney, accountant or other agent
retained by any such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the
17
<PAGE>
Corporation, and cause the Corporation's officers, directors, employees and
independent accountants to supply all information reasonably requested by
any such seller, underwriter, attorney, accountant or agent in connection
with such registration statement;
(ix) permit any holder of Shareholder Stock which is reasonably
likely to be deemed to be an underwriter or a controlling person of the
Corporation, to participate in the preparation of such registration or
comparable statement and to require the insertion therein of material,
furnished to the Corporation in writing, which in the reasonable judgment
of such holder and its counsel should be included; and
(x) in the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order suspending
or preventing the use of any related prospectus or suspending the
qualification of any Shareholder Stock included in such registration
statement for sale in any jurisdiction, the Corporation will use it
reasonable best efforts promptly to obtain the withdrawal of such order.
6.5 Registration Expenses. All expenses incident to the Corporation's
---------------------
performance of or compliance with this ARTICLE SIX, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses,
and fees and disbursements of counsel for the Corporation and all independent
certified public accountants, underwriters (excluding discounts and commissions)
and other persons or entities retained by the Corporation (all such expenses
being herein called "Registration Expenses"), will be borne by the Corporation,
and the Corporation will, in any event, pay its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit or
quarterly review, the expense of any liability insurance and the expenses and
fees for listing the securities to be registered on each securities exchange on
which similar securities issued by the Corporation are then listed or on the
NASD automated quotation system. The Corporation shall not, however, pay (i)
underwriting discounts or commissions to the extent related to the sale of the
Shareholder's Stock sold in any registration and qualification, or (ii) fees and
expenses of counsel to the Shareholder relating to such registration and
qualification.
6.6 Indemnification. The Corporation will indemnify and hold harmless
---------------
each Shareholder and any underwriter (as defined in the Act) for such
Shareholder and each person, if any, who controls the Shareholder or underwriter
within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several, and expenses (including reasonable attorneys'
fees and expenses and reasonable costs of investigation) to which the
Shareholder or underwriter or such controlling person may be subject, under the
Act or otherwise, insofar as any thereof arise out of or are based upon (i) any
untrue statement or alleged untrue statement of a material fact contained in (A)
any registration statement under which such Shareholder's Stock was registered
under the Act pursuant to this ARTICLE SIX, any prospectus or preliminary
prospectus contained therein, or any amendment or supplement thereto or (B) any
other document incident to the registration of the Stock under the Act or the
qualification of the Shareholder Stock under any state securities laws
applicable to the Corporation, (ii) the omission
18
<PAGE>
or alleged omission to state in any item referred to in the preceding clause (i)
a material fact required to be stated therein or necessary to make the
statements therein not misleading or (iii) any violation or alleged violation by
the Corporation of the Securities Act, the Securities Exchange Act of 1934, as
amended, or any other federal or state securities law, rule or regulation
applicable to the Corporation and relating to action or inaction by the
Corporation in connection with any such registration or qualification, except
insofar as such losses, claims, damages, liabilities or expenses arise out of or
are based upon any untrue statement or alleged untrue statement or omission or
alleged omission based upon information furnished to the Corporation in writing
by such Shareholder or by any underwriter expressly for use therein (with
respect to which information such Shareholder or underwriter shall so indemnify
and hold harmless the Corporation and each person, if any, who controls the
Corporation or such underwriter within the meaning of the Act). The Corporation
will enter into an underwriting agreement with the underwriter or underwriters
for any offering registered under the Act pursuant to this ARTICLE SIX hereof
and with the Shareholders selling Stock pursuant to such offering, and such
underwriting agreement shall contain customary provisions with respect to
indemnification and contribution.
ARTICLE SEVEN
Protective Covenants
--------------------
7.1 Transactions with Affiliates of Telmex or Telmex Investor; Allocation
---------------------------------------------------------------------
of Corporate Overhead. All transactions by the Corporation with an Affiliate of
- ---------------------
Telmex, Telmex Investor or Telmex, whether or not such transactions are deemed
to be at arms' length or at fair market value, including without limitation,
transactions involving the use of services or personnel of Telmex or its
Affiliates, must be approved by a majority of the Board, excluding any members
of the Board designated by Telmex Investor. In addition, all allocations of
corporate overhead to the Corporation or a Subsidiary by Telmex or its Affiliate
must be approved by a majority of the Board, excluding any members of the Board
designated by Telmex Investor. All transactions with Southwestern Bell and
France Telecom must be on terms and conditions substantially equivalent to the
terms and conditions under which the Corporation engages in such transactions
with an independent third party. For the avoidance of doubt, no provision of
this Agreement shall be deemed or construed to limit any legal duty of Telmex,
Telmex Investor and the directors of the Corporation selected by Telmex Investor
pursuant to Article 5 hereof, whether under statutory or common law or
otherwise.
7.2 Access to Documents. The Corporation agrees and each of the
-------------------
Shareholders agree to cause the Corporation (i) to make available for inspection
by the Shareholders and its directors, officers, employees, counsel,
representatives, accountants and auditors (collectively "Representatives"),
during normal business hours, corporate records, books of account, contracts and
all other documents requested by the Shareholders, and (ii) to permit the
Shareholders reasonable access to the properties of the Corporation, upon
reasonable advance notice to the Corporation, in order to make reasonable
inspection of and examination of the business,
19
<PAGE>
operations and affairs of the Corporation. The Corporation agrees and each of
the Shareholders agree to cause the Corporation to cause its Representatives to
be available upon reasonable notice to answer questions of the Shareholder's
Representatives concerning the business, operations and affairs of the
Corporation and to make available all relevant books and records in connection
with such inspection and examination.
7.3 Corporate Existence. The Corporation agrees and each of the
-------------------
Shareholders agree to cause the Corporation to preserve and maintain its
corporate existence.
7.4 Financial Statements. The Corporation agrees and each of the
--------------------
Shareholders agree to cause the Corporation to furnish to each Shareholder: (i)
within 120 days after the end of each fiscal year of the Corporation, financial
statements as at the close of such year, audited by independent public
accountants selected by the Corporation, and (ii) within 45 days after the end
of each quarter, financial statements as at the end of such period for such
quarter. In addition, the Corporation will provide monthly financial statements
within a reasonable period after such statements are available.
7.5 New Shareholders. As a condition to the issuance by the Corporation
----------------
of any authorized but unissued shares of Common Stock, or any rights or options
to acquire, or securities convertible into, Common Stock, to any person who is
not a Shareholder, the Corporation shall require such Person to execute an
agreement to become lawfully bound by the provisions of ARTICLES THREE, FOUR,
NINE, TEN and ELEVEN.
7.6 Distributions. The Corporation agrees that it will not and, each of
-------------
the Shareholders agree not to cause the Corporation to, declare or pay any cash
dividends, make any distribution of property to its shareholders based on such
shareholder's ownership in the Corporation or redeem, retire or purchase shares
of Common Stock; provided that, (i) the Corporation may declare and deliver
dividends and distributions payable only in Common Stock of the Corporation,
(ii) such distributions can be made with the consent of Topp and the CellStar
Shareholders, (iii) transactions contemplated by this Agreement hereof shall not
be subject to this prohibition, (iv) this covenant will expire on the earlier to
occur of (x) the two-year anniversary date of this Agreement, and (y) with
respect to Topp, on the date the Topp Notes have been satisfied in full, and
with respect to the CellStar Shareholder, on the date the CellStar Note has been
satisfied in full, and (v) the Corporation may redeem, retire or purchase shares
of its employees other than the Management Shareholders.
ARTICLE EIGHT
Preemptive Rights
-----------------
8.1 Participation Rights. The Corporation shall, at least 20 days prior
--------------------
to any issuance by the Corporation of any of its securities other than Excluded
Stock to any Person or Persons (other than issuances to Shareholders and other
holders of Shareholder Stock pursuant to this Section 8.1) after the date of
this Agreement, give written notice of such issuance (a "New
20
<PAGE>
Issuance") to each Management Shareholder and the CellStar Shareholder (the
"Offerees"). The Corporation's written notice to the Offerees shall describe the
securities proposed to be issued by the Corporation and specify the number,
price and payment terms. Each Offeree shall have the right, for a period of 20
days from such notice, to purchase, at the same price and on the same terms and
conditions, that number of additional securities of the Corporation as would be
necessary to preserve such holder's percentage interest in the Common Stock of
the Corporation on a fully diluted, as of the time immediately prior to such New
Issuance. Each Offeree may accept the Corporation's offer as to the full number
of securities offered to such Offeree or any lesser number, by written notice
thereof given by such Offeree to the Corporation prior to the expiration of the
aforesaid 20 day period, in which event the Corporation shall promptly sell and
such Offeree shall buy, upon the terms specified, the number of securities
agreed to be purchased by such Offeree. CellStar may, in its sole discretion,
upon an exercise of its rights hereunder, apply all or a portion of the then
accrued interest and the outstanding principal amount of the CellStar Note to
the purchase price of the securities CellStar is otherwise entitled to purchase,
upon issuance of an appropriate credit on such note, to be applied first to
accrued and unpaid interest and then ratably across all remaining amortizations
of principal of the CellStar Note.
