-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MUtI+2v13vzNmwByowYrSjfbJ9H7fBVGot1pTbuBHnUjWEb1scg+INbZ0latvA8f cFa63QUHAQnP2A/kBhI9oQ== 0000930661-99-000371.txt : 19990301 0000930661-99-000371.hdr.sgml : 19990301 ACCESSION NUMBER: 0000930661-99-000371 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELLSTAR CORP CENTRAL INDEX KEY: 0000913590 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 752479727 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22972 FILM NUMBER: 99550627 BUSINESS ADDRESS: STREET 1: 1730 BRIERCROFT DR CITY: CARROLLTON STATE: TX ZIP: 75006 BUSINESS PHONE: 2144665000 MAIL ADDRESS: STREET 1: 1730 BRIERCROFT DRIVE CITY: CARROLLTON STATE: TX ZIP: 75006 10-K405 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- 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 ---------------- CELLSTAR CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- 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) ---------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CELLSTAR CORPORATION INDEX TO FORM 10-K
PAGE NUMBER ------ 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
2 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 3 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 4 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. 5 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:
TYPE OF OPERATION YEAR (AS OF NOVEMBER 30, COUNTRY ENTERED 1998) ------- ------- -------------------- 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
6 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. 7 The following table outlines the Company's entry into the Latin American Region:
TYPE OF OPERATION YEAR (AS OF NOVEMBER 30, COUNTRY ENTERED 1998) ------- ------- -------------------- 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
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. 8 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 9 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 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: 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
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 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 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 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 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.
HIGH LOW ------- ------ 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
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 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.
YEAR ENDED NOVEMBER 30, --------------------------------------------------- 1998 1997 1996 1995 1994 ---------- --------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) 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) AT NOVEMBER 30, --------------------------------------------------- 1998 1997 1996 1995 1994 ---------- --------- ------- ------- ------- (IN THOUSANDS) 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
- -------- (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 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 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:
1998 1997 1996 ----- ----- ----- 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)% ===== ===== =====
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:
1998 1997 1996 ---------------- --------------- ------------- (DOLLARS IN THOUSANDS) 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% ========== ===== ========= ===== ======= =====
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 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 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 20 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 21 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 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 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. 24 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. 25 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 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
NUMBER DESCRIPTION ------ ----------- 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)
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NUMBER DESCRIPTION ------ ----------- 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)
28
NUMBER DESCRIPTION ------ ----------- 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)
- -------- (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 (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 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 CELLSTAR CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- 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
F-1 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 CELLSTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 1998 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 --------- ------- 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 ========= =======
See accompanying notes to consolidated financial statements. F-3 CELLSTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996 ---------- --------- ------- 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) ========== ========= =======
See accompanying notes to consolidated financial statements. F-4 CELLSTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED NOVEMBER 30, 1998, 1997, AND 1996 (IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL COMMON OTHER ------------- PAID-IN STOCK COMPREHENSIVE RETAINED SHARES AMOUNT CAPITAL WARRANT INCOME EARNINGS TOTAL ------ ------ ---------- ------- ------------- -------- ------- 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 ====== ==== ====== === ====== ======= =======
See accompanying notes to consolidated financial statements. F-5 CELLSTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 1998, 1997, AND 1996 (IN THOUSANDS)
1998 1997 1996 --------- --------- -------- 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 ========= ========= ========
See accompanying notes to consolidated financial statements. F-6 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 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 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):
1998 1997 1996 ------- ------ ------ 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) ======= ====== ======
(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 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):
1998 1997 --------------- ---------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ------- Long-term debt............................ $150,000 91,500 150,000 122,250 ======== ====== ======= =======
F-10 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):
1998 1997 ------- ------- 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 ======= =======
(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 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)
NOVEMBER 30, DECEMBER 31, 1998 1997 ------------ ------------ 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)
TOPP TELECOM, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
ELEVEN MONTHS ENDED YEAR ENDED NOVEMBER 30, 1998 DECEMBER 31, 1997 ------------------- ----------------- Revenues............................. $34,491 30,850 Gross margin......................... 8,183 6,545 Net loss............................. (35,788) (10,207)
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): Multicurrency revolving credit facility........................... $73,500 Brazilian credit facilities....................................... 11,523 ------- $85,023 =======
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 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 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):
1998 1997 1996 -------- ------ ------- United States.................................... $(48,413) 22,539 (22,354) International.................................... 55,359 48,417 15,488 -------- ------ ------- Total............................................ $ 6,946 70,956 (6,866) ======== ====== =======
(Benefit) provision for income taxes for the years ended November 30, 1998, 1997 and 1996 consisted of the following (in thousands):
CURRENT DEFERRED TOTAL -------- -------- ------- 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) ======== ======= =======
(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):
1998 1997 1996 -------- ------ ------ 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) ======== ====== ======
F-14 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):
1998 1997 ------- ------ 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) ======= ======
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 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):
YEAR ENDING NOVEMBER 30, AMOUNT -------- ------- 1999............................. $4,312 2000............................. 3,842 2001............................. 2,060 2002............................. 1,616 2003............................. 889 Thereafter......................... 1,498 ------- $14,217 =======
(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 CELLSTAR CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Segment information for the years ended November 30, 1998, 1997 and 1996 follows (in thousands):
NORTH ASIA- LATIN AMERICA PACIFIC AMERICA EUROPE CORPORATE TOTAL -------- ------- ------- ------- --------- --------- 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
F-17 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):
1998 1997 1996 --------------------- -------------------- ------------------- LONG-LIVED LONG-LIVED LONG-LIVED REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS ---------- ---------- --------- ---------- -------- ---------- 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 ========== ====== ========= ====== ======= ======
