UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the fiscal year ended December 31, 2003 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-16381 CeriStar, Inc. (Name of small business issuer in its charter) Delaware 87-0642448 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 50 West Broadway, Suite 1100, Salt Lake City, Utah 84101 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (801) 350-2017 Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year were $430,630. The aggregate market value of the voting stock held by non-affiliates of the Issuer as of March 31, 2004 was approximately $1,591,400 based on the closing price on that date on the OTC Bulletin Board. On March 31, 2004, there were 8,004,450 shares of the issuer's common stock outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] CERISTAR, INC. Annual Report on Form 10-KSB For the Fiscal Year Ended December 31, 2003 TABLE OF CONTENTS Page ---- PART I Item 1. Description of Business....................................... 1 Item 2. Description of Properties..................................... 9 Item 3. Legal Proceedings............................................. 9 Item 4. Submission of Matters to a Vote of Security Holders........... 9 PART II Item 5. Market for Common Equity and Related Stockholder Matters...... 10 Item 6. Management's Discussion and Analysis or Plan of Operation..... 11 Item 7. Financial Statements and Supplementary Data................... 19 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...................................... 19 Item 8A. Controls and Procedures....................................... 19 PART III Item 9. Directors and Executive Officers of the Company............... 19 Item 10. Executive Compensation........................................ 22 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............................... 26 Item 12. Certain Relationships and Related Transactions................ 27 Item 13. Exhibits, Financial Statement Schedules and Current Reports on Form 8-K................................................... 28 Item 14. Principal Accountant Fees and Services........................ 29 Signatures................................................................... 30 This report contains trademarks and trade names that are the property of CeriStar, Inc. and its subsidiaries, and of other companies, as indicated. PART I This Annual Report on Form 10-KSB contains forward-looking statements within the meaning of the federal securities laws. These statements include those concerning the following: our intentions, beliefs and expectations regarding our future success and results; our operating results; our expectations regarding our revenues and customers; and our distributors and territorial expansion efforts. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the "Business" section of this Form 10-KSB. CeriStar, Inc. undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-KSB. ITEM 1. DESCRIPTION OF BUSINESS Background ---------- CeriStar, Inc. ("CeriStar" or the "Company") was incorporated in December 1999 in the State of Delaware. We are an Internet Protocol ("IP") Communication Services Provider, leading the convergence of voice, video and data by providing "Triple Play" communications services to residential, commercial and municipal concerns through reliable, fast and intelligent IP networks. Our current principal operations are related to providing residential subscribers with integrated voice, video and data communications services over Fiber-to-the-Premise ("FTTP"). These communications services include a robust IP telephony package (commonly referred to as "VoIP"), high-speed Internet connectivity, broadcast and IP entertainment services such as HDTV, video-on-demand, games-on-demand and security services. We also manage our quality of service ("QoS") and provide customer service and billing functions as well as integration, engineering and management support for our customer base and network. On September 10, 2002, we entered into a forward triangular merger with Planet Resources, Inc., a Delaware corporation ("Planet"), in which all of our issued and outstanding common and preferred stock was exchanged for Planet's common stock with each of our Series A and B preferred stock being exchanged for ..757 shares of Planet's common stock and our existing common stock was exchanged for .322 shares of Planet's common stock (the "Merger"). Prior to the Merger, Planet had no operations for two years. On October 15, 2002, Planet Resources Inc. was renamed as CeriStar, Inc. Market Opportunity ------------------ The convergence of voice, video and data in today's marketplace is being facilitated by the maturation of certain IP technologies, primarily Voice over IP ("VoIP"). VoIP allows voice communication to be "digitized" into data packets and transported over data networks, thereby allowing voice, as well as video and data, to be delivered efficiently over the same network. Traditionally, these services have been provided via multiple delivery systems and until recent years via separate service providers, e.g., traditional telephone vendors provided call termination over copper wires; television over broadcast antenna, encoded cable or satellite receivers; and data services over the Internet by Internet Service Provider's ("ISP's"). 1 We believe that as IP technologies evolve many of the current differences between cable TV signals, phone transmissions and Internet data will converge until all broadband communications become IP-based, although there is no assurance that such results will occur. Further, to provide a truly converged network platform, bandwidth capacity and the capability to integrate, manage and deliver large amounts of data and signals to the end user with superior quality of service (QoS) is a key component. We believe that fiber optic cable will serve as the key component to achieve this goal. According to the Fiber to the Home ("FTTH") Council, as of September 2003, there were 94 Optical Fiber Communities across 26 states in the United States with communities being passed by fiber. Industry estimates forecast overall residential fiber access (Fiber-to-the-Home or FTTx) to be made available to over more than 1 million North American homes in 2004 and is expected to increase to 26 million by 2008. The smaller housing development market is of particular importance to us and other smaller businesses in this field, since such developments are less likely to be a target for early FTTx deployment and converged services from the larger industry players. As of March 2004, we are currently offering the Triple Play of integrated phone, video and Internet services over fiber networks to customers who are located in the State of Utah. Using our existing reference base of customers, we believe that we are positioned to emerge as a premier market player as mainstream adoption of converged IP network services occurs in the residential market, although no assurance can be made that such results will be the case. A transition to a pure IP environment has important implications for all organizations, including, items such as: o Reduced network infrastructure costs; 2 o Lower IT capital costs; o Reduction in cost to provide traditional moves/adds/changes to subscriber services; o Reduction in complexity of network management; o Reduced long distance telephony charges; o Overall increase in productivity; and o Reduces management and administrative costs. While other competitors offer various components of IP Engineering (i.e., broadband, building controls and office applications) or even "bundled" communication services, we are among only a handful of providers that offer a complete converged services solution, or "all-in-one package" which creates a more efficient and technologically advanced home or business environment. This integrated service profile results in significant competitive advantage for the residential or commercial building developers and contains additional feature and cost advantages for subscribers. Our Corporate Vision and Mission Our mission is to be a leading provider of converged voice, video and data communications. We are working towards this goal by leveraging a thorough understanding of the suppliers, networks and technologies which, we believe, enable Triple Play networks and services for the future. Our current leadership is geared towards a result with tight integration of the operational dynamics and protocols of these new and emerging enabling technologies. Our future, through our current leadership believes that the following factors will help us reach our corporate goal: o Exploit our understanding of current customer and market communications requirements; o Leverage our extensive knowledge of the networks and technologies that are enabling Triple Play networks and services for the future; o Strengthen our relationships with suppliers and partners who are delivering the needed core components for Triple Play networks; o Draw upon and utilize the deep resources and experiences of our executive team and integrate those elements into a meaningful, customer driven services platform; and o Deliver services in a timely and cost efficient manner, creating high quality and a value-rich environment for our current and prospective customers and partners. 3 Business Strategy ----------------- Our primary goals are to grow revenues, achieve profitability and maximize shareholder value. We believe that to achieve our goal of becoming a leading provider of Triple Play services, providing communications, applications and entertainment to our subscribers, we need to continually refine our core services and expand and offer additional services as technology and costs related to such additional services permit. We have identified certain key elements to increase our market presence and growth strategy, which include: o Focus marketing efforts where they can be most effective. We currently market our services primarily to "Greenfield" residential housing developers where we are able to leverage our skills and size by reaching a larger number of subscribers through a single contact point; o Speed the widespread adoption of IP converged communications by demonstrating its feasibility and benefits to developers, municipalities and end-user subscribers; o Continually refine and develop our brand; o Build shareholder value through innovation, operational efficiency and financial performance; o Expand and refine our content offering; o Expand our network model and services offering beyond our historical markets in the State of Utah by partnering and/or opening new offices in new regions in order to both increase revenues and improve profitability; and o Make strategic acquisitions wherever possible. IP Network Service Offerings ---------------------------- Our service offerings are integrated and delivered through systems that have been designed to create an open, converged platform within the community or enterprise LAN and to provide equivalent bandwidth for other licensed IP services. These systems guarantee the convergence and delivery of voice, computer data, and video services over the same "pipe" and also act as a gateway to all other service providers. We are able to deliver or manage the delivery of these services through relationships with leading carriers and "best of breed" service, application and content providers. The following is a list of IP Enhanced products and services with the designated (A) available today, (F) in the future. We believe the items that are designated with an F should be available ranging from six months to two years. 