CellStar Corporation

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CellStar Corporation

601 South Royal Lane
Coppell, Texas 750519
U.S.A.
Telephone: (972) 462-2700
Toll Free: (800) 723-9070
Fax: (972) 323-4571
Web site: http://www.cellstar.com

Public Company
Incorporated: 1981 as National Auto Center, Inc.
Employees: 730
Sales: $987.3 million (2005)
Stock Exchanges: Over the Counter (OTC)
Ticker Symbol: CLST (Pink Sheets)
NAIC: 423690 Other Electronic Parts and Equipment Merchant Wholesalers; 453998 All Other Miscellaneous Store Retailers (Except Tobacco Stores); 551112 Offices of Other Holding Companies

CellStar Corporation serves the wireless communications industry, operating as a distributor of wireless products in North America and Latin America. CellStar purchases cellular phones and accessories from manufacturers such as Sony Ericsson Mobile Communications AB, Nokia Corporation, and Motorola, Inc. and distributes them to network operators, agents, resellers, dealers, and retailers. A small percentage of the company's business is derived from providing activation services that generate new subscribers for wireless carriers and from providing testing and repair services.

ORIGINS

CellStar took an indirect route in becoming one of the United States' largest cellular phone distributors, aping the career path of its founder, Alan Goldfield, the most influential figure in CellStar's first quarter-century of business. A Brooklyn, New York, native, Goldfield took turns at several different vocational pursuits before settling on the direction that would ultimately award him with a personal fortune. He was signed out of high school by the Houston Colt 45s, the predecessor to professional baseball's Houston Astros. A pitcher with ample power but without sufficient control, Goldfield spent four years in the minor leagues before giving up on his dream of becoming a major leaguer. After his exit from baseball in 1966, Goldfield remained in Texas, starting a record store in Dallas in 1969 that operated under the name National Tape and Record Center, the distant relative of CellStar. Goldfield enjoyed little success with his first entrepreneurial effort—the April 11, 1994 issue of Forbes characterized the record store as a "flop"—prompting him to try his hand at the car-stereo installation business. Soon afterwards, he began distributing stereos to car dealers and other installers, a line of business that introduced him to John Shalan and led to the formation of CellStar.

Shalan and Goldfield were both distributors, but Shalan's business interests were far more potent than Goldfield's Dallas-based enterprise. Shalan owned Audiovox Corp., a Hauppauge, New York, distributor of car stereos that competed in a different league than Goldfield's more modestly sized distribution business. Shalan's aspirations were far greater in scope as well, driven by a desire to make Audiovox into a nationwide competitor in the car-stereo distribution business. To accomplish his goal, Shalan needed to patch together a national network, and he saw Goldfield as being able to fill in one part of the map that would eventually make Audiovox a national force. Goldfield was happy to form a partnership with his more successful colleague, seeking to secure the large discounts Audiovox could provide because of the volume of its purchases. In 1981, the complementary desires of each distributor spawned a joint venture company named National Auto Center, Inc., the direct predecessor to CellStar. Equally owned by Shalan and Goldfield, National Auto assumed responsibility for Audiovox's distribution efforts in Texas, Oklahoma, and New Mexico, wholesaling car stereos, car security systems, and other consumer electronics.

Goldfield hitched himself to Shalan's ambitions for expansion, but he soon began to demonstrate his own penchant for achieving growth. When Audiovox began distributing cellular phones as part of its distribution business in 1984, Goldfield naturally followed suit, putting him into the business that 20 years later would fund the construction of his own 48,000-square-foot mansion. Cellular-phone distribution soon became the primary focus of Goldfield's business. Goldfield purchased handsets from manufacturers, packaged them, and delivered the phones to retailers. The burgeoning growth of the cellular industry fueled Goldfield's rise as an entrepreneur, making the failed baseball player and failed record-store owner into a successful distributor, but, aside from the serendipity of being involved in an emerging market and crossing paths with Shalan, Goldfield exhibited a proactive posture that greatly contributed to the stature CellStar would later enjoy. When Audiovox began to struggle with inventory problems with its main brand, Toshiba, Goldfield took steps to protect his business, using his business contacts at Southwestern Bell to gain an introduction with executives at Motorola. The meeting led to a distribution agreement with Motorola, which would become CellStar's largest supplier. Goldfield also launched a retail side to CellStar's business, establishing a small chain of stores in Texas and Kansas that acted as agents for cellular carriers, including GTE Mobile Network and Southwestern Mobile System. The carriers paid CellStar a $300 commission for every customer that signed up for service at one of the company's stores. CellStar also received a residual royalty of approximately 5 percent of a customer's monthly bill.