8.2 Corporation's Right to Sell. The Corporation shall be free at any time
---------------------------
after the end of the aforesaid 20 day period and prior to 90 days after the date
of its notice of offer to the Offerees, to offer and sell to any Person the
number of such securities not agreed by the Offerees to be purchased by them, at
a price and on payment terms no less favorable to the Corporation than those
specified in such notice of offer to the Offerees. However, if such sale or
sales are not consummated within such ninety 90 day period, the Corporation
shall not sell such securities as shall not have been purchased within such
period without again complying with this ARTICLE EIGHT. The obligations of the
Corporation under this ARTICLE EIGHT shall terminate upon the completion of a
Qualified Public Offering. Notwithstanding anything contained in this Agreement
to the contrary, the written notice of an offer to purchase newly issued shares
to which a participation right applies (as provided in Section 8.1 above) need
not be given prior to the purchase by the Person intending to purchase the newly
issued shares, provided such offer is sent within five days thereafter and
remains open for a 20 day period from the receipt thereof, and further provided
that the Corporation has set aside a number of shares sufficient to satisfy the
obligations of the Corporation pursuant to this ARTICLE EIGHT.
ARTICLE NINE
Conversion of Class B Common Stock to Class A Common Stock
----------------------------------------------------------
9.1 Conversion of Class B Common Stock to Class A Common Stock. Subject
----------------------------------------------------------
to Section 9.2 hereof, each share of Class B Common Stock shall be convertible,
at any time and from time to time, and without payment of additional
consideration by the holder thereof into one fully paid and nonassessable share
of Class A Common Stock at the option of a holder thereof. Upon the exercise of
such option by any Shareholder, all Class B Common Stock shall
21
<PAGE>
immediately be converted to Class A Common Stock, without further action by any
holder of Class B Common Stock.
9.2 HSR Filing. In connection with any conversion by a Shareholder of
----------
Class B Common Stock to Class A Common Stock, each Shareholder and the
Corporation agrees to file any notifications, reports and approvals required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and
regulations promulgated thereunder, at its expense, and to comply with all
reasonable requests of any other party for information necessary in connection
with the preparation by such other party of its notification and report form.
ARTICLE TEN
The Giving of Notices Required by This Agreement
------------------------------------------------
10.1 Addresses. Any notices, requests, demands and other communications
---------
required or permitted to be given hereunder must be in writing and, except as
otherwise specified in writing, will be deemed to have been duly given when
personally delivered, telexed or facsimile transmitted, or three days after
deposit in the United States mail, by certified mail, postage prepaid, return
receipt requested, as follows. The addresses of the Corporation and the
Shareholders, which shall be considered to be their last known addresses unless
subsequently changed in accordance with the provisions of this Agreement, are as
follows:
To the Corporation: Topp Telecom, Inc.
8390 N.W. 25 Street
Miami, FL 33122
Telecopier: (305) 640-2070
Attention: President
To Telmex Investor or Telmex: Inmobiliaria Aztlan, S.A. de C.V.
c/o Telefonos de Mexico, S.A. de C.V.
Parque Via 198
Colonia
06599 Mexico, D.F.
Mexico
Telecopier: 011 52 5 625-3852
Attention: Daniel Hajj
To CellStar Shareholder: CellStar Telecom, Inc.
c/o CellStar Corporation
1730 Briercroft Court
Carrollton, TX 75006
Telecopier: (972) 323-4539
Attention: General Counsel
22
<PAGE>
To any Management Shareholder: at the address reflected on the
Corporation's payroll records
Any party may change its address for the purposes of this Agreement by giving
notice of such change of address to the other parties in the manner herein
provided for giving notice.
10.2 Form of Notice. Any notice or communication hereunder must be in
--------------
writing, and may be personally delivered or given by registered or certified
mail, return receipt requested, and if given by registered or certified mail,
shall be deemed to have been given and received forty-eight hours after deposit
in the United States mail of a registered or certified letter, return receipt
requested, containing such notice, properly addressed, with postage prepaid; and
if given otherwise than by registered or certified mail, it shall be deemed to
have been given when received by the party to whom it is addressed at the time
received.
10.3 Failure to Notify of Changed Address. It shall be the responsibility
------------------------------------
of each of the parties to this Agreement to notify all other parties of their
respective addresses and any changes thereof, and any objections to the
performance of any act required hereunder based upon a failure to receive a
notice mailed in conformity with the provisions of this Agreement shall be
meritless.
ARTICLE ELEVEN
Miscellaneous
-------------
11.1 Termination. This Agreement shall terminate upon the earlier to
-----------
occur of (i) the dissolution of the Corporation, (ii) the filing of a voluntary
or involuntary petition by or against the Corporation under Chapter 7 or Chapter
11 of the Bankruptcy Code, (iii) appointment of a receiver for the Corporation,
(iv) the ten-year anniversary date of the date of the Agreement Closing, or (v)
except with respect to the registration rights provisions set forth in ARTICLE
SIX and the right of first refusal provisions set forth in Section 3.8, the
consummation of a Qualified Public Offering (it being understood that the
provisions of this Agreement shall not apply to any Shareholder Stock sold
pursuant thereto). This Agreement shall terminate as to any specific
Shareholder upon the date such Shareholder ceases to own any Shareholder Stock.
11.2 Modification. This Agreement may only be amended, terminated or
------------
modified by the written consent of all parties; provided, that, ARTICLE TWO of
this Agreement may be amended by consent of David Topp and Telmex.
11.3 Successors. This Agreement shall be binding upon the parties hereto,
----------
their heirs, administrators, successors, executors and assigns, and the parties
hereto do covenant and agree that they themselves and their respective heirs,
executors, successors, administrators and assigns will execute any and all
instruments, releases, assignments and consents that may be reasonably required
of them to more fully execute the provisions of this Agreement.
23
<PAGE>
11.4 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall serve as an original for all purposes, but all
copies of which shall constitute but one and the same Agreement.
11.5 Headings. All headings set forth in this Agreement are intended for
--------
convenience only and shall not control or affect the meaning, construction or
effect of this Agreement or of any of the provisions thereof.
11.6 Governing Law. This Agreement shall be governed by and shall be
-------------
construed and enforced in accordance with the laws of the State of Florida.
11.7 Waiver. The waiver by any party hereto of a breach of any provision
------
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party.
11.8 Entire Agreement. This Agreement constitutes the entire Agreement of
----------------
the parties hereto with respect to the transactions contemplated hereby, and it
is hereby agreed that any prior oral or written agreements concerning the sale
or disposition of Shareholder Stock, including, but not limited to, the Prior
Shareholders' Agreement, shall be null and void. To the extent of any
inconsistency between this Agreement and that certain Agreement dated as of
December 23, 1994, by and among David Topp, Dora Topp, Mark Topp and Risia Topp
Wire (the "Topp Family Agreement"), the Topp Family Agreement shall be construed
so as to be consistent herewith.
11.9 Severability. If any provision of this Agreement shall be held to be
------------
illegal or unenforceable, such illegality or unenforceability shall extend to
that provision solely, and the remainder of this Agreement shall be enforced as
if such illegal or unenforceable provision were not incorporated herein.
11.10 Specific Performance. The parties acknowledge that remedies at law
--------------------
may be inadequate to protect the parties against any actual or threatened breach
of this Agreement, and, without prejudice to any other rights and remedies
otherwise available to the parties, the parties agree that they shall be
entitled to the remedy of specific performance and other temporary and permanent
injunctive or equitable relief without proof of actual damages.
