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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27029
RSTAR CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 91-1836242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1560 SAWGRASS CORPORATE PKWY, SUITE 200
SUNRISE, FL 33323
(Address of principal executive offices)
Registrant's telephone number, including area code:
(954) 858-1600
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 periods that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past (90) days. Yes Y No
The number of shares of the issuer's Common Stock outstanding as of April
30,2003 was 104,529,864.
1
INDEX
PART I -- FINANCIAL INFORMATION
- -------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2003
(UNAUDITED) AND DECEMBER 31, 2002 (UNAUDITED) CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2003 AND 2002 (UNAUDITED) CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2003
AND 2002 (UNAUDITED) NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4 DISCLOSURE CONTROLS
PART II -- OTHER INFORMATION
- ----------------------------
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
2
RSTAR CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RSTAR CORPORATION AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
MARCH 31, DECEMBER 31,
2003 2002
------------------ ------------------
UNAUDITED
ASSETS
Current Assets:
Cash and cash equivalents $ 2,235 $ 8,163
Restricted cash 2,228 1,416
Accounts receivables, net 18,683 15,542
Tax receivable 3,834 3,345
Other accounts receivable and prepaid expenses 1,768 2,876
Inventory 7,630 8,842
------------------ ------------------
Total current assets 36,378 40,184
Long term restricted cash 3,293 3,659
Long term receivables 11,057 9,028
Property and equipment, net 14,708 15,673
Other assets, net 526 514
------------------ ------------------
Total assets $ 65,962 $ 69,058
================== ==================
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
RSTAR CORPORATION AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
MARCH 31, DECEMBER 31,
2003 2002
--------------------- ------------------
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term bank credit $ 2,291 $ 2,315
Current portion of capital lease obligations 1,609 1,809
Accounts payable 7,362 7,988
Due to related parties 23,228 23,480
Deferred revenues 1,462 1,823
Accrued expenses and other liabilities 5,803 5,439
--------------------- ------------------
Total current liabilities 41,755 42,854
Long-Term Liabilities:
Other long term liabilities 1,817 1,893
Long term deferred revenue 1,668 1,614
Long term capital lease obligations 3,038 3,415
Liability for distribution to Minority Shareholders 5,000 5,000
--------------------- ------------------
Total Long-Term liabilities 11,523 11,922
Stockholders' Equity:
Convertible preferred stock, $0.01 par value Authorized shares-5,000,000,
none issued and outstanding at March 31, 2003 and December 31, 2002 - -
Common stock, $0.01 par value Authorized shares-200,000,000 Issued and
outstanding shares 104,529,864 at March 31, 2003 and December 31, 2002 1,045 1,045
Additional Paid-in-Capital 248,227 248,227
Notes receivable from stockholders (312) (312)
Treasury stock, at cost (Common 2,526,315 at March 31, 2003) (9,979) (9,979)
Accumulated other comprehensive loss (154) (198)
Accumulated deficit (226,143) (224,501)
--------------------- ------------------
Total stockholders' equity 12,684 14,282
--------------------- ------------------
Total liabilities and stockholders' equity $ 65,962 $ 69,058
===================== ==================
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
RSTAR CORPORATION AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(U.S. dollars in thousands)
THREE MONTHS
ENDED MARCH 31
----------------------------------
2003 2002
--------------- -----------------
UNAUDITED
Revenues:
Products $ 4,208 $ 8,362
Services 2,425 2,257
--------------- -----------------
Total revenues 6,633 10,619
Cost of products sold and services:
Products 2,366 6,234
Services 4,055 2,758
--------------- -----------------
Total cost of products sold and services revenues: 6,421 8,992
--------------- -----------------
Gross profit 212 1,627
--------------- -----------------
Operating Expenses
Selling, marketing, general and administrative 1,925 4,478
--------------- -----------------
Operating loss (1,713) (2,851)
Financial income (expenses), net 36 (457)
Other income 42 10
--------------- -----------------
Loss before taxes on income (1,635) (3,298)
Taxes on income 7 147
--------------- -----------------
lLoss after taxes on income (1,642) (3,151)
Loss from discontinuing operations - (930)
--------------- -----------------
Net Loss $ (1,642) $ (4,081)
=============== =================
Basic and diluted loss per common share:
from continuing operations $ (0.01) $ (0.03)
from discontinued operations - $ (0.01)
--------------- -----------------
Net loss per share $ (0.01) $ (0.04)
=============== =================
Weighted average number of stock used in computing basic and diluted net loss per
share used in calculation of net loss per common share basic and diluted. 104,530 106,906
=============== =================
See accompanying Notes to Condensed Consolidated Financial Statements
5
RSTAR CORPORATION AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2003 2002
--------------- ----------------
UNAUDITED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,642) $ (4,081)
Less: loss from discontinued operations - 930
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,073 1,224
Amortization of deferred stock compensation - 54
Increase in trade receivables (2,873) (4,769)
Deferred income taxes, net (80) (93)
Decrease in inventories 1,278 2,302
Increase in other accounts receivable and prepaid expenses and long
term receivable (1,342) (2,309)
Increase (decrease) in trade payables (626) 713
Decrease in deferred revenue (307) (313)
(Decrease) Increase in related parties (539) 705
Increase in accrued expenses 32 1,963
Decrease in other accounts payable and other long-term liabilities 256 40
--------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING ACTIVITIES (4,770) (3,634)
NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS - (884)
--------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (4,770) (4,518)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (108) (85)
Proceeds from the sale of property and equipment - -
Restricted cash, net (446) (3,347)
--------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (554) (3,432)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term bank credit, net (24) 622
Payments on capital lease obligations (577) (803)
--------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES (601) (181)
Effects of exchange rate changes on cash (3) 1
--------------- ----------------
Decrease in cash and cash equivalents (5,928) (8,130)
Cash and cash equivalents at beginning of period 8,163 37,334
--------------- ----------------
Cash and cash equivalents at end of period $ 2,235 $ 29,204
=============== ================
Supplemental Disclosures:
Cash paid for interest $ 145 $ 351
=============== ================
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
RSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statement presentation. In addition, certain reclassifications have
been made to the 2002 consolidated financial statements to conform to the 2003
presentation.
The Company, in its opinion, has included all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the results of
operations for the three months ended March 31, 2003 and 2002, respectively. The
condensed consolidated financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes for the year ended
December 31, 2002 included on Form 10K, as filed with the Securities and
Exchange Commission on April 15, 2003. Operating results for the three months
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. For further information, refer to
the financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 (File No. 000-27029).
On August 2, 2002 (the "Closing"), the Company closed the previously announced
StarBand Latin America acquisition and issued 43,103,448 shares of the Company's
Common Stock to Gilat-To-Home Latin America (Holland) N.V., an affiliate of
Gilat Satellite Networks Ltd. ("Gilat") in exchange for the business of StarBand
Latin America (Holland) B.V., and its subsidiaries. In accordance with the terms
of the acquisition agreement between Gilat and rStar, while regulatory approvals
required for the transfer of certain of the Latin American entities of StarBand
Latin America were pending, rStar assumed all rights, obligations and
liabilities with respect to the business conducted by those entities, as of the
date of the Closing. Accordingly to the closing agreement amended in May 2003,
in the event that Gilat cannot obtain such regulatory approvals within twelve
months from the closing date, Gilat will transfer to rStar the parent company of
such entities. As such, rStar will continue to have control over these entities
whether directly or indirectly.
As Gilat is the controlling shareholder of both rStar and StarBand Latin America
from January 2001, the acquisition has been accounted for as a combination
between entities under common control in accordance with Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and FASB
Technical Bulletin 85-5 "Issues relating to accounting for business
combinations" ("FTB 85-5") issue No. 2 relating to Stock Transactions between
Companies under Common Control from the date Gilat achieved such common control.
As such, no goodwill resulted from the transaction, as originally contemplated
in the Closing and historical amounts are presented in a manner similar to a
pooling of interests. Accordingly, rStar's 2001 historical financial statements
and rStar's 2002 historical quarterly financial statements until the date of the
closing have been restated to include the consolidated financial position,
results of operations, and cash flows of StarBand as of and for the year ended
December 31, 2001 and for the quarters ended March 31, 2002 and June 30, 2002
since Gilat achieved common control over StarBand and rStar which was in January
2001.
NOTE 2: MAJOR CUSTOMERS AND SUPPLIERS
A significant portion of the Company's and its subsidiaries (the "Group")
revenues comes from services provided for Gilat in relation to a small number of
contracts with foreign governments in Latin America. Revenues from the
government of Peru amounted to $4.1 million and $6.1 million in the three months
ended March 31, 2003 and 2002, respectively. These services are awarded on a
bid-by-bid basis and, as such, are considered non-recurring. See Note 5 for
details regarding major customers.
The Group depends on a limited number of suppliers and on a single supplier,
which is a related party, for the equipment sold and certain services. If such
supplier fails to deliver the necessary equipment and services, the Group may be
required to seek alternative sources of supply. A change in suppliers could
result in installation delays, which could cause a possible loss of sales and,
consequently, could adversely affect the Group's results of operations and cash
position. See Note 7 for detail regarding related parties transactions.
NOTE 3: CRITICAL ACCOUNTING POLICIES AND ESTIMATES
a. General:
The Company's discussion of results of operations and financial condition relies
on its consolidated financial statements that are prepared based on certain
critical accounting policies that require management to make judgments and
estimates that are subject to varying degrees of uncertainty. The Company
believes that investors need to be aware of these policies and how they impact
its financial statements as a whole, as well as its related discussion and
analysis presented herein. While the Company believes that these accounting
policies are based on sound measurement criteria, actual future events can and
often do result in outcomes that can be materially different from these
estimates or forecasts. The accounting policies and related risks described in
the Company's annual report on Form 10K as filed with the Securities and
Exchange
7
Commission on April 15, 2003 are those that depend most heavily on these
judgments and estimates. As of March 31, 2003, there have been no material
changes to any of the critical accounting policies contained therein.
b. Impact of recently issued accounting standards:
In January 2003, the FASB issued Interpretation No. 46 (or FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
variable interest entity is a corporation, partnership, trust, or any other
legal structures used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company is
evaluating the possible impact of the new interpretation and does not expect it
to have a material effect on its financial position or result of operations.
