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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filed as defined
in Rub 12b-2 of the Act. Yes [ ] No [X]
The number of shares of the issuer's Common Stock outstanding as of October 31,
2003 was 104,529,864.
1
INDEX
PART I -- FINANCIAL INFORMATION
- -------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 CONTROLS AND PROCEDURES
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
2
RSTAR CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RSTAR CORPORATION AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 3,727 $ 8,163
Restricted cash 3,450 1,416
Accounts receivables, net 17,717 15,542
Tax receivable 806 546
Supplier advances 2,652 83
Other accounts receivable and prepaid expenses 1,844 2,793
Inventory 11,221 8,842
------------- -------------
Total current assets 41,417 37,385
Long-term restricted cash 2,316 3,659
Long-term tax receivable 2,179 2,799
Long-term receivables 20,946 9,028
Property and equipment, net 13,570 15,673
Other assets, net 357 514
------------- -------------
Total assets $ 80,785 $ 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, share data)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank credit $ 1,802 $ 2,315
Current portion of capital lease obligations 1,542 1,809
Accounts payable 11,200 7,988
Due to related parties 23,757 23,480
Deferred revenues 2,224 1,823
Taxes payable 1,781 30
Accrued expenses and other liabilities 5,482 5,409
------------- ------------
Total current liabilities 47,788 42,854
Long-term liabilities:
Other long-term liabilities 1,479 1,893
Long-term deferred revenue 3,172 1,614
Long-term capital lease obligations 2,352 3,415
Long-term deferred tax 1,267 --
Liability for distribution to minority shareholders 5,000 5,000
------------- ------------
Total long term liabilities 13,270 11,922
Stockholders' equity:
Common stock, $0.01 par value authorized shares- 200,000,000 issued and
outstanding shares 104,529,864 at September 30, 2003 and December 31, 2002 1,045 1,045
Additional Paid-in-Capital 249,479 248,227
Deferred stock compensation (550) -
Notes receivable from stockholders - (312)
Treasury stock, at cost (Common 2,526,315) (9,979) (9,979)
Accumulated other comprehensive loss (99) (198)
Accumulated deficit (220,169) (224,501)
------------- ------------
Total stockholders' equity 19,727 14,282
------------- ------------
Total liabilities and stockholders' equity $ 80,785 $ 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, except dollar per share data)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2003 2002 2003 2002
Unaudited
----------------------------------------------------------------------
Revenues:
Products $1,115 2,998 $19,117 8,903
Services *3,763 4,615 *16,814 14,771
------------ ----------------- -------------- ---------------
Total revenues 4,878 7,613 35,931 23,674
Cost of products sold and services:
Products 455 1,323 7,379 4,297
Services 5,741 4,905 14,441 18,105
------------ ----------------- -------------- ---------------
Total cost of products sold and services
revenues: 6,196 6,228 21,820 22,402
------------ ----------------- -------------- ---------------
Gross profit (loss) (1,318) 1,385 14,111 1,272
------------ ----------------- -------------- ---------------
Operating expenses
Selling, marketing, general and administrative 3,665 5,826 8,437 13,312
------------ ----------------- -------------- ---------------
Operating income (loss) (4,983) (4,441) 5,674 (12,040)
Financial income (expenses), net 553 (155) 237 (727)
Other income (expense) 813 (455) 872 (406)
------------ ----------------- -------------- ---------------
Income (loss) before taxes on income (3,617) (5,051) 6,783 (13,173)
Taxes (benefit) on income (8) 15 2,449 (337)
------------ ----------------- -------------- ---------------
Income (loss) after taxes (benefit) on income (3,609) (5,066) 4,334 (12,836)
Loss from discontinuing operations -- (227) -- (1,666)
------------ ----------------- -------------- ---------------
Net income (loss) $(3,609) $(5,293) $4,334 $(14,502)
============ ================= ============== ===============
Basic and diluted income (loss) per common share:
from continuing operations $(0.03) $(0.04) $0.04 $(0.12)
from discontinued operations -- 0.00 -- (0.01)
------------ ----------------- -------------- ---------------
Net income (loss) per common share $(0.03) $(0.04) $0.04 $(0.13)
============ ================= ============== ===============
Weighted average number of shares outstanding
used in computing net income (loss) per share (in
thousands)
Basic: 104,530 105,568 104,530 106,460
============ ================= ============== ===============
Diluted: 104,530 105,568 104,745 106,460
============ ================= ============== ===============
* Including revenues from related parties in the amount of $27 and $6,768 for the three and nine months ended September 30, 2003
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
RSTAR CORPORATION AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
NINE MONTHS
ENDED SEPTEMBER 30
2003 2002
---------------- ---------------
Cash flows from operating activities:
-------------------------------------
Net income (loss) $ 4,334 $ (14,502)
Less: loss from discontinued operations -- 1,666
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation 3,097 4,693
Amortization of deferred stock compensation 692 132
Loss on sale of property and equipment - 406
Impairment of shareholder loan 312 -
Decrease (increase) in deferred income taxes, net 1,956 (195)
Decrease (increase) in trade receivables (2,494) 724
Decrease (increase) in inventories (2,345) 3,330
Increase in other accounts receivable and prepaid expenses and long-
term receivable (12,336) (4,345)
Increase (decrease) in account payables 1,064 (3,013)
Increase (decrease) in deferred revenue 1,959 (670)
Increase (decrease) in related parties 752 5,761
Increase (decrease) in accrued expenses (713) (4,166)
Increase (decrease) in other accounts payable and other long-term liabilities 1,160 (633)
---------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FROM CONTINUING ACTIVITIES (2,562) (10,812)
NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS -- (1,666)