(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 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:
1998 1997 1996 ----- ----- ----- 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
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):
1998 1997 1996 ------- ------ ------ 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)
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 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:
1998 1997 1996 ------------------- ------------------- ------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICES OF SHARES PRICES OF SHARES PRICES --------- --------- --------- --------- --------- --------- 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
For options outstanding and exercisable as of November 30, 1998, the exercise prices and remaining lives were:
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 - ------------------------ ----------- -------------- --------- ----------- --------- $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 ========= =========
(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 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 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 CELLSTAR CORPORATION AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- ------- ------- ------- 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
- -------- (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 CELLSTAR CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996 (IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS, BALANCE AT BEGINNING OF COSTS AND ACTIVATION NET OF END OF PERIOD EXPENSES INCOME (A) RECOVERIES PERIOD ------------ ---------- ---------- ----------- ---------- 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
- -------- (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 EX-10.36 2 AMENDMENT TO 1ST LETTER AGREEMENT 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: 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 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. 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. 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 EX-10.37 3 STOCK PURCHASE AGREEMENT 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"); - ------------------------ 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 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 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 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 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 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 (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 (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 (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 (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 (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 (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 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 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 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 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 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 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 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 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 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 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 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 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 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 (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 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 (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 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 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 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 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 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 (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 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 (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 (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 (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 (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 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 (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 (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 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 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 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 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 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 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 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 "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 "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 "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 "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 "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 "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 "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 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 /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 EX-10.38 4 SHAREHOLDERS' AGREEMENT 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: 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 "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 "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 "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 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 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 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 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 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 (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 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 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 (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 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 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 (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 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 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 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 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 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 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 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 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 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 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 SCHEDULE I
Number of Percentage Name of Shareholder Shares of Stock Ownership - ------------------------ ---------------------- -------------------------------------- Voting Non-voting Voting Non-voting Combined ------ ---------- ------ ---------- -------- 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%
- ---------------------- * Management Shareholders D-1 EX-10.39 5 DIVIDEND REPLACEMENT 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 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 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 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 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 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 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 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 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 EX-10.40 6 AMENDED AND RESTATED LETTER AGREEMENT 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. 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 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 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 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 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 EX-10.41 7 THIRD AMENDMENT TO DISTRIBUTION AND FULFILLMENT 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 EX-21.1 8 SUBSIDIARIES OF THE COMPANY 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 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 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 EX-23.1 9 CONSENT OF KPMG LLP 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 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR NOV-30-1998 DEC-01-1997 NOV-30-1998 47,983 0 393,409 33,361 274,438 707,657 41,806 13,948 775,525 447,734 150,000 0 0 590 177,201 775,525 1,995,850 1,995,850 1,823,075 1,823,075 137,744 13,639 14,446 6,946 (7,418) 14,364 0 0 0 14,364 0.24 0.24 BASIC NET INCOME PER SHARE UNDER SFAS NO. 128. DILUTED NET INCOME PER SHARE UNDER SFAS NO. 128. 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.
EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR NOV-30-1997 NOV-30-1996 DEC-01-1996 DEC-01-1995 NOV-30-1997 NOV-30-1996 74,646 27,296 0 0 199,889 160,835 23,857 29,023 190,404 94,473 446,200 259,368 34,009 27,725 11,132 7,591 497,111 298,551 186,246 188,003 150,000 6,285 0 0 0 0 293 193 160,572 104,070 497,111 298,551 1,482,814 947,601 1,482,814 947,601 1,325,488 810,000 1,325,488 810,000 75,463 108,166 3,131 27,951 7,776 8,350 70,956 (6,866) 17,323 (453) 53,633 (6,413) 0 0 0 0 0 0 53,633 (6,413) 0.92 (0.11) 0.89 (0.11) BASIC NET INCOME PER SHARE UNDER SFAS NO. 128. DILUTED NET INCOME PER SHARE UNDER SFAS NO. 128. 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.
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