NOTE 4: SHAREHOLDERS EQUITY
a. Stock options plans:
The following table summarizes information about stock options
outstanding as of March 31, 2003:
Weighted average
Number of options exercise price
------------------ ------------------
Outstanding at December 31, 2002 2,086,788 $ 0.29
Forfeited (18,329) $ 0.15
------------------ ------------------
Outstanding at March 31, 2003 (unaudited) 2,068,459 $ 0.29
================== ==================
b. Accounting for Stock-Based Compensation:
The Company accounts for stock-based compensation in accordance
with the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25") and
FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" ("FIN No. 44") in accounting for
its employee stock options. Under APB No. 25, when the exercise
price of an employee's options equals or is higher than the
market price of the underlying Common Stock on the date of grant,
no compensation expense is recognized. Under Statement of
Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), pro-forma information
regarding net income (loss) and income (loss) per share is
required, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of
SFAS No. 123.
The fair value of these options is amortized over their vesting
period and estimated at the date of grant using a Black-Scholes
multiple option pricing model with the following weighted average
assumptions: risk-free interest rates of 3% for each of 2003 and
2002; a dividend yield of 0.0% for each of those years; a
volatility factor of the expected market price of the Common
Stock of 0.82 and 0.42 for 2003 and 2002, respectively; and a
weighted-average expected life of the option of 3.5 years for
each of 2003 and 2002.
8
The following table illustrates the effect on net income and
earnings per share, assuming that the Company had applied the
fair value recognition provision of SFAS No. 123 on its
stock-based employee compensation:
Three months ended March 31,
------------------------------------
2003 2002
------------- -------------
Net Loss as reported $ (1,642) $ (4,081)
Deduct: Stock-based compensation expenses determined
under fair value method for all awards, net of related
tax effects: 6
------------- -------------
Pro forma net loss $ (1,642) $ (4,087)
============= =============
Loss per share:
Basic and diluted, as reported $ (0.01) $ (0.04)
============= =============
Basic and diluted, pro forma $ (0.01) $ (0.04)
============= =============
Net loss from continuing operations as reported (1,642) (3,151)
Deduct: Stock-based compensation expenses related to
continuing operations determined under fair value
method for all awards, net of related tax effects: 3 6
------------- -------------
Pro forma loss) from continuing operations $ (1,645) $ (3,157)
============= =============
Loss per share from continuing operations:
Basic and diluted, as reported $ (0.01) $ (0.03)
============= =============
Basic and diluted, pro forma $ (0.01) $ (0.03)
============= =============
RSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 5:-CUSTOMERS AND GEOGRAPHIC INFORMATION
The Group operates in one business segment - the marketing and providing of
services for very small aperture terminal ("VSAT") satellite earth stations. See
Note 1 for a brief description of the Company's business. The Group has adopted
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131").
1. Revenues by geographic area:
Following is a summary of revenues by geographic area. Revenues are attributed
to geographic area, based on the location of the end customers, as follows:
THREE MONTHS
ENDED MARCH 31
---------------------------------
2003 2002
--------------- ----------------
Peru $ 5,407 $ 7,634
Colombia 1,146 475
Brazil 80 2,510
--------------- ----------------
$ 6,633 $ 10,619
=============== ================
9
2. Revenues from single customers, which exceed 10% of total revenues in the
reported years, as a percentage of total revenue:
THREE MONTHS
ENDED MARCH 31,
---------------------------------
2003 2002
--------------- ----------------
Government of Peru $ 4,079 $ 6,054
=============== ================
3. The Group's long-lived assets are located in the following countries:
MARCH 31, DECEMBER 31,
2003 2002
------------------------ -----------------
UNAUDITED
------------------------ -----------------
------------------------ -----------------
Peru $ 6,438 $ 6,918
Colombia 3,090 3,341
Brazil 177 79
United States 5,003 5,335
------------------------ -----------------
$ 14,708 $ 15,673
======================== =================
NOTE 6: NET LOSS PER SHARE
Basic loss per share is computed based on the weighted average number of
ordinary shares outstanding during each period. Diluted loss per share is
computed based on the weighted average number of ordinary shares outstanding
during each period, plus dilutive potential ordinary shares considered
outstanding during the period, in accordance with SFAS No. 128, "Earnings per
Share".
The following table presents the calculation of unaudited basic and diluted
earnings per share (in thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------------- ---------------------
Net loss from continuing operations $ (1,642) $ (3,151)
Loss from discontinued operations - (930)
------------------- ---------------------
Loss applicable to common stockholders $ (1,642) $ (4,081)
=================== =====================
Weighted-average shares of common stock outstanding 104,530 106,906
Less: weighted-average shares subject to repurchase
Weighted-average shares of common stock outstanding used in computing basic net
loss per common share 104,530 106,906
Basic and diluted net loss per common share from continuing operations $ (0.01) $ (0.03)
Basic and diluted net loss per common share from discontinued operations $ - $ (0.01)
Basic and diluted net loss per common share $ (0.01) $ (0.04)
For the three months ended March 31, 2003 and 2002, we have excluded all
convertible preferred stock, warrants to purchase common and preferred
convertible stock, outstanding stock options and stock subject to repurchase
from the calculation of diluted net loss per common share because all such
securities are anti-dilutive. At March 31, 2003 there are 1,959,524 shares
exercisable at an average exercise price of $.29.
NOTE 7: - RELATED PARTY TRANSACTIONS
Related party debts are due to Gilat and various Gilat controlled entities.
These amounts include certain liabilities that are not transferring to rStar and
are expected to be eliminated either through payment with existing cash or upon
collection of accounts receivables or liquidation of other excluded assets. As
of the closing of the StarBand Latin America acquisition, Gilat was not able to
remove certain assets and liabilities from these entities and as such has left a
related party debt equal to such excess assets. The risks and rewards of these
assets and liabilities are with Gilat and therefore in the event that certain
receivables are not collected or assets are not realized, there will be a change
in amounts due to
10
related parties. It is the Gilat's intention to re-capitalize or forgive any
such debts in excess of excluded assets. Gilat has committed not to require
repayment of this obligation during 2003 although it is anticipate that a
significant portion will be due in 2003.
Prior to the closing of the acquisition of StarBand Latin America in August
2002, related party debts of approximately $9.0 million and $12.0 million, in
2001 and 2002, respectively were converted to equity by Gilat. Gilat is
committed to convert the remaining $5.0 million of additional debt to equity.
Gilat and its affiliates charged rStar and its subsidiaries for equipment, space
segment, management services and related costs, 1.7 and 1.2 million during the
quarter ended March 31, 2003 and 2002, respectively. Additional the Company
recorded a reduction of maintanence expense of $800,000 for the three months
ended and a reduction of the payable to Gilat.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
CERTAIN MATTERS DISCUSSED IN THIS DOCUMENT MAY CONSTITUTE FORWARD-LOOKING
STATEMENTS UNDER SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE EXCHANGE ACT). SUCH MATTERS ARE GENERALLY PRECEDED BY, FOLLOWED BY
OR INCLUDE WORDS SUCH AS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE," "SEEK,"
AND "INTEND," AND WORDS OF SIMILAR IMPORT.
THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT
TO BUSINESS AND ECONOMIC RISKS AND UNCERTAINTIES, WHICH ARE DIFFICULT TO
PREDICT. THEREFORE, OUR ACTUAL RESULTS OF OPERATION MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED OR FORECASTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A
NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO:
o OUR SUCCESS IN BEING AWARDED SUBSTANTIAL PROJECTS FOR THE PROVISION OF
OUR SERVICES AS DETAILED HEREIN;
o THE WILLINGNESS OF END USERS FOR INTERNET ACCESS AND TRAFFIC TO PAY A
PREMIUM FOR THESE SERVICES AND THE EXTENT OF REVENUES WE ARE ABLE TO
GENERATE FROM PROVIDING THESE SERVICES;
o THE WILLINGNESS OF END USERS TO PAY A FEE FOR BROADBAND INTERNET
ACCESS, INDUSTRY-SPECIFIC CONTENT AND OTHER BUNDLED PRODUCTS AND
SERVICES;
o THE AVAILABILITY OF CASH RESOURCES AND FINANCING FACILITIES IN AMOUNTS
ADEQUATE TO MEET OUR EXPECTED WORKING CAPITAL AND CAPITAL REQUIREMENTS
FOR THE NEXT 12 MONTHS BASED ON OUR CURRENT BUSINESS PLAN; AND
o INTEGRATION OF THE STARBAND LATIN AMERICAN BUSINESS, AMONG OTHER
RISKS.
IN ADDITION, A MORE COMPLETE DISCUSSION OF THE RISKS AND UNCERTAINTIES
WHICH AFFECT OUR BUSINESS IS SET FORTH BELOW UNDER THE HEADING "FACTORS
AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION." ALL
FORWARD-LOOKING STATEMENTS MADE BY US ARE QUALIFIED BY AND SHOULD BE READ IN
CONJUNCTION WITH SUCH RISK DISCLOSURE. WE UNDERTAKE NO OBLIGATION TO PUBLICLY
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
OVERVIEW
Following the closing of the acquisition of StarBand Latin America on
August 2, 2002, rStar has committed a significant portion of its resources and
technical expertise to the Latin American market for voice and data services. As
such, through our acquired subsidiaries, we install, operate and maintain
satellite-based rural telephony networks in certain Latin American countries, as
well as high-speed consumer Internet access pilot networks in certain other
countries. We work on a wholesale basis with Latin American ISP's, PTTs,
government entities and other providers to offer high-speed Internet access and
telephony services via satellite. Our end-user target customers for our products
and services are small office/home office ("Soho") customers and consumer
customers in Latin America.