---------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2.562) (12,478)
Cash flows from investing activities:
-------------------------------------
Purchase of property and equipment (1,757) (1,440)
Acquisition of net assets of parent of Gilat Colombia S.A. E.S.P. and Gilat to
Home Peru S.A.(a) 338 -
Other investments (33) -
Restricted cash, net 851 577
---------------- ---------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (601) (863)
Cash flows from financing activities:
-------------------------------------
Short term bank credit, net 26 (638)
Proceeds from exercise of stock options - 31
Repurchase of common stock - (9,979)
Proceeds (Repayment) of long term debt, net (539) 2,458
Payments on capital lease obligations (785) (1,969)
---------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (1,298) (10,097)
Effects of exchange rate changes on cash 25 (135)
---------------- ---------------
Decrease in cash and cash equivalents (4,436) (23,573)
Cash and cash equivalents at beginning of period 8,163 37,334
---------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,727 $ 13,761
================ ===============
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
RSTAR CORPORATION AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
NINE MONTHS
ENDED SEPTEMBER 30
2003 2002
---------------- ---------------
Supplemental Disclosures:
Cash paid for interest $ 718 $ 1,324
Non cash transactions:
Conversion of related parties debt into equity $ - $ 13,033
(a) Assets acquired and liabilities assumed at the date of
acquisition of the parent company of Gilat Colombia S.A.
E.S.P. and Gilat to Home Peru S.A. were as follows:
Working capital (excluding cash and cash equivalents) $ (2,011)
Due to related party 2,349
----------------
$ 338
================
7
RSTAR CORPORATION AND ITS SUBSIDARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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.
rStar Corporation and its subsidiaries the (the "Company" or "rStar"), 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 and nine months ended September 30, 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 in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002 (File No. 000-27029). Operating results for the
three and nine months ended September 30, 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 acquired StarBand Latin America
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.
("StarBand Latin America"), 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. On September 30, 2003 the parent entity of certain
subsidiaries was transferred to rStar in accordance with the Closing agreement.
The primary assets of the entity were the investments in those subsidiaries.
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 had achieved such common
control. As such no goodwill resulted from the transaction 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 Latin America as of and for the year
ended December 31, 2001 and for the quarters ended September 30, 2002 since
Gilat achieved common control over StarBand Latin America and rStar which was in
January 2001.
As part of the second amended and restated acquisition agreement Gilat granted
rStar's stockholders the right to receive a certain cash distribution from rStar
(the "Special Distribution"). In accordance with the Agreement, in the event
that the StarBand Latin America Business ("SLA Business"), as defined below,
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 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 SLA Business' net income. Specifically,
(i) 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, (ii) 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, (iii) 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, the Special Distribution shall be zero,
(iv) 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, (v) 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, and (vi) if the net
income for the SLA Business for the period from July 1, 2003 through June 30,
2004 is greater than $ 16.5 million, the Special Distribution shall be zero.
Gilat guarantees the payment of the Special Distribution. As for the year ended
June 30, 2003, consolidated net income was approximately $3.1 million. No
extraordinary items of gain or loss existed and no amortization of goodwill and
other intangible assets existed. As the Net Applicable Income for the year ended
June 30, 2003 was above $ 2.5 million, no provision was needed for the first
distribution. Notwithstanding, rStar has provided in its financial statements a
$ 5 million provision for the second distribution as of December 31, 2002 as
management's current assessment is that it is probable that the special
distribution will be paid in 2004. However, if rStar is successful in growing
its business and increasing its net income during 2003 and 2004, the special
distribution may not need to be paid in part or at all.
8
According to the Certificate of Incorporation of rStar, the SLA Business means
the business of (a) implementing, operating and marketing broadband Internet
access services and voice services to consumers and small office and home office
subscribers in Latin America; (b) providing in Latin America a bundled product
with direct-to-home television services using a single satellite dish; and (c)
providing in Latin America such new technologies and products relating to the
foregoing as Gilat Satellite Networks Ltd. may in the future develop or make
available to StarBand Communications Inc., which shall be offered to the
Corporation upon commercially reasonable terms via a two-way satellite-based
network, together with the related assets, licenses, rights, management,
employees experience and know-how, in each case, as conducted by the Corporation
either directly or through one or more direct or indirect subsidiaries,
including, without limitation, StarBand Latin America (Holland) B.V. ("SLA').
rStar's management has determined that the following operations are included in
the SLA Business: (i) StarBand Latin America (Holland) B.V (ii) Gilat Colombia
S.A. E.S.P (iii) Gilat To Home Peru S.A. (iv) Gilat To Home Brazil Holding Ltda.