4 Digital Packet TV A Outbound Calling to other VoIP Devices A Expanded Channel Line-Up A Inbound DID Based Calling A Pay-Per-View Television A Call Return A Video-on-Demand Services A Call Forwarding A Pay-per-View On-Demand A Call Waiting A High Definition TV A Caller ID A Digital Music Channels A Conference Calling A World Wide Web at TV F Speed Dial A Email at TV Control F Last Number Redial A Appliance at TV Control F Voice Mail A Gaming on Demand A Hosted IP Centrex Services A Interactive Gaming A Hosted IP Call Center F Wireless Access A Unified Messaging A WiFi Hot Spot Installation F Speech Enhanced Voice Services F WiFi access for Homes/Small Businesses F Find Me/Follow Me Services A WiFi access for Laptops and PDA Access F Video Conferencing A Hosted IP Telephone F Video Chat F Outbound Calling to PSTN Devices A Full Featured Video Conferencing F Secure Instant Messaging F Collaborative Work Space F Energy Management A Telephone Services ------------------ Using the latest in fiber optic and IP technologies, we provide traditional voice telephony over IP (VoIP) and services such as Call Return, Call Forwarding, Call Waiting, Caller ID, Conference Calling, Speed Dial and Last Number Redial along with other unique features such as video conferencing. We offer full local and long distance service, utilizing managed Internet Protocol (IP) technology to deliver superior voice service with crystal clear connections. High Speed Internet Access/Data ------------------------------- We currently provide Internet connectivity ranging from 128 kbps to 10 mbps on both the upstream and downstream and can provide up to 1gbps bandwidth within the LAN. Internet service includes POP3 e-mail, integrated calendaring, news and sports feeds. Digital Packet Television (DPTV) -------------------------------- Our customers will enjoy the advantages of increased programming choices and advanced interactive services that greatly enhance their choices, convenience and control. We provide crystal clear digital video quality and home theatre quality audio as part of our television service to our customers. We currently offer more than 230 channels of local off-air, basic, premium movie, audio music channels, video-on-demand, near-video-on-demand, music-on-demand and pay-per-view events delivered as "Digital Packet Television (DPTV)". Our network also supports a migration to the new High Definition Television (HDTV) standards. Advanced interactive services allows customers to enjoy the comfort, control and convenience to answer their phone, check e-mail, fax documents, shop at their favorite stores and surf the Internet. 5 Other Options and Services -------------------------- o Wireless Internet connectivity for PDA's and/or laptops; o Home security w/ remote monitoring; o Remote temperature, lighting and access control. o Physical Features o Energy management o Security; o URL filtering; and o Firewall and anti-virus applications. Distribution Channels --------------------- Our distribution channels and potential customers can be categorized in the following categories: o Business partners, such as real estate developers and building owners; o Direct sales - "Greenfield" residential developments, existing residential neighborhoods and building owners; o Service providers, such as MSO's content providers and equipment suppliers; and o Strategic alliances, which include industry leaders, channel partners/re-sellers and universities and municipalities, Competition ----------- We face competition from larger, better capitalized companies. We compete directly with cable and satellite television providers, such as Comcast, EchoStar and DirecTV; traditional local and long distance POTS telephone providers, such as Qwest; newly-emerging VoIP telephony providers, such as Vonage; and small and large ISP's, such as EarthLink and Mindspring. Many of these established companies have resources greater than ours and are direct competitors. We believe that we compete favorably with these and other entities in the smaller markets and especially in Greenfield developments on the basis of technology, customer service, and quality assurance. Our prices are expected to be generally lower and/or will include more features offering a better value package. In addition, our market emphasis permits us to make these advanced services available in underserved markets. 6 Regulatory Matters ------------------ We are currently licensed as a Common Local Exchange Carrier ("CLEC") licensed with the Utah Public Utility Commission ("PUC") under certificate number 2389, but we do not offer traditional CLEC services. As a CLEC, may be subject to certain Public Utility Commission and Federal Communications Commission rules and regulations for telephony services. However, we believe that since we provide our service using 100% IP Protocol, our VoIP services are not covered under current PUC and Federal Communications Commission ("FCC") regulation. Any proposed or enacted changes should only affect our voice services, but it is possible that new legislation in the future could also affect our data and video services. We do not hold any domestic license with the FCC. Presently, the FCC does not regulate companies that provide IP telephony services as common carriers or telecommunications service providers. Despite current laws, the FCC's potential jurisdiction over the Internet is broad because the Internet relies on wire and radio communications facilities and services over which the FCC has long-standing authority. We have previously requested CLEC status in other states and territories of the United States, but do not presently intend to vigorously continue to pursue such additional CLEC licenses. A CLEC designation permits the resale of local telecommunications services. Many states also impose various reporting requirements or require prior approval for transfers of control of certified carriers, corporate reorganizations, acquisitions of telecommunications operations, assignments of carrier assets, including subscriber bases, carrier stock offerings and incurrence by carriers of significant debt obligations. Certificates of authority can generally be conditioned, modified, canceled, terminated or revoked by state regulatory authorities for failure to comply with state law and the rules, regulations and policies of the state regulatory authorities. Fines and other penalties, including the return of all monies received for intrastate traffic from residents of a state, may be imposed for such violations. In certain states, prior regulatory approval may be required for acquisitions of telecommunications operations. Currently, we do not believe we are subject to any state regulation with respect to our Internet related services. However, there can be no assurances that VoIP will not be subject to such regulations in the future. Additionally, we are not aware of any pending legislation that would have a material adverse affect on our operations. 7 Most states have consumer protection laws that further define the framework within which our marketing activities must be conducted. We intend to comply fully with all laws and regulations; however, the constraints of federal and state restrictions could impact the success of direct marketing efforts and otherwise increase our costs of doing business. Future Regulation ----------------- Due to the increasing popularity and use of the Internet, it is possible that additional laws and regulations may be adopted with respect to the Internet, covering issues such as content, privacy, access to adult content by minors, pricing, bulk e-mail, encryption standards, consumer protection, electronic commerce, taxation, copyright infringement, and other intellectual property issues. We cannot predict the impact, if any, that future regulatory changes or developments may have on our business, financial condition, or results of operation. Changes in the regulatory environment relating to the Internet access industry, including regulatory changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies or others, could increase our operating costs, limit our ability to offer services and reduce the demand for our services. As the law in this area develops, we could become liable for information carried on, stored on, or disseminated through our gateways, it may be necessary for us to take steps to reduce our exposure to this type of liability through alterations in our equipment, expanded insurance coverage or other methods. This may require us to spend significant amounts of money for new equipment or premiums and may also require us to discontinue offering certain of our products or services. In a report to Congress in 1998, the FCC stated its intention to consider whether to regulate voice and fax telephony services provided over the Internet as "telecommunications" even though Internet access itself would not be regulated. The FCC is also considering whether such Internet-based telephone service should be subject to universal service support obligations or pay carrier access charges on the same basis as traditional telecommunications companies. A governmental body could impose further sales and other taxes on the provision of our services, which could increase the costs of doing business. A number of state and local government officials have asserted the right or indicated a willingness to impose taxes on Internet-related services and commerce, including sales, use and access taxes. To date, no such laws have become effective. We cannot accurately predict whether the imposition of any such taxes would materially increase our costs of doing business or limit the services which we provide. It may be possible to pass on some of these costs to the consumer and continue to remain competitive. 8 Employees --------- As of March 31, 2004, we had 12 employees and two independent contractors. All of our employees are full-time. Of the 12 employees employed by us, five are in service operations, two are in sales and marketing and five are in general administration. One independent contractor provides sales and marketing services to the Company on a month-to-month basis and one provides technical engineering service. None of our employees are represented by a labor union or subject to a collective bargaining agreement. We have never experienced a work stoppage and consider our employee relations to be good. ITEM 2. DESCRIPTION OF PROPERTIES Our corporate headquarters are located in Salt Lake City, Utah. We currently lease on a month-to-month leases approximately 2,750 square feet of office space for a month rent with all additional charges equal to $1.29 per square foot per month or approximately $3,500 per month . We believe that our facilities are adequate to meet our requirements through the end of fiscal year 2004. ITEM 3. LEGAL PROCEEDINGS On March 4, 2004, a lawsuit captioned Wired, L.C. v. CeriStar, Inc. was filed in the Third Judicial District Court, Salt Lake County, State of Utah., Case No. 040904512 (the "Wired Litigation"). Wired alleges a breach of contract under an agreement that we entered into with Wired. We believe that the case is without merit and in our response filed on March 24, 2004, we denied any breach and asserted various affirmative defenses along with a counterclaims against Wired for declaratory judgment. We will continue to vigorously defend our position; however, we could be forced to incur material expenses if the litigation continues and if result is against us, our business could be harmed. Other than the Wired Litigation, we do not have any legal liabilities, past or present that could cause material harm to our shareholders and us in the future of which our management is aware. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fiscal year ended December 31, 2003, no matters were submitted to a vote of security holders through the solicitation of proxies or otherwise. 9 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Information Our shares of common stock currently trade on the OTC Bulletin Board under the trading symbol "CRTI.OB". Upon our merger with Planet, our stock was traded under the trading symbol "PLNT.OB." until it was changed to our current trading symbol on September 15, 2002. The following table sets forth the range of high and low closing quotations for the first quarter of fiscal year 2004 and each fiscal quarter for the last two fiscal years ending December 31, 2003 and 2002 as reported by the OTC Bulletin Board. The quotes represent inter-dealer prices without adjustment or mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. The trading volume of our securities fluctuates and may be limited during certain periods. As a result of these volume fluctuations, the liquidity of an investment in our securities may be adversely affected. Year 2004 2003 2003 2003 2003 2002 2002 2002 2002 Quarter First Fourth Third Second First Fourth Third Second First High $0.46 $0.58 $1.95 $0.95 $1.55 $2.25 $3.10 N/A N/A Low $0.15 $0.26 $0.47 $0.48 $0.55 $1.05 $1.30 N/A N/A On March 31, 2004, the final quoted closing price as reported by the OTC Bulletin Board was $0.25 for each share of our common stock. Holders of Record As of March 31, 2004, there were 8,004,450 shares of Common Stock outstanding, held by approximately 1,600 record holders. Dividends We have never paid a cash dividend on our common stock nor do we anticipate paying cash dividends on our common stock in the near future. It is our present policy not to pay cash dividends on the common stock but to retain earnings, if any, to fund growth and expansion. Under Delaware law, a company is prohibited from paying dividends if the company, as a result of paying such dividends, would not be able to pay its debts as they become due, or if the company's total liabilities and preferences to preferred shareholders exceed total assets. Any payment of cash dividends on the our common stock in the future will be dependent on the Company's financial condition, results of operations, current and anticipated cash requirements, plans for expansion, as well as other factors the Board of Directors deems relevant. At the time of the merger with Planet, both CeriStar's common and preferred shares were converted to Planet's common stock. With the change of Planet's name to CeriStar this common stock is referred to as CeriStar's New Common Stock. CeriStar is also registered on the Berlin Stock Exchange. There were no recent sales of unregistered securities. 