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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001 Commission File No. 000-27582
SPEEDUS.COM, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-3853788
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
140 58th Street, Suite 7E, Brooklyn, NY 11220
(Address of Principal Executive Offices)
(718) 567-4300
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par
value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was $10,955,000 on March 1, 2002, based on the
closing trade price of the Common Stock on the NASDAQ National Market system on
that date.
The number of shares of Common Stock outstanding as of March 27, 2002 was
18,652,206.
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DOCUMENTS INCORPORATED BY REFERENCE
None.
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SPEEDUS.COM, Inc.
TABLE OF CONTENTS
PART I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6 Selected Consolidated Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8 Consolidated Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief or
current expectations of the Company or its officers with respect to, among other
things, the ability of the Company to make capital expenditures, the ability to
incur additional debt, as necessary, to service and repay such debt, if any, as
well as other factors that may effect the Company's financial condition or
results of operations. Forward-looking statements may include, but are not
limited to, projections of revenues, income or losses, capital expenditures,
plans for future operations, financing needs or plans, compliance with covenants
in loan agreements, plans for liquidation or sale of assets or businesses, plans
relating to products or services of the Company, assessments of materiality,
predictions of future events, and the ability to obtain additional financing,
including the Company's ability to meet obligations as they become due, and
other pending and possible litigation, as well as assumptions relating to the
foregoing. All statements in this Form 10-K regarding industry prospects and the
Company's financial position are forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. The
Company undertakes no obligation to publicly release the result of any revisions
to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
2
PART I
ITEM 1. BUSINESS
The Company
We have co-invested with Siemens Corporate Research, Inc., a subsidiary of
Siemens Corporation, in Zargis Medical Corp. to develop a service solution,
initially targeted toward primary care physicians that would be used as part of
general medical examinations for the early screening and detection of valvular
and congenital heart disease. We will continue to explore additional
acquisitions of emerging-growth companies. We own a portfolio of patents that
allow for high-speed wireless communications. We also own fixed wireless
spectrum in the New York City metropolitan area that we may commercialize in the
future to support high-speed, or broadband, Internet access service. During
2001, we also developed and launched an online cell phone store, 007Phones,
which we now license to a third-party.
New Business Initiatives
Zargis Medical
Zargis Medical, in which we have co-invested with Siemens Corporate
Research, Inc., a subsidiary of Siemens Corporation, is building a service
solution, initially targeted toward primary care physicians that would be used
as part of general medical examinations for the early screening and detection of
valvular and congenital heart disease. General medical examinations, according
to The National Center for Health Statistics, totaled 46 million in 1999 for the
US alone.
We have signed an exclusive contract with Zargis Medical to design and
develop the wireless applications, as well as provide transaction processing to
support the commercial rollout of Zargis Medical's cardiac diagnostic products.
Under this contract, using a combination of wireless and wired technology,
Speedia Wireless, our wholly owned subsidiary, has demonstrated the ability to
transfer the heart sound file from a physician's office to the SPEEDUS Data
Center which will enable Zargis Medical to pursue a business model based on a
fee per usage basis.
Some of the major next steps remaining for Zargis Medical include clinical
trials, FDA approval, marketing and roll-out, along with the formation of
strategic partnerships.
Acquisitions
We seek business opportunities across all industries for potential
transactions and relationships in which we can apply our current resources and
management strengths. We are particularly focused on companies with sound
business plans and existing revenue bases that require growth capital. We will
continue to pursue opportunities involving our wireless expertise and broadband
assets as attractive opportunities present themselves. The companies that we
target, either public or privately held and regardless of industry, will be
seeking growth or restructuring capital to pursue near term business objectives
in demonstrated markets.
We have examined numerous business opportunities and believe that we will
finalize and close our first investment under this growth plan during the second
quarter of 2002. We have a signed letter of intent for the purchase of a
controlling interest in a European style casual food service company. This
company is operating its first store in Manhattan and is currently planning
expansion to other locations. The amount of our commitment is $3,500,000, which
funds will be applied principally for its expansion. We will also enter into a
management services contract with this company that will result in direct
revenues to us apart from those arising out of our ownership interest. There can
be no assurance that this transaction will be consummated or consummated on
these terms.
Patent portfolio relating to high-speed wireless communications
Through our wholly owned subsidiaries, Broadband Patents, LLC and
CellularVision Technology & Telecommunications, L.P., we have accumulated a
portfolio of patents that allow for high-speed wireless communication systems
with greater information content, reliability, clarity, or more efficient use of
licensed spectrum as compared to prior systems. We have five domestic patents
with expiration dates ranging from 2007 through 2017, with numerous
international counterparts. Any particular wireless communications system may
employ a number of different combinations of our patented technology to maximize
operational and spectrum efficiency. While we believe that it would be difficult
for any wireless communications company to construct a system without using one
or more of our patented technologies, it is a lengthy and expensive process to
pursue licensing/patent infringement cases.