(v) Gilat To Home Brazil Ltda (vi) Gilat-To-Home Florida Inc. and (vii)
intercompany agreements to provide services for subsidiaries of Gilat Satellite
Networks Ltd. ("Gilat"). In addition, certain expenses were allocated from rStar
to SLA Business. See also Note 1 - Related parties transactions.
The Applicable Net Income used in connection with the Special Distribution as
stated above is defined as follows:
Consolidated net income (excluding extraordinary items of gain or loss and
before the amortization of goodwill and other intangible assets) generated
during the preceding 12-month period, by the SLA Business (as defined above), in
each case: as determined in accordance with generally accepted accounting
principles in the United States of America as in effect from time to time
consistently applied.
RELATED PARTY TRANSACTIONS
The Company has debt obligations to Gilat and various Gilat controlled entities.
These amounts include certain assets and liabilities (described below) that
Gilat was unable to transfer to rStar in the StarBand Latin America acquisition
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 to amounts due to related parties. Debts in excess of excluded assets
have been contributed to equity. Starband Latin America Business has recorded a
related party debt equal to the net of assets and liabilities due back to Gilat.
These amounts are expected to be eliminated either through payment with existing
cash or upon collection of accounts receivables or liquidation of other assets
which are due to Gilat, once the assets due back to Gilat have been exhausted an
agreement for the repayment of this related party debt will be established.
Gilat and its affiliates charged rStar and its subsidiaries for equipment, space
segment, management services and related costs, totaling $2.9 million and $2.0
million for the three months ended September 30, 2003 and 2002, respectively.
During the nine months ended September 30, 2003 and 2002 such charges amounted
to $ 7.5 million and $ 7.8 million, respectively.
Additionally, the Company entered into following related party agreements:
o a representative agreement with a Gilat affiliate pursuant to which
Gilat compensates the Company for services supplied to Gilat
affiliates, which were required for Gilat to be award government bids
in Colombia. For the services received beginning in August 2002, Gilat
has paid a commission equal to 3.5% of the gross proceeds of the bids.
The total amount recognized as service revenues for the nine month
ended September 30, 2003 was $2.2 million.
o a representative agreement with a Gilat affiliate pursuant to which
Gilat compensates the Company for services supplied to a Gilat
affiliate, which were required for Gilat to be awarded a government
bid in Brazil. For the services received beginning in November 2002,
Gilat has paid a commission equal to 3.5% of the gross proceeds of the
bid. The total amount recognized as service revenues for the nine
month ended September 30, 2003 was $0.9 million.
o a software license agreement with a Gilat affiliate pursuant to which
and the Company, according to which, the Company sold two copies of
the licensed software to Gilat for subleasing to Gilat's Colombian
subsidiaries. The total amount recognized for the nine month ended
September 30, 2003 was $0.6 million.
o engineering, procurement and construction management agreements with
two Gilat affiliates pursuant to which the Company will provide
services to the Gilat affiliates. The engineering, procurement and
construction management services relating to the implementation and
operation of voice and data services for the execution of the Gilat
government projects in Colombia. The contracts are for a total of $4.7
million. The total amount recognized for the nine month ended
September 2003 was $3.1 million.
o a settlement agreement and general release with a Gilat affiliate
according to which Gilat reimbursed the Company for disputes that
arose with regard to certain assets transferred by Gilat to the
Company in the closing agreement which the Company had incurred
unexpected expenses. The total amount reimbursed the nine month ended
September 30, 2003 was $2.0 million.
9
NOTE 2: MAJOR CUSTOMERS AND SUPPLIERS
A significant portion of the Company's revenues comes from services provided to
Gilat (see Note 1 "Related Party Transactions") in relation to a small number of
contracts with foreign governments in Latin America. Revenues from the
government of Peru amounted to $504,000 and $ 6.5 million in the three months
ended September 30, 2003 and 2002, respectively. For the nine months ended
September 30, 2003 such revenues amounted to $ 9.4 million and $ 16.0 million,
respectively. These services, much like the contracts awarded to Gilat are
awarded on a bid-by-bid basis and, as such, are considered non-recurring. See
Note 5 "Customer and Geographic Information" for details regarding major
customers. Revenues from StarOne which consist of sales of equipment under
long-term capital leases was $0 for the three months ended September 30, 2003
and 2002 and $9.8 million and $0 for the nine months ended September 30, 2003
and 2002, respectively. Revenues from Gilat affiliates amounted to $27,000 and
$6.8million in the three months and nine months ended September 30, 2003,
respectively, and $0 for the three and nine months ended September 30, 2002.
These services are in connection with contracts awarded to Gilat on a bid
- -by-bid basis and, as such are considered non-recurring. See Note 1, "Related
Party Transactions".
The Company depends on a limited number of suppliers, out of which the major one
is Gilat, a related party, for the equipment it sells and for certain services.