10 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included in Item 7 of this Form 10-KSB. This discussion contains forward-looking statements. These statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's results, levels of activity, performance or achievement to be materially different from any future results, levels of activity, performance or achievements expressed or implied in or contemplated by the forward-looking statements. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of selected factors, including those set forth below under "Risk Factors Affecting Operations and Future Results." Company and Industry Overview CeriStar, incorporated in December of 1999 in Delaware, provides converged voice, video and data services - the "Triple Play" - to residential, commercial and municipal concerns through reliable, fast and intelligent IP networks. The Company's current principal offering is to provide residential subscribers with integrated voice, video and data communications services over Fiber-to-the-Premise (FTTP). These communications services include a robust IP telephony package (VoIP), high-speed Internet connectivity, broadcast and IP entertainment services such as HDTV, video-on-demand, games-on-demand, as well as security services. CeriStar also manages the quality of service (QoS) and provides customer service and billing, as well as integration, engineering and management support for its customer base and for its network. On September 10, 2002, CeriStar merged with a wholly owned subsidiary of Planet Resources Inc., a non-operating publicly held company, together referred to as Planet, in which all the issued and outstanding stock of CeriStar, including Convertible Preferred Series A shares and the Convertible Preferred Series B shares, were exchanged for shares of common stock of Planet. Series A and B preferred shares of CeriStar were exchanged at a rate of approximately .757 for every common share of Planet and common shares of CeriStar were exchanged into approximately .322 common shares of Planet. Just prior to the merger, Planet authorized a 1 to 5.23 reverse stock split. The merger was accounted for as a reverse merger with CeriStar being the accounting acquirer. On October 15, 2002 Planet was renamed CeriStar, Inc. Since Planet had no operations for the two years prior to the merger, only CeriStar's financial condition and results of operations will be discussed. Until we achieve profitability over several quarters, we must be considered as a start-up entity. Until that time, we remain dependent on financing resources for cash flows to meet certain operating expenses and offer no assurance of our financial success or economic survival. 11 In 2003, the Company moved from development stage into that of an operating company and have acquired significant assets required to conduct our business. While we believe that our service capability enables us to compete effectively in the Triple Play services market, there can be no assurances that any benefit will result from these activities. We received limited revenues and incurred expenses in excess of revenues during our development in 2003. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and disclosures at the date of the financial statements. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventories, other intangibles and income taxes. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates. We identified our most critical accounting policies to be related to revenue recognition, asset valuation and accounting for stock options. A complete list of our accounting policies is contained in Note 1 to the notes of the consolidated financial statements. 1. Revenue Recognition Revenue is recognized when a valid contract or purchase order has been executed or received, services have been performed or product has been delivered, the selling price is fixed or determinable, and collectibility is reasonably assured. Payments received prior to performance are recorded as deferred revenue. The company enters into long-term service contracts in which it receives payments for initial equipment installation. These revenues are typically deferred over the life of the service term. Equipment installations relating to residential monthly contracts are recognized when installed. 2. Allowance for Doubtful Accounts Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of trade receivables. In the normal course of business, the Company provides on-going credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management's expectations. Management assesses its estimates of uncollectible accounts based on age of receivables and direct negotiations with its customers if disputes arise. 12 3. Impairment of Long-lived Assets We review our long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. We evaluate, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. We use an estimate of future undiscounted net cash flows of the related asset or group of assets over the estimated remaining life of in measuring whether the assets are recoverable. 4. Accounting for Stock-based Compensation We account for stock-based compensation issued to employees and directors under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under APB No. 25, compensation related to stock options, if any, is recorded if an option's exercise price on the measurement date is below the fair value of the Company's common stock and amortized to expense over the vesting period. Compensation expense for stock awards or purchases, if any, is recognized if the award or purchase price on the measurement date is below the fair value of the common stock and is recognized on the date of award or purchase. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," requires pro forma information regarding net loss and net loss per common share as if the Company had accounted for its stock options granted under the fair value method. We account for stock-based compensation issued to persons other than employees using the fair value method in accordance with SFAS No. 123 and related interpretations. Under SFAS No. 123, stock-based compensation is determined as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for these issuances is the earlier of either the date at which a commitment for performance by the recipient to earn the equity instruments is reached or the date at which the recipient's performance is complete. 5. Recent Accounting Pronouncements In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN No. 45). FIN No. 45 requires certain guarantees to be recorded at fair value, which is different from current practice to record a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, "Accounting for Contingencies." FIN No. 45 also requires us to make significant new disclosures about guarantees. The disclosure requirements of FIN No. 45 are effective for the first quarter of fiscal year 2003. FIN No. 45's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Our previous accounting for guarantees issued prior to the date of the initial application of FIN No. 45 will not be revised or restated to reflect the provisions of FIN No 45. The adoption of FIN No. 45 did not have a material impact on our consolidated financial position, results of operations or cash flows. 13 In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123," which is effective for all fiscal years ending after December 15, 2002. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation under SFAS No. 123 from the intrinsic value based method of accounting prescribed by APB Opinion No. 25. SFAS 148 also changes the disclosure requirements of SFAS 123, requiring a more prominent disclosure of the pro-forma effect of the fair value based method of accounting for stock-based compensation. The adoption of SFAS No. 148 did not have a material impact on our financial position or operations. In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R") (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN 46), which was issued in January 2003. Before concluding that it is appropriate to apply ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity ("VIE"). As of the effective date of FIN 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003 to determine whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities. Public companies must apply either FIN 46 or FIN 46R immediately to entities created after January 31, 2003 and no later than the end of the first reporting period that ends after March 15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated financial position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003, with certain exceptions. Management is currently evaluating the effect that the adoption of SFAS No. 149 may have, but believes it will not have a material effect on its results of operations and financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This new statement changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity or classifications between liabilities and equity in a section that has been known as "mezzanine capital." It requires that those instruments be classified as liabilities in balance sheets. Most of the guidance in SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003. Adoption of SFAS No. 150 did not have a material effect on our financial statements. 14 Results of Operations Year ended December 31, 2003 compared to the Year ended December 31, 2002 ------------------------------------------------------------------------- Revenues as reported decreased 17% for the year ended December 31, 2003 compared to the year ended December 31, 2002. Revenues for the fiscal year ended 2003 were $431,000 compared to $521,000 in 2002, a decrease of $90,000. This decrease was primarily due to the continuing migration away from equipment related revenues and towards recurring service revenues. Realized equipment sales also decreased from the prior year period due to the deferral of certain revenues. Equipment sales decreased from $214,000 in fiscal 2002 to $26,000 in fiscal 2003. In fiscal 2003, revenues from providing services increased 38% to $370,000, compared with $269,000 in fiscal 2002 due primarily to the increase in service contracts and subscriber base. Cost of sales increased by $46,000 from $465,000 in 2002 to $511,000 in 2003. This increase is the result of adding a significant amount of bandwidth to our expanding residential customer service network. Bandwidth costs were $112,000 higher in 2003 than 2002. These bandwidth circuits can manage a substantially larger customer base in the future and so new customers can be added to our residential service network at relatively little additional bandwidth cost. Gross margin on sales in 2003 was a negative $81,000 compared to a positive gross margin in 2002 of $56,000. This change was primarily due to two factors, first the higher bandwidth costs relating to the addition of new residential customers, and second the decline in high margin equipment sales. In 2002 equipment sales, primarily to commercial customers, totaled $214,000 while in 2003 had only $26,000 in equipment sales. Administrative expenses in 2003 totaled $3,868,000, compared to $2,768,000 in 2002, an increase of $1,100,000 or a 39.7 percent increase. A majority of the 2003 administrative expenses related to stock based compensation to consultants and amortization of deferred compensation to employees and stock subscriptions for contracts entered into in 2002. Expenses related to stock compensation totaled $2,529,000, or 65.4 percent of administrative expenses paid in 2003. Administrative expenses related to stock compensation in 2002 totaled $1,687,000 which was 60.9 percent of total administrative expenses in 2002. During 2003, $2,202,000 in stock compensation was paid to consultants advising CeriStar on product positioning, customer identification and business plan consulting issues compared to $1,305,000 in 2002 including merger costs with Planet Resources. The remaining increase in general and administrative expenses relates primarily to increases in labor costs, travel, and bad debt expense. 