3
We are evaluating a strategy for the utilization of these patents in the
future, which may include pursuit of licensing or development of other strategic
opportunities with users of the underlying technology. However, due to the
current economic state of the telecommunications industry, licensing activity
for the patent portfolio is not actively being pursued. We have licensed
technology in the past, both domestically and internationally, but are not
currently receiving any license fees. Currently, we have instituted litigation
in the New York courts against an international licensee in Canada.
Local multipoint distribution service license
We also own fixed wireless spectrum under a local multipoint distribution
service license covering the metropolitan New York area granted to us by the
Federal Communications Commission. We may commercialize this spectrum in the
future to support high-speed Internet access service if local multipoint
distribution service equipment becomes commercially available at a cost and with
performance levels that allow for commercial implementation on an economically
attractive basis.
Our commercial operating license was awarded to us by the Federal
Communications Commission in recognition of our efforts in developing and
deploying local multipoint distribution service technology, and for spearheading
its regulatory approval at the Federal Communications Commission. In September
1997, our pioneer local multipoint distribution service license was renewed as a
standard local multipoint distribution service license through February 1, 2006.
The license provides that the spectrum may be used for a wide variety of fixed
wireless purposes, including wireless local telephone service, high-speed
Internet access and two-way teleconferencing. The license covers 150 MHz of
spectrum in the 28 GHz range encompassing the New York Primary Metropolitan
Statistical Area, a region which includes the five boroughs of New York City as
well as the New York Counties of Westchester, Rockland, and Putnam. Under the
Federal Communications Commission's authorization, the license includes an
additional 150 MHz of spectrum until the first Ka-band satellite is launched, an
event that is not presently determinable.
From 1992 until November 1998, we operated a 49-channel subscription
television service under our license. In November 1998, we assigned an 850 MHz
portion of our license to an unaffiliated third-party as an alternative source
of financing that was needed at the time. In connection with this assignment, we
terminated our subscription television service because we no longer had
sufficient spectrum to deliver those services.
Competition
Many of our present and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do and therefore may be able to respond more quickly than we
can to new or changing opportunities, technologies, standards and customer
requirements.
Intellectual Property
To protect our proprietary rights, we rely on a combination of copyright
and trademark laws, trade secrets, confidentiality agreements with employees and
third parties and protective contractual provisions. All of our employees have
executed confidentiality and nonuse agreements that transfer any rights they may
have in copyrightable works or patentable technologies to us.
We have applied for registration of our service marks and trademarks in
the United States and in other countries. We may not be successful in obtaining
the service marks and trademarks for which we have applied. To the extent we
consider it necessary, we may file patents to protect our technology. Patents
with respect to our technology may not be granted, and, if granted, patents may
be challenged or invalidated. In addition, issued patents may not provide us
with any competitive advantages and may be challenged by third parties.
Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products or services or obtain and use
information that we regard as proprietary. The laws of some foreign countries do
not protect proprietary rights to as great an extent as do the laws of the
United States. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively protect
our intellectual property, our business could suffer. Companies have frequently
resorted to litigation regarding intellectual property rights. We may have to
litigate to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of other parties' proprietary
rights.
From time to time, we have received, and may receive in the future, notice
of claims of infringement of other parties' proprietary rights. Any such claims
could be time-consuming, result in costly litigation, divert management's
attention, cause product or service release delays, require us to redesign our
products or services or
4
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements, if required, may not be available on acceptable terms or
at all. If a successful claim of infringement were made against us and we could
not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could suffer.
Equipment and Facilities
Our Network Operations Center has a complete satellite downlink facility
with access to international media sources and a fully equipped data center
along with Cisco hardware and Harmonic Linux based gateway transmitter hardware
and software.
The principal physical assets incorporated in the our system consist of
headend equipment, 28GHz transmitters, fiber optic transmitters and receivers,
repeaters and customer premise equipment, as well as office space.
Government Regulation
We are not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. However,
the grant, renewal and administration of spectrum licenses is regulated by the
Federal Communications Commission. Our local multipoint distribution service
license expires in February 2006. While the FCC has historically renewed
licenses as a matter of course, no license in the local multipoint distribution
service band has yet been up for renewal. A failure by the FCC to renew our
license could have a material adverse effect on the Company.
The wireless network carriers that connect us to our users are subject to
regulation by the Federal Communications Commission. Changes in FCC regulations
could affect the availability of wireless coverage. We could also be adversely
affected by regulations that govern or may in the future govern the Internet,
the allocation of radio frequencies or the placement of cellular towers.