If Gilat fails to deliver the necessary equipment and services, the Company may
be required to seek an alternative source 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 Company's results of operations and
cash position. See Note 1"Related Party 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 10-K for the year ended December 31, 2002
(File No. 000-27029) are those that depend most heavily on these judgments and
estimates. As of September 30, 2003, there have been no material changes to any
of the critical accounting policies contained therein.
b. Impact of recently issued accounting standards:
In November 2002, the EITF reached a consensus on Issue 00-21, addressing how to
account for arrangements that involve the delivery or performance of multiple
products, services, and/or rights to use assets. Revenue arrangements with
multiple deliverables are divided into separate units of accounting if the
deliverables in the arrangement meet the following criteria: (1) the delivered
item has value to the customer on a standalone basis; (2) there is objective and
reliable evidence of the fair value of undelivered items; and (3) delivery of
any undelivered item is probable. Arrangement consideration should be allocated
among the separate units of accounting based on their relative fair values, with
the amount allocated to the delivered item being limited to the amount that is
not contingent on the delivery of additional items or meeting other specified
performance conditions. The final consensus will be applicable to agreements
entered into in fiscal periods beginning after June 15, 2003 with early adoption
permitted. The provisions of this Consensus are not expected to have a
significant effect on the Company's financial position or operating results.
NOTE 4: SHAREHOLDERS' EQUITY
a. Stock options plans
The following table summarizes information about stock
options outstanding as of September 30, 2003:
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
------------------ ------------------
Outstanding at December 31, 2002 2,086,788 $ 0.27
Issued 3,622,306 $ 0.18
Forfeited (269,277) $ 0.15
------------------ ------------------
Outstanding at September 30, 2003 (unaudited) 5,439,867 $ 0.23
================== ==================
In January 2003 the Company granted options to four non-Gilat related
and non-employee directors. Each such
10
director was granted 200,000 stock options, to vest annually over a
four-year period so long as such optionee remains a director of the
Company. The option price is $ 0.26 per share, which is equal to the
fair market value on the date of the grant.
In August 2003, the compensation committee approved the grant of 2.8
million stock options to the CEO in accordance with the terms in his
employment agreement. The options vest monthly over a four-year period
beginning on the date of his employment, November 4, 2002. The
exercise price for the options p is $0.16. The options were treated
under APB 25 as variable plan and compensation expense of $692,000 has
been recorded in the three months and nine months ended September 30,
2003 using the accelerated method of accounting for incentive stock
options.
Total deferred compensation $ 1,241,815
Amortization of deferred compensation in the nine month
period ended September 30, 2003 691,474
-------------
Unamortized deferred compensation $ 550,341
=============
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 1.09 and 0.82 for 2003
and 2002, respectively; and a weighted-average expected life of the
option of 3.5 years for 2003 and 2002. Using SFAS No. 123 has no
material effect on any of the periods presented.
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, "Basis of Presentations" 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").
a. 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 NINE MONTHS
Dollars in thousands ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------------------------------------------------
2003 2002 2003 2002
------------------ ------------- ----------- ------------
Peru 2,472 6,463 15,201 18,487
Brazil 561 553 10,253 3,279
Colombia 1,818 597 3,709 1,908
Gilat affiliates in Latin America 27 - 6,768 -
------------------ ------------- ----------- ------------
$4,878 $7,613 $35,931 $23,674
================== ============= =========== ============
11
b. Revenues from single customers, which exceed 10% of total revenues in
the reported period, as a percentage of total revenue:
Dollars in thousands THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------------------
2003 2002 2003 2002
------------------ ------------ ------------ --------------
StarOne 561 140 10,253 3,291
Government of Peru 504 6,478 9,370 15,956
Gilat affiliates 27 -- 6,768 --
------------------ ------------ ------------ --------------
$1,092 $6,618 $26,391 $19,247
================== ============ ============ ==============
c. The Group's long-lived assets are located in the following countries:
Dollars in thousands SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- --------------
Peru $5,766 $6,918
United States 4,260 5,335
Colombia 3,351 3,341
Brazil 193 79
--------------- --------------
$13,570 $15,673
=============== ==============
NOTE 6: NET INCOME LOSS PER SHARE
Basic loss per share is computed based on the weighted average number of shares
of common stock outstanding during each period. Diluted loss per share is
computed based on the weighted average number of shares of common stock
outstanding during each period, plus dilutive potential shares of common stock
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):
12
Dollars in thousands, per share data THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) as reported (3,609) (5,293) 4,334 (14,502)
========= ========= ========= =========
Earnings (losses) per share:
Basic $(0.03) $(0.04) $0.04 $(0.13)
Diluted $(0.03) $(0.04) $0.04 $(0.13)
Net income from continuing operations $(3,609) $(5,066) $4,334 $(12,836)
========= ========= ========= =========
Earnings (losses) per share from continuing
operations:
Basic $(0.03) $(0.04) $0.04 $(0.12)
Diluted $(0.03) $(0.04) $0.04 $(0.12)
Net Loss from discontinued operations - (227) - (1,666)
Losses per share from discontinued operations
Basic $0.00 $0.00 $0.00 $(0.01)
Diluted $0.00 $0.00 $0.00 $(0.01)
Weighted average number of shares of Common Stock
outstanding during the period used to compute basic
net earnings per share 104,530 105,568 104,530 106,460
========= ========= ========= =========
Incremental shares attributable to exercise of
outstanding options - - 215 -
Weighted average number of shares of Common Stock
outstanding during the period used to compute
diluted net earnings per share 104,530 105,568 104,745 106,460
========= ========= ========= =========
For the three months ended September 30, 2003 and the three and nine months
ended September 30, 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. For the nine
months ended September 30, 2003 we have excluded all convertible preferred
stock, warrants to purchase common and preferred convertible stock. We have
included 1,667,015stock options that were outstanding and exercisable with an
average exercise price of $0.32
14
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 CONTINUED INTEGRATION OF THE STARBAND LATIN AMERICAN BUSINESS,
AMONG OTHER RISKS.