11.11 Business Days. Whenever the terms of this Agreement call for the
-------------
performance of a specific act on a specified date, which date falls on a
Saturday, Sunday or legal holiday, the date for the performance of such act
shall be postponed to the next succeeding regular business day following such
Saturday, Sunday or legal holiday.
11.12 Stock References. References to "Shareholder Stock" herein shall
----------------
mean (i) any Shareholder Stock purchased or otherwise acquired by any
Shareholder, (ii) any equity securities issued or issuable directly or
indirectly with respect to the Shareholder Stock referred to in clause (i) above
by way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization, and
(iii) any other shares of any class or series of capital stock of the
Corporation held by a Shareholder, including all
24
<PAGE>
Shareholder Stock acquired by the Management Shareholder by reason of any option
agreements between the Corporation and each of the Management Shareholder,
pursuant to which the Corporation will grant each Management Shareholder the
option to purchase, subject to the terms and conditions thereof, additional
shares of Shareholder Stock. As to any particular shares constituting Stock,
such shares will cease to be Stock when they have been (x) effectively
registered under the Act and disposed of in accordance with the registration
statement covering them or (y) sold to the public through a broker, dealer or
market maker pursuant to Rule 144 (or any similar provision then in force) under
the Act.
11.13 Failure to Deliver Stock. If a Shareholder (or any personal
------------------------
representative or other representative of a Shareholder) who has become
obligated to sell Shareholder Stock of the Corporation hereunder shall fail to
deliver such Shareholder Stock on the terms and in accordance with this
Agreement, the Corporation, in addition to all other remedies it may have, may
send to such obligated party by registered mail, return receipt requested, the
purchase price for such Stock on the terms provided for in this Agreement.
Thereupon, the Corporation, upon written notice to such Shareholder, shall
cancel on its books the certificates representing the Stock to be sold; and
thereupon, all of the obligated Shareholder's rights in and to such Shareholder
Stock shall terminate.
11.14 David Topp as Representative and Attorney-In-Fact. Each of Dora
-------------------------------------------------
Topp, Risia Wine Topp and Mark Topp hereby appoints David as such Shareholder's
custodian and attorney-in-fact to act for such Shareholder in connection with
the sale of the Common Stock and the other provisions contemplated by the terms
hereof, including the execution and delivery of any amendments to this
Agreement, and David Topp hereby accepts such appointment. It is agreed by each
of such Shareholders that the arrangements made by such Shareholder hereunder
are irrevocable and that the obligations of such Shareholder hereunder shall not
be terminated by any acts of such Shareholder, or by operation of law, whether
by death or incapacity of such Shareholder or any other party to this Agreement
or the occurrence of any other event; and if any such death, incapacity or any
other such event shall occur after the execution of this Agreement and before
the delivery of the sale of the shares of Common Stock, David Topp is
nevertheless authorized and directed to hold and dispose of the Common Stock in
accordance with the terms and conditions of this Agreement as if such death,
incapacity or other event had not occurred, regardless of whether or not David
Topp shall have received notice of such death, incapacity or other event.
11.15 Attorneys' Fees and Costs. If either party seeks to enforce its
-------------------------
rights or remedies hereunder by arbitration, the prevailing party shall be
entitled to reasonable attorneys' fees, expenses, and costs incurred in
connection therewith.
11.16 VENUE. THE PARTIES HERETO CONSENT AND AGREE THAT THE STATE OR
-----
FEDERAL COURTS LOCATED IN MIAMI-DADE COUNTY, FLORIDA SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE PARTIES
PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS
AGREEMENT, PROVIDED,
25
<PAGE>
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE PARTIES
HERETO FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION
TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF SUCH PARTY. THE PARTIES
HERETO HEREBY WAIVE PERSONAL SERVICE OF THE SUMMONS, COMPLAINTS AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO SUCH PARTY AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED
UPON THE EARLIER OF ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN
THE U.S. MAIL, PROPER POSTAGE PREPAID.
11.17 WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY KNOWINGLY,
--------------------
VOLUNTARILY AND INTENTIONALLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE, BETWEEN THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH,
RELATED TO, OR INCIDENTAL TO THIS AGREEMENT OR THE TRANSACTIONS RELATED HERETO
OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR
WRITTEN) OR ACTIONS OF EITHER PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT
FOR THE PARTIES HERETO ENTERING INTO THIS AGREEMENT.
26
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have hereunto set their
names as of the date first above written.
TOPP TELECOM, INC.
By: /s/ F. J. POLLAK
----------------------------------------------
F. J. Pollak
President
TELEFONOS de MEXICO, S.A. de C.V.
By: /s/ ADOLFO CEREZO
----------------------------------------------
Adolfo Cerezo
INMOBILIARIA AZTLAN, S.A. de C.V.
By: /s/ ADOLFO CEREZO
----------------------------------------------
Adolfo Cerezo
CELLSTAR TELECOM, INC.
By: /s/ ELAINE FLUD RODRIGUEZ
----------------------------------------------
Elaine Flud Rodriguez, Vice President
/s/ DAVID TOPP
-------------------------------------------------
David Topp
/s/ DAVID TOPP
-------------------------------------------------
David Topp, as attorney-in-fact for Dora Topp
/s/ DAVID TOPP
-------------------------------------------------
David Topp, as attorney-in-fact for Risia Wine
Topp
/s/ DAVID TOPP
-------------------------------------------------
David Topp, as attorney-in-fact for Mark Topp
/s/ F. J. POLLAK
-------------------------------------------------
F. J. Pollak
/s/ RICHARD P. ANDERSON
-------------------------------------------------
Richard P. Anderson
27
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Percentage
Name of Shareholder Shares of Stock Ownership
- ------------------------ ---------------------- --------------------------------------
Voting Non-voting Voting Non-voting Combined
------ ---------- ------ ---------- --------
<S> <C> <C> <C> <C> <C>
David Topp* 2,472 16,151 17.80% 5.48% 6.04%
Dora Topp - 18,636 6.33% 6.04%
David Topp and Dora
Topp, Joint Tenants
with right of
Survivorship - 5,911 2.01% 1.92%
Mark Topp - 6,212 2.11% 2.01%
Risia Topp Wine - 6,212 2.11% 2.01%
------ ------- ----- ----- -----
Topp Family Total 2,472 53,122 17.80% 18.04% 18.03%
F.J. Pollak* 1,000 19,000 7.20% 6.45% 6.49%
Richard P. Anderson* - 1,500 0.51% 0.49%
CellStar Telecom, Inc. 2,708 57,425 19.50% 19.50% 19.50%
Inmobiliaria Aztlan,
S.A. de C.V. 7,708 163,442 55.50% 55.50% 55.50%
====== ======= ===== ===== =====
Total 13,888 294,489 100% 100% 100%
</TABLE>
- ----------------------
* Management Shareholders
D-1
<PAGE>
EXHIBIT 10.39
DIVIDED REPLACEMENT NOTE NUMBER ONE
-----------------------------------
$22,507,537.00 Dated as of February 12, 1999
FOR VALUE RECEIVED, Topp Telecom, Inc., a corporation organized and
existing under the laws of Florida (the "Borrower"), promises to pay to the
order of CellStar, Ltd., a limited partnership organized and existing under the
laws of Texas (the "Lender"), at the principal office of the Lender at 1730
Briercroft Court, Carrolton, Texas 75006 (or at such other office or location as
the Lender shall specify to the Borrower in writing from time to time), the
principal sum of TWENTY TWO MILLION FIVE HUNDRED SEVEN THOUSAND FIVE HUNDRED
THIRTY SEVEN DOLLARS ($22,507,537.00) (the "Loan"), in lawful money of the
United States of America, and to pay interest on the aggregate unpaid daily
average outstanding principal balance hereof in like money at such office from
the date hereof until the principal hereof shall have become due and payable by
acceleration or otherwise, at a fixed rate per month equal to six tenths of one
percent (.60%) per month.
Interest on this Note shall be due and payable in quarterly installments on
the last day of January, April, July and October, commencing on April 30, 1999
(and at maturity, whether by acceleration or otherwise). The entire amount of
principal and accrued interest outstanding under this Note shall be due and
payable on January 31, 2003. Interest under this Note shall be calculated on
the average daily balance from time to time outstanding, on the basis of a 360-
day year for the actual number of days elapsed (i.e. 1/360th of a full year's
interest shall accrue for each day any principal amount of the Loan is
outstanding).