Risk Factors
Risks related to our business generally
Although we have been a public company since February 1996, we have reoriented
our business several times and our current business has not generated any
significant revenues to date.
At the time of our initial public offering, our business was primarily a
subscription television service. In November 1998, we terminated the
subscription television business and began a pilot program for the delivery of
high-speed Internet access. We encountered technical difficulties in the pilot
program and reoriented our business on wireless data and other services. We have
not yet generated any significant revenue from these businesses.
We have recorded operating losses in each reporting period since our inception
and may never be profitable.
We have recorded operating losses and negative operating cash flows in all
reporting periods since inception and, at December 31, 2001, had an accumulated
deficit of approximately $42.6 million. We believe that we have sufficient
liquidity to finance our current level of operations. However, we do not expect
to have earnings from operations, exclusive of non-cash charges, until such time
as we substantially increase our customer base and/or form a strategic alliance
for use of our capabilities in the future.
Our existing operations and infrastructure may not be adequate to manage the
growth necessary for successful implementation of our business plan.
Successful implementation of our business plan will require the management
of growth. Our existing operations and infrastructure may not be adequate to
manage such growth, and any steps taken to improve such systems and controls may
not be sufficient. Our future success will depend in part upon attracting and
retaining the services of current management and technical personnel. We also
may not be successful in attracting, assimilating and retaining new personnel in
the future as future growth takes place. We do not maintain "key person" life
insurance policies on any of our key personnel.
Shant S. Hovnanian and Vahak S. Hovnanian, who in the aggregate own
approximately 34% of our common stock, may have the power acting together to
control the direction and future operations of our company.
Shant S. Hovnanian and Vahak S. Hovnanian in the aggregate own
approximately 34% of our outstanding common stock at March 1, 2002. As a result,
acting together they may have the power to elect all of the members of
5
our Board of Directors, amend our certificate of incorporation and by-laws and
control the direction and future operations of our Company, in each case without
the approval of any of our other stockholders.
Our stock price has historically been volatile, which may make it more difficult
for you to resell shares when you want at prices you find attractive.
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. During 2001 and 2000, the high and low sale prices
of our common stock on the Nasdaq Stock Market ranged from $2.00 to $0.62 and
from $24.75 to $0.563, respectively. The closing sale price of our common stock
was $1.10 on March 27, 2002. Our stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products and media properties
by us or our competitors, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets.
We have received notice from Nasdaq informing us that we have until May
15, 2002, to regain compliance with Marketplace Rule 4450(a)(5), which requires
listed companies to maintain a closing bid price equal to or greater than $1.00.
See Item 5.
Sales of shares of common stock by Shant S. Hovnanian and Vahak S. Hovnanian
could adversely affect the market price of the common stock.
Future sales of shares of common stock, or the availability of shares of
common stock for future sale, may adversely impact the market price of the
common stock prevailing from time to time. Sales of substantial amounts of our
common stock, or the perception that such sales could occur, could adversely
affect the prevailing market price of the common stock.
Shares of common stock held by Shant S. Hovnanian and Vahak S. Hovnanian
have been held by each of them for the requisite holding periods under Rule 144
under the Securities Act and may be sold thereunder in accordance with volume
restrictions.
Risks related to certain short-term investments
Securities that we invest in are subject to market price risks
As part of our overall investment strategy, we invest in publicly traded
equity securities. We purchase these securities in anticipation of increases in
the fair market values of the securities.
We also sell publicly traded equity securities that we do not own in
anticipation of declines in the fair market values of the securities. When we
sell securities that we do not own, we must borrow the securities we sold in
order to deliver them and settle the trades. Thereafter, we must buy the
securities and deliver them to the lender of the securities. Our potential for
loss on these transactions increases as the value of the underlying security can
keep increasing.
The Company is seeking to eliminate the risk that it could be deemed to be an
investment company.
The Company has substantial liquidity as a result of its dispositions of
wireless spectrum. Although a portion of the Company's cash is invested in
securities, the Company is pursuing an acquisition strategy that will, if
successfully executed, eliminate any risk of it being deemed to be an investment
company.
Generally, a company must register under the Investment Company Act of
1940 and comply with significant restrictions on operations and transactions
with affiliates if its investment securities exceed 40% of the company's total
assets, or if it holds itself out as being primarily engaged in the business of
investing, owning or holding securities. If it is deemed to be an investment
company, it might need to dispose of or acquire investments in order to avoid
investment company status.