o THE LAUNCH AND CONSUMMATION OF A TENDER OFFER FOR OUR OUTSTANDING
COMMON STOCK BY GILAT OR A DECISION BY GILAT TO ELIMINATE THE
PUBLIC INTEREST IN THE COMPANY THROUGH OTHER MEANS.
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, the Company 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 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.
In accordance with the terms of the acquisition agreement between Gilat
and rStar for the StarBand Latin America acquisition, 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. On September 30, 2003 the parent entity of certain
subsidiaries was transferred to rStar in accordance with the Closing agreement.
Under the acquisition agreement, StarBand Latin America entered into a
master services and supply agreement with Gilat pursuant to which we receive
specified services and products from Gilat necessary to conduct our business in
Latin America. See "Master Service and Supply Agreement" incorporated by
reference in the Company's Annual Report of Form 10-K for the year ended
December 31, 2002.
In connection with our change in business focus, we underwent
significant reductions-in-force during 2002. These actions, combined with
attrition, reduced our headcount approximately 85% from 120 employees at January
1, 2002 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 $2.2 million for the nine months ended September 30, 2002. These
costs have been charged to operations. Also in connection with the StarBand
Latin America acquisition, we obtained through subsidiary companies of StarBand
Latin America approximately 115 employees, most of whom are located in Latin
America and have increased our head count to approximately 180 employees as of
October 31, 2003. In addition, Gilat has provided headquarters personnel during
the transition period.
15
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. Gross receivable from leases under capital lease at September 30,
2003 was $ 12.4 million and a net present value of $9.7. The average interest
used to discount the leases is 10.8%.
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.
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.
16
Inventory:
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 and nine months ended September 30, 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 Report on 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 NINE MONTHS
SEPTEMBER 30, INCREASE ENDED SEPTEMBER 30, INCREASE
UNAUDITED (DECREASE) UNAUDITED (DECREASE)
2003 2002 PERCENTAGE 2003 2002 PERCENTAGE
Revenues:
Products 1,115 2,998 (63%) $19,117 $8,903 115%
Services 3,763 4,615 (18%) 16,814 14,771 14%
--------- --------- --------- ---------- ---------- ----------
Total revenues 4,878 7,613 (36%) 35,931 23,674 52%
Cost of revenues:
Products 455 1,323 (66%) 7,379 4,297 72%
Services 5,741 4,905 17% 14,441 18,105 (20%)
--------- --------- --------- ---------- ---------- ----------
Total cost of revenues: 6,196 6,228 (0.5%) 21,820 22,402 (2.6%)
Gross profit (loss) (1,318) 1,385 (195%) 14,111 1,272 1009%
--------- --------- --------- ---------- ---------- ----------
Operating Expenses
Selling, marketing, general and administrative 3,665 5,826 (37%) 8,437 13,312 (37%)
--------- --------- --------- ---------- ---------- ----------
Operating income (loss) (4,983) (4,441) (12%) 5,674 (12,040) 147%
Financial income (expenses), net 553 (155) 457% 237 (727) 133%
Other income (loss) 813 (455) 279% 872 (406) 315%
--------- --------- --------- ---------- ---------- ----------
Income (loss) before taxes on income (3,617) (5,051) (28%) 6,783 (13,173) 151%
Taxes (benefit) on income (8) 15 (153%) 2,449 (337) 827%
--------- --------- --------- ---------- ---------- ----------
Income (loss) after taxes on income (3,609) (5,066) 29% 4,334 (12,836) 134%
Loss from discontinuing operations - (227) 100% - (1,666) 100%
--------- --------- --------- ---------- ---------- ----------
Net income (loss) (3,609) (5,293) 32% $4,334 $(14,502) 130%
========= ========= ========= ========== ========== ==========
Basic and diluted income (loss) per common
share:
from continuing operations $(0.03) $(0.04) 25% $0.04 $(0.12) 133%
from discontinued operations - 0.00 - (0.01) 100%
--------- --------- --------- ---------- ---------- ----------
Net income (loss) per common share $(0.03) (0.04) 25% $0.04 $(0.13) 131%
Weighted average number of shares outstanding
used in computing basic net income (loss) per
share 104,530 105,568 (2)% 104,530 106,460 (1)%
========= ========= ========= ========== ========== ==========
Weighted average number of shares outstanding
used in computing diluted net income (loss) per
share 104,530 105,568 (2)% 104,745 106,460 (1)%
========= ========= ========= ========== ========== ==========
16
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
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. For the nine months ended September 30, 2003, we were not awarded
any new projects, however Gilat has been awarded certain projects in Latin
America in 2002 and 2003 and we have provided and continue to provide certain
services under such contracts (See Note 1, "Related Party Transactions".