Principal on this Note shall be due and payable in twelve equal quarterly
installments of $1,875,628.10 on the last day of January, April, July and
October, commencing on April 30, 2000 (and at maturity, whether by acceleration
or otherwise).
The principal amount of this Note and all outstanding accrued interest
shall be payable in full, together with any accrued and unpaid interest thereon,
on January 31, 2003 (the "Maturity Date").
This Note will be subordinate in right of payment to the prior payment in
full of all Senior Indebtedness of the Borrower outstanding from time to time,
provided that so long as no payment of principal or interest under Senior
Indebtedness shall be due and unpaid, the Borrower shall pay (a) scheduled
installments of interest on this Note as and when the same become due and
payable, and (b) scheduled installments of principal on this Note as and when
the same become due and payable.
Upon any distribution to creditors of the Borrower in a liquidation or
dissolution of the Borrower or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Borrower or its property, an
assignment for the benefit of
<PAGE>
creditors or any marshalling of the Borrower's assets and liabilities, the
holders of Senior Indebtedness of the Borrower will be entitled to receive
payment in full of all obligations due in respect of such Senior Indebtedness
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Indebtedness) before the Lender will be
entitled to receive any payment with respect to the Note, and until all
obligations with respect to Senior Indebtedness are paid in full, any
distribution to which the Lender would be entitled shall be made to the holders
of Senior Indebtedness.
Prior to a default under this Note, all payments received by Lender under
this Note, including, without limitation, any prepayments, shall be applied
first to accrued and unpaid interest under this Note (including interest payable
but not yet due) and then to the principal of indebtedness hereunder.
All payments by the Borrower under this Note shall be in such amounts as
may be necessary in order that all payments, after deduction or withholding for
or on account of any present or future taxes, levies, imposts, duties or other
charges of whatsoever nature imposed by any government or any political
subdivision or taxing authority thereof (collectively the "Taxes"), shall not be
less than the amounts otherwise specified to be paid under this Note.
Notwithstanding anything to the contrary contained in this paragraph, the
Borrower shall not be liable for the payment of any tax on or measured by net
income imposed on the Lender pursuant to the income tax laws of the United
States or by the jurisdiction under the laws of which the Lender is organized or
is or should be qualified to do business or any political subdivision thereof.
The Borrower shall further pay any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies which arise
from any payment made hereunder or from the execution, delivery or registration
of, or otherwise with respect to, this Note (herein referred to as "Other
Taxes"). The Borrower shall pay all Taxes and Other Taxes when due (and
indemnify the Lender against any liability therefor) and shall promptly (and in
any event not later than 30 days thereafter) furnish to the Lender any
certificates, receipts and other documents which may be required (in the
reasonable judgment of the Lender) to establish any tax credit to which the
Lender may be entitled. The Borrower shall indemnify the Lender for the full
amount of Taxes and Other Taxes (including, without limitation, any Taxes and
Other Taxes imposed by any jurisdiction on amounts payable under this paragraph)
paid by the Lender or any liability (including interest and penalties) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted. Without prejudice to the survival of any other
agreement of the Borrower hereunder, the obligations of the Borrower under this
paragraph shall survive the termination of this Note and the repayment of the
Loan.
For the purposes hereof, the following terms shall have the following
meanings:
"Business Day" shall mean a day on which commercial banks are open for
------------
business in Dallas, Texas.
"Governmental Authority" shall mean, as to any Person, any government (or
----------------------
any political subdivision or jurisdiction thereof), court, bureau, agency
2
<PAGE>
or other governmental authority having jurisdiction over such Person or any
of its business, operations or properties.
"Indebtedness" shall mean, all obligations of the Borrower for borrowed
------------
money and any amendments, renewal, extension, deferral, modification,
restructuring or refunding of any such indebtedness.
"Person" shall mean any natural person, corporation, unincorporated
------
organization, trust, joint-stock company, joint venture, association,
company, partnership or Governmental Authority.
"Senior Indebtedness" shall mean any and all Indebtedness of the Borrower;
-------------------
provided that the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness
shall be senior in right of payment to this Note.
Upon the happening of any of the following events, each of which shall
constitute a default hereunder (herein referred to as an "Event of Default"),
all liabilities of the Borrower to the Lender under this Note shall thereupon or
thereafter, at the option of the Lender, without notice or demand, become due
and payable; provided, however, that in the event of an Event of Default under
Subsection (a) below, no acceleration shall occur unless any amounts due remain
unpaid following the expiration of five (5) days following any written notice to
the Borrower of such Event of Default:
(a) failure of the Borrower to pay in full, when due, any monetary
liability whatsoever under this Note, including, without limitation,
any principal installment of this Note or interest installment hereon
for any reason or by reason of subordination, within five (5) business
days following the due date thereof;
(b) (i) the Borrower shall make an assignment for the benefit of
creditors, petition or apply to any court or other tribunal for the
appointment of a custodian, receiver or any trustee or shall commence
any proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; (ii) or if there
shall have been filed any such petition or application, or any such
proceeding shall have been commenced against the Borrower, in which an
order for relief is entered and remains undismissed for a period of
thirty (30) days or more; (iii) the Borrower, by any act or omission
shall indicate consent to, approval of or fail to timely object to any
such petition, application or proceeding or order for relief or the
appointment of a custodian, receiver or any trustee or shall suffer any
such custodianship, receivership or trusteeship to continue
undischarged for a period of thirty (30) days or more; (iv) the
Borrower shall generally not pay its debts as such debts become due or
admit in writing its inability to pay its debts as they mature; or (v)
the Borrower shall have concealed, removed or permitted to be concealed
or removed any part of its properties or assets, with intent to hinder,
delay or
3
<PAGE>
defraud its creditors or any of them, or made or suffered a transfer of
any of its property which may be fraudulent under any bankruptcy,
fraudulent conveyance or similar law, or shall have made any transfer
of its property to or for the benefit of a creditor at a time when
other creditors similarly situated have not been paid; or (vi) be
"insolvent," as such term is defined in the federal bankruptcy code of
the United States or under the laws of the jurisdiction in which the
Borrower is organized;
(c) the taking of possession of any substantial part of the property
of the Borrower at the instance of any Governmental Authority, which is
not cured within twenty (20) days;
(d) the dissolution of Borrower;
(e) an Event of Default (as defined therein) has occurred under any of
the Topp Notes (as hereinafter defined); provided, that, such lender
has exercised his right to accelerate the payment due under the Note
prior to its scheduled maturity date.
If there shall occur any Event of Default hereunder, the entire outstanding
principal balance under this Note shall bear interest for any period during
which such principal or interest shall be overdue or during the pendency of any
such Event of Default at the rate of eighteen percent (18%) per annum (the
"Default Rate"), payable on demand.
The Borrower agrees to pay all reasonable costs incurred by any holder
hereof, including reasonable attorneys' fees (including those for appellate
proceedings), incurred in connection with any Event of Default, or in connection
with the collection or attempted collection or enforcement hereof, whether or
not legal proceedings may have been instituted.
In the event of any demand by Lender for payment hereunder or if an Event
of Default has occurred, the Borrower shall immediately provide written notice
to the holders of the Topp Notes (as hereinafter defined) at the address
therefor in the Borrower's books and records.
All parties to this Note, including the Borrower and any sureties,
endorsers or guarantors, hereby waive presentment for payment, demand, protest,
notice of dishonor, notice of acceleration of maturity, and all defenses on the
ground of extension of time for payment hereof, and agree to continue and remain
bound for the payment of principal, interest and all other sums payable
hereunder, notwithstanding any change or changes by way of release, surrender,
exchange or substitution of any security for this Note or by way of any
extension or extensions of time for payment of principal or interest; and all
such parties waive all and every kind of notice of such change or changes and
agree that the same may be made without notice to or consent of any of them.
Rights and remedies of the holder as provided herein shall be cumulative
and concurrent and may be pursued singularly, successively or together at the
sole discretion of the holder, and may be exercised as often as occasion
therefor shall occur, and the
4
<PAGE>
failure to exercise any such right or remedy shall in no event be construed as a
waiver or release of the same.