At the time of the closing of the StarBand Latin America Acquisition, the
legal transfer of some of the Latin American entities to be transferred to us
was and remains pending government regulatory approvals. Pursuant to a closing
agreement entered into by rStar and Gilat at the closing of the acquisition, if
these approvals are not obtained by August 2, 2003, and amended May 2003, Gilat
will transfer to rStar the parent company of such entities. Despite the pending
transfers, rStar obtained all rights, obligations and liabilities with respect
to the businesses conducted by the entities as of August 2, 2002.
Under the acquisition agreement, StarBand Latin America entered into a
master services and supply agreement with Gilat pursuant to which we received
specified services and products from Gilat necessary to conduct our business in
Latin America. See "Master Service and Supply Agreement" incorporated by
reference.
From September 1997 through October 2000 our principal focus was building
and operating an advertiser-supported network serving the education market. Due
to changes in our business focus, we discontinued this business and concentrated
our efforts toward becoming a provider of satellite-based services to vertical
markets. Management has discontinued this business as well in order to focus
solely on providing satellite connectivity in Latin America.
In connection with our change in business focus, we underwent significant
reductions-in-force during 2001 and 2002. These actions, combined with
attrition, reduced our headcount approximately 85% from 120 employees at
December 31, 2001 to 18 employees as of June 30, 2002. In connection with the
StarBand Latin America acquisition, the employment of remaining employees was
terminated, including the then current CEO and the CFO during the third quarter
ended September 30, 2002. Total severance costs associated with these actions
equaled approximately $735,000 for the twelve months of 2001, and approximately
$2.2 million for the twelve months ended December 31, 2002. These costs have
been charged to operations. Also in connection with the StarBand Latin America
acquisition, we obtained through subsidiary
12
companies of StarBand Latin America approximately 115 employees, most of whom
are located in Latin America and have increase our head count to approximately
200 employees as of April 30, 2003. In addition, Gilat has provided headquarters
personnel during the transition period. It is anticipated that we will increase
our headcount in the near term to match the demand in the market.
BASIS OF PRESENTATION
As Gilat is the controlling shareholder of both rStar and StarBand
Latin America, the acquisition has been accounted for as a combination between
entities under common control in accordance with SFAS No. 141. As such, no
goodwill has resulted from the transaction and historical amounts are presented
much like in a pooling of interests. Common control of the entities began on
January 1, 2001. Accordingly, rStar's historical financial statements have been
restated to include the consolidated financial position, results of operations,
and cash flows of StarBand Latin America from January 1, 2001 to the present.
Therefore the discussions below include both the activities of rStar and those
of StarBand Latin America.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their
"critical accounting policies." A critical accounting policy is a policy that is
both important to the portrayal of our financial condition and results and
requires subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. We believe
the following accounting policies to be critical:
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition:
We recognize revenues from product sales when shipment has occurred, persuasive
evidence of an arrangement exists, the vendor's fee is fixed or determinable, no
future obligations exist and collection is probable. We do not grant rights of
return. Determination of the probability of collection is based on the financial
position and the history with the customers, and on management's assessment of
the probability of the payment of fees for services rendered and products
delivered. Should changes in conditions cause management to determine that these
criteria are not met for certain future transactions, revenue recognized for any
reporting period could be adversely affected.
Service revenues are recognized ratably over the contractual period or as
services are performed. Where arrangements involve multiple elements, revenue is
allocated to each element based on the relative fair value of the element when
sold separately.
Arrangements that include installation services are evaluated to determine
whether those services are an integral component of the equipment used. When
installation services are considered integral, revenue from products and
services is recognized only upon installation. When services are not considered
integral, revenues from product sales are recognized upon shipment and the
service revenue is recognized when the services are performed.
Revenues from products under sales-type-lease contracts are recognized in
accordance with Statement of Financial Accounting Standard No. 13, "Accounting
for Leases" ("SFAS No. 13") upon installation or upon shipment, in cases where
the customer obtains its own or others installation services. The present values
of payments due under sales-type-lease contracts are recorded as revenues at the
time of shipment or installation, as appropriate. Future interest income is
deferred and recognized over the related lease term as financial income. The net
investments in sales-type-lease are discounted at the interest rates implicit in
the leases.
Cost of Revenues:
Cost of revenues, for both products and services, includes the cost of system
design, equipment, satellite capacity, and third party maintenance and
installation. For equipment contracts, cost of revenues is expensed as revenues
are recognized. For network service contracts, cost of revenues is expensed as
revenues are recognized over the term of the contract. For maintenance
contracts, cost of revenues is expensed as the maintenance cost is incurred or
over the term of the contract. Gilat has agreed to reimburse the Company up to
$2.0 million for excess maintanence cost related to energy design problems on
the Columbia network. During the three months ended March 31, 2003 maintanence
expense was reduce by $800,000 under this agreement.
Accounts Receivable:
We are required to estimate our ability to collect our trade receivables. A
considerable amount of judgment is required in assessing their ultimate
realization. We provided allowance for our receivables relating to customers
that were specifically identified by our management as having difficulties
paying their respective receivables.
Inventory:
13
We are required to state our inventories at the lower of cost or market price.
In assessing the ultimate realization of inventories, we are required to make
judgments as to future demand requirements and compare that with the current or
committed inventory levels. We have recorded significant changes in required
reserves in recent periods due to changes in strategic direction, such as
discontinuation of product lines and due to changes in market conditions such as
altered demands for product specifications.
Other Operating Data
The following information for the three months ended March 31, 2003 and 2002 is
provided for informational purposes and should be read in conjunction with the
unaudited Consolidated Financial Statements and Notes provided herein and the
Consolidated Financial Statements presented with the Company's annual Form 10-K
for the year ended December 31, 2002.
The following table sets forth certain operating data and the percentage
increase or decrease from the prior period:
THREE MONTHS
ENDED MARCH 31,
UNAUDITED INCREASE
---------------------------- (DECREASE)
2003 2002 PERCENTAGE
--------------- ------------ ------------
Revenues:
Products $4,208 $8,362 50%
Services 2,425 2,257 (7%)
--------------- ------------ ------------
Total revenues 6,633 10,619 (38%)
Cost of revenues:
Products 2,366 6,234 62%
Services 4,055 2,758 47%
--------------- ------------ ------------
Total cost of revenues: 6,421 8,992 (29%)
Gross profit 212 1,627 (87%)
--------------- ------------ ------------
Operating Expenses
Selling, marketing, general and
administrative 1,925 4,478 (57%)
--------------- ------------ ------------
Operating loss (1,713) (2,851) (40%)
Financial income (expenses), net 36 (457) 108%
Other income 42 10 (320%)
--------------- ------------ ------------
Loss before taxes on income (1.635) (3,298) (50%)
Taxes on income 7 147 (95%)
--------------- ------------ ------------
Loss after taxes on income (1,642) (3,151) (48%)
Loss from discontinuing operations - (930) -
--------------- ------------ ------------
Net loss $(1,642) $(4,081) (60%)
=============== ============ ============
Basic and diluted loss per common share:
from continuing operations $(0.01) $(0.03) (67%)
from discontinued operations - $(0.01) -
--------------- ------------ ------------
Net loss per share $(0.01) $(0.04) (75%)
Weighted average number of stock used in
computing basic and diluted net loss per
share used in calculation of net loss
per common share basic and diluted: 104,530 106,906 (2%)
=============== ============ ============
RESULTS OF OPERATIONS
We believe that, due to the change in business scope, the discontinued
operations and the changing climate of business in Latin America,
period-to-period comparisons of our operating results are not meaningful and
should not be relied upon as predictive of future performance. Our prospects
must be considered in light of the risk, expenses and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. We may not be successful in
addressing such risks and difficulties.
REVENUES
The majority of our revenues are from the installation and
implementation of rural telephony and Internet networks in Latin America.
Revenue is recognized from the sale of equipment, installation of that
equipment, and for services performed from the networks such a telephony and
Internet. We classify our revenues as either product revenues or service
revenues. Product revenues are derived from the sale and installation of
equipment. When sales require installation, revenues are recognized as the
products are installed and are considered non-recurring revenue on a per project
basis. Sales not requiring installation are recognized as products are shipped
and title passes to the customer. Service revenues are derived from maintenance
contracts for the network, and services performed from the network such as
telephony and Internet services. Service revenues related to the maintenance
contracts and to services performed from traffic generated through the networks
14
are recurring in nature throughout the life of the contract. A significant
portion of revenue comes from foreign governments. These contracts are won on a
bid-by-bid basis and, as such, each bid is considered non-recurring. In 2001, we
provided services for bids awarded to Gilat by the Government of Peru amounting
to approximately $39.0 million.
For the three months ended March 31, 2003, we were not awarded any new
projects. Gilat has been awarded certain projects in Latin America in 2002 and
2003 and it is expected that we will be providing certain services under such
contracts. As such, we expect that our recurring revenue will increase in the
near future.
PRODUCTS
Revenues from product sales and installations decreased $4.2 million
(50%) from $8.4 million for the three months ended March 31, 2002 to $4.2
million as for the three months ended March 31, 2003. This decrease in revenue
was attributable mainly to a decrease in the implementation of new projects
during 2003. Product sales and installations typically occur during the
beginning of project implementation. Accordingly, since we did not record any
revenue from new bids in 2003, there was a corresponding reduction in the amount
of product revenues.
SERVICES
Revenues from services increased $168,000 (7%) from $2.3 million for
the three months ended March 31, 2002 to $2.4 million for the three months ended
March 31, 2003. This increase was attributable primarily to (i) the
implementation of bids won in 2001, which were implemented in 2002 and 2003.