RAPID GROWTH

CellStar entered the 1990s as a $70 million-in-sales company, a total Goldfield would exponentially increase during the decade by spearheading aggressive expansion. His most impressive efforts occurred on the international front, as CellStar developed into a company with an expansive geographic reach. The international cellular market was underdeveloped relative to the market in the United States, spurring Goldfield overseas, but he also was motivated by other factors. Cellular phone prices were beginning to fall as CellStar entered the 1990s, which meant the company's profit margins were dropping as well. Further, cellular carriers were reducing the commissions paid to go-between firms such as CellStar, heightening Goldfield's need to find ways to compensate for the waning financial potential in the United States. To facilitate CellStar's expansion abroad, Goldfield turned to his partners in the retail side of his operations, Southwestern Bell and GTE. In 1991, Goldfield established his first foreign operations, setting up wholesale and retail businesses in Mexico, where Southwestern Bell owned 10 percent of Telefonos de Mexico. Within two years, the Mexican operations were accounting for more than 30 percent of CellStar's total revenues, encouraging Goldfield to continue to expand internationally. In mid-1993, he established wholesale and retail operations in Venezuela and Chile, taking advantage of GTE's investments in South American telecommunications companies. With his international expansion gaining momentum, Goldfield wanted to press ahead, eyeing entry into South Korea, India, and Malaysia, but first he needed to establish a financial foundation to support the company's development into a global force.

COMPANY PERSPECTIVES

CellStar creates unique value by tailoring logistics services to meet specific needs. Every client has their own highly complex fulfillment and logistics challenges. Time and time again, CellStar has met the demands—helping clients increase their operating income, leverage their return on investment, improve market agility, and achieve higher levels of customer service.

Goldfield turned to Wall Street for the financial resources he needed to expand. In December 1993, he completed the company's initial public offering (IPO) of stock, giving the investment community the opportunity to invest in his rapidly growing enterprise. Revenue had more than tripled during the three years preceding the company's IPO, rising to $180 million in 1992 and totaling $121 million during the first six months of 1993. Following the IPO, Goldfield remained in control of the company, controlling a 54 percent interest, while Audiovox maintained an equity position, with Shalan's firm controlling a 24 percent interest. With the proceeds from the IPO at his disposal, Goldfield moved forward with international expansion. He began to carve out a toehold in Asia, establishing a presence in a region that would contribute massively to CellStar's financial stature and would cause difficulties years later. The foray into Asia began in 1993, when the company set up wholesale operations in Hong Kong, followed by entry into The Philippines and Taiwan in 1995. In 1997, CellStar entered China, a country that was on its way to becoming the world's largest wireless market in terms of subscribers.

The 1990s witnessed the spectacular rise of CellStar, a decade that offered fertile conditions for the company's development into one of the largest cellular phone distributors in the world. Revenues increased at a rapid rate following the company's IPO, fueled largely by Goldfield's advances on the international front. In 1994, sales reached $447 million, from which the company earned $16.2 million in net income. Sales nearly doubled in the next two years, reaching $845 million in 1996 before more than doubling in the next two years, skyrocketing to $1.99 billion. CellStar ended the decade with $2.33 billion in sales, a total exponentially higher than the $70 million generated at the beginning of the 1990s, but soon the company's record of consistent and robust financial gains ended. The beginning of a new century also marked a change in the dynamics of the wireless industry, which, coupled with CellStar's own internal problems, delivered a telling blow to Goldfield's enterprise.