No failure on the part of Lender to exercise any right or remedy hereunder,
whether before or after the happening of an Event of Default shall constitute a
waiver thereof, and no waiver of any past Event of Default shall constitute a
waiver of any future Event of Default or of any other Event of Default. No
failure to accelerate the debt evidenced hereby by reason of default hereunder,
or acceptance of a past due installment, or indulgence granted from time to time
shall be construed to be a waiver of the right to insist upon prompt payment
thereafter or to impose late charges retroactively or prospectively, or shall be
deemed to be a novation of this Note or a reinstatement of the debt evidenced
hereby or a waiver of such right or acceleration or any other right, or be
construed so as to preclude the exercise of any right that Lender may have,
whether by the laws of the State of Florida, by agreement, or otherwise; and
Borrower and each endorser hereby expressly waives the benefit of any statute or
rule of law or equity that would produce a result contrary to or in conflict
with the foregoing. This Note may not be modified, altered or amended orally,
and shall be modified, altered or amended only by an agreement in writing signed
by the party against whom such agreement is sought to be enforced.
None of Lender or its affiliates, officers, directors, employees, agents or
representatives shall be responsible to Borrower for any act or failure to act
hereunder or pursuant hereto, except in respect of damages attributable solely
to their own gross negligence or willful misconduct as finally determined by a
court of competent jurisdiction, nor for any punitive, exemplary, indirect or
consequential damages.
Anything herein to the contrary notwithstanding, the obligations of the
Borrower under this Note shall be subject to the limitation that payments of
interest to the Lender shall not be required to the extent that receipt of any
such payment by the Lender would be contrary to provisions of law applicable to
the Lender (if any) which limit the maximum rate of interest which may be
charged or collected by the Lender; provided, however, that nothing herein shall
-------- -------
be construed to limit the Lender to presently existing maximum rates of
interest, if an increased interest rate is hereafter permitted by reason of
applicable federal or state legislation. In the event that the Borrower makes
any payment of interest, fees or other charges, however denominated, pursuant to
this Note, which payment results in the interest paid to the Lender to exceed
the maximum rate of interest permitted by applicable law, any excess over such
maximum shall be applied in reduction of the principal balance owed to the
Lender as of the date of such payment, or if such excess exceeds the amount of
principal owed to the Lender as of the date of such payment, the difference
shall be paid by the Lender to the Borrower.
This Note, together with the other Divided Replacement Notes (as
hereinafter defined) amends and restates in its entirety, but does not satisfy
the indebtedness evidenced by, that certain Promissory Note, dated as of
September 1, 1998, in the principal amount of up to $26,990,000, made by
Borrower payable to the order of Lender (the "Existing Note"). Immediately
prior to the effectiveness of this Note, the
5
<PAGE>
outstanding principal balance of the Existing Note is $26,990,000. As of the
date hereof, and without any further action on the part of any party, the entire
outstanding principal balance of the Existing Note shall be deemed to be
outstanding under this Note and the Divided Replacement Notes with the same
allocation between principal and interest as under said Existing Note. Nothing
herein shall be deemed as a satisfaction, novation or refinancing of the
indebtedness evidenced by the Existing Note. For the purposes hereof, "Divided
Replacement Notes" means and includes the following: (i) this Note, (ii) that
certain Divided Replacement Note Number Two in the principal amount of $838,165,
dated as of the date hereof, made by the Borrower payable to the order of the
Lender ("Divided Replacement Note Number Two"), (iii) that certain Divided
Replacement Note Number Three in the principal amount of $837,165, dated as of
the date hereof, made by the Borrower payable to the order of the Lender
("Divided Replacement Note Number Three"), (iv) that certain Divided Replacement
Note Number Four in the principal amount of $265,394, dated as of the date
hereof, made by the Borrower payable to the order of the Lender ("Divided
Replacement Note Number Four"), (v) that certain Divided Replacement Note Number
Five in the principal amount of $279,138, dated as of the date hereof, made by
the Borrower payable to the order of the Lender ("Divided Replacement Note
Number Five"), and (vi) that certain Divided Replacement Note Number Six in the
principal amount of $279,138, dated as of the date hereof, made by the Borrower
payable to the order of the Lender ("Divided Replacement Note Number Six").
The Dividend Replacement Notes Number Two, Three, Four, Five and Six being
endorsed and assigned to David Topp, Mark Topp, Dora Topp, David and Dora Topp
as joint tenants with right of survivorship and Risia Topp Wine, pro rata shall
be referred to herein as the "Topp Notes".
All scheduled payments of principal and interest on this Note and the Topp
Notes shall be made pro rata; provided that if the Borrower has insufficient
funds to permit full payment of all principal and interest which so becomes due
and payable, then such funds shall be allocated first to the repayment of
interest pro rata based upon the amount of interest due and payable under this
Note and the Topp Notes and then to the payment of principal pro rata based upon
the amount of principal due and payable under this Note and the Topp Notes,
provided that in all events, the failure by the Borrower to make full payment of
all principal and interest which so becomes due and payable shall constitute an
Event of Default hereunder. In the event that the holder of this Note and the
Topp Notes receives an amount in excess of the amount to which such holder is
entitled by operation of the preceding sentence, such holder shall be deemed to
have received such excess amount in trust for the benefit of the other holder
receiving less than the amount to which such holder is so entitled, and shall
promptly remit such excess amount to such other holder so as to give effect to
such preceding sentence.
The Borrower shall have the right, at any time or from time to time, to
prepay the Note in whole or in part, without premium or penalty; provided, that,
each prepayment by the Borrower shall be applied, first, to pay interest accrued
and unpaid as of the date of prepayment under this Note and each Topp Note (this
Note and the Topp Note shall be referred to collectively as the "New Notes");
provided, further, that (i) prepayments by
6
<PAGE>
the Borrower under this Note and each Topp Note shall be made first to accrued
interest as of the date of prepayment under this Note and each Topp Note pro
rata, and then to principal outstanding under this Note as of the date of
prepayment under this Note, pro rata, in inverse order of maturity and (ii) the
preceding clause (i) shall not apply to prepayments resulting from the exercise
of preemptive rights or the exercise of the Borrower's right to set off, as
described below. For the purposes hereof, as to a New Note, (i) as to interest,
"pro rata" shall mean the percentage interest accrued and unpaid to the date of
prepayment of such New Note divided by the interest accrued and unpaid to the
date of prepayment on all of the New Notes and (ii) as to principal, "pro rata"
shall mean the principal amount outstanding as of the date of prepayment of such
New Note divided by the principal amount outstanding as of the date of
prepayment on all of the New Notes. Nothing herein shall be construed to
prohibit the Lender from accepting prepayments of principle or interest in whole
or in part.
The Borrower may satisfy amounts due under this Note by right of set off,
to the extent permitted by applicable law, against any amounts payable under any
credits or other obligations due Borrower from the Lender that are not paid as
and when due; provided, however, that (i) the proposed set off is approved by
the Borrower's board of directors at a meeting in which the director designated
by CellStar Telecom, Inc. is present, and (ii) any amounts set off shall be
applied as though it were a prepayment under this Note, as set forth above.
The rights and obligations of the Lender hereunder may be assigned as
security, to Chase Bank of Texas, N.A., or to any other lender which is a party
to the Credit Agreement dated October 15, 1997 by and among CellStar, Ltd.,
Chase Bank of Texas, N.A. and the other Banks thereunder (the "Credit
Agreement"), or to any successor lenders under the Credit Agreement, or to
creditors under any credit agreement of CellStar, Ltd., entered into subsequent
to the date hereof, without any approval or consent of, or notice to, the
Borrower.
All notices and other communications to the Borrower under this Note shall
be deemed given when delivered personally or by overnight mail to the Borrower
at Topp Telecom, Inc., 8390 N.W. 25th Street, Miami, Florida 33122, Attention:
F.J. Pollak.
IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS NOTE AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED
BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
FLORIDA, WITHOUT REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. BORROWER
HEREBY, AND THE LENDER BY ITS ACCEPTANCE OF THIS NOTE, CONSENTS AND AGREES THAT
THE STATE OR FEDERAL COURTS LOCATED IN MIAMI-DADE COUNTY, FLORIDA SHALL HAVE
EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN
BORROWER AND LENDER PERTAINING TO THIS NOTE OR TO ANY MATTER ARISING OUT OF OR
RELATING TO THIS NOTE, PROVIDED, NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR
--------
OPERATE TO
7
<PAGE>
PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER.
BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO BORROWER AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED
UPON THE EARLIER OF ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN
THE U.S. MAILS, PROPER POSTAGE PREPAID.