Risks related to investments in other companies
Ability to successfully identify investment opportunities
We will face substantial competition in identifying and closing
appropriate investment opportunities from, among others, venture capital firms,
large corporate investors and other publicly traded companies. These competitors
may limit our opportunity to acquire interests in new partner companies. In
addition, we may be unable to acquire interests in appropriate companies for
other reasons, including the inability to agree on terms, such as price and
ownership percentages, incompatibility between us and management and access to
sufficient funding. Our growth will be materially adversely affected if we
cannot successfully identify investments in a sufficient number of companies.
The value of our business may fluctuate because of companies that we invest in
The value of our business may fluctuate because of companies that we may
invest in. These companies may be development stage or privately held companies
for which no public market exists for their stock. The valuations of our
investments in privately held companies that we may invest in are indeterminate
prior to their public offerings, and there can be no assurance that these
offerings will occur since they will be dependent upon the development of these
businesses, market conditions and other conditions over which we may have no
control.
Capital and management resources
There will be a number of special issues that we will have to address for
investment in start-up companies, including: the diversion of management
attention in connection with both negotiating and overseeing these
6
transactions; the potential issuance of additional shares of our Common Stock in
connection with these transactions, which could dilute the rights of existing
shareholders, and the need to incur additional debt in connection with these
transactions. In addition, many, if not all, of these start-up companies will
face the same, or similar, risks as we face in our own business.
Managing growth
Successful implementation of our business plan will require the management
of growth. We cannot assure you that our existing operations and infrastructure
will be adequate to manage such growth, or that any steps taken to improve such
systems and controls will be sufficient. Our future success will depend in part
upon attracting and retaining the services of current management and technical
personnel. We cannot assure you that we will be successful in attracting,
assimilating and retaining new personnel in the future as future growth takes
place.
Risks related to our high-speed Internet access service
We may be unable to solve ongoing technical difficulties in our deployment and
equipment for our SPEED(SM) super high-speed Internet access service is not, and
may never be, available at a cost and with performance levels that allow for
commercial implementation on an economically attractive basis.
Our super high-speed Internet service utilizes a new technology that has a
limited operating history and that remains subject to further development and
refinement.
The equipment necessary to provide our SPEED(SM) super high-speed Internet
access service is not currently manufactured on a scale and at a cost suitable
for the commercialization of our service. Such equipment may never become
available at a cost and with performance levels that allow for commercial
implementation on an economically attractive basis.
Many financially stronger competitors with broader market coverage are offering
high-speed Internet access.
The market for Internet access and related services is highly competitive.
We expect local, regional and national Internet service providers to be
competitors for our super high-speed Internet access service. These Internet
service providers include large companies like America OnLine, Hughes DirecPC
and ATT World Net. Telephone companies with digital subscriber line technology,
which increases the effective capacity of existing copper telephone cables, are
among other competitors. Also, cable operators with high-speed cable modems are
among the other communications companies also providing high-speed Internet
access. Many of the competing Internet service providers have, or can be
expected to have, greater financial, marketing and other resources than us. We
may not be able to compete successfully with these entities.
ITEM 2. PROPERTIES
The Company leases 20,000 square feet of space at the Brooklyn Army
Terminal for its NOC, as well as, executive and administrative offices. This
lease expires in 2004 and provides for 1 five-year renewal option.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and proceedings that occur in the
ordinary course of business. The Company believes it has substantial defenses to
a material portion of these claims and is prepared to pursue litigation if a
reasonable and structured settlement cannot be reached with the parties. Based
on information currently available, the Company believes that none of these
current claims or proceedings, either individually or in the aggregate, will
have a material effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders during the
fourth quarter of fiscal 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
7
Our Common Stock is listed for quotation on the Nasdaq National Market
system under the symbol "SPDE." The following table sets forth high, low and
closing trade prices for the Common Stock for the fiscal quarters indicated.
High Sale Low Sale Closing Sale
-------------- -------------- --------------
2001
First quarter $2.000 $.688 $.906
Second quarter 1.500 .750 1.100
Third quarter 1.150 .620 .930
Fourth quarter 1.000 .660 .890
2000
First quarter $24.750 $4.500 $10.563
Second quarter 10.750 4.000 9.938
Third quarter 6.000 2.000 2.000
Fourth quarter 2.250 .563 .656
We have received notice from Nasdaq informing us that we have until May
15, 2002, to regain compliance with Marketplace Rule 4450(a)(5), which requires
listed companies to maintain a closing bid price equal to or greater than $1.00.