15 Labor expenses increases from $912,000 in 2002 to $984,000 in 2003 for engineering and support to accommodate residential expansion being only partially offset by reduced marketing payroll expense as CeriStar narrowed its marketing focus to primarily the residential market. Travel expenses also increased to $84,000 in 2003 compared to $25,000 in 2002. Travel expense increase is primarily related housing and travel expenses incurred by the new management team, whose primary residence is outside the State of Utah. Bad debt expenses also increase to $126,000 in 2003 from $16,000 in 2002, reflecting collection concerns related to commercial customers. Office, insurance and advertising expense also increased, again a reflection of the residential market expansion. Liquidity and Capital Resources As of December 31, 2003, current assets were $245,000 while current liabilities were $1,911,000 equaling a $1,666,000 working capital deficit. In order for CeriStar to continue operating, additional capital is essential as operating revenues are not capable of supporting current operations. During 2003, CeriStar received approximately $462,000 from the sale of its common stock, and borrowed $1,177,000 to fund operations and equipment purchases. A majority of the borrowed funds are short-term and either have warrants attached or are convertible into common stock. Our principal sources of liquidity and operating capital are the net proceeds from debt and the issuance of common stock for cash, which provided net cash proceeds of approximately $1,607,000 and $859,000 respectively, in 2003 and 2002. This cash was used to fund operations and the purchase of $287,000 of equipment in 2003 and $86,000 of equipment in 2002. Of the short-term debt incurred in 2003, $864,000 was received from a finance company. Operating activities used $1,184,000 in 2003 and $748,000 in 2002. To meet our funding needs in 2004, CeriStar is actively seeking debt and equity funding in both the public and private capital markets. There can be no assurances that adequate funding can be obtained. Risks Related to Our Business Certain statements contained in this Form 10-KSB, and other written and oral statements made from time to time by us, do not relate strictly to historical facts. These statements are considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible," "project," and "should," or similar words or expressions, are intended to identify forward looking statements. This forward looking information involves important risks and uncertainties that could materially alter results in the future from those expressed in any forward looking statements made by, or on behalf of, us. We caution you that such forward-looking statements are only predictions and actual events or results may differ materially. In evaluating such statements, you should specifically consider the various factors that could cause actual events or results to differ materially, including those factors described below. It is not possible to foresee or identify all factors affecting our forward-looking statements and you should not consider any list of such factors to be exhaustive. We are under no duty to update any forward-looking statements. 16 We have substantial losses and negative cash flow. Since our inception in 1999, we have had substantial and recurring losses and negative cash flow. We are at risk of continued losses until our revenues increase. There is no assurance that we can increase our revenue sources and it is unlikely that we can lower our expenses in our present mode of operations. We may never earn profits. If we continue to lose money over a period of time, we may be forced to discontinue our operations. We required substantial capital to grow our business and sustain current operations. Since our inception, we have required substantial capital to fund our business operations. Our future capital requirements will depend upon many factors, including the adoption of converged, Triple Play services, requirements to maintain adequate telecommunications capabilities, expansion of our marketing and sales efforts and the status of competitive products and services. Our business operates at a loss and we require additional capital to fund current operations. Historically, our revenues have been less than our expenses and we have financed our operations primarily through sales of equity and debt securities. We expect to enter into additional financial transactions, which could result in significant dilution or substantial indebtedness. Our access to capital is uncertain. We have no commitments, agreements or understandings regarding additional financing and we may be unable to obtain additional financing on satisfactory terms or at all. We expect to pursue additional financing through the private placement of debt or equity. If additional funds are raised or acquisitions are made by issuing equity securities, further dilution to the existing stockholders will result. We may also incur or assume substantial indebtedness. These arrangements may require us to relinquish rights to certain of our existing or potential products or other assets. Accordingly, the inability to obtain such financing could have a material adverse affect on our business, financial condition and results of operations. Our future revenue and operating results depend on a number of factors. 17 We are in a rapidly changing industry which affects our ability to forecast growth and revenues. Our short operating history and the rapidly changing nature of the market in which we compete make it difficult to accurately forecast our revenues and operating results. Our quarterly operating results are unpredictable and we expect them to fluctuate in the future due to a number of factors. These factors may include, among others things: o The amount and timing of operating costs and capital expenditures relating to the growth of our business; o The costs to develop and introduce new products and services in response to changing market conditions and customer preferences: o The announcement or introduction of new or enhanced products or services by our competitors; and o The entrance of a large, better capitalized competitor into our markets. In view of such fluctuations, we believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as a measure of future performance. We may not be able to attract customers for our services. There is no assurance that we will be able to obtain adequate distribution of our services to a large number of subscribers. We believe that our ability to achieve revenues in the future will depend in significant part upon our ability to build upon existing relationships with, and provide support to, large, residential developers. As a result, any cancellation, reduction or delay may materially adversely affect our business, financial condition and results of operations. If we make any acquisitions, we will incur a variety of costs and may never realize the anticipated benefits. We may attempt to acquire businesses, technologies or products that we believe are a strategic fit with our business. If we undertake any transaction of this sort, the process of integrating a business, technology or product may result in operating difficulties and expenditures which may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may never realize the anticipated benefits of any acquisition. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to goodwill and other intangibles and the incurrence of large immediate write-offs. Our ability to attract and retain key management, employees and consultants is uncertain. We are dependent on our management staff. The loss of services of any of these personnel could impede the achievement of our corporate goals and development objectives. There can be no assurance that we will be able to attract and retain personnel on acceptable terms given the competition among telecommunications companies for experienced personnel. In addition, we do not maintain "key-man" life insurance policies on any member of our management staff and do not expect to obtain such policies in the near future. 18 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CERISTAR Financial Statements December 31, 2003 and 2002 19 CERISTAR, INC. Index to Financial Statements -------------------------------------------------------------------------------- Page ---- Independent auditors' report F-1 Consolidated balance sheet F-2 Consolidated statement of operations F-3 Consolidated statement of stockholders' deficit F-4 Consolidated statement of cash flows F-5 Notes to consolidated financial statements F-6 -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of CeriStar Inc. and Subsidiary We have audited the accompanying consolidated balance sheet of Ceristar, Inc. as of December 31, 2003 and 2002, and the related statements of operations, stockholders' deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CeriStar, Inc. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3, the Company has a deficit in working capital, negative cash flows from operations, and recurring net losses. These issues raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The accompanying financial statements do not include any adjustment that might result from the outcome of this uncertainty. /s/Tanner + Co. Salt Lake City, Utah February 13, 2004 F-1 CERISTAR, INC. Consolidated Balance Sheet December 31, -------------------------------------------------------------------------------- Assets 2003 2002 ------ ------------------------------ Current assets: Cash $ 164,183 $ 28,210 Accounts receivable, net of allowance for doubtful accounts of $142,242 and $16,117, respectively 68,570 52,945 Prepaid expenses 4,354 3,954 Deposits 8,379 8,338 ------------------------------ Total current assets 245,486 93,447 Property and equipment, net 548,919 339,395 ------------------------------ $ 794,405 $ 432,842 ------------------------------ -------------------------------------------------------------------------------- Liabilities and Stockholders' Deficit ------------------------------------- Current liabilities: Accounts payable $ 436,924 $ 385,615 Accrued liabilities 303,871 101,888 Deferred revenue 236,509 181,296 Notes payable including related parties 933,515 2,708 ------------------------------ Total current liabilities 1,910,819 671,507 Commitments and contingencies Stockholders' deficit: Preferred stock, $.001 par value; 1,000,000 shares authorized, no shares issued and outstanding - - Common stock, $.001 par value, voting, 25,000,000 shares authorized, 7,859,310 and 5,852,197 shares issued and outstanding, respectively 7,859 5,852 Additional paid-in capital 10,477,098 8,546,387 Deferred compensation (96,843) (615,011) Subscriptions receivable (28,430) (996,289) Accumulated deficit (11,476,098) (7,179,604) ------------------------------ Total stockholders' deficit: (1,116,414) (238,665) ------------------------------ Total liabilities and stockholders'deficit $ 794,405 $ 432,842 ------------------------------ -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. F-2 CERISTAR, INC. Consolidated Statement of Operations Years Ended December 31, -------------------------------------------------------------------------------- 2003 2002 ------------------------------ Service revenue $ 404,173 $ 306,512 Equipment sales 26,457 214,440 ------------------------------ Total revenues 430,630 520,952 Cost of sales (511,362) (465,202) Selling, general, and administrative expense (3,867,535) (2,767,581) ------------------------------ Loss from operations (3,948,267) (2,711,831) Other income (expense) 734 1,753 Interest expense (348,961) (23,197) ------------------------------ Loss before benefit for income taxes (4,296,494) (2,733,275) Income taxes benefit - - ------------------------------ Net loss $ (4,296,494) $(2,733,275) ------------------------------ Loss per common share - basic and diluted $ (0.62) $ (0.58) ------------------------------ Weighted average shares - basic and diluted 6,940,000 4,724,000 ------------------------------ -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. F-3 CERISTAR, INC. Consolidated Statement of Stockholders' Deficit Years Ended December 31, 2002, and 2001 --------------------------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Additional Deferred Subscrip- Accumu- ------------------------------------- Paid-in Compen- tions lated Shares Amount Shares Amount Capital sation Receivable Deficit -------------------------------------------------------------------------------------------- Balance, January 1, 2002 - - 4,180,078 4,180 5,284,625 (821,033) (80,630) (4,446,329) Issuance of common stock for: Cash - - 328,654 329 482,584 - Services - - 1,072,968 1,073 2,207,017 - (911,932) - Subscription receivables and compensation - - 175,322 175 352,328 (320,000) (6,211) - Debt - - 147,768 148 308,708 - - - Non-vested common stock reacquired through employee terminations (52,593) (53) (163,875) 161,444 2,484 - Amortization of deferred compensation - - - - - 364,578 - - Preferential conversion feature and issue of warrants with long-term debt - - - - 75,000 - - - Net loss - - - - - - - (2,733,275) -------------------------------------------------------------------------------------------- Balance, December 31, 2002 - - 5,852,197 5,852 8,546,387 (615,011) (996,289) (7,179,604) Issuance of common stock for: Cash - - 224,097 224 462,166 - - - Services - - 1,949,383 1,949 1,264,362 - (769,144) - Employee stock subscriptions satisfied through services - - - - - - 69,894 Non-vested common stock canceled through employee terminations - - (166,367) (166) (222,817) 211,500 11,483 - Amortization of deferred compensation and - subscriptions receivable - - - - - 306,668 1,655,626 Preferential conversion feature and issue of warrants with long-term debt - - - - 427,000 - - - Net loss - - - - - - - (4,296,494) -------------------------------------------------------------------------------------------- Balance, December 31, 2003 - $ - 7,859,310 $ 7,859 $ 10,477,098 $ (96,843) $ (28,430) $ (11,476,098) -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. F-4 CERISTAR, INC. Consolidated Statement of Cash Flows Years Ended December 31, -------------------------------------------------------------------------------- 2003 2002 ----------------------------- Cash flows from operating activities: Net loss $ (4,296,494) $ (2,733,275) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 77,414 63,682 Stock issued for services 497,167 1,322,450 Amortization of deferred compensation 306,668 364,578 Stock subscription satisfied with services 1,725,520 - Amortization of discount on long-term debt 213,003 10,000 Bad debt expense 126,125 16,117 Decrease (increase) in: Accounts receivable (90,181) (66,856) Prepaid expense (400) - Deposits (41) (8,338) Increase (decrease) in: Accounts payable 51,309 186,990 Accrued liabilities 201,983 40,489 Deferred revenue 3,644 56,396 ----------------------------- Net cash used in operating activities (1,184,283) (747,767) ----------------------------- Cash flows used in investing activities- purchase of property and equipment (286,938) (86,018) ----------------------------- Cash flows from financing activities: Proceeds from issuance of common stock 462,390 482,913 Proceeds from related party note 103,000 140,300 Payments on related party notes payable (9,798) - Proceeds from note payable 209,916 228,394 Payments on note payable (10,090) (59,838) Proceeds from convertible short-term debt 864,000 - Proceeds from convertible long-term debt - 75,000 Payments on convertible long-term debt (12,224) (7,292) ----------------------------- Net cash provided by financing activities 1,607,194 859,477 ----------------------------- Net increase in cash and cash equivalents 135,973 25,692 Cash and cash equivalents at beginning of period 28,210 2,518 ----------------------------- Cash and cash equivalents at end of period $ 164,183 $ 28,210 ----------------------------- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. F-5 CERISTAR, INC. Notes to Consolidated Financial Statements December 31, 2003, and 2002 -------------------------------------------------------------------------------- 1. Organization CeriStar, Inc. (formerly Planet Resources, Inc.) (the and Company) operates in the communications industry as a Description developer and service provider of IP technology applied of Business to data convergence. The Company is located in Salt Lake City, Utah, and was formed in December 1999. On September 10, 2002 the Company entered into an Agreement and Plan of Merger with Planet Resources, Inc and its wholly owned subsidiary (together referred to as Planet) in which all the issued and outstanding stock of the Company, including Convertible Preferred Series A shares (Series A) and Convertible Preferred Series B shares (Series B), were exchanged for the issued and outstanding stock of Planet. Series A and B shares were exchanged at a rate of approximately .757 for every common share of Planet and common shares of the Company were converted into approximately .322 shares of Planet common share. Just prior to the merger Planet authorized a 1 to 5.23 reverse stock split. The merger was accounted for as a reverse merger with the Company being the accounting acquirer. 2. Summary of Concentration of Credit Risk Significant Financial instruments which potentially subject the Accounting Company to concentration of credit risk consist Policies primarily of trade receivables. In the normal course of business, the Company provides on-going credit evaluations of its customers and maintains allowances for possible losses. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on cash and cash equivalents. Cash and Cash Equivalents Cash includes all cash and investments with original maturities to the Company of three months or less. -------------------------------------------------------------------------------- F-6 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Property and Equipment Significant Property and equipment are recorded at cost less Accounting accumulated depreciation. Depreciation and amortization Policies on capital leases and property and equipment are Continued determined using the straight-line method over the estimated useful lives of the assets or terms of the leases. Depreciation and amortization periods are as follows: Computer equipment and software 3 - 5 years Furniture and fixtures 5 years Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the estimated remaining life in measuring whether the assets are recoverable. If it is determined that an impairment loss has occurred based on expected cash flows, such loss is recognized in the statement of operations. Revenue Recognition Revenue is recognized when a valid contract or purchase order has been executed or received, services have been performed or product has been delivered, the selling price is fixed or determinable, and collectibility is reasonably assured. Payments received prior to performance are recorded as deferred revenue. Income Taxes Deferred taxes are computed using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are not recognized unless it is more likely than not that the asset will be realized in future years. -------------------------------------------------------------------------------- F-7 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Earnings Per Common and Common Equivalent Share Significant The computation of basic earnings per common share is Accounting computed using the weighted average number of common Policies shares outstanding during the year. Continued The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus common stock equivalents which would arise from the exercise of warrants outstanding using the treasury stock method and the average market price per share during the year. Warrants and convertible debt to issue 1,290,793 and 83,724 common stock equivalents are not included in the diluted earnings per share calculation for 2003 and 2002, respectively, since their effect is anti-dilutive. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Stock-Based Compensation The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Accordingly, In accordance with APB Opinion No. 25, no compensation is recognized for options granted to employees unless those options are re-priced and are subject to variable accounting. No compensation expense is recognized when stock options or warrants are granted to employees. During the year ended December 31, 2003, the Company issued 3,900,000 options to Officers of the Company to purchase the Company's common stock at an exercise price of $.38 to $.46 per share. These options expire in 2013 and vest in November of 2004. -------------------------------------------------------------------------------- F-8 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Stock-Based Compensation - Continued Significant Had compensation cost for these options been determined Accounting based upon the fair value at the grant date consistent Policies with the methodology prescribed under SFAS No. 123, the Continued Company's net earnings would have changed as set forth in the table below: Years Ended December 31, ----------------------------- 2003 2002 ----------------------------- Net income (loss) - as reported $ (4,296,494) $ (2,733,275) Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects - - Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (340,000) - ----------------------------- Net income (loss) - pro forma $ (4,636,494) $ (2,733,275) ----------------------------- Income (loss) per share - as reported $ (.62) $ (.58) ----------------------------- Income (loss) per share - pro forma $ (.67) $ (.58) ----------------------------- These options were valued at the date of grant with the total calculated pro forma expense equal to approximately $1,585,000. The pro forma expense is being amortized over the vesting period of the option. No options or warrants were issued to employees for the year ended December 31, 2002. The fair value of each warrant grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions at December 31: 2003 2002 ---------------------------------- Expected dividend yield $ - $ - Expected stock price volatility 100% 50.41% Risk-free interest rate 4.0% 4.25% Expected life of options 10 years 5 years The weighted average fair value of each option granted to employees during 2003 was $.41. -------------------------------------------------------------------------------- F-9 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Reclassifications Significant Certain amounts in the 2002 financial statements have Accounting been reclassified to conform with classifications Policies adopted in the current year. Continued 3. Going The Company has a working capital deficit, a Concern stockholders' deficit, and recurring net losses. These factors create substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company generating cash from the sale of its common stock or obtaining debt financing and attaining future profitable operations. Management's plans include selling its equity securities and obtaining debt financing to fund its capital requirement and ongoing operations, however, there can be no assurance the Company will be successful in these efforts. 4. Property Property and equipment consists at December 31: and Equipment 2003 2002 ---------------------------------- Computer equipment and software $ 694,137 $ 410,598 Furniture and fixtures 13,986 10,587 ---------------------------------- 708,123 421,185 Less accumulated depreciation and amortization (159,204) (81,790) ---------------------------------- $ 548,919 $ 339,395 ---------------------------------- -------------------------------------------------------------------------------- F-10 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 5. Accrued Accrued liabilities consisted of the following at Liabilities December 31: 2003 2002 ---------------------------------- Accrued payroll $ 230,129 $ 90,445 Other 73,743 11,443 ---------------------------------- $ 303,872 $ 101,888 ---------------------------------- 6. Deferred The Company has entered into long-term service contracts Revenue which are accompanied by payments received from customers for initial equipment installation to service residential developments. Amounts received for the initial equipment installation are deferred until they are earned based on the terms of the contract. The balance of the deferred revenue at December 31, 2003 and 2002 was $236,509 and $181,296, respectively. 7. Notes Payable Notes payable consisted of the following at December 31: 2003 2002 ----------------------------- Discounted convertible notes payable due to a financing company. These notes have a face interest rate of 18% and an effective interest rate of 58% due to amortization of an original discount of $338,000 of which $288,000 was due to a beneficial con-version feature attached to the notes and $50,000 of the discount in the redemption value of the notes. The total unamortized discount at December 31, 2003 was $178,004. The notes are unsecured. Of the notes, $197,000 are due on demand with the remainder due through April 2004. The notes are convertible upon maturity at a rate of 75% of the average closing bid price of the Company's common stock for the five trading days ending on the trading day immediately preceding the conversion date. $ 685,996 $ - -------------------------------------------------------------------------------- F-11 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 7. Notes Payable Continued Note payable with an effective interest rate of 57% including an original discount of $78,015 from issuance of detachable warrants with the note. As of December 31, 2003 the unamortized portion of the discount was $45,509. The note is due to a financing company and matures on August 2004. The note is secured by equipment. 