THE BORROWER HEREBY, AND THE LENDER BY ITS ACCEPTANCE OF THIS NOTE, KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE, BETWEEN LENDER AND BORROWER ARISING OUT OF, CONNECTED WITH,
RELATED TO, OR INCIDENTAL TO THIS NOTE OR THE TRANSACTIONS RELATED HERETO OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR
ACTIONS OF EITHER PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER
MAKING THE LOAN EVIDENCED BY THIS NOTE.
8
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed as of
the date first above written.
Topp Telecom, Inc.,
a Florida corporation
By: /s/ F. J. POLLAK
------------------------------
Its: President
------------------------------
The undersigned, CellStar, Ltd., a Texas limited partnership, hereby
assigns and endorses, without recourse, representation or warranty, this
Promissory Note, this 17th day of February 1999, to Chase Bank of Texas, N.A.,
as Agent for itself and other Banks under that Certain Credit Agreement dated
October 15, 1997, by and among CellStar, Ltd., Chase Bank of Texas, N.A. and the
other Lenders thereunder, as amended. 1998.
CellStar, Ltd.
By National Auto Center, Inc.
Its General Partner
/s/ ELAINE FLUD RODRIGUEZ
-----------------------------
By: Elaine Flud Rodriguez
Its: Vice President
9
<PAGE>
EXHIBIT 10.40
AMENDED AND RESTATED LETTER AGREEMENT
-------------------------------------
This Amended and Restated Letter Agreement ("Agreement") is made and
entered into as of February 5, 1999, by and among CellStar, Ltd. ("CellStar"),
CellStar Telecom, Inc. ("CellStar Telecom") (CellStar and CellStar Telecom are
hereinafter sometimes collectively referred to as the "CellStar Parties"), Topp
Telecom, Inc. ("Topp Telecom"), David Topp, Dora Topp, Risia Topp Wine, Mark
Topp and F.J. Pollak (Topp Telecom, David Topp, Dora Topp, Risia Topp Wine and
Mark Topp and F.J. Pollak are hereinafter sometimes collectively referred to as
the "Topp Parties"). The CellStar Parties and the Topp Parties are hereinafter
collectively referred to as the "Parties."
W I T N E S S E T H:
--------------------
A. The Parties are parties to that certain Letter Agreement, dated
September 1, 1998 (the "September Agreement"), as amended by Amendment to
September 1st Letter Agreement, dated December 18, 1998 (the "December
Agreement" and collectively with the September Agreement, the "Original
Agreement").
B. The Parties desire to amend and restate the Original Agreement, upon
the terms and conditions as hereinafter set forth.
C. This Agreement is being entered into in connection with that certain
Stock Purchase Agreement, dated the date hereof, in which Inmobiliaria Aztlan,
S.A. de C.V., a wholly owned subsidiary of Telefonos de Mexico, S.A. de C.V.
will purchase a controlling interest in Topp Telecom (the "Tel Mex Purchase
Agreement").
D. The consummation of the transactions contemplated by this Agreement are
conditioned upon, and shall occur simultaneous with, the closing of the Tel Mex
Purchase Agreement (the "Closing Date").
E. Topp Telecom currently has authorized capital stock of (i) 5,000,000
shares of voting common stock, $.01 par value (the "Voting Common Stock"), of
which 6,100 shares are outstanding, (ii) 5,000,000 shares of non-voting common
stock, $.01 par value (the "Non-Voting Common Stock"), of which 133,463 shares
are outstanding, (iii) 1,043 shares of Class A Convertible Preferred Stock, $.01
par value ("Series A Preferred"), of which 100 shares are outstanding, and (iv)
17,988 shares of Class B Convertible Preferred Stock, $.01 par value ("Series B
Preferred"), of which 100 shares are outstanding.
F. Topp Telecom currently owes a principal amount of approximately
$26,990,000 to CellStar pursuant to a Promissory Note, dated as of September 1,
1998, in the principal amount of up to $26,990,000, as amended by the December
Agreement (the "Original Note").
G. On the Closing Date, as a result of the exercise of the Option by
CellStar, as described herein, the principal balance of the promissory note
shall be reduced by the exercise price of the Option.
<PAGE>
H. On the Closing Date, David Topp (and his family members, pro rata),
will purchase (pursuant to an endorsement thereof) an aggregate amount of 10% of
the principal amount of the promissory note, or $2,499,000, resulting in a
$22,507,537 principal amount owed by Topp Telecom to CellStar.
I. The capitalized terms contained but not defined herein shall have the
meanings ascribed to them in the Original Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, each of the undersigned Amendment
Parties hereby agree as follows:
AGREEMENT
---------
1. Amended and Restated Credit Facility Note; Purchase by Topp Group. On
-----------------------------------------------------------------
the Closing Date, Topp Telecom shall execute and deliver divided replacement
notes to CellStar in the aggregate principal amount of $24,990,000 that reduce,
divide and amend the Original Note as follows (collectively, the "Divided
Replacement Notes"): (i) a Divided Replacement Note in the principal amount of
$22,507,537 in the form and containing the terms and conditions of the Note set
forth as Exhibit A, and (ii) Divided Replacement Notes in the aggregate
principal amount of $2,499,000. On the Closing Date, each of David Topp, Dora
Topp, David and Dora Topp as joint tenants, Mark Topp and Risia Topp Wine
(collectively, the "Topp Group") will pay to CellStar, pro rata, an aggregate of
$2,499,000 in immediately available funds in exchange for the assignment and
endorsement by CellStar to: (i) David Topp of a replacement note, in the form
and containing the terms and conditions of the Note set forth in Exhibit B in
---------
the principal amount of $838,165; (ii) Dora Topp of a replacement note, in the
form and containing the terms and conditions of the Note set forth in Exhibit C
---------
in the principal amount of $837,165; (iii) David and Dora Topp, as joint tenants
with right of survivorship, of a replacement note, in the form and containing
the terms and conditions of the Note set forth in Exhibit D in the principal
---------
amount of $265,394; (iv) Mark Topp of a replacement note, in the form and
containing the terms and conditions of the Note set forth in Exhibit E in the
---------
principal amount of $279,138; and (v) Risia Topp Wine of a replacement note in
the form and containing the terms and conditions of the Note set forth in
Exhibit F in the principal amount of $279,138, each without recourse,
- ---------
representation or warranty of any kind whatsoever, and subject to any and all
defenses, counterclaims and setoffs of Topp Telecom as to payment of principal
or interest on, or performance of any other obligation under, the Original Note
or said Divided Replacement Notes. Upon delivery of the Divided Replacement
Notes to CellStar, CellStar shall return the executed Original Note to Topp
Telecom, marked cancelled. Paragraph 4 of the December Agreement is hereby
amended to change the date of February 15, 1999 to reflect the earlier of (x)
the termination of the Purchase Agreement (but in no event earlier than February
15, 1999), or (y) March 1, 1999, in each place where such February 15 date is
referenced in paragraph 4.