DIFFICULTIES IN THE EARLY
21ST CENTURY

As CellStar approached its 20th anniversary, it faced a business environment decidedly less hospitable than the one that supported its electric growth during the 1990s. The number of wireless carriers had begun to decrease, as industry consolidation winnowed the ranks of service providers and left control over the U.S. market to a handful of major telecommunications companies. The consequence for CellStar was less business because the major service providers had little use for intermediary companies. CellStar also felt the sting of dwindling business to retailers as massive chains such as Best Buy Co. and RadioShack Corp. brushed aside independent dealers to grab control of the cellular-phone retail market. "More and more," an analyst explained in the June 15, 2004 edition of the Dallas Morning News, "sales are through the big-box retailers, [and] they have their own pretty sophisticated systems of distribution." Consequently, the bulk of CellStar's business in the United States was reduced to dealings with regional and rural wireless telecommunications companies. Internationally, particularly in Asia where independent retailers still played a vital role in the handset business, CellStar face brighter prospects, but profound troubles hobbled the company's progress, making the start of the 21st century the most difficult period in the company's history.

KEY DATES

1981:: Alan Goldfield and John Shalan form a joint venture company, National Auto Center, Inc.
1984:: National Auto Center begins distributing cellular phones.
1991:: Operating as CellStar, the company makes its first move into international markets by expanding into Mexico.
1993:: CellStar completes its initial public offering of stock.
1997:: Expansion in Asia, begun by entering Hong Kong in 1993, concludes with CellStar's entry into China.
2005:: After several years of trying to shed its operations in Asia, CellStar exits the region, losing more than half of its annual revenue.

CellStar was on the retreat in the wake of its 20th anniversary. The company shuttered operations in Europe after determining the investment required to improve results exceeded the potential gains. In Latin America, restructuring efforts including installing new management in Chile and Mexico and exiting Brazil and Venezuela. The problems in Europe and Latin America hurt CellStar, but they paled in comparison to its troubles in Asia, a region of tremendous importance to the company. Between 1996 and 2000, CellStar's activities in Asia represented its largest source of operating income. Between 1999 and 2004, the region accounted for between 35 percent and 54 percent of its total revenues, with approximately 70 percent of its revenues from the region generated in China. CellStar management believed the "intrinsic value of its Asia-Pacific region was not fully reflected in the market price of its common stock," according to the company's annual filing with the Securities and Exchange Commission (SEC) in 2005, which prompted executives to mull over a number of possible solutions to the problem, including a spin-off of the operation, a sale to outside investors, or a management-led buyout of the operations in China, Hong Kong, and Taiwan, the "Greater China Operations." In March 2003, the company filed with the SEC to divest up to 70 percent of the Greater China Operations in an IPO on the Hong Kong Stock Exchange, but the IPO was delayed because of the spread of severe acute respiratory syndrome (SARS). A second attempt, scheduled for mid-2004, was delayed as well, allegedly because Hong Kong regulators were worried that a money-losing Taiwanese operation was included in the offering. In September 2004, the company announced it was no longer going forward with the transaction.

While CellStar struggled to shed its Greater China Operations, more disturbing news beset the company. In 2004, it was later revealed, CellStar's operations in China began to suffer from grave accounting problems. The chief financial officer of the operation resigned in October 2004, but his departure did little to fix the problems. In May 2005, CellStar executives at corporate headquarters realized they would have to restate financial results for the fiscal years 2000 to 2003 and for the first three quarters of 2004. CellStar, at last, was able to sever its ties to the burdensome Greater China Operation, selling the operations to the head of the Asia-Pacific region, A.S. Horng, in 2005, but the damage done was significant. The company that generated nearly $2.5 billion in revenue in 2000 ended 2005 with less than half the total, recording $987 million in sales. Profits, which had reached a record-high of $69 million in 1999, had disappeared, resulting in a net loss of $24 million in 2005, the company's sixth consecutive money-losing year. In the years ahead, much needed to be accomplished to restore the vibrancy exuded by CellStar in the 1990s, but the company was confident it could reinvent itself to compete effectively in the 21st century and return to the profit-making ways of its past.

Jeffrey L. Covell

PRINCIPAL SUBSIDIARIES

CellStar Air Services, Inc.; CellStar Telecom, Inc.; CellStar Financial, Inc.; CellStar Holding AB (Sweden); National Auto Center, Inc.; CellStar International Corporation/SA; CellStar International Corporation/Asia; Audiomex Export Corp. (Mexico); NAC Holdings, Inc.; CellStar Fulfillment, Inc.; CellStar Netherlands Holdings, B.V.