COST OF REVENUES
Cost of revenues related to products consists of the cost of equipment
for the government projects noted above. However, equipment sales, within each
specific project, are non-recurring in nature. We anticipate that upon
maturation of the various networks that compose our continuing operations, cost
of revenue related to services will consist primarily of the depreciation on
network equipment, the cost of administering our satellite communications
network, and the cost of procuring and providing space segment necessary to
provide such services, installing satellite signal-receiving equipment at
customer sites mainly. The costs associated with this type of telecommunications
business generally include (1) the cost of land-based equipment, or earth
segment, such as the satellite dishes, hubs, send/receive cards located inside
the network servers; (2) the cost of the link to and from the satellite, or
space segment; and (3) interconnection fees with local providers.
PRODUCTS
For the three months ended March 31, 2003, cost of revenues related to
products decreased $3.8 million (62%) from $6.2 million for the three months
ended March 31, 2002 to $2.4 million for the three months ended March 31, 2002.
This decrease was attributable to a decrease in product sales revenue in 2003.
SERVICES
For the three months ended March 31, 2003, cost of revenues from
services increased $1.3 million (47%) from $2.8 million for the three months
ended March 31, 2002 to $4.1 million for the three months ended March 31, 2003.
The increase was attributable to the increased traffic on the networks we
service and increased maintenance costs related to the operation of the
networks. Other than installation services, cost of revenues consisted primarily
of operational expenses for our existing networks in Colombia and Peru.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE
Selling, marketing, general and administrative expenses represent the
costs of personnel and overhead associated with our efforts to obtain contracts
and new business in Latin America with Internet Service Providers (ISP's), PTTs,
government entities and other providers to offer high-speed Internet access and
telephony services via satellite. Selling, marketing, general and administrative
expenses for continuing operations for the three months ended March 31, 2003 and
2002 were approximately $1.9 million and $4.5million, respectively. The decrease
of $2.6 million (57%) in this expense in 2003 was attributable to selling and
marketing efforts associated with project awards in Peru and Colombia of 530,000
during the prior year and as such resulted in higher than normal management fees
charged by a Gilat affiliate for such sales and marketing assistance and the
reduction of former rStar personnel and related cost of 2.1million. In addition,
the decrease in this expense is attributable to professional and consulting
costs relating to the StarBand Latin America acquisition, which were incurred in
the prior year quarter totaled approximately $250,000.
15
FINANCIAL EXPENSES, NET
Financial expenses include interest income, interest expenses and
foreign currency gains and losses. Financial expense was $ (36,000) and $
457,000 for the three months ended March 31, 2003 and 2002 respectively. The
increase for the three months ended March 31, 2003 over 2002 was the result of
foreign exchange losses in Brazil and Colombia. Interest expenses and interest
income during the three months ended March 31, 2003 declined by (67%) and (18%),
respectively since the three months ended March 31, 2002, primarily as a result
of a combination of diminishing cash balances available for investment at lower
interest rates and a reduction in interest expenses relating to the expiration
of significant capital lease obligation during 2002 and a conversion of debt to
equity with a related party lease, Spacenet Inc., a wholly owned subsidiary of
Gilat.
LOSS FROM DISCONTINUED OPERATIONS
We discontinued all operational components of rStar, which was mainly
the AutoNetworks business in 2002. As of the first quarter of 2003, there were
no further costs incurred for discontinued operations. For the three months
ended March 31, 2002, approximately $0.9 million of costs were incurred relating
the AutoNetworks business. As of March 31, 2001 all the losses from the
discontinuation of the advertiser-supported business serving the education
market had been recognized. The discontinuation of this business resulted in
$18.3 million loss for the three months ended 2001 primarily consisting of a
$5.9 million charge recorded to cover principally the cost of excess space
segment bandwidth consumed by the School Business that resolved a discrepancy
between Spacenet and the Company and $9.0 million impairment charges to reflect
a revised estimate of the net proceeds to be obtained from the sale of School
Business assets and $6.0 million in costs related to the remaining operational
components of rStar primarily the discontinued AutoNetworks' operations.
Partially offsetting these charges were actual expenses that were lower than the
original estimates for which a reserve was established in March 2000. The
remainder of the loss in 2001 resulted from the presentation of discontinued
operations of the operational components of rStar which was mainly the
AutoNetworks business.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. For the three months ended March 31, 2003, net
cash used by operating activities was approximately $4.8 million consisting of
approximately $722,000 of net loss offset by non-cash charges of approximately
$1.1 million relating to depreciation. In addition, trade receivables increased
by approximately $2.9 million, and other receivables and prepaid expenses
(including long-term receivables) increased by approximately $1.4 million. This
overall increase was attributable to revenue recorded from our projects in Peru.
These uses of cash were offset by decreasing our inventory by approximately $1.3
million. This compares to similar cash used in the three months ended March 31,
2002 of approximately $4.5 million.
INVESTING ACTIVITIES. During the three months ended March 31, 2003, we
spent approximately $554,000 on investing activities, which was attributable to
$108,000 in fixed asset purchases and an increase in restricted cash from our
various activities in Peru of approximately $446,000.
FINANCING ACTIVITIES. During the three months ended March 31, 2003 we
spent approximately $601,000 in financing activities, which was primarily
attributable to repayments of debt and capital leases.
In connection with the acquisition of StarBand Latin America, we have
committed to pay a special distribution to our minority shareholders under
certain circumstances. In accordance with the acquisition agreement and our
certificate of incorporation, in the event that the StarBand Latin America
business, as defined, does not achieve certain net income targets agreed to by
the parties during each of the one year periods ended June 30, 2003 and June 30,
2004, rStar stockholders of record as of June 30, 2003 or June 30, 2004 (other
than Gilat and its affiliates which agreed to waive receipt of such amounts)
will be entitled to their pro rata share of a special distribution equal to
either $2.5 million or $5.0 million in cash, depending upon the net income.
Specifically, if the net income for the StarBand Latin America business for the
period from July 1, 2002 through June 30, 2003 is less than or equal to $1.6
million, the special distribution shall be $5.0 million and if the net income
for the StarBand Latin America business for the period from July 1, 2002 through
June 30, 2003 is greater than $1.6 million and less than or equal to $2.5
million, the special distribution shall be $2.5 million. If the net income for
the StarBand Latin America business for the period from July 1, 2002 through
June 30, 2003 is greater than $2.5 million, then no payment shall be due. If the
net income for the StarBand Latin America business for the period from July 1,
2003 through June 30, 2004 is less than or equal to $11.0 million, the special
distribution shall be $5.0 million and if the net income for the StarBand Latin
America business for the period from July 1, 2003 through June 30, 2004 is
greater than $11.0 million and less than or equal to $16.5 million, the special
distribution shall be $2.5 million. If the net income for the StarBand Latin
America business for the period from July 1, 2003 through June 30, 2004 is
greater than $16.5 million, there shall be no special distribution. In
connection with the acquisition of StarBand Latin America, Gilat agreed to
guarantee the payment of this special distribution.
We have not recorded a provision regarding distribution of dividend to
the minority in the year 2003 as management does not believe it is probable that
we will make such distribution. However we have recorded a provision of $5.0
million regarding distribution of special distribution to the minority
shareholders in year 2004. It is management's current assessment that with the
current level of sales in 2003, it is probable that the special distribution
will be paid in 2004. However, if the Company is successful in growing its
business and increasing its net income during 2003, the special distribution may
not need to be paid.
16
In the event we have to pay such a dividend it would have a significant
impact on our cash reserves. We anticipate that if we collect our receivables
and if we reach our targets as we have projected then our available cash
resources will be sufficient to meet our expected working capital and capital
expenditure requirements for the next 12 months, however this anticipates that
we do not make any significant payments to Gilat. The acquisition of StarBand
Latin America, however, results in the addition of a substantial new business to
the Company and new management. The financial requirements of that business may
vary significantly based on a number of factors, including, the speed with which
service is expanded, the impact that competitive offerings have on market prices
and terms, the ability of the Company to forecast its expenses and the terms it
receives from its vendors (See "Factors Affecting our Business, Operating
Results and Financial Condition"). Consequently, we may seek to raise additional
funds. Additionally, we may require additional capital to develop new
satellite-based private networks, respond to competitive pressures, acquire
complementary technologies, or respond to unanticipated developments.
We may seek to raise additional funds through private or public sales
of securities, strategic financial and business relationships, bank debt, lease
financing, or otherwise. If additional funds are raised through the issuance of
equity securities, the percentage of the Company owned by existing stockholders
will be reduced, stockholders may experience additional dilution, and these
equity securities may have rights, preferences, or privileges senior to those of
the holders of our common stock. Additional financing may not be available on
acceptable terms, if at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to deploy or enhance our
networks, develop the business acquired in the StarBand Latin America
acquisition, take advantage of future opportunities, or respond to competitive
pressures or unanticipated developments, which could severely harm our business.
As of March 31, 2003, our short and long term obligations were as
follows:
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
CONTRACTUAL OBLIGATIONS 2007 AND
TOTAL 2003 2004-2006 BEYOND
----------------------------------------------------
Long-term debt $ - $ - $ - $ -
Convertible subordinated notes - - - -
Capital Lease Obligations 4,647 1,609 3,038 -
Operating lease 76 63 13 -
Other long-term obligations 1,817 397 1,420 -
Related party obligation 23,228 23,228 - -
----------------------------------------------------
Total Contractual Cash Obligations $ 29,768 $ 25,297 $ 4,471 $ -
====================================================
OFF BALANCE SHEET ARRANGEMENTS
At March 31 2003, the Company is required to provide guarantees of
performance of our work to our customers (usually government entities). Such
guarantees are generally provide by Gilat on our behalf. The guarantees are
required by contract for our performance during the installation and operational
period of long-term rural telephony projects in Latin America. The guarantees
for installation typically expire soon after certain milestones are met and
guarantees for operations typically expire proportionally over the contract
period. Our maximum potential amount of future payments the subsidiaries could
be required to make under its guarantees at March 31, 2003 is $30.8 million. We
have not recorded any liability for such amounts, as we do not expect that our
performance will be unacceptable.
FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
RISKS RELATING TO OUR BUSINESS.
WE HAVE AN UNPROVEN BUSINESS MODEL AND WE MAY NOT REALIZE ANY BENEFITS FROM THE
STARBAND LATIN AMERICA ACQUISITION.
Achieving the benefits of the StarBand Latin America acquisition will depend, in
part, on our ability to integrate the StarBand Latin America business,
technology, operations and personnel into our operations. The integration of
StarBand Latin America will be a complex, time consuming and expensive process
and may disrupt our business if not completed in a timely and efficient manner.
Among other challenges involved in this integration are (i) obtaining the
regulatory approvals required to transfer certain Latin American operations from
Gilat to us, (ii) ensuring that Gilat provides us with the economic benefit of
such operations until such time as the regulatory approvals have been obtained;
(iii) retaining key personnel and addressing any adverse changes in business
focus; and (iv) maintaining the necessary cash and other resources to meet our
expected working capital and capital expenditure requirements, including the
cash that we may have to pay our stockholders pursuant to the special cash
distribution.
17
We do not have experience in integrating operations on the scale represented by
the acquisition, and it is not certain that we will be able to successfully
integrate StarBand Latin America into our operations in a timely manner or at
all, or that any of the anticipated benefits of the acquisition will be
realized. Failure to do so could seriously harm our business, financial
condition and operating results.
A stockholder must carefully consider the risks and difficulties frequently
encountered by companies in an early stage of development, as well as the risks
we face due to our participation in a new and rapidly evolving market. Our
business strategy may not be successful and it may not successfully overcome
these risks.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES.
We incurred net losses of approximately $221 million from our inception through
March 31, 2003, which losses resulted primarily from costs related to developing
our discontinued education network business, deploying the network to schools
and developing content and features for the network. We have also had
significant losses in our operation in Latin America and as of today have not
achieved profitability. We expect to have continued net losses and negative cash
flows for the foreseeable future. We will need to generate significant
additional revenues to achieve profitability. It is possible that we will never
achieve profitability, and even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis in the future.
If we do not achieve or sustain profitability in the future, then we may be
unable to continue our operations. In the event that we do not achieve certain
levels of net income for the periods ending June 2003 and June 2004, we will
need to pay a special distribution in the form of a dividend to our minority
shareholders. See Item 2: "Liquidity and Capital Resources"
WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE, AND OUR RECENT SHIFT TO
OUR CURRENT BUSINESS LIMITS MANAGEMENT'S ABILITY TO PREDICT REVENUES AND
EXPENSES PRECISELY.
Our quarterly and annual operating results have varied in the past and are
likely to fluctuate significantly in the future due to a variety of factors,
many of which are outside of our control. Factors that might cause quarterly
fluctuations in our operating results include the factors described in the
accompanying subheadings. To respond to these and other factors, we may need to
make business decisions that could impact our quarterly operating results. Most
of our expenses are relatively fixed in the short term. Moreover, our expense
levels are based, in part, on our expectations regarding future revenue levels
in connection with our current business. As a result, if total revenues for a
particular quarter are below our expectations we may not be able to
proportionately reduce our operating expenses for that quarter. This revenue
shortfall might then have a disproportionate effect on our expected operating
results for that quarter. In addition, during future periods our quarterly or
annual operating results may fail to meet the expectations of securities
analysts or investors. In this case the trading price of our common stock would
likely decrease.
GILAT CAN EXERCISE TOTAL CONTROL OVER US. GILAT'S MANAGEMENT CHANGED ON APRIL
15, 2003, AND WE CANNOT BE SURE TO WHAT EXTENT, IF AT ALL, THIS CHANGE WILL
AFFECT US.
As of December 31, 2002, Gilat beneficially owned approximately 85% of our
common stock. Therefore, Gilat is able to exercise total control over such
matters as the election of our directors and other fundamental corporate
transactions such as mergers, asset sales, transfer of operations and a sale of
our company. Additionally, our Fourth Amended and Restated Certificate of
Incorporation permits, as allowed by the Delaware General Corporation Law, Gilat
to undertake certain actions without calling and holding a special meeting of
stockholders and to call a special meeting of rStar stockholders at any time.
Accordingly, the influence of our other stockholders will be limited, which may
depress our stock price. Also, we cannot assure you that the interests of Gilat
will not, from time to time, conflict with your interests as a stockholder.
On April 15, 2003, Gilat's shareholders elected new board of directors, the
majority of whom have not served in the past as directors, officers or employees
of Gilat. In addition, Gilat's former CEO, Yoel Gat, has resigned from the Board
of directors of our corporation. We cannot guarantee that the new officers and
directors of Gilat will not implement changes in rStar's business going forward
and, that if such change is implemented, it will not have a material adverse
effect on our business going forward.
WE MAY SUFFER FOREIGN EXCHANGE RATE LOSSES.
Following the StarBand Latin America acquisition, a portion of our international
revenues and expenses are denominated in local currency. Therefore, a weakening
of other currencies compared to the U.S. dollar could make our products less
competitive in foreign markets and could negatively affect our operating results
and cash flows. We do not currently engage in currency hedging activities,
although in some instances we will reserve the right to engage in such
activities. We have not yet, but may in the future, experience significant
foreign currency transaction losses, especially to the extent that we do not
engage in currency hedging.
THE SUCCESS OF OUR INTERNATIONAL OPERATIONS IS DEPENDENT ON MANY FACTORS BEYOND
OUR CONTROL WHICH COULD ADVERSELY AFFECT OUR PROFITABILITY AND ABILITY TO OFFER
OUR PRODUCTS AND SERVICES IN LATIN AMERICA.
Due to the StarBand Latin America acquisition, we have increased our exposure to
international laws and regulations. If we cannot comply with foreign laws and
regulations, which are often complex and subject to variation and unexpected
changes, we could incur unexpected costs, delays and potential litigation. For
example, the governments of foreign countries might attempt to regulate our
products and services or levy sales or other taxes relating to our activities.
In addition, foreign countries may confiscate our products or impose tariffs,
duties, price controls or other restrictions on foreign currencies or trade
barriers, any of which could make it more difficult for us to conduct our
business. In
18
addition, our operations in Latin America are also subject other factors beyond
our control, such as political and economic instability, including the current
political instability throughout Latin America.
Our expansion in foreign markets requires us to respond to rapid changes in
market conditions in these countries. Our overall success as an international
business will depend, in part, upon our ability to succeed in differing
economic, social and political conditions. We may not continue to succeed in
developing and implementing policies and strategies that are effective in each
location where we do business due to the StarBand Latin America acquisition.
WE HAVE LIMITED PREVIOUS EXPERIENCE IN THE LATIN AMERICAN MARKET AND OUR ABILITY
TO BE SUCCESSFUL IN THAT MARKET IS UNCERTAIN.
Through the StarBand Latin America acquisition, we have expanded our business
operations into the delivery of satellite-based telephony and Internet access
services in Latin America. We have limited previous experience in the Latin
American market, and have limited meaningful historical financial and
operational data upon which we can base projected revenues and planned operating
expenses and upon which you may evaluate our prospects in Latin America. The
Latin American satellite-based telephony and Internet access market is an
untested market for us and the results of these operations are uncertain and
unpredictable. As a company expanding its business in the satellite-based
telephony and Internet access market in Latin America, we face risks relating to
our ability to implement our business plan, including our ability to continue to
develop and upgrade our technology, our ability to maintain and develop customer
and supplier relationships, obtain key technology and the necessary governmental
and regulatory approvals, consents and licenses. We may not adequately address
these risks, and if we do not, we may not be able to implement our business plan
as we intend. Our business model contemplates that we will generate revenues
through wholesale sales to Latin American Internet Service Providers, DTH TV
companies and other service providers. The revenues may not materialize if we
fail to implement our strategy for attracting wholesale customers. You should
consider our business and prospects in light of the heightened risks and
unexpected expenses and problems we may face in an emerging market place.
FAILURE TO MANAGE THE GROWTH OF OUR OPERATIONS COULD HARM OUR BUSINESS AND
STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES.
Due to the StarBand Latin America acquisition, we have recently and
significantly changed our business model and strategy. We anticipate that future
expansion will be required to successfully implement our business strategy. We
may not be able to implement management information and control systems in an
efficient and timely manner, and our current or planned personnel, systems,
procedures and controls may not be adequate to support our future operations. If
we were unable to manage growth effectively, our business would suffer. To
manage the expected growth of our operations and personnel, we will be required
to: (1) improve existing and implement new operational, financial and management
controls, reporting systems and procedures; (2) install new management
information systems; and (3) train, motivate and manage our sales and marketing,
engineering, technical and customer support employees.
Our employees, outsourcing arrangements, systems, procedures and controls may be
inadequate to support our future operations. In particular, due to the StarBand
Latin America acquisition, we expect that demands on the network infrastructure
and our technical support resources will increase rapidly as our customer base
grows. We may therefore experience difficulties meeting a high demand for
services in the future or encounter problems in dealing with the customs of
various countries in Latin America. In order to meet this demand, we will need
to hire, train and retain the appropriate personnel, as well as the third-party
service providers we depend on for customer service, to manage our operations.
We will also need to adapt our financial and management controls, billing and
information systems, reporting systems and operating systems. Our failure to
manage growth and expansion effectively, or the failure by one of our service
providers to adequately perform its services, could harm our ability to retain
or grow our customer base which in turn would harm our business, financial
condition and results of operations.
WE RELY HEAVILY ON OUR KEY PARTNERS, WHO ARE RELATED PARTIES, AND IF THEY
TERMINATE THEIR STRATEGIC ALLIANCES WITH US OR IF THE ARRANGEMENTS FAIL TO MEET
OUR OBJECTIVES, WE MAY EXPERIENCE SIGNIFICANT DIFFICULTY AND OUR REVENUE GROWTH
MAY SUFFER.