2. Termination Security Interests. On the Closing Date, all security
------------------------------
for the Note shall be terminated, and, to evidence such termination, CellStar
shall deliver (a) to Topp Telecom manually executed originals of (i) Form UCC-3
termination statements terminating the security
2
<PAGE>
interests granted by Topp Telecom to CellStar (or its affiliates) as evidenced
by Form UCC-1, file number 980000197088, filed with the Florida Secretary of
State, and Form UCC-1, the number 970000236679, filed with the Florida Secretary
of State, (ii) Security Agreement, dated as of September 1, 1998, between Topp
Telecom and CellStar, marked cancelled, and (iii) Power of Attorney, dated as of
September 1, 1998, delivered by Topp Telecom in favor of CellStar, marked
cancelled; (b) to David Topp manually executed originals of the (i) Stock Pledge
Agreement, dated as of September 1, 1998, between David Topp (on behalf of
himself and Dora Topp, Risia Topp Wine and Mark Topp) in favor of CellStar,
marked cancelled, (ii) Stock Certificate No. 1 representing 26,000 shares of
Non-Voting Common Stock issued to David Topp, along with Stock Power regarding
such shares in favor of CellStar marked cancelled, (iii) Stock Certificate No. 3
representing 30,000 shares of Non-Voting Common Stock issued to Dora Topp, along
with Stock Power regarding such shares in favor of CellStar marked cancelled,
(iv) Stock Certificate No. 4 representing 10,000 shares of Non-Voting Common
Stock issued to Mark Topp, along with Stock Power regarding such shares in favor
of CellStar marked cancelled, (v) Stock Certificate No. 5 representing 10,000
shares of Non-Voting Common Stock issued to Risia Topp Wine, along with Stock
Power regarding such shares in favor of CellStar marked cancelled, (vi) Stock
Certificate No. 11 representing 9,516 shares of Non-Voting Common Stock issued
to David and Dora Topp, along with Stock Power regarding such shares in favor of
CellStar marked cancelled, (vii) Stock Certificate No. 1 representing 4,000
shares of Voting Common Stock issued to David Topp, along with Stock Power
regarding such shares in favor of CellStar marked cancelled, and (viii)
Irrevocable Proxy Agreement, dated as of September 1, 1998, among CellStar,
David Topp, Dora Topp, Risia Topp Wine and Mark Topp, marked cancelled; and (c)
to F.J. Pollak manually executed originals of (i) Stock Pledge Agreement, dated
as of September 1, 1998, between F.J. Pollak and CellStar, (ii) Stock
Certificate No. 2 representing 1,000 shares of Voting Common Stock, along with
Stock Power regarding such shares in favor of CellStar marked cancelled, (iii)
Stock Certificate No. 2 representing 19,000 shares of Non-Voting Common Stock,
along with Stock Power regarding such shares in favor of CellStar marked
cancelled, and (iv) Irrevocable Proxy Statement, dated as of September 1, 1998,
between CellStar and F.J. Pollak, marked cancelled; provided, that, in the event
CellStar fails to deliver the executed originals of any instruments referenced
in items (a)(ii) and (iii), b(i) and (viii), or (c)(i) and (iv), the parties
acknowledge that, notwithstanding their failure to deliver, all such instruments
will be terminated as of the Closing Date, and no party thereto shall have any
rights, obligations or liabilities with respect thereto, all of which shall have
been deemed to be fully released.
3. Termination of Guarantees. On the Closing Date, all personal
-------------------------
guarantees for the Note shall be terminated and, to evidence such termination,
CellStar shall deliver to David Topp and F.J. Pollak the manually executed
original Guaranty, dated as of September 1, 1998, marked cancelled, and no party
thereto shall have any rights, obligations or liabilities with respect thereto,
all of which shall have been deemed to be fully released.
4. Distribution Agreement. On the Closing Date, the Distribution and
----------------------
Fulfillment Agreement, by and between CellStar and Topp Telecom, dated as of the
15th day of September 1997, as amended by that certain Amendment to Distribution
and Fulfillment Agreement, dated as of September 1, 1998, and further amended as
set forth in the December Agreement, shall be
3
<PAGE>
further amended in the form attached hereto as Exhibit G. Topp Telecom and
CellStar intend to amend and restate the Distribution Agreement within the next
20 business days after the Closing Date to more accurately reflect the status of
their business relationship after giving effect to the Tel Mex Purchase
Agreement.
5. License Agreement. Effective on the Closing Date, the Amended and
-----------------
Restated License Agreement, dated as of September 1, 1998, shall be terminated.
6. Exercise of Options and Warrants and Conversion of Preferred Stock; Net
-----------------------------------------------------------------------
Amounts Owed to CellStar. On the Closing Date, CellStar shall (a) exercise in
- ------------------------
full the Option by offsetting the principal due under the Original Note in the
amount of $1,978,982, (b) exercise in full the Warrant by receiving credit in
the amount of $2,643, and (c) convert the 100 shares of Series A Preferred Stock
and 100 shares of Series B Preferred Stock into 100 shares of Voting Common
Stock and 100 shares of Non-Voting Common Stock, respectively. On the Closing
Date, Topp Telecom shall (upon receipt of the consideration referenced above, as
well as the certificates representing the shares of Series A and Series B
Preferred Stock), deliver (i) a stock certificate to CellStar for the number of
shares of Voting Common Stock and Non-Voting Common Stock as set forth on the
Closing Memorandum attached hereto as Exhibit H.
---------
7. Amendment to Articles of Incorporation. On the Closing Date, the
--------------------------------------
Articles of Amendment to the Articles of Incorporation which, among other
things, delete the classes of Series A and Series B Preferred Stock, shall be
filed with the Florida Secretary of State, a form of which are attached hereto
as Exhibit I.
---------
8. Mutual Releases. On the Closing Date, each Release and Waiver as set
---------------
forth in Exhibit J-1 and J-2 shall be executed and delivered by the parties
thereto.
9. Interest on Original Note. On the Closing Date, Topp Telecom will pay
-------------------------
accrued interest as of such date under the Original Note based on an outstanding
principal amount of $26,990,000, it being understood that Topp Telecom and
CellStar shall negotiate in good faith to determine the actual amount of such
principal for calculation of the interest payment and to pay (or receive credit
against any future interest payment), as the case may be, within five days of
such final determination.
10. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Florida, without regard to the
principles of conflicts of laws thereunder.
11. Benefit. This Agreement shall be binding upon and inure to the
-------
benefit of each of the parties hereto and each of their respective successors
and permitted assigns.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, with each counterpart constituting an original, but altogether
constituting but one and the same agreement.
4
<PAGE>
13. Attorneys Fees. In the event that there shall be any dispute
--------------
relating to or arising out of or in connection with this Agreement, the
prevailing party shall be entitled to recover from each of the other adverse
parties thereto, jointly and severally, attorneys' fees and costs incurred, at
all levels.
14. Drafting. This Agreement has been drafted with the suggestions and
--------
revisions of all parties hereto and should not be construed more strictly
against one party than against any other.
15. Cooperation. Each party hereto agrees to execute and deliver, upon
-----------
the request of any other party hereto and in addition to the documents to be
delivered pursuant hereto, such documents as may be reasonably necessary to
evidence or effectuate the terms and conditions of this Amendment and to comply
with applicable law.
16. Amendments. This Agreement may not be amended or modified except
----------
pursuant to a written instrument executed by all parties hereto.
17. Termination of this Agreement and Survival of Original Agreement.
----------------------------------------------------------------
This Agreement shall terminate in the event the Purchase Agreement is terminated
pursuant to Article XV thereof.
18. Conditions of Performance. The covenants of the parties contained
-------------------------
herein are dependent and the performance of each obligation to be performed on
the Closing Date is conditioned on the performance of all obligations required
to be performed on the Closing Date under this Agreement and the Telmex Purchase
Agreement.
5
<PAGE>
IN WITNESS WHEREOF, this Agreement is entered into as of the date first
above written.
CellStar, Ltd. CellStar Telecom, Inc.
By: National Auto Center, Inc.
Its: General Partner
/s/ ELAINE FLUD RODRIGUEZ /s/ ELAINE FLUD RODRIGUEZ
- ---------------------------------- -------------------------------
By: Elaine Flud Rodriguez By: Elaine Flud Rodriguez
Its: Vice President Its: Vice President
Topp Telecom, Inc.
/s/ F.J. POLLAK /s/ DAVID TOPP
- ---------------------------------- --------------------------------
By: F.J. Pollak David Topp
Its: President
/s/ DAVID TOPP /s/ DAVID TOPP
- ---------------------------------- --------------------------------
David Topp, as attorney-in-fact for David Topp, as attorney-in-fact
Dora Topp for Risia Topp Wine
/s/ DAVID TOPP /s/ F.J. POLLAK
- ---------------------------------- --------------------------------
David Topp, as attorney-in-fact for F.J. Pollak
Mark Topp
Acknowledged:
Telefonos de Mexico, S.A. de C.V.
/s/ ADOLFO CEREZO
- ----------------------------------
By: Adolfo Cerezo
Its: C.F.O.
6
<PAGE>
EXHIBIT 10.41
THIRD AMENDMENT
TO
DISTRIBUTION AND FULFILLMENT AGREEMENT
THIS Third Amendment to Distribution and Fulfillment Agreement (the "Fourth
Amendment") is entered into as of the 12th day of February, 1999, between
CellStar Ltd., a Texas limited partnership ("CellStar"), and Topp Telecom, Inc.,
a Florida corporation ("Topp").
W I T N E S S E T H:
-------------------
WHEREAS, CellStar and Topp are parties to that certain Distribution and
Fulfillment Agreement, dated as of September 15, 1997, as amended by that
certain Amendment to Distribution Agreement, dated as of September 1, 1998, and
further amended as set forth in that certain Amendment to September 1st Letter
Agreement, dated as of December 18, 1998 (collectively the "Agreement"); and
WHEREAS, CellStar and Topp desire to further amend the Agreement upon the
terms and conditions as hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions herein contained, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Topp and CellStar agree
as follows:
1. The Agreement is hereby amended to convert the Agreement from an
exclusive agreement to a non-exclusive agreement.