PRODUCTS
Revenues from product sales decreased $1.9 million (63%) from $3.0
million for the three months ended September 30, 2002 to $1.1 million for the
three months ended September 30, 2003. This decrease in revenue was attributable
mainly to the completion of the implementation phase of the Peru projects in the
six-month period ended June 30, 2003. The current sales for the three months
ended September 30, 2003 relates primarily to the completion of the installation
of equipment in a government project in Colombia.
Revenues from product sales increased $10.2 million (115%) from $8.9
million for the nine months ended September 30, 2002 to $19.1 million for the
nine months ended September 30, 2003. This increase in revenue was attributable
mainly to the sale of equipment totaling $9.8 million to StarOne in Brazil under
long-term capital leases and the completion of the implementation phase of the
Peru projects during the nine months ended September 30, 2003. As the Peru
implementation was completed during the six months ended June 30, 2003 and we
did not win new bids in 2003. We expect revenue will continue to decline related
to bids.
SERVICES
Revenues from services decreased $852,000 (18%) from $4.6 million for
the three months ended September 30, 2002 to $3.8 million for the three months
ended September 30, 2003. The decrease is a result of the decrease in
installation services in Peru provided in 2002 off set by increases in network
traffic in 2003. Revenues from services increased $2.1 million (14%) from $14.7
million for the nine months ended September 30, 2002 to $16.8 million for the
nine months ended September 30, 2003. This increase is primarily the result of
services provided to Gilat (see Note 1, "Related Party Transactions") and an
increase in network traffic off set by decreases in installation revenue in
Peru.
COST OF REVENUES
Cost of revenues related to products consists of the cost of equipment
for the government projects noted above and for other third parties. 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 of 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 September 30, 2003, cost of revenues related
to products decreased $868,000 66% from $1.3 million for the three months ended
September 30, 2002 to $455,000 for the three months ended September 30, 2003.
This decrease was attributable to a corresponding decrease in product sales
revenue in 2003. The margin on product sales for the three months ended
September 30, 2003 is consistent with the three months ended September 30, 2002.
For the nine months ended September 30, 2003, cost of revenues related
to products increased $3.1 million (72%) from $4.3 million for the nine months
ended September 30, 2002 to $7.4 million for the nine months ended September 30,
2003. The increase is attributable to a corresponding increase in product sales
revenue. The margin on product sales is higher in 2003, because margins vary
based on the type of customer.
17
SERVICES
For the three months ended September 30, 2003, cost of revenues from
services increased $836,000 (17%) from $4.9 million for the three months ended
September 30, 2002 to $5.7 million for the three months ended September 30,
2003. The cost of services increased as a result of a higher cost of maintaining
the entire installed network, an increase in insurance costs and other
maintenance costs. Other than installation services, cost of revenues consisted
primarily of operational expenses for our existing networks in Colombia and
Peru.
For the nine months ended September 30, 2003, cost of revenues from
services decreased $3.7 million (20%) from $18.1 million for the nine months
ended September 30, 2002 to $14.4 million for the nine months ended September
30, 2003. The decrease is related to the additional revenues related to services
provided to Gilat with lower cost of services compared to the prior periods and
therefore higher margins on those services. 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 September, 2003
and 2002 were approximately $3.7 million and $5.8 million, respectively. The
2002 amount includes the cost of severance for the prior management of rStar
(before the Gilat acquisition in August 2002) of $1.7 million as well as other
costs associated with these personnel. During the nine months ended September
30, 2003, selling, marketing, general and administrative decreased $4.9 million
(37%) from $8.4 million for the nine months ended September 30, 2003 to $13.3
million for the nine months ended September 30, 2002. The nine months ended
September 30, 2002 included $2.2 million of severance for rStar employees that
were terminated after the acquisition and other employee related costs.
Decreases were offset by an increase in compensation expense of $692,000 for the
three months ended September 30, 2003 related to stock options issued to the CEO
in August of 2003.
FINANCIAL INCOME (EXPENSES), NET
Financial expenses include interest income, interest expenses and
foreign currency gains and losses. Financial income (expenses) was $553,000 and
$(155,000) during the three months ended September 30, 2003 and 2002
respectively. The increase was the result of an increase in interest income
related to the capital lease negotiated in the end of the second quarter of
2003, a reduction in interest expenses relating to the expiration of significant
capital lease obligations during 2002 and a conversion of debt to equity with a
related party lease, with Spacenet Inc., a wholly owned subsidiary of Gilat.