If at any time until then the closing bid price of our Common Stock is equal to
or greater than $1.00 for a minimum of ten consecutive trading days, we will
have complied with the minimum bid requirement. If we are unable to demonstrate
compliance with the $1.00 minimum bid requirement by May 15, 2002, Nasdaq will
notify us that our Common Stock will be delisted from the Nasdaq National
Market. At that time, we may appeal the decision to a Nasdaq Listing
Qualifications Panel. The Company is considering all of its alternatives in
order to maintain a listing on Nasdaq. Under newly issued rules implemented on a
pilot basis until December 31, 2003, the Company could apply for transfer to the
Nasdaq SmallCap Market by May 15, 2002. Under these rules, the Company would
then have until August 13, 2002, subject to further extension until February 10,
2003 under certain conditions, to regain compliance. During this period, the
Company would also have the ability to transfer back to the Nasdaq National
Market if it maintained a closing bid price equal to or greater than $1.00 for
30 consecutive trading days and maintained compliance with all other continued
listing requirements on that market.
On March 27, 2002, the closing trade price of our Common Stock was $1.10
per share. As of December 31, 2001, there were approximately 300 registered
shareholders and, to the best of our belief, approximately 10,000 beneficial
owners of our Common Stock. During the year ended December 31, 2001, we did not
make any sales of securities that were not registered under the Securities Act
of 1933, as amended.
We have never declared or paid any cash dividends on our Common Stock and
do not intend to declare or pay cash dividends on the Common Stock at any time
in the foreseeable future. Future earnings, if any, will be used for the
expansion of our business.
8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and Notes
thereto included elsewhere in this Form 10-K.
Year ended December 31,
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data
Revenues $ 69 $ 105 $ 612 $ 3,648 $ 4,943
Total operating expenses 16,353 11,889 8,204 18,074 20,004
------------ ------------ ------------ ------------ ------------
Operating loss (16,284) (11,784) (7,592) (14,426) (15,061)
Equity in loss of associated company (125) (570) (351) -- --
Settlement of litigation -- (283) -- -- --
Net interest/investment income (expense) 9,059 3,468 1,278 (2,365) (202)
Other income 86 100 624 -- --
Gain on assignment of spectrum -- -- 19,442 28,066 --
Intellectual property settlement -- -- (2,425) -- --
Income taxes -- -- (330) (302) --
------------ ------------ ------------ ------------ ------------
Net earnings/(loss) $ (7,264) $ (9,069) $ 10,646 $ 10,973 $ (15,263)
============ ============ ============ ============ ============
Per Common Share
Basic earnings/(loss) $ (0.36) $ (0.44) $ 0.58 $ 0.59 $ (0.95)
Weighted average outstanding 19,947,784 20,445,586 18,465,974 16,551,417 16,000,000
Diluted earnings/(loss) $ (0.36) $ (0.44) $ 0.57 $ 0.57 $ (0.95)
Weighted average outstanding 19,947,784 20,445,586 18,680,082 17,612,443 16,000,000
December 31,
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data
Cash and cash equivalents $ 39,934 $ 38,595 $ 44,613 $ 12,902 $ 408
Working capital (deficiency) 37,528 36,765 42,794 9,312 (7,029)
Net property and equipment 5,828 8,660 10,959 12,836 20,608
Total assets 53,892 57,628 55,769 25,915 23,154
Total debt -- -- 211 338 7,495
Total liabilities 8,410 2,773 1,969 3,868 11,464
Total equity 45,482 54,855 53,799 22,047 11,690
In November 1998, the Company assigned an 850MHz portion of its FCC license to
an unaffiliated third party. As a result, the Company terminated its
subscription television service. In connection with this transaction, the
Company recognized a gain in the amount of $28,066,000. In October 1999, the
Company assigned a 150MHz portion of its license to another unaffiliated third
party. In connection with this transaction, the Company recognized a gain in the
amount of $19,442,000.
In June 2000, the Company purchased the remaining 55% interest in Speedia, LLC
that it did not already own. This acquisition was accounted for using the
purchase method of accounting and the results of operations of Speedia have been
included in the consolidated statements of operations for the periods subsequent
to June 30, 2000.
For additional information on these transactions, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Operations
We have co-invested with Siemens Corporate Research, Inc., a subsidiary of
Siemens Corporation, in Zargis Medical Corp. to develop a service solution,
initially targeted toward primary care physicians that would be used as part of
general medical examinations for the early screening and detection of valvular
and congenital heart disease. We will continue to explore additional
acquisitions of emerging-growth companies. We own a portfolio of patents that
allow for high-speed wireless communications. We also own fixed wireless
spectrum in the New York City metropolitan area that we may commercialize in the
future to support high-speed, or broadband, Internet access service. During
2001, we also developed and launched an online cell phone store, 007Phones,
which we now license to a third-party.
We changed our business focus in November 1998, terminating our
subscription television service. Since changing our focus, we have yet to
generate any revenue from our wireless data products and services business.