2. Topp is hereby released from its obligation to have all telephones that
will be activated on its TracFone program originate from shipments by CellStar.
3. It is the intention of the parties to amend and restate the Agreement
within the next twenty business days. Until such amended and restated agreement
is executed by the parties, except as may be expressly modified hereby, all
other covenants, terms and conditions contained in the Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CELLSTAR, LTD. TOPP TELECOM, INC.
By: NATIONAL AUTO CENTER, INC.
By: /s/ ELAINE FLUD RODRIGUEZ /s/ F.J. POLLAK
--------------------------------- --------------------------------
Name: Elaine Flud Rodriguez Name: F.J. Pollak
Title: Vice President Title: President
<PAGE>
Exhibit 21.1
List of Subsidiaries and Foreign Affiliates
-------------------------------------------
and Percentage of CellStar Corporation's Ownership /1/
--------------------------------------------------
[as of February 23, 1999]
Name of Subsidiary Incorporation
- ------------------ -------------
National Auto Center, Inc. Delaware
CellStar Financo, Inc. Delaware
CellStar Air Services, Inc. Delaware
A&S Air Service, Inc. Delaware
CellStar Telecom, Inc. Delaware
CellStar Fulfillment, Inc. Delaware
CellStar West, Inc. Delaware
CellStar International Corporation/Asia Delaware
ACC-CellStar, Inc. Delaware
CellStar International Corporation/SA Delaware
Topp Telecom, Inc. /2/ Florida
NAC Holdings, Inc. Nevada
Florida Properties, Inc. Texas
Audiomex Export Corp. Texas
CellStar, Ltd. Texas Limited Partnership
CellStar Fulfillment, Ltd. Texas Limited Partnership
- ---------------------
/1/ 100 %, unless otherwise stated.
/2/ 19.5 % owned.
1
<PAGE>
Name of Subsidiary Incorporation
- ------------------ -------------
CellStar, S.A. Argentina
CellStar Foreign Sales Corporation Barbados
CellStar International Telefonia
Celular Ltda. Brazil
CellStar Industria da Telefonia
da Amazonia Ltda. Brazil
CellStar do Brasil Ltda. /3/ Brazil
Saporito Holdings, Inc. British Virgin Islands
CellStar Celular Chile, S.A. Chile
CellStar de Colombia, S.A. Colombia
CellStar Ecuador, S.A. Ecuador
CellStar (Asia) Corporation Limited Hong Kong
CellStar Telecommunications
Service (Asia) Limited /4/ Hong Kong
HCL-CellStar Ltd. /5/ India
CellStar Ireland Ireland
CellStar Amtel Sdn Bhd /6/ Malaysia
Celular Express S.A. de C.V. Mexico
- --------------------------
/3/ 51% owned.
/4/ 60% owned.
/5/ 50% owned.
/6/ 30% directly owned and 19% beneficially owned.
2
<PAGE>
Name of Subsidiary Incorporation
- ------------------ -------------
Celular Express Management
S.A. de C.V. Mexico
Shanghai CellStar International
Trading Co. Ltd. Peoples Republic of China
Shanghai Fengxing CellStar
International Trading Co. Ltd. Peoples Republic of China
Shenzhen CellStar Honbo
Telecommunication Co. Ltd./7/ Peoples Republic of China
CellStar del Peru, S.A. Peru
CellStar Philippines, Inc. Philippines
CellStar Poland Spolka zo.o Poland
CellStar Puerto Rico, Inc. Puerto Rico
CellStar Pacific Pte. Ltd. Singapore
CellStar Singapore Pte Ltd. Singapore
CellStar Holding AB Sweden
CellStar-Intercall AB Sweden
CellStar Telecommunication
Taiwan Co Ltd. Taiwan
CellStar (UK) Ltd. United Kingdom
CellStar Europe Ltd. United Kingdom
CellStar Celular, C.A. Venezuela
- --------------------------
/7/ 51% owned
3
<PAGE>
EXHIBIT 23.1
------------
The Board of Directors and Stockholders
CellStar Corporation
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 33-87754 and 333-23381) and Form S-3 (No. 333-41753) of CellStar
Corporation of our report dated January 12, 1999, relating to the consolidated
balance sheets of CellStar Corporation and subsidiaries as of November 30, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss), and cash flows for each of the years in
the three-year period ended November 30, 1998, and the related schedule, which
report appears in the November 30, 1998 annual report on Form 10-K of CellStar
Corporation.
/s/ KPMG LLP
Dallas, Texas
February 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<CASH> 47,983
<SECURITIES> 0
<RECEIVABLES> 393,409
<ALLOWANCES> 33,361
<INVENTORY> 274,438
<CURRENT-ASSETS> 707,657
<PP&E> 41,806
<DEPRECIATION> 13,948
<TOTAL-ASSETS> 775,525
<CURRENT-LIABILITIES> 447,734
<BONDS> 150,000
0
0
<COMMON> 590
<OTHER-SE> 177,201
<TOTAL-LIABILITY-AND-EQUITY> 775,525
<SALES> 1,995,850
<TOTAL-REVENUES> 1,995,850
<CGS> 1,823,075
<TOTAL-COSTS> 1,823,075
<OTHER-EXPENSES> 137,744
<LOSS-PROVISION> 13,639
<INTEREST-EXPENSE> 14,446
<INCOME-PRETAX> 6,946
<INCOME-TAX> (7,418)
<INCOME-CONTINUING> 14,364
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,364
<EPS-PRIMARY> 0.24<F1><F3>
<EPS-DILUTED> 0.24<F2><F3>
<FN>
<F1>BASIC NET INCOME PER SHARE UNDER SFAS NO. 128.
<F2>DILUTED NET INCOME PER SHARE UNDER SFAS NO. 128.
<F3>A 2 FOR 1 COMMON STOCK SPLIT WAS DISTRIBUTED ON JUNE 23, 1998. PRIOR FINANCIAL
DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THIS RECAPITALIZATION EXCEPT FOR
NOVEMBER 30, 1996, MAY 31, 1997, AUGUST 31, 1997 AND NOVEMBER 30, 1997.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1997 NOV-30-1996
<PERIOD-START> DEC-01-1996 DEC-01-1995
<PERIOD-END> NOV-30-1997 NOV-30-1996
<CASH> 74,646 27,296
<SECURITIES> 0 0
<RECEIVABLES> 199,889 160,835
<ALLOWANCES> 23,857 29,023
<INVENTORY> 190,404 94,473
<CURRENT-ASSETS> 446,200 259,368
<PP&E> 34,009 27,725
<DEPRECIATION> 11,132 7,591
<TOTAL-ASSETS> 497,111 298,551
<CURRENT-LIABILITIES> 186,246 188,003
<BONDS> 150,000 6,285
0 0
0 0
<COMMON> 293 193
<OTHER-SE> 160,572 104,070
<TOTAL-LIABILITY-AND-EQUITY> 497,111 298,551
<SALES> 1,482,814 947,601
<TOTAL-REVENUES> 1,482,814 947,601
<CGS> 1,325,488 810,000
<TOTAL-COSTS> 1,325,488 810,000
<OTHER-EXPENSES> 75,463 108,166
<LOSS-PROVISION> 3,131 27,951
<INTEREST-EXPENSE> 7,776 8,350
<INCOME-PRETAX> 70,956 (6,866)
<INCOME-TAX> 17,323 (453)
<INCOME-CONTINUING> 53,633 (6,413)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 53,633 (6,413)
<EPS-PRIMARY> 0.92<F1><F3> (0.11)<F1><F3>
<EPS-DILUTED> 0.89<F2><F3> (0.11)<F2><F3>
<FN>
<F1>BASIC NET INCOME PER SHARE UNDER SFAS NO. 128.
<F2>DILUTED NET INCOME PER SHARE UNDER SFAS NO. 128.
<F3>A 2 FOR 1 COMMON STOCK SPLIT WAS DISTRIBUTED ON JUNE 23, 1998. PRIOR FINANCIAL
DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THIS RECAPITALIZATION EXCEPT FOR
NOVEMBER 30, 1996, MAY 31, 1997, AUGUST 31, 1997 AND NOVEMBER 30, 1997.
</FN>
</TABLE>