Financial income (expenses) was $237,000 and ($727,000) during the nine
months ended September 30, 2003 and 2002 respectively. The increase was the
result of foreign exchange losses in Brazil and Colombia in 2002, an increase in
interest income related to the capital lease negotiated in the end of the second
quarter of 2003, a reduction in interest expenses relating to the expiration of
significant capital lease obligations during 2002 and a conversion of debt to
equity with a related party lease, with Spacenet Inc
LOSS FROM DISCONTINUED OPERATIONS
We discontinued all operational components of rStar, which was mainly
the AutoNetworks business in 2002, As of December 2002, there were no further
costs incurred for discontinued operations. For the three months ended September
30, 2002, approximately $227,000 of costs was incurred relating the AutoNetworks
business. For the nine months ended September 30, 2002 approximately $1.7
million of costs were incurred relating to the AutoNetworks business.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. For the nine months ended September 30, 2003, net
cash used in operating activities was approximately $2.6 million consisting of
approximately $4.3 million of net income offset by non-cash charges of
approximately $3.1 million relating to depreciation. In addition, trade
receivables increased by approximately $2.4 million, and other receivables and
prepaid expenses (including long-term receivables) increased by approximately $
12.3 million. This overall increase was attributable to revenue recorded from
our projects in Peru and from the long-term capital lease with StarOne. In
addition, we increased our debt with Gilat by $752,000 and increased our
inventory by approximately $2.3 million. This compares to cash used in the nine
months ended September 30, 2002 of approximately $12.5 million. In the nine
months ended September 30, 2002 cash was primarily used to fund net losses
generated by the Company.
INVESTING ACTIVITIES. During the nine months ended September 30, 2003
we spent approximately $601,000 on investing activities, which was attributable
to $1.8million in fixed asset purchases and a reduction in restricted cash from
our various activities in Peru and Colombia of approximately $851,000.
FINANCING ACTIVITIES. During the nine months ended September 30, 2003
we spent approximately $ 1.3 million in financing activities, which was
primarily attributable to repayments of debt and capital leases.
In connection with the acquisition of StarBand Latin America, we agreed
to pay a special distribution to our minority shareholders under certain
circumstances. We agreed that, in the event that the StarBand Latin America
business, as defined, did not achieve certain net
18
income targets agreed to by the parties during the years ended June 30, 2003 and
June 30, 2004, rStar stockholders of record as of June 30, 2003 and 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. The
net applicable income for the StarBand Latin America business for the period
ended June 30, 2003 was greater than of $2.5 million, therefore no payment was
due for this period.
Additionally, 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 recorded a provision of $5.0 million regarding distribution of
special distribution to the minority shareholders in year ending June 30, 2004.
It is management's current assessment that 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 the period from July
1, 2003 to June 30, 2004, the special distribution may not need to be paid.
In the event we have to pay such a dividend it will 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 twelve 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 September 30, 2003, our short and long term obligations were as
follows:
PAYMENTS DUE BY PERIOD FROM
(IN THOUSANDS)
TOTAL OCTOBER 1, TO OCTOBER 1, OCTOBER 1,
SEPTEMBER 30, 2005 TO 2008 AND
CONTRACTUAL OBLIGATIONS 2004 SEPTEMBER 30, BEYOND
2007
Capital Lease Obligations 3,894 1,542 2,352 --
Operating lease 650 227 349 74
Other long-term obligations 9,527 1,102 8,425 --
Related party obligation 23,757 23,757 -- --
------------- ------------- ------------- -------------
Total Contractual Obligations $37,828 $26,628 $11,126 $74
============= ============= ============= =============
OFF BALANCE SHEET ARRANGEMENTS
At September 30 2003, the Company was 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. The maximum potential amount of future payments that our subsidiaries
could be required to make under guarantees at September 30, 2003 is $30.6
million. We have not recorded any liability for such amounts, as we do not
expect that our performance will be unacceptable.
19
FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
RISKS RELATING TO OUR BUSINESS.
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 WILL AFFECT US.
As of September 30, 2003, 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 Final 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 a new board of directors, the
majority of which have not served in the past as directors, officers or
employees of Gilat. In addition, as of April 15, 2003 Gilat has a new CEO and
President, Oren Most. Mr. Most also serves as our chairman of the board of
directors. 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.
GILAT ANNOUNCED THAT THEY ARE CONTEMPLATING PURCHASING ALL OF THE OUTSTANDING
SHARES OF THE COMPANY. THIS ANNOUNCEMENT COULD AFFECT THE PRICE OF OUR SHARES
CURRENTLY AND IN THE FUTURE.
Gilat announced on September 18, 2003 that it is contemplating a purchase of all
outstanding shares of common stock of the Company not already owned by Gilat at
a price not yet determined but expected to be between $0.60 and $0.70 per share
in cash. This press release indicated Gilat's interest in pursuing such a tender
offer, but no such offer has yet commenced. It is currently anticipated that the
purchase would be made through a tender offer, subject to customary conditions,
in accordance with the rules of the Securities and Exchange Commission. In its
press release Gilat also indicated that, if it holds at least 90 percent of the
outstanding rStar shares following completion of the offer, it may effect a
"short-form" merger of rStar with a Gilat subsidiary which would cash out the
unaffiliated public stockholders of the Company at the tender offer price. After
consummation of such a tender offer and short-form the unaffiliated public
stockholders would no longer have any interest in the Company other than their
appraisal rights under Delaware law with respect to the consideration received
by them in the short-form merger. Gilat could determine not to proceed with the
offer if in its sole judgment changes in economic, business or market conditions
make the offer unadvisable to Gilat. Further, as discussed above, Gilat holds a
substantial majority of our shares of common stock, and currently has the
ability to call a special meeting of the Company's stockholders. In addition to
pursuing a tender offer as indicated and described above, Gilat could consider a
cash-out merger, open market or other purchases of our stock or a reverse stock
split in order to take rStar private. In any such scenario, the interests of our
unaffiliated public stockholders could be eliminated.