Since 1999, our only significant source of revenue was $550,000 received from XO
Communications, Inc. (formerly NEXTLINK Communications, Inc.) as discussed
below. The balance of revenues from 1999 to 2001, generally subscriber fees from
our pilot program for high-speed Internet service and co-hosting revenues from
the use of our Data Center, have not been material and future revenues from this
and our mobile wireless business are uncertain.
In January 2001, we co-invested with Siemens Corporate Research, Inc., a
subsidiary of Siemens Corporation, in a new company, Zargis Medical Corp. Zargis
Medical is building a service solution, initially targeted toward primary care
physicians that would be used as part of general medical examinations for the
early screening and detection of valvular and congenital heart disease. General
medical examinations, according to the National Center for Health Statistics,
totaled 46 million in 1999 for the US alone. We have signed an exclusive
contract with Zargis Medical to design and develop the wireless applications, as
well as provide transaction processing to support the commercial rollout of
Zargis Medical's cardiac diagnostic products. Under this contract, using a
combination of wireless and wired technology, Speedia Wireless, our wholly owned
subsidiary, has demonstrated the ability to transfer the heart sound file from a
physician's office to the SPEEDUS Data Center which will enable Zargis Medical
to pursue a business model based on a fee per usage basis. Some of the major
next steps remaining for Zargis Medical include clinical trials, FDA approval,
marketing and roll-out, along with the formation of strategic partnerships.
We seek business opportunities across all industries for potential
transactions and relationships in which we can apply our current resources and
management strengths. We are particularly focused on companies with sound
business plans and existing revenue bases that require growth capital. We will
continue to pursue opportunities involving our wireless expertise and broadband
assets as attractive opportunities present themselves. The companies that we
target, either public or privately held and regardless of industry, will be
seeking growth or restructuring capital to pursue near term business objectives
in demonstrated markets. We have examined numerous business opportunities and
believe that we will finalize and close our first investment under this growth
plan during the second quarter of 2002. We have a signed letter of intent for
the purchase of a controlling interest in a European style casual food service
company. This company is operating its first store in Manhattan and is currently
planning expansion to other locations. The amount of our commitment is
$3,500,000, which funds will be applied principally for its expansion. We will
also enter into a management services contract with this company that will
result in direct revenues to us apart from those arising out of our ownership
interest. There can be no assurance that this transaction will be consummated or
consummated on these terms.
We have invested a portion of our assets in a portfolio of marketable
securities consisting of publicly traded equity securities. We have also sold
publicly traded equity securities we do not own in anticipation of declines in
the fair market values of these securities. During the year ended December 31,
2001, we recognized realized gains on these transactions in the amount of
$9,324,000.
Through our wholly owned subsidiaries, Broadband Patents, LLC and
CellularVision Technology & Telecommunications, L.P., we have accumulated a
portfolio of patents that allow for high-speed wireless communication systems
with greater information content, reliability, clarity, or more efficient use of
licensed spectrum as compared to prior systems. We have five domestic patents
with expiration dates ranging from 2007 through 2017, with numerous
international counterparts. Any particular wireless communications system may
employ a number of different combinations of our patented technology to maximize
operational and spectrum
10
efficiency. While we believe that it would be difficult for any wireless
communications company to construct a system without using one or more of our
patented technologies, it is a lengthy and expensive process to pursue
licensing/patent infringement cases.
We are evaluating a strategy for the utilization of these patents in the
future, which may include pursuit of licensing or development of other strategic
opportunities with users of the underlying technology. However, due to the
current economic state of the telecommunications industry, licensing activity
for the patent portfolio is not actively being pursued. We have licensed
technology in the past, both domestically and internationally, but are not
currently receiving any license fees. Currently, we have instituted litigation
in the New York courts against an international licensee in Canada.
In August 2001, we launched 007Phones.com, an e-commerce portal designed
to provide consumers and businesses with an easy-to-use, online method of
researching and purchasing wireless phones and carrier services. We now license
007Phones.com to a third-party.
We have generated operating losses and negative operating cash flows since
our inception and expect to continue to do so in the near future.
From 1992 until November 1998, we operated a 49-channel analog
subscription television service utilizing 1,300 MHz of spectrum under a LMDS
license from the FCC. The FCC commercial operating license was awarded to us in
recognition of our efforts in developing and deploying LMDS technology, and for
spearheading its regulatory approval at the FCC. In September 1997, our pioneer
LMDS license was renewed as a standard LMDS license through February 1, 2006.
The license provides that the spectrum may be used for a wide variety of fixed
wireless purposes, including wireless local loop telephony, high-speed Internet
access and two-way teleconferencing. The license covers 1,150 MHz of spectrum in
the 28 GHz range encompassing the New York Primary Metropolitan Statistical
Area, a region which includes the five boroughs of New York City as well as the
New York Counties of Westchester, Rockland, and Putnam. Under FCC authorization,
the license includes an additional 150 MHz of spectrum until the first Ka band
satellite is launched, an event which is not currently determinable.