We rely heavily on our strategic alliance relationships with Gilat and its
wholly owned subsidiary, Spacenet. Our arrangements with Gilat and Spacenet are
complex and, as a result, they entail many risks, including some that we may not
have foreseen. It is difficult to assess the likelihood of occurrence of these
risks, including the lack of success of the overall arrangements to meet the
parties' objective or the financial condition of Gilat and its affiliates. For
example, Gilat recently consummated a restructuring plan with some of its
creditors. It is unclear whether this plan will affect our relationship with
Gilat. If we fail to maintain these relationships, as anticipated, or if our
partners do not perform to our expectations, the performance of our networks,
and our ability to generate revenues, may be harmed.
IF GILAT IS UNABLE TO PROVIDE US WITH THE LICENSES AND SERVICES WE REQUIRE, WE
MAY BE UNABLE TO PROVIDE OUR SERVICES AND OUR BUSINESS WILL BE HARMED.
We depend upon Gilat and its subsidiaries in Latin America and the United States
to provide us with the services that are required to run our business and
provide our services, especially due to the StarBand Latin American Acquisition.
For example, we are not a licensee in the United States or in any Latin America
country and do not hold any authorizations to operate satellite communication
facilities. We will depend totally upon the licenses held by the subsidiaries of
Gilat located in the United States and in Latin America for our products and
services. If their licenses are limited or revoked, if any legal or regulatory
restrictions are imposed on extending their services to us, or if the United
States or any Latin American country limits the number of their earth stations
or if they fail to operate the earth stations providing service to subscribers
of our wholesale customers, in a satisfactory manner, our business could be
seriously harmed.
19
THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE AS A RESULT OF THE STARBAND
LATIN AMERICA ACQUISITION.
In connection with the StarBand Latin America acquisition, we issued new shares
of our common stock to Gilat and certain of its subsidiaries, further diluting
our results of operations on a per-share basis. This dilution could reduce the
market price of our common stock unless and until we achieve revenue growth or
cost savings and other business economies sufficient to offset the effect of the
issuance of additional shares. Additionally, the market price of our common
stock may decline as a result of the transactions if:
o the integration of rStar and StarBand Latin America is unsuccessful;
o we do not achieve the perceived benefits of the StarBand Latin America
acquisition as rapidly or to the extent anticipated by financial or industry
analysts or investors; or
o the effect of the StarBand Latin America acquisition on our financial
results is not consistent with the expectations of financial or industry
analysts or investors.
THE LOSS OF KEY PERSONNEL MAY HURT OUR ABILITY TO OPERATE OUR BUSINESS
EFFECTIVELY.
Our success depends, in part, upon the continued contributions of the principal
members of our sales, engineering and management departments, many of whom
perform important management functions and would be difficult to replace. The
loss of the services of any key personnel could seriously harm our business.
IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES.
Like all technology companies, we must compete for talented employees to develop
our products, services, and solutions in a market where the demand for such
individuals exceeds the number of qualified candidates. As a result, our human
resources organization focuses significant efforts on attracting and retaining
individuals in key technology positions. If we experience a substantial loss of,
or an inability to attract, talented personnel, the resulting talent gap could
affect our ability to meet our business objectives.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD BE DILUTIVE TO OUR STOCKHOLDERS
AND RESULT IN INCREASED DEBT AND ASSUMPTION OF CONTINGENT LIABILITIES.
As part of our business strategy, we may consider acquisition prospects that
would complement our current product offerings, augment our market coverage,
enhance our technical capabilities, or otherwise offer growth opportunities. In
the event of such future acquisitions, we could: (1) issue equity securities,
which would dilute current stockholders' percentage ownership; (2) incur
substantial debt; or (3) assume contingent liabilities.
Such actions by us could have a detrimental effect on our results of operations
and/or the price of our common stock. Acquisitions also entail numerous risks,
including: (1) difficulties in assimilating acquired operations, technologies,
products or personnel; (2) unanticipated costs associated with the acquisition
that could materially adversely affect our results of operations; (3) negative
effects on our reported results of operations from acquisition related charges
and of amortization of acquired technology and other intangibles; (4) diversion
of management's attention from other business concerns; (5) adverse effects on
existing business relationships with suppliers and customers; (6) risks of
entering markets in which we have no or limited prior experience; and (7)
potential loss of key employees of acquired organizations.
OUR VARIED SALES CYCLES COULD HARM OUR RESULTS OF OPERATIONS IF FORECASTED SALES
ARE DELAYED OR DO NOT OCCUR.
The length of time between the date of initial contact with a potential customer
or sponsor and the execution of a contract with the potential customer or
sponsor may vary significantly and may depend on the nature of the arrangement.
During any given sales cycle, we may expend substantial funds and management
resources and yet not obtain significant revenue, resulting in harm to our
operations.
Further, a significant portion of our sales revenue is derived from our being
selected as the service provider under large-scale contracts. The number of
major bids for these large-scale contracts for VSAT-based networks in Latin
America in any given year is limited and the competition is intense. Losing a
relatively small number of bids each year could have a significant adverse
effect on our business.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS, THEN WE MAY LOSE USERS TO OTHER SERVICES RESULTING IN LOWER THAN
EXPECTED REVENUES.
The market for our products and services is new and rapidly evolving, and we
expect competition in and around this market to intensify in the future. While
we do not believe any of our competitors currently offer the bundle of products
and services we will offer, we face competition from a number of companies. Many
of our existing competitors for some of our products and services, as well as
potential new competitors, have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. This may allow such competitors to
devote greater resources than we can to the development and promotion of their
products and services and to adopt more aggressive pricing policies and make
more attractive offers to our potential subscribers, partners, sponsors and
e-commerce merchants.
20
RISKS RELATING TO OUR COMMON STOCK AND CAPITAL STRUCTURE.
THE PAYMENT OF THE SPECIAL CASH DISTRIBUTION WILL BE SUBJECT TO THE FINANCIAL
CONDITION OF RSTAR AND GILAT.
We will need to have sufficient available capital or surplus available in order
to pay the special cash distributions, if any are required. As part of the
StarBand Latin America acquisition, Gilat has agreed that, in the event that we
are unable to make the special cash distribution to its stockholders for any
reason, Gilat will make a cash capital contribution to us to the extent
necessary for us to make the special cash distribution. We cannot give you any
assurance that at the time any special distribution is required to be made that
either we or Gilat will have sufficient resources available to fund the special
cash distribution. This is particularly true since Gilat has recently
consummated its own restructuring plan. We do not know how this plan will impact
our relationship with Gilat or its obligations under the transaction documents
for the StarBand Latin America acquisition.
NASDAQ HAS DELISTED OUR COMMON STOCK FROM THE NASDAQ NATIONAL MARKET AND HAS
SENT US NOTICES REGARDING THE POSSIBILITY OF DELISTING OUR COMMON STOCK FROM THE
NASDAQ SMALLCAP MARKET.
On February 14, 2002 we received a notice from the NASDAQ Stock Market that,
pursuant to Marketplace Rule 4450(a)(5), our stock could be delisted from the
NASDAQ National Market because the stock failed to close above a minimum bid
price of $1.00 during the preceding 30 consecutive trading days. Subsequently,
we were, in fact, delisted from the NASDAQ National Market System and began
trading on the NASDAQ SmallCap market. Our stock has failed to close above a
minimum bid price of $1.00 for an extended period of time. On August 27, 2002,
we were notified that we had until February 10, 2003, to comply with the minimum
bid price requirement. On February 3, 2003 we held a Special Meeting of our
shareholders and approved an amendment to the Final Amended and Restated
Certificate of Incorporation to effect a reverse stock spilt of our common
stock, pursuant to which ten outstanding shares would be converted into one
share of common stock. The resolution authorized the Board of Directors to
select to act anytime in the following twelve-month period to effect the reverse
stock split. Concurrent with the stockholders special meeting, NASDAQ proposed
certain regulatory changes which could render the reverse stock split
unnecessary. On March 3, 2003, we received a notice from the NASDAQ stating that
the NASDAQ Listing Qualifications Panel had determined to continue the listing
of our securities on the NASDAQ Small Cap Market, pursuant to a 90-day extension
to allow for developments in the rule-making process. As such, on or before June
3, 2003, we must demonstrate a closing bid price of at least $1.00 per share.
Should the NASDAQ rules change or should the June 3 deadline date remain
unchanged, the Board of Directors will determine whether to implement the
reverse stock split. There can, however, be no assurances that we will be in
compliance with all of the other requirements for continued listing on the Small
Capital National Market.
A reverse stock split could negatively impact the value of our stock by allowing
additional downward pressure on the stock price as our relative value becomes
greater following the reverse split. That is to say, the stock, at our new,
higher price per share has farther to fall and therefore more room for investors
to short or otherwise trade the value of the stock downward.
Effective with the open of business on March 5, 2003, our trading symbol was
again changed from RTRCE to RSTRC.
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH WOULD
IMPAIR THEIR LIQUIDITY.
If the shares of our common stock are delisted from the NASDAQ SmallCap Market,
their liquidity could be impaired. Though we may decide, among other
alternatives, to seek trading of our common stock on the Over-the-Counter
Bulletin Board, or OTC market, if our common stock is delisted, the OTC market
provides substantially less liquidity than the NASDAQ SmallCap Market, and
stocks traded on the OTC market generally trade with larger spreads between the
bid and the ask price, which may cause the trading price of our common stock to
decline.