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
20
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.
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 we may not successfully overcome
these risks.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES.
We incurred net losses of approximately $213 million from our inception through
September 30, 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 only recently in the
six months ended June 30, 2003 achieved profitability and even though we have
achieved profitability we have not maintained that profitability in the three
months ended September 30, 2003, and we may not sustain it on an annual basis.
We expect to have negative cash flows for the foreseeable future. We will need
to generate significant additional revenues to maintain profitability. We
anticipate that a significant portion of these revenues will come from providing
services to Gilat for the projects that it has won in Colombia and Brazil
However Gilat is not obligated to buy such services from the Company. It is
possible that we may not sustain or increase profitability on a quarterly or
annual basis in the future. If we do not 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 2004, we will
need to pay a special distribution in the form of a dividend to our minority
shareholders. See "Managements Discussion and Analysis of Financial
Condition-Liquidity and Capital Resources."
WE MAY SUFFER FOREIGN EXCHANGE RATE LOSSES.
A portion of our 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.
Because all of our revenues currently come from business outside of the United
States, we have substantial we have substantial 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 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.
WE HAVE LIMITED PREVIOUS EXPERIENCE IN THE LATIN AMERICAN MARKET AND OUR ABILITY
TO BE SUCCESSFUL IN THAT MARKET IS UNCERTAIN.
Since the closing date of the StarBand Latin America acquisition in August of
2002, we have expanded our business operations into the delivery of
satellite-based telephony and Internet access services in Latin America. Because
our acquisition of StarBand Latin America was relatively recent and prior to
such acquisition we had no operations in Latin America, we have limited
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. 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
21
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.
We have recently and significantly changed our business model and strategy when
we acquired StarBand Latin America in August 2002. 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 further: (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, 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, there entail many risks, including some that we may
not have contemplated. It is difficult to assess the material adverse effects
from these interrelationships... 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. 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 Gilat affiliates' 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.
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
22
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.
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. In 2002 NASDAQ delisted our common stock from the NASDAQ
Stock Market because our stock has failed to close above a minimum bid price of
$1.00 for an extended period of time. We have engaged in extensive
correspondence with NASDAQ about the potential for the delisting of
23
our common stock from the NASDAQ SmallCap Market due to our failure to comply
with the NASDAQ's 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 that could render the
reverse stock split unnecessary. In March, May and August, the NASDAQ Listing
Qualifications Panel informed us that it 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. This continued listing
status has been afforded to the Company by NASDAQ pursuant to NASDAQ proposed
rule allowing for certain modifications to the bid price rules, including an
extended grace period for Small Cap issuers.
A reverse stock split, if required, 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.
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 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
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.
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
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.
24
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. 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
25
change our operating methods, business strategy, or subject us to additional
liabilities and cause the price of our common stock to decline. In particular,
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 has required and will continue to
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.
26
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.
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.
27
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.
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 September 30, 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
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluation of our disclosure controls and procedures as
of the end of the period covered by this Quarterly Report on Form 10-Q,
our Chief Executive Officer and l Chief Financial Officer are effective
to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities
and Exchange Commission rules and forms, of and include controls and
procedures designed to ensure that information required to be disclosed
by us in such reports is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
(B) CHANGES IN INTERNAL CONTROLS
There were no changes that occurred during the fiscal quarter covered
by this Quarterly Report on Form 10-Q that have materially affected, or
are reasonably likely to materially affect, our internal controls over
financial reporting.
28
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2001 rStar filed an action against On Technology Corporation (OTC) and
subsequently OTC filed a counter claim. In May 2003 the case was settled, and
the lawsuit was dismissed with prejudice.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Modification of Constituent Instrument
Not applicable.
(b) Change in Rights
Not applicable.
(c) Issuance of Securities The Company did not have any sales of unregistered
securities during the period.
(d) Use of Proceeds
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders through the
solicitation of proxies or otherwise during the third quarter ended September
30, 2003.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(A) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rules 13-a14 and 15d-14.
31.2 Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-14 and 15d-14.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
* In accordance with SEC Release 33-8238, Exhibits 32.1
and 32.2 are being furnished and not filed.
(B) REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K dated August 15, 2003 announcing
audited financial statements for a portion of our business in order to determine
whether a special distribution to our shareholders was required.
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.
29
RSTAR CORPORATION
(Registrant)
By: /s/ SAMER SALAMEH
Samer Salameh
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ Doron Gefen
Doron Gefen
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
Date: November 14 , 2003
30
CERTIFICATIONS
I, certify that:
1. I have reviewed this quarterly report on Form 10-Q of rStar Corporation;
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-158(e) and 15(e) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this quarterly
report (the based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
/s/ SAMER SALAMEH Date November 14, 2003
Samer Salameh,
Chief Executive Officer
31
I, certify that:
1. I have reviewed this quarterly report on Form 10-Q of rStar Corporation;
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-158(e) and 15(e) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this quarterly
report (the based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
/s/ DORON GEFEN Date November 14, 2003
Doron Gefen
Chief Financial Officer
32