In November 1998, we assigned an 850 MHz portion of our license to an
unaffiliated third-party as an alternative source of financing that was needed
at the time. In connection with this assignment, we terminated our subscription
television service because we no longer had sufficient spectrum to deliver those
services. As a result, while we were able to repay, repurchase and redeem debt
(in the aggregate amount of approximately $11.2 million) and preferred stock
(approximately $4.6 million) in connection with the 1998 assignment as required
under those indentures and substantially strengthen our financial position, we
eliminated the only source of revenues that we had at the time.
In October 1999, we assigned a 150Mhz portion of our license to XO. From
July 1999 to October 1999, pending regulatory approval of the license
assignment, XO made monthly payments of approximately $172,000 to us.
Currently, we are conducting a limited pilot program of our SPEED(SM)
broadband super high-speed Internet service and, at December 31, 2001, had less
than 100 subscribers. A full marketing effort will not commence until new LMDS
equipment becomes commercially available with cost and performance that allow
implementation of SPEED(SM) service on an economically attractive basis. We
cannot determine when this will occur and this equipment may never be available
to us on this basis. Revenues from our high-speed Internet service would consist
of subscriber fees, as well as the sales and installations of modems; however,
the pricing structure of the service could change in response to market and
other competitive conditions. Revenues to date from these sources have not been
material. We estimate that the total annual cost of the pilot program is
approximately $500,000.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements. The preparation
of those financial statements in conformity with generally accepted accounting
principles 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 dates of the financial statements and the reported
amounts of operating revenues and expenses during the reporting periods. Actual
results could differ from those estimates. For a description of all of our
accounting policies, see Note 2 to our consolidated financial statements
included in this Form 10-K. However, we believe the following critical
accounting policies affect the more significant judgments and estimates used in
the preparation of our consolidated financial statements.
11
Financial instruments. Our financial instruments consist primarily of cash
equivalents, marketable securities and securities sold and not purchased. The
carrying value of cash equivalents approximates market value since these highly
liquid, interest earning investments are invested in money market funds.
Marketable securities consist of publicly traded equity securities classified as
trading securities and are recorded at fair market value. Securities sold and
not repurchased are carried at the fair market value of the securities.
Significant changes in the market value of securities that we invest in could
have a material impact on our financial position and results of operations.
Long-lived assets. Long-lived assets, including fixed assets, goodwill,
equity method investments and other intangibles, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
any such asset may not be recoverable through estimated future cash flows from
that asset. The estimate of cash flow is based upon, among other things, certain
assumptions about expected future operating performance. Specifically, we own
broadband assets, including fixed and intangible assets, which had a carrying
value of $6.2 million at December 31, 2001 and currently do not generate
significant revenues or cash flows. Absent increased revenues and cash flows in
the future, however, we estimate that, based upon our review of recent
transactions and other factors, the fair value of our remaining FCC license and
certain patents that have no carrying value on our books would generate
sufficient cash to fully realize our assets described above. These estimates may
differ from actual results due to, among other things, technological changes,
economic conditions, changes to our business model or changes in our operating
performance.
Contingencies. We account for contingencies in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies". SFAS
No. 5 requires that we record an estimated loss when information available prior
to issuance of our financial statements indicates that it is probable that an
asset has been impaired or a liability has been incurred at the date of the
financial statements and the amount of the loss can be reasonably estimated.
Accounting for contingencies such as environmental, legal and income tax matters
requires us to use our judgment. While we believe that our accruals for these
matters are adequate, if the actual loss is significantly different than the
estimated loss, our results of operations may be misstated.
Twelve Months Ended December 31, 2001 Compared to Twelve Months Ended December
31,2000
Revenues decreased $36,000 from $105,000 for the twelve months ended
December 31, 2000 to $69,000 for the twelve months ended December 31, 2001.
These revenues reflect the early results of the Company's pilot program to
connect its first Internet subscribers and co-hosting revenues from use of the
Company's Data Center. The Company intends to continue this pilot program until
a final determination can be made on the availability of equipment on an
economically attractive basis. We cannot determine when this will occur and this
equipment may never be available to us on this basis. We estimate that the total
annual cost of the pilot program is approximately $500,000.