Also, if we decide to seek trading of our common stock on the OTC market, our
common stock would be subject to rules under the Securities Exchange Act of
1934, which impose additional requirements on broker-dealers like making a
special suitability determination regarding the purchaser and receiving the
purchaser's written consent prior to the sale. This could negatively affect the
ability of broker-dealers to sell shares of our common stock and further impair
the liquidity of our common stock
IF DELISTED, OUR SHARES OF COMMON STOCK MAY BE CHARACTERIZED AS A PENNY STOCK,
WHICH MAY SEVERELY HARM THEIR LIQUIDITY.
The SEC has adopted regulations which define a penny stock to be any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, these rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
relating to the penny stock market. Disclosure is also required to be made about
current quotations for the securities and about commissions payable to both the
broker-dealer and the registered representative. Finally, broker-dealers must
send monthly statements to purchasers of penny stocks disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Although we are not currently considered a penny
stock, the foregoing penny stock restrictions could apply to our common stock if
they are deemed to be "penny stock" and our common stock may not qualify for an
exemption from the penny stock restrictions. If our common stock were subject to
the rules on penny stocks, its liquidity would be severely harmed.
21
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE AND HAS EXPERIENCED A SIGNIFICANT
DECLINE, PARTICULARLY AND MAY CONTINUE TO BE VOLATILE AND DECLINE.
The trading price of our common stock has fluctuated widely in the past and is
expected to continue to do so in the future, as a result of a number of factors,
many of which are outside our control. In addition, the stock market has
experienced extreme price and volume fluctuations that have affected the market
prices of many technology companies, particularly telecommunication and
Internet-related companies, often unrelated or disproportionate to the operating
performance of these companies. These broad market fluctuations could adversely
affect the market price of our common stock. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. Securities
class action litigation involving the company could result in substantial costs
and a diversion of our management's attention and resources.
BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS, YOU MAY LOSE THE ENTIRE AMOUNT OF
YOUR INVESTMENT.
We have never declared or paid any cash dividends on our common stock. Subject
to certain limited exceptions, we expect to retain our future earnings, if any,
for use in the operation and expansion of our business and do not anticipate
paying any cash dividends in the foreseeable future. Therefore, you will not
receive any funds without selling your shares. Pursuant to the StarBand Latin
America acquisition, Gilat has agreed not to permit us to pay or declare any
dividends or other distributions, other than the special cash distributions, for
the longer of (x) one year following the closing of the StarBand Latin America
acquisition or (y) the date on which our obligation to make the special cash
distributions has been satisfied in full or otherwise terminated in accordance
with the terms of the acquisition agreement. Further, our charter has been
amended to provide that, until such time as we have satisfied our obligation to
make the special cash distribution we are not permitted to declare or pay any
dividend or other distributions on any of our capital stock other than our
common stock and dividends payable in the form of additional shares of our
capital stock. We cannot assure you that you will receive a return on your
investment when you sell your shares of our common stock or that you will not
lose the entire amount of your investment.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED.
We expect to use our existing cash for general corporate purposes, developing
the StarBand Latin America business, as well as working capital and other
corporate expenses, including the funding of net losses from operations. We
believe that our existing capital resources will be sufficient to meet our cash
requirements for at least the next 12 months. However, our cash requirements are
large, and depend on several factors, including operating the operations
acquired due to the StarBand Latin America acquisition, cash outflows due to
lease obligations, our success in generating revenues, the growth of sales and
marketing efforts, and other factors. If capital requirements vary materially
from those currently planned, we may require additional financing sooner than
anticipated. If additional funds are raised through the issuance of equity
securities, the percentage ownership of our stockholders will be reduced, and
our stockholders may experience additional dilution, or these equity securities
may have rights, preferences or privileges senior to those of the holders of our
common stock. If additional funds were raised through the issuance of debt
securities, such securities would have rights, preferences and privileges senior
to holders of common stock and the terms of such debt could impose restrictions
on our operations. Additional financing may not be available when needed on
terms favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to deploy our business plan,
take advantage of future opportunities or respond to competitive pressures.
Given Gilat's majority ownership, all future financing decisions will be made by
Gilat.
RISKS RELATED TO REGULATORY MATTERS
GOVERNMENT REGULATION AFFECTING OUR BUSINESS STRATEGY COULD HARM OUR BUSINESS.
Laws and regulations directly applicable to communications or commerce over the
Internet are becoming more prevalent. These laws or regulations may relate to
liability for information retrieved from or transmitted over the Internet,
online content regulation, user privacy, taxation and the quality of products
and services. In addition, the courts have not yet significantly interpreted
these new laws, and consequently their applicability and reach are not defined.
Moreover, the applicability to the Internet of existing laws governing issues
such as intellectual property ownership, copyright, defamation, obscenity and
personal privacy is uncertain and developing. We may be subject to claims that
our services violate such laws.
Governmental regulations may prevent us from choosing our business partners or
restrict our activities due to the StarBand Latin America acquisition. For
example, a particular Latin American country may decide that high-speed data
networks used to provide access to the Internet should be made available
generally to Internet service providers and may require us to provide our
wholesale service to any Internet service providers that request it, including
entities that compete with us. Additionally, relevant zoning ordinances may
restrict the installation of satellite antennas, which might also reduce market
demand for our service. Governmental authorities may also increase regulation
regarding the potential radiation hazard posed by transmitting earth station
satellite antennas' emissions of radio frequency energy, which may negatively
impact our business plan and revenues.
Any new legislation or regulation, particularly in the United States of America
or in Latin America or the application of existing laws and regulations, related
to our business could impose significant restrictions, requirements or
additional costs on our business, require us to change our operating methods,
business strategy, or subject us to additional liabilities and cause the price
of our common stock to decline. In particular,
22
we cannot assure you that we will succeed in obtaining all requisite regulatory
approvals for our operations in Latin America without the imposition of
restrictions on our business, which could have the effect of imposing additional
costs on us or limiting our revenues.
BECAUSE WE OPERATE IN FOREIGN COUNTRIES, WE MAY FACE LIABILITY UNDER THE U.S.
FOREIGN CORRUPT PRACTICES ACT AND OTHER REGULATIONS.
We are subject to additional provisions of the U.S. Foreign Corrupt Practices
Act, which generally prohibits U.S. companies and their intermediaries from
bribing foreign officials for the purpose of obtaining or maintaining business.
As a result, we may be exposed to liability under this Act as a result of past
or future actions taken with or without our knowledge by our agents, strategic
partners or other intermediaries. For many of our activities, we are also
subject to the U.S. foreign export control laws.
BARRIERS TO INTERNATIONAL EXPANSION COULD LIMIT OUR FUTURE GROWTH.
Expansion of our Latin American operations due to the StarBand Latin America
acquisition will require significant management attention and financial
resources. Expenses incurred in expanding international operations might never
result in increased revenue. We face certain risks inherent in conducting
business internationally, such as:
o difficulties and costs of staffing and managing international operations;
o difficulties in recruiting and training an international staff;
o difficulties in entering into strategic relationships with companies in
international markets;
o language and cultural differences; o difficulties in collecting accounts
receivable and longer collection periods; and
o seasonal business activity in certain parts of the world.
Any of these factors could seriously harm our international operations and,
consequently, our business.
RISKS RELATED TO OUR TECHNOLOGY
WE MAY BE SUBJECT TO THIRD PARTY ABUSES OF OUR NETWORKS, SUCH AS COMPUTER
VIRUSES, SPAM OR HACKING, WHICH COULD LEAD TO INTERRUPTIONS IN OUR SERVICES AND
OTHER ADVERSE CONSEQUENCES.
The future success of our business depends on the security of our networks.
Computer viruses or problems caused by our users or other third parties, such as
the sending of excessive volumes of unsolicited bulk e-mail or spam, could lead
to interruptions, delays, or cessation in service to our users. In addition, the
sending of spam through our networks could result in third parties asserting
claims against us. We may not prevail in such claims and our failure to do so
could result in large judgments that would harm our business. Users or other
third parties could also potentially jeopardize the security of confidential
information stored in our computer systems by their inappropriate use of the
Internet, including hacking, which could cause losses to us, or our users or
deter persons from using our services. Users or third parties may also
potentially expose us to liability by identity theft, or posing as another
network user. Unauthorized access by current and former employees or others
could also potentially jeopardize the security of confidential information
stored in our computer systems and that of our users.
We expect that our users will increasingly use the Internet for commercial
transactions in the future. Any network malfunction or security breach could
cause these transactions to be delayed, not completed at all, or completed with
compromised security. Users or others may assert claims of liability against us
as a result of any failure by us to prevent these network malfunctions and
security breaches, and may deter others from using our services, which could
cause our business prospects to suffer. Although we intend to continue using
industry-standard security measures, such measures have been circumvented in the
past, and we cannot assure you that these measures will not be circumvented in
the future. In addition, to alleviate problems caused by computer viruses or
other inappropriate uses or security breaches, we may have to interrupt, delay,
or cease service to our users, which could severely harm our business.
WE ARE DEPENDENT ON LEASED SATELLITE BANDWIDTH, AND IF SUCH A BANDWIDTH IS
UNAVAILABLE TO US, WE COULD BE SUBJECTED TO SIGNIFICANT RESTRICTIONS ON OUR
BUSINESS.
We lease and sublease all of our satellite transponder capacity from satellite
providers and through Gilat. If we achieve the growth projected in our business
plan, we will need additional satellite capacity. If we are unable to procure
this capacity, we may be unable to provide service to our subscribers or the
quality of service we provide may not meet their expectations. There is no
assurance that these third parties will continue to provide the capacity and
positioning we need on reasonable terms, or at all. If we were forced to change
our satellite capacity providers, we would be forced to spend significant time
and resources finding alternative providers and re-pointing antennas. If, for
any reason, we are not able to obtain sufficient capacity on favorable terms,
our business could be significantly jeopardized.