136,491 - Convertible notes due to a shareholder and former officer of the Company. These notes bear interest at 12%, are unsecured, and due on demand. Subsequent to December 31, 2003 these notes were in default. The notes are convertible into approximately 186,000 shares at approximately $.50 per share. 93,202 - Note payable to an individual with interest at 10% secured by receivables and due on demand. 17,826 - Note payable to a financial institution. The note is payable in monthly installments of $1,744, including interest at 14%, secured by equipment, and matures on May 30, 2007. At December 31, 2003 and 2002 the outstanding balance of the debt was 55,484 and 67,708 less a discount of $55,484 and $65,000, respectively. - - ---------------------------- $ 933,515 $ - ---------------------------- -------------------------------------------------------------------------------- F-12 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 7. Notes Payable Future maturities of notes payable are as follows: Continued Year Ending December 31: Amount ------------------------ ------------------ 2004 $ 947,556 2005 16,138 2006 18,548 2007 6,757 ------------------ 988,999 Less discount (55,484) ------------------ $ 933,515 ------------------ 8. Income The benefit for income taxes is different than amounts Taxes which would be provided by applying the statutory federal income tax rate to loss before benefit for income taxes for the following reasons: Years Ended December 31, ---------------------------------- 2003 2002 ---------------------------------- Income tax benefit at statutory rate $ 1,592,000 $ 1,020,000 Stock valuation for services (538,000) (472,000) Change in valuation allowance (1,053,000) (546,000) Other (1,000) (2,000) ---------------------------------- $ - $ - ---------------------------------- Deferred tax assets (liabilities) are comprised of the following as of December 31: 2003 2002 ---------------------------------- Net operating loss carry-forwards $ $ 1,370,000 Amortization of license technology 287,000 298,000 Depreciation (114,000) (48,000) Deferred revenue 88,000 26,000 Allowance for doubtful accounts 43,000 6,000 Valuation allowance (2,705,000) (1,652,000) ---------------------------------- $ - $ - ---------------------------------- -------------------------------------------------------------------------------- F-13 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 8. Income At December 31, 2003, the Company has net operating loss Taxes carry-forwards available to offset future taxable income Continued of approximately $6,437,000 which will begin to expire in 2019. The utilization of the net operating loss carry-forwards is dependent upon the tax laws in effect at the time the net operating loss carry-forwards can be utilized. A valuation allowance has been recorded against the deferred tax asset due to the uncertainty surrounding its realization caused by the Company's recurring losses. 9. Common The Company has issued 360,760 and 240,742 warrants in Stock conjunction with the issuance of its securities and Warrants convertible debt during the years ended December 31, 2003 and 2002, respectively. Warrants that were issued generally do not have a life that exceeds five years. Information regarding warrants o purchase common shares is summarized below: Number of Options Exercise and Price Per Warrants Share ---------------------------------- Outstanding at January 1, 2002 83,724 $ 1.67 Granted 240,742 1.67 - 4.50 Expired - - ---------------------------------- Outstanding at December 31, 2002 324,466 1.67 - 4.50 Granted 4,260,760 .38 - 4.50 Expired - - ---------------------------------- Outstanding at December 31, 2003 4,585,226 $ .38 - 4.50 ---------------------------------- -------------------------------------------------------------------------------- F-14 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 9. Common The following table summarizes information about Stock outstanding warrants and options for common stock at Warrants December 31, Continued Outstanding Exercisable ----------------------------------------------------------------- Weighted Average Remaining Weighted Range of Number Contractual Average Average Exercise Out- Life Exercise Number Exercise Prices standing (Years) Price Exercisable Price ------------------------------------------------------------------------------- $ .38 - .58 3,900,000 9.79 $ .45 - $ - 1.00 - 2.55 395,489 2.41 1.39 395,489 1.39 3.30 - 4.50 289,737 2.04 3.71 289,737 3.71 ------------------------------------------------------------------------------- $ .38 - 4.50 4,585,226 8.66 $ .73 685,226 $ 2.37 ------------------------------------------------------------------------------- 10. Stock Subscriptions receivable consist of the obligation of Subscriptions employees to purchase common shares. In addition the Receivable Company may enter into contracts with consultants in which the Company issues stock at the commencement of the contract period. The value of the services or common stock given, which ever is more determinable is recorded as a stock subscription and amortized as expense over the period of the service contract. At December 31, 2003 and 2002 there were approximately $28,000 and $996,000 of subscriptions receivable related to these contracts 11. Deferred Deferred compensation is comprised of common stock Compensationns issuances to employees which have not yet vested. As of December 31, 2003 and 2002 the company had common stock for employee services valued at $96,843 and $615,011, respectively. The measurement date of compensation is the date the shares were granted. 12. Supplemental During the year ended December 31, 2003, the Company had Cash Flow significant non-cash financing and investing activities Information as follows: o Issued 1,282,000 common shares valued at $769,144 to consultants for short-term contract services. -------------------------------------------------------------------------------- F-15 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 12. Supplemental o Cancelled 166,367 unvested shares of common Cash Flow stock valued at $222,983 recorded as deferred Information compensation of $211,500 and subscriptions Continued receivable of $11,483, due to employee terminations. o Issued warrants in connection with debt which resulted in a debt discount of $139,000. o Debt issued with beneficial conversion features valued at $288,000 which resulted in debt discounts. o Recorded accounts receivable for unearned revenue of $51,569. During the year ended December 31, 2002, the Company: o Financed the purchase of equipment with a cash advance from a customer which it classified as unearned revenue of $103,196. o Issued 1,248,290 of the Company's common shares for services of $1,325,660, deferred compensation of $320,000 and subscriptions receivable of $914,933. o Exchanged 147,768 shares of the Company's common stock for $308,708 of notes payable. o Issued 45,420 warrants with a beneficial conversion feature attached to long-term debt, which resulted in a discount against the long-term debt of $75,000. o Reacquired, through employee terminations, 52,593 shares of the Company's common stock for a reduction in deferred compensation of $161,444 and subscriptions receivable of $800. o Acquired equipment in exchange for accounts payable of $164,541. -------------------------------------------------------------------------------- F-16 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 12. Supplemental Cash paid for interest and income taxes are as follows: Cash Flow Information Continued Years Ended December 31, ---------------------------------- 2003 2002 ---------------------------------- Interest $ 122,214 $ 23,197 ---------------------------------- Income taxes $ - $ - ---------------------------------- 13. Related Party Related party transactions are as follows: Transactions Otherwise o During the year ended December 31, 2002, an not disclosed officer of the Company and relatives of the Officer exchanged $127,200 of notes payable for 59,585 shares of the Company's common stock. 14. Major Sales to customers which exceeded 10% of total sales are Customers as follows for the years ended December 31: 2003 2002 ---------------------------------- Customer A $ 155,000 $ 152,000 Customer B $ - $ 91,000 Customer C $ - $ 60,000 15. Commitments Litigation and The Company may become or is subject to investigations, Contingencies claims or lawsuits ensuing out of the conduct of its business. The Company is currently not aware of any such items which it believes could have a material effect on its financial position. 16. Fair Value of The Company's financial instruments consist of cash, Financial receivables and payables. The carrying amount of cash, Instruments receivables, convertible long-term debt and payables approximates fair value because of the short-term nature of these items. -------------------------------------------------------------------------------- F-17 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 17. Recent In June 2002, the FASB issued SFAS No. 146, "Accounting Accounting for Costs Associated with Exit or Disposal Activities." Pronounce- This standard, which is effective for exit or disposal ments activities initiated after December 31, 2002, provides new guidance on the recognition, measurement and reporting of costs associated with these activities. The standard requires companies to recognize cost associated with exit or disposal activities when they are incurred rather than at the date the company commits to an exit or disposal plan. The adoption of SFAS No. 146 by the Company did have a material impact on the Company's financial position or future operations. In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Instruments with Characteristics of Both Liabilities and Equity". This new statement changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity or classifications between liabilities and equity in a section that has been known as "Mezzanine Capital". It requires that those certain instruments be classified as liabilities in balance sheets. Most of the guidance in SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements. In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R") (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity though means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN 46), which was issued in January 2003. Before concluding that it is appropriate to apply ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity (VIE). As of the effective date of FIN 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003, to determine whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities. Public companies must apply either FIN 46 or FIN 46R immediately to entities created after January 31, 2003 and no later than the end of the first reporting period that ends after March 15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated financial position, results of operations or cash flows. -------------------------------------------------------------------------------- F-18 CERISTAR, INC. Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 17. Recent In November 2002, the FASB issued Interpretation No. 45, Accounting Guarantor's Accounting and Disclosure Requirements for Pronounce- Guarantees, Including Indirect Guarantees of ments Indebtedness of Others (FIN No. 45). FIN No. 45 requires Continued certain guarantees to be recorded at fair value, which is different from current practice to record a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. FIN No. 45 also requires the Company to make significant new disclosures about guarantees. The disclosure requirements of FIN No. 45 are effective for the Company in the first quarter of fiscal year 2003. FIN No. 45's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company's previous accounting for guarantees issued prior to the date of the initial application of FIN No. 45 will not be revised or restated to reflect the provisions of FIN No 45. The Company does not expect the adoption of FIN No. 45 to have a material impact on its consolidated financial position, results of operations or cash flows. The Emerging Issues Task Force issued EITF No. 00-21, "Revenue Arrangements with Multiple Deliverables" addressing the allocation of revenue among products and services in bundled sales arrangements. EITF 00-21 is effective for arrangements entered into in fiscal periods after June 15, 2003. The Company does not expect the adoption of EITF No. 00-21 to have a material impact on the Company's future results of operations or financial position In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 revises or rescinds portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB 104 did not have a material effect on the Company's results of operations or financial condition. -------------------------------------------------------------------------------- F-19 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A CONTROLS AND PROCEDURES In designing and evaluating our disclosure controls an procedures, management has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and, consequently, management has been required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Within 90 days prior to the filling date of this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer (since their employment in September 2003), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive and Chief Financial Officer each has concluded that our disclosure controls and procedures are effective in ensuring that information is accumulated and communicated to both the Chief Executive and Chief Financial Officer, as appropriate. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth our control persons and executive officers. Current Directors and Executive Officers Name Age Position ---- --- -------- Frederick A. Weismiller 62 Chairman of the Board, Chief Executive Officer and President Michael B. Miller 60 Chief Operating Officer Robert E. Lester 36 Chief Financial Officer Mark S. Hewitt 52 Director 19 Former Directors and Executive Officers David L. Bailey 64 Chairman of the Board, President and Chief Executive Officer Dane P. Goodfellow 58 Vice President of Marketing and Director G. Earl Demorest(1) 49 Vice President of Engineering and Finance Paul D. Losee 55 Vice President of Corporate Development Lark M. Allen 59 Director (1) Mr. Demorest is the son-in-law of Mr. Bailey. Fred A. Weismiller joined CeriStar as President and Chief Executive Officer and Director in October 2003. In January 2004, Mr. Weismiller became our Chairman of the Board of Directors. From September 2000 until September 2003, Mr. Weismiller was employed by MFJCo., a telecommunications consultancy company as their Chief Executive Officer. From September 2000 through June 2001, Mr. Weismiller was the Chief Operating Officer for Mediacentric, Inc. From January 1995 until July 2000, Mr. Weismiller was employed by Pacific Gateway Exchange as Executive Vice President - International Marketing. From 1990 until 1995, he was employed by Telecom New Zealand, most recently as its Managing Director. From 1969 through 1989 Mr. Weismiller was employed by AT&T, most recently as a Regional Managing Director. Prior to joining AT&T, Mr. Weismiller was with the United States Navy as a Naval Aviation Officer from September 1963 until January 1969. Mr. Weismiller obtained a BSS degree in Economics from Fairfield University in 1963 and a MBA in Professional Management from Pace University in 1974. Michael B. Miller became our Chief Operating Officer in October 2003. Mr. Miller has over thirty years of telecommunications experience, including senior positions with U.S. West (now Qwest International), involved in Engineering, Construction Management and Installation and Maintenance of Central Office switching and transmission equipment. Before joining CeriStar, from May 2001 until September 2003, Mr. Miller was employed by MFJCo, a telecommunications consultancy as its COO. From September 2000 through June 2001, Mr. Miller was the Senior Vice President - Operations for Mediacentric. Between May 1998 and August 2000, Mr. Miller was an operational consultant to Nextink Communications (now XO Communications). From February 1962 until April 1998, he was employed in a variety of position for US West Communications and US West International (now Qwest Communications), most recently as General Manager, Fixed Network, Malaysia. Robert Lester has served as Chief Financial Officer and Director since September 2003. Mr. Lester is responsible for financial operations and reporting, corporate finance and investor relations. Prior to joining CeriStar, Mr. Lester was employed by AlphaWest Capital, a boutique advisory firm, as a Managing Director, from January 2002 until October 2003. Before joining CeriStar, Mr. Lester was employed as an investment banker and for Deutsche Banc Alex. Brown from March 2000 until June 2001; Paribas from January 1999 until March 2000; Ernst & Young, LLC from 1997 through 1998; and Merrill Lynch & Co from 1995 through 1997. Mr. Lester earned a BS in Economics from the University of California in Riverside in 1990 and a MBA from Pepperdine University in Malibu, California in 1994. 20 Mark S. Hewitt has served as a member of our Board of Directors since April 2000. Currently, Mr. Hewitt is the Chief Technology Officer of Nextbend, Inc. a consumer electronics company based in Florida. Previously he was Chief Technology Officer of Mediacentric Group, a communications solutions provider from February 2000 until September 2001. From August 1999 until October 2000 he was Senior VP at I-Link, Incorporated, a unified messaging and IP telephony company. From May 1998 until September 1999 he was the Senior Director of New Product Development for Frontier Communications, a NASDAQ company which was acquired by Global Crossing. Mr. Hewitt earned a BS in Electronics Engineering in 1974 from the University of Alaska. David L Bailey served as our Chairman of the Board, President and Chief Executive Officer from December 1999 until his resignation as our President and Chief Executive Officer on October 9, 2003 and his resignation as a member of our Board of Directors on January 21, 2004. From May 1997 to December 1999, Mr. Bailey served as Managing Partner of DL Group, a limited liability corporation, which marketed computer software and telecommunications products. From 1993 to 1997, he was Chairman and Chief Executive Officer of VZ Corp., a software development company. Mr. Bailey has also been Chairman and Chief Executive Officer of Clyde Digital Systems and Cericor, and was the lead founder and Chief Executive Officer of Iomega, Inc. Dane P. Goodfellow served as Vice President of Marketing and a director of CeriStar from December 1999 until his resignation as Vice President of Marketing in May 6, 2003 and resigned as a member of our Board of Directors in January 2004. From 1998 to 1999, Mr. Goodfellow served as Vice President of Sales of ViewPoint, Inc. a software development company. From 1994 to 1997, he served as Vice President of Marketing and Sales of VZ Corp., a software development company. G. Earl Demorest served as Vice President of Engineering and Chief Financial Officer from December 1999 until his resignation from that position on September 21, 2003. Mr. Demorest served as Chief Financial Officer and Network Administrator of DL Group, a limited liability corporation, which marketed computer software and telecommunications products. From 1995 to 1997, he was Controller and Network Administrator of VZ Corp, a software development company. Mr. Demorest is also the son-in-law of Mr. Bailey. Mr. Demorest is currently employed as an engineer and is not an officer or executive employee. 21 Paul D. Losee served as Vice President of Development from March 2001 until his resignation in May 2003. From 1999 to 2001, Mr. Losee was the Chief Operating Officer of Xboundary.com, Inc., an internet centric software developer. From 1998 to 1999, he was the Chief Operating Officer of IQ Telecommunications, Inc. Mr. Losee was President and founder of M+, Inc., a marketing consultancy firm. Lark M. Allen served as a member of our Board of Directors from April 2000 until his resignation in March 2003. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our directors, officers and persons who own more than 10% of our common stock to file reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. These persons are required by regulations of the Securities and Exchange Commission to furnish us with copies of all Section 16(a) forms they file. We are unable nor do we have any copies of any filings which may have been required to complete by our former officers and directors. In addition, we have not been able to determine if any forms required to be filed by such persons before our current officers assumed their positions were filed or copies delivered to the Company. Messrs. Weismiller, Miller and Lester did not timely file their Form 3. ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth, for each of the last three fiscal years, all compensation awarded to, paid to or earned by the Chief Executive Officer of our company and the two other most highly compensated executive officers during any of the last three fiscal years. Annual Compensation Long-Term Compensation --------------------------------------- -------------------------------- Stock Options Other Annual Granted All Other Name and Principal Salary Bonus Compensation (In Shares) Compensation Positions Year $ $ $ (#) ($) -------------------------------------------------------------------------------------------------------------- Frederick A. Weismiller 2003 $20,768 $7,500 1,750,000(2) Chairman of the Board, 2002 0 0 Chief Executive Officer 2001 0 0 and President (1) Michael B. Miller 2003 $19,384 $6,000 1,500,000(4) Chief Operations Officer 2002 0 0 and Director (3) 2001 0 0 Robert E. Lester 2003 $12,000 $8,500 650,000(6) Chief Financial Officer 2002 0 0 and Director (5) 2001 0 0 David L. Bailey 2003 $63,173 President, Chief Executive 2002 $75,000 Officer and Director (7) 2001 $136,154 Dane P. Goodfellow 2003 $20,769 Vice President - Marketing 2002 $71,923 and Director (8) 2001 $79,788 G.Earl Demorest 2003 $75,000 $200 0 Vice President Engineering 2002 $81,923 0 and Finance (9) 2001 $103,615 $123,750(10) Paul D. Losee 2003 $21,577 0 Vice President Corporate 2002 $95,539 0 Development(11) 2001 $92,961 $569,250(12) 22 (1) Mr. Weismiller is employed by us pursuant to an employment agreement, dated October 8, 2003. See "Executive Compensation - Employment Agreements." Pursuant to Mr. Weismiller's employment agreement, Mr. Weismiller is entitled to a monthly base salary of $7,500 with annual adjustments approved by our Board of Directors. (2) Pursuant to Mr. Weismiller's employment agreement, Mr. Weismiller received options to purchase 1,750,000 options of our Common Stock for a price of $0.46 per share. As of March 31, 2004, none of these options are currently vested or exercisable. (3) Mr. Miller is employed pursuant to terms of an employment agreement, dated as of October 9, 2003. See "Executive Compensation - Employment Agreements." (4) Pursuant to Mr. Miller's employment agreement, Mr. Miller received options to purchase 1,500,000 options of our Common Stock for a price of $0.46 per share. As of March 31, 2004, none of these options are currently vested or exercisable. (5) Mr. Lester is employed pursuant to terms of an employment agreement, dated as of November 18, 2003. See "Executive Compensation - Employment Agreements." (6) Pursuant to Mr. Lester's employment agreement, Mr. Lester received options to purchase 650,000 options of our Common Stock for a price of $0.38 per share. As of March 31, 2004, none of these options are currently vested and exercisable. (7) Mr. Bailey resigned as President and Chief Executive Officer on September 22, 2003 and as member and Chairman of the Board of Directors on January 21, 2004. (8) Mr. Goodfellow resigned as Vice President of Marketing on May 6, 2003 and as a member of Board of Director on January 20, 2004. (9) Mr. Demorest resigned as Chief Financial Officer on September 21, 2003 and currently is employed as an engineer, but is not an officer or deemed to be an executive employee. (10) Represents 125,000 shares of CeriStar stock issued prior to the Planet transaction granted at $.01 per share related to payments for services. (11) Mr. Losee resigned in May 2003. (12) Represents 575,000 shares of CeriStar stock issued prior to the Planet transaction granted at $.01 per share related to payments for services. 23 Stock Option Grants And Exercises We granted non-qualified stock options to Messrs. Weismiller, Miller and Lester. As of December 31, 2003, options to purchase a total of 3,900,000 shares were outstanding. The following tables show, for the fiscal year ended December 31, 2003 certain information regarding options granted to, exercised by, and held at year-end by, the current executive officers listed on the "Summary of Executive Compensation" table above. The potential realizable value is calculated based on the ten-year term of the option at the time of grant. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent our prediction of our stock price performance. The potential realizable values at 5% or 10% appreciation are calculated by: o multiplying the number of shares of common stock subject to a given option by the exercise price per share; o assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table until the expiration of the options; and o subtracting from that result the aggregate option exercise price. Percentages shown under "Percent of Total Options/SARs Granted to Employees in Fiscal Year Ended December 31, 2003 " are based on (i) options to purchase 3,900,000 shares of our common stock. Option/SAR Grants During the Fiscal Year Ended December 31, 2003 Individual Grants ------------------------------------- % of Total Options/SARs Potential Realizable Number of Granted to Value at Assumed Annual Securities Employees in Exercise Rates of Stock Price Underlying Fiscal Year or Base Appreciation for Option Options/SARs Ended December Price Expiration Term Name Granted (#) 31, 2003 ($/Share) Date 5% ($) 10% ($) ---------------------- ----------------- ------------------- ------------ ------------- ------------ ------------ Frederick A. 1,750,000 44.87% $0.46 Oct 7, 2013 $1,312,500 $2,082,500 Weismiller (1) Michael B. Miller (2) 1,500,000 38.46% $0.46 Oct 7, 2013 $1,125,000 $1,785,000 Robert E. Lester (3) 650,000 16.67% $0.38 Nov 18, 2013 $ 403,000 $ 643,500 (1) Pursuant to Mr. Weismiller's employment agreement, Mr. Weismiller received options to purchase 1,750,000 options of our Common Stock for a price of $0.46 per share. As of March 31, 2004, none of these options are currently vested or exercisable. (2) Pursuant to Mr. Miller's employment agreement, Mr. Miller received options to purchase 1,500,000 options of our Common Stock for a price of $0.46 per share. As of March 31, 2004, none of these options are currently vested or exercisable. 24 (3) Pursuant to Mr. Lester's employment agreement, Mr. Lester received options to purchase 650,000 options of our Common Stock for a price of $0.38 per share. As of March 31, 2004, none of these options are currently vested or exercisable. Compensation of Directors Our non-employee directors do not receive any additional compensation for serving as a member of our board of directors or for attending any of our board committees, but non-employee directors are reimbursed for out-of-pocket expenses incurred in connection with attending our board and board committee meetings. Employment Contracts We entered into employment agreements with Mr. Weismiller to serve as our Chief Executive Officer, with Mr. Miller to serve as our Chief Operations Officer and with Mr. Lester to serve as our Chief Financial Officer. Frederick A. Weismiller ----------------------- In October 2003, we entered into an employment agreement with Frederick Weismiller (the "Weismiller Agreement"), whereby Mr. Weismiller became our President and Chief Executive Officer for a term of one year. The Weismiller Agreement includes provisions allowing this term to be extended for successive one year terms unless terminated by either party. Under the terms of the Weismiller Agreement, Mr. Weismiller receives a salary of $7,500 per month. Michael B. Miller ----------------- In October 2003, we entered into an employment agreement with Michael B. Miller (the "Miller Agreement"), whereby Mr. Miller became our Chief Operations Officer for a term of one year. The Miller Agreement includes provisions allowing this term to be extended for additional one year terms unless terminated by either party. Under the terms of the Miller Agreement, Mr. Miller receives a salary of $7,000 per month. Robert E. Lester ---------------- In November 2003, we entered into an employment agreement with Robert E. Lester (the "Lester Agreement"), whereby Mr. Lester became our Chief Financial Officer for a one year term. The Lester Agreement includes provisions allowing this term to be extended for additional one year terms unless terminated by either party. Under the terms of the Lester Agreement, Mr. Miller receives a salary of $6,500 per month. Under each of the Weismiller, Miller and Lester Agreements, in the event of a change of control, which, as defined under these agreements, Messrs. Weismiller, Miller and Lester are entitled to certain severance benefits, including a lump sump payment equal to six months of their then current salary and all their stock options granted in these agreements shall immediately vest. 25 Prior to the Weismiller, Miller and Lester Agreements, we did not have any employment agreements with any current or former employees. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Common Stock The following table sets forth certain information regarding the ownership of our Common Stock as of March 31, 2004 by: (i) each director; (ii) each of the executive officers named in the Summary of Executive Compensation table in Item 10 of this Report; (iii) all executive officers and directors of the company as a group; and (iv) all those known by us to be beneficial owners of more than five percent of our Common Stock. Unless otherwise indicated, the mailing address for each party listed below is c/o CeriStar, Inc., 50 West Broadway, Suite 1100, Salt Lake City, Utah 84119. Beneficial Owner Beneficial Ownership (1) Percent of Total Executive Officers and Directors Number of Shares Class -------------------------------- Frederick A. Weismiller 0 - Michael B. Miller 0 - Robert E. Lester 0 - Mark Hewitt 19,925 * 5% Stockholders --------------- SovCap Equity Partners c/o Lion Corporate Securities Ltd. Cumberland House #27 Cumberland Street P.O. Box N-10818 Nassau, New Providence 773,888 9.67% Former Officers and Directors ----------------------------- David L. Bailey(2) 1971 N. Summerwood Drive Farmington Utah 84025 844,927 10.56% G. Earl Demorest 1529 East Hilda Drive Fruit Heights, Utah 84037 161,112 2.01% Dane P. Goodfellow 8798 South Sutton Way Salt Lake City, Utah 84121 254,865 3.18% Paul D. Losee 2783 Hobbs Creek Drive Layton, Utah 84040 0 - * Less than one percent. (1) This table is based upon information supplied by current and former officers, directors and principal stockholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 8,004,450 shares of the Company's Common Stock outstanding on March 31, 2004 adjusted as required by rules promulgated by the Securities and Exchange Commission. (2) Includes 39,028 shares owed by Connie Bailey, the wife of Mr. Bailey. 26 Equity Compensation Plan Information 2002 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan and New Planet Resources, Inc. Stock Incentive Plan We maintain the 2002 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan and the New Planet Resources, Inc. Stock Incentive Plan, pursuant to which we may grant equity awards to eligible persons. The following table provides information as of March 31, 2004 about equity awards under these plans. Number Of Securities To Weighted Average Be Issued Upon Exercise Exercise Price of Number of Securities of Outstanding Options, Outstanding Options, Remaining Available for Private Plan Category Warrants And Rights Warrants And Rights Future Issuance ---------------------------------- --------------------------- ------------------------ ------------------------- Equity Compensation Plans 0 $0.00 0 Approved by Security Holders (1) Equity Compensation Plans Not 0 $0.00 225,731 Approved by Security Holders(2) Total 0 $0.00 225,731 (1) As of March 31, 2004, the New Planet Resources, Inc. Stock Incentive Plan had no shares issued or grants underlying such plan. (2) As of March 31, 2004, the 2002 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan had available for issuance approximately 225,731 shares. The number of options presented in this chart do not include the 3,900,000 options to purchase shares of stock issued to Messrs. Weismiller, Miller and Lester. See "Executive Compensation - Stock Option Grants and Exercises." ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Relationships During 2003, David L Bailey, loaned $78,000 to CeriStar, his brother loaned CeriStar $15,000 and his sister-in-law loaned CeriStar $10,000. Of the monies loaned by Mr. Bailey, $9,798 has been used to offset amounts due CeriStar for stock subscriptions. During 2002, Mr. Bailey, wife and nephew loan $127,200 to CeriStar, which was later exchanged for 4,736 shares of Series B convertible preferred stock (converted to 3,585 of CeriStar common stock) 56,000 shares of CeriStar common stock. During 2001 Mr. Bailey, his wife and his brother purchased a total of 27,200 shares of Series B convertible preferred stock for $68,000. 27 ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND CURRENT REPORTS ON FORM 8-K (a)(3) Exhibits The following exhibits are filed as part of this Annual Report on Form 10-KSB. 10.01 Amendment Number 1 to Employment Agreement between CeriStar, Inc. and Fred Weismiller dated October 1, 2003. 10.02 Amendment Number 1 to Employment Agreement between CeriStar, Inc. and Michael Miller dated October 9, 2003. 10.03 Amendment Number 1 to Employment Agreement between CeriStar, Inc. and Robert Lester dated November 18, 2003. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (a)(4) Previously Filed Exhibits Exhibit Description ------- ----------- 3.1 Certificate of Incorporation(1) 3.2 Bylaws(1) 4.1 Specimen Common Stock Certificate(1) 10.1 2002 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan.(2) 10.2 New Planet Resources, Inc. Stock Incentive Plan(3) 10.2 Agreement and Plan of Merger between Planet Resources, Inc. and CeriStar, Inc. (4) 10.01 Employment Agreement between CeriStar, Inc. and Fred Weismiller dated October 1, 2003. (5) 10.02 Employment Agreement between CeriStar, Inc. and Michael Miller dated October 9, 2003. (5) 10.03 Employment Agreement between CeriStar, Inc. and Robert Lester dated November 18, 2003. (5) (1) Incorporated by reference from Form 8-A, as filed on March 1, 2001. (2) Incorporated by reference from Registration Statement on Form S-8, as filed on September 10, 2002. 28 (3) Incorporated by reference from Registration Statement on Form SB-2, as filed on April 19, 1999. (4) Incorporated by reference from Form 8-K, as filed on September 17, 2002. (5) Incorporated by referenced from Form 10-QSB, as filed on November 19, 2003. (a) Current Reports on Form 8-K We filed the following Current Reports on Form 8-K during 2003 (i) On March 5, 2004 to file a press release. (ii) On January 21, 2004 to announce the resignation of Mr. Goodfellow as a member of our Board of Directors. (iii) On January 13, 2004 to announce the resignation of Mr. Bailey as our Chairman of the Board and President ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES We retained Tanner & Co. to audit the consolidated financial statements for the fiscal years ended December 31, 2003 and to provide various accounting services during the fiscal year ended December 31, 2003. The aggregate fees billed for professional accounting services by Tanner & Co. for the fiscal years ended December 31, 2003 are as follows: follows: 2003 2002 ---- ---- Audit Related fees $41,843 $34,700 Audit fees - - Tax fees - - Total $41,843 $34,700 Audit Fees. This category includes the audit of our annual financial statements, review of financial statements included in our Form 8-K Current Reports and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. Audit Related Fees. This category consists of assurance and related services that were reasonably related to the performance of the audit of our financial statements and are not reported above under "Audit Fees." The services for the fees disclosed under this category were for benefit plan audits. Tax Fees. This category consists of professional services rendered for tax compliance and tax advice. The services for the fees disclosed under this category were for tax return preparation and technical tax advice. All Other Fees. All other fees would include fees billed for professional services that were not the result of an audit or review. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CERISTAR, INC. Dated: April 13, 2004 /s/ Frederick A. Weismiller --------------------------- Frederick A. Weismiller Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Frederick A. Weismiller -----------------------------=---- Frederick A. Weismiller Dated: April 13, 2004 Chairman of the Board, Chief Executive Officer and President /s/ Michael B. Miller ----------------------------=----- Michael B. Miller Dated: April 13, 2004 Chief Operations Officer /s/ Robert E. Lester ----------------------------=----- Robert E. Lester Dated: April 13, 2004 Chief Financial Officer (Principal Financial Officer) Dated: April 13, 2004 /s/ Mark S. Hewitt ---------------------------------- Mark S. Hewitt Director 30