23
The satellite industry is a highly regulated industry. In the United States,
operation and use of satellites requires licenses from the FCC. As a lessee of
satellite space, we could in the future be indirectly subject to new laws,
policies or regulations or changes in the interpretation or application of
existing laws, policies or regulations, any of which may modify the present
regulatory environment in the United States of America. While we believe that
our corporate partners will be able to obtain all U.S. and other licenses and
authorizations necessary to operate effectively, they may not continue to be
successful in doing so. Our failure to indirectly obtain some or all necessary
licenses or approvals could impose significant additional costs and restrictions
on our business, require us to change our operating methods.
UNAUTHORIZED ACCESS COULD HARM OUR BUSINESS AND CAUSE US TO LOSE EXISTING
CUSTOMERS, DETER POTENTIAL CUSTOMERS AND HARM OUR REPUTATION.
Unauthorized access could potentially jeopardize the security of confidential
information stored in the computer systems of our customers, which might cause
our subscribers to bring liability claims against us and also might deter
potential customers from using our services. Since our services allow end users
to be connected to the Internet at all times, unauthorized users may have a
greater ability to access information stored in end users' computer systems.
Always-on Internet services may give unauthorized users, or hackers, more and
longer opportunities to break into end users' computer or access,
misappropriate, destroy or otherwise alter data accessed through the Internet.
WE MAY BE SUBJECT TO LIABILITY FOR INFORMATION RETRIEVED AND REPLICATED BY MEANS
OF OUR SERVICES.
Because our customers' end users will download and redistribute material and we
may replicate material or store it on our own network devices in connection with
our services, claims may be made against us for defamation, or other theories
based on the nature and content of such materials. These types of claims have
been brought, and sometimes successfully litigated, against online service
providers in the past. Although we carry general liability insurance, our
insurance may not cover potential claims of these types, or may not be adequate
to indemnify us for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of insurance coverage
could result in a substantial reduction in our revenue and losses over a
significant period of time.
WE ARE HEAVILY DEPENDENT ON OUR RELATIONSHIP WITH GILAT AND WE MAY BE
SIGNIFICANTLY HARMED IF GILAT IS UNABLE OR FAILS TO CONTINUE TO DEVELOP AND SELL
US THIS TECHNOLOGY AND RELATED EQUIPMENT.
We will depend on Gilat and its corporate affiliates and suppliers for the
satellite technology used to deliver our products and services. We have an
agreement with Gilat pursuant to which, if certain conditions are met, Gilat
will serve as our exclusive provider of the equipment, technology and services
that we will use in our Latin American operations. If we are not able to perform
our obligations under our agreements with Gilat, or if Gilat is unable or fails
to continue to sell us this equipment and technology under the current terms of
our agreement, our ability to operate our Latin American operations would be
severely harmed.
Gilat's principal offices, development facilities and manufacturing and research
are located in the State of Israel. Gilat is directly affected by the political,
economic and military conditions in Israel. Gilat's production is dependent upon
components imported from outside of Israel and any major hostilities involving
Israel or the interruption or curtailment of trade between Israel and its
present trading partners could significantly harm Gilat's ability to meet its
supply obligations to us. Recently, Gilat announced a restructuring plan with
its major banking creditor and bondholders. The impact of this plan on our
relationship with Gilat is unclear. If Gilat does not meet our demand and
quality standards for its products, for any reason, or if the terms of our
agreements with Gilat change and we decide to pursue other strategic partners,
it is unlikely that we would be able to find a replacement supplier without
significant harm to our business operations or relationship with Gilat.
Our future growth depends on a number of technological advances Gilat expects to
attain over its existing satellite technology and which Gilat has agreed to
license to us, such as the development of software that we expect will enable us
to optimize the allocation of end users across our leased satellite capacity and
reduce our satellite capacity costs per end user. Furthermore, Gilat has
substantial business operations and opportunities apart from our business, and
Gilat may develop different business objectives than ours. As a result,
situations may arise in which Gilat's interests diverge from rStar or our other
stockholders. For example, we expect to be one of Gilat's largest customers for
their technology, equipment and software. We will seek to purchase from Gilat
technology, products, software and equipment necessary to the operations of
StarBand Latin America at prices favorable to us, but Gilat will seek to sell
those items to us at prices favorable to them. If Gilat does not meet our
expectations regarding these technological advances, our ability to successfully
operate our business, and our financial condition and profitability, would be
harmed.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY.
The market for our current products and services is characterized by rapidly
changing technologies, frequent new service introductions and evolving industry
standards. Our future success will depend on our ability to adapt to rapidly
changing technologies by continually improving the performance, features and
reliability of our networks. We may experience difficulties that could delay or
prevent the successful development, introduction or marketing of new features,
content or network services. In addition, our new enhancements must meet the
requirements of our current and prospective sponsors and subscribers and must
achieve significant market acceptance. We could also incur substantial costs if
we needed to modify our service or infrastructures to adapt to these changes.
OUR DEPENDENCE ON THIRD PARTIES FOR OUR INTELLECTUAL PROPERTY PUTS US AT RISK IF
THIS INTELLECTUAL PROPERTY IS NOT PROPERLY PROTECTED OR INFRINGES UPON THE
RIGHTS OF OTHERS.
24
We rely exclusively on third parties like Gilat and Spacenet for most of the
intellectual property used in our business. If Gilat or any of our other
suppliers fails to adequately protect their intellectual property or is found to
be infringing on the intellectual property rights of other parties, our ability
to operate our business as expected may, in turn, be harmed.
Infringement claims could materially harm our business and financial condition.
From time to time, we may receive notice of claims of infringement of third
parties' proprietary rights. The fields of telecommunications and Internet
communications are filled with domestic and international patents, both pending
and issued. We may unknowingly infringe such a patent. We may be exposed to
future litigation based on claims that our products infringe the intellectual
property rights of others, especially patent rights. Someone, including a
competitor, might file a suit with little merit, in order to harm us
commercially, to force us to re-allocate resources to defending such a claim, or
extract a large settlement. In addition, our employees might utilize proprietary
and trade secret information from their former employers without our knowledge,
even though we prohibit these practices. Any litigation, with or without merit,
could be time consuming to defend, result in high litigation costs, divert our
management's attention and resources or cause us to delay deployment of related
technology. A jury or judge may decide against us even if we had not in fact
infringed. If we lose or are forced to settle, we could be required to remove or
replace allegedly infringing technology, to develop non-infringing technology or
to enter into royalty or licensing arrangements. These royalty or licensing
arrangements, if required, may not be available on terms acceptable to us, or at
all.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
The risk associated with fluctuating interest expense is limited, however, to
the expense related to those debt instruments and credit facilities that are
tied to market rates. We do not use derivative financial instruments in our
investment portfolio. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in high-credit money market funds. A
hypothetical increase or decrease in market interest rates by 10% from the
market interest rates at March 31, 2003 would not cause the fair value of our
cash and cash equivalents or the interest expense paid with respect to our
outstanding debt instruments to change by a material amount. Declines in
interest rates over time will, however, reduce our interest income while
increases in interest rates over time will increase our interest expense. We are
also exposed to foreign currency risk as the result of our contracts in Latin
America. We attempt to mitigate such risk by entering into contracts denominated
in US dollars, however this is not always possible and as such we are exposed to
changing exchange rates primarily in Peru, Colombia and Brazil.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, an evaluation was
carried out, under the supervision and with the participation of our management,
including our Chief Executive Officer and Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based
upon that evaluation, the Chief Executive Officer and Principal Financial
Officer concluded that our disclosure controls and procedures were effective, in
all material respects, with respect to the recording, processing, summarizing
and reporting, within the time periods specified in the SEC's rules and forms,
of information to be required to be disclosed by us in reports that we file or
submit under the Exchange Act.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation, nor were there any significant deficiencies or material weaknesses
in our internal controls requiring corrective actions.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about March 3, 2003, Comerica Bank - California, located in California,
brought an action against us in the Superior Court for the County of Los Angeles
for breach of contract in connection with an equipment lease agreement. The case
has been settlement including a dismissal with prejudice of the lawsuit.
In March 2001 rStar filed an action against On Technology Corporation (OTC) and
subsequently OTC filed a counter claim. In May 2003 the parties agreed to settle
these claims and the settlement is currently being documented and is expected to
include a dismissal with prejudice of the law suit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Modification of Constituent Instrument
Not applicable.
(b) Change in Rights
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Not applicable.
(c) Issuance of Securities The Company did not have any sales of unregistered
securities during the quarter.
(d) Use of Proceeds Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 3, 2003, we held a special meeting of our shareholders who voted and
approved an amendment to the Fourth Amended and Restated Certificate of
Incorporation to effect a reverse stock split of our Common Stock, pursuant to
which ten outstanding shares would be converted into on share of Common Stock.
The resolution authorized the Board of Director to act anytime in the following
twelve-month period to implement the reverse stock split. 88,832,347 votes were
cast in favor of the reverse stock split, 2,160 votes were cast against the
reverse stock split and no votes abstained with respect to the reverse stock
split.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
Exhibit 99.01-Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.02-Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
a. We filed a Current Report on Form 8-K dated February 5, 2003 announcing
that our stockholders had approved a 10-for-1 reverse stock split to be
implemented at the approval of the board.
b. We filed a Current Report on Form 8-K dated January 14, 2003 announcing
that our board had authorized us to seek shareholders' approval for a 10-for-1
reverse stock split of our common stock.
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SIGNATURES
Pursuant to the requirements 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.
RSTAR CORPORATION
(Registrant)
By: /s/ SAMER SALAMEH
Samer Salameh
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ Julia M. Decker
Julia M. Decker
CONTROLLER
(PRINCIPAL FINANCIAL OFFICER)
Date: May 20 , 2003
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CERTIFICATIONS
I, certify that:
1. I have reviewed this quarterly report on Form 10-Q of March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ SAMER SALAMEH Date May 20 , 2003
Samer Salameh,
Chief Executive Officer
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I, certify that:
1. I have reviewed this quarterly report on Form 10-Q of March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ JULIA M.DECKER Date May 20, 2003
Julia M Decker
Controller (Principal Financial Officer)
29