Selling, general and administrative expenses decreased $581,000 from
$5,844,000 for the twelve months ended December 31, 2000 to $5,263,000 for the
twelve months ended December 31, 2001. This decrease is net of a $148,000
increase attributable to the June 30, 2000 acquisition of the remaining 55%
interest in Speedia Wireless that the Company did not already own. This
acquisition was accounted for using the purchase method of accounting. The
results of operations of Speedia are included in the consolidated statements of
operations beginning with the quarter ended September 30, 2000. The net decrease
in selling, general and administrative expenses for 2001 is primarily a result
of decreases in stock based compensation and legal expenses, as well as staff
reductions.
Research and development expenses increased $369,000 from $1,347,000 for
the twelve months ended December 31, 2000 to $1,716,000 for the twelve months
ended December 31, 2001. The increase for the twelve months is primarily
attributable to the June 30, 2000 acquisition of the remaining 55% interest in
Speedia, as discussed above.
Depreciation and amortization increased $4,675,000 from $4,698,000 for the
twelve months ended December 31, 2000 to $9,373,000 for the twelve months ended
December 31, 2001. $1,234,000 of this increase is a result of amortization of
the goodwill resulting from the Speedia acquisition on June 30, 2000, as
discussed above. As a result of continuing weak industry conditions and lower
market valuations, we determined that there were indications of impairment to
the carrying value of our goodwill and other purchased intangibles in connection
with our purchase in 2000 of the remaining 55% interest in Speedia that we did
not already own. Based on our review, we recorded a charge of $3,779,000 in the
fourth quarter of 2001 for the impairment of goodwill and intangible assets
associated with that acquisition. The increase in depreciation and amortization
for 2001 is also net of a decrease as a result of certain fixed assets having
become fully depreciated.
Investment income increased $5,583,000 from $3,476,000 for the twelve
months ended December 31, 2000 to $9,059,000 for the twelve months ended
December 30, 2001. This increase is primarily a result of realized
gains/(losses). Realized gains/(losses) increased $8,527,000 from net gains of
$797,000 for the twelve months ended December 31, 2000 to net gains of
$9,324,000 for the twelve months ended December 31, 2001. Unrealized
gains/(losses) increased $777,000 from net losses of $10,000 for the twelve
months ended December 31, 2000 to net losses of $787,000 for the twelve months
ended December 31, 2001. $5,544,000 of the net gains realized in the twelve
months ended December 31, 2001 was previously recognized as unrealized gains
during 2001. Investment gains or losses will fluctuate based upon changes in the
market value of the underlying investments and are not necessarily indicative of
the results that may be expected for any future periods.
Equity in loss decreased $445,000 from $570,000 for the twelve months
ended December 31, 2000 to $125,000 for the twelve months ended December 31,
2001. The 2000 period primarily reflects the Company's 45%
12
interest in Speedia's operations, accounted for under the equity method. As
discussed above, subsequent to June 30, 2000, upon the acquisition of the
remaining 55% interest, the results of operations of Speedia are included in the
consolidated statements of operations. The 2001 period reflects the Company's
share (49% at December 31, 2001) in Zargis Medical's operations, accounted for
under the equity method.
During the twelve months ended December 31, 2001, the Company recognized
other income in the amount of $86,000 from the sale of certain assets. During
the twelve months ended December 31, 2000, the Company recognized other income
in the amount of $100,000 from negotiating settlements with vendors and others.
During the twelve months ended December 31, 2000, the Company recognized
an expense in the amount of $282,500 from the settlement of litigation. No such
amounts were recorded for the twelve months ended December 31, 2001.
Twelve Months Ended December 31, 2000 Compared to Twelve Months Ended December
31, 1999
Revenues decreased $507,000 from $612,000 for the twelve months ended
December 31, 1999 to $105,000 for the twelve months ended December 31, 2000.
Revenues for the twelve months ended December 31, 1999 include $550,000 received
from XO Communications, Inc. pending FCC approval of an assignment of 150 MHz of
the Company's LMDS license to XO. The balance of revenues for 1999, as well as
2000, reflects the early results of the Company's pilot program to connect its
first Internet subscribers and co-hosting revenues from use of the Company's
Data Center.
Selling, general and administrative expenses increased $1,435,000 from
$4,409,000 for the twelve months ended December 31, 1999 to $5,844,000 for the
twelve months ended December 31, 2000. Approximately $518,000 of this increase
is a result of the June 30, 2000 acquisition of the remaining 55% interest in
Speedia that the Company did not already own. This acquisition was accounted for
using the purchase method of accounting and the results of operations of Speedia
are included in the consolidated statements of operations beginning with the
quarter ended September 30, 2000. Selling, general and administrative expenses
also increased as a result of increases in compensation expense as a result of
additions to senior management and legal expenses in connection with
intellectual property matters.
Research and development expenses increased $331,000 from $1,016,000 for
the twelve months ended December 31, 1999 to $1,347,000 for the twelve months
ended December 31, 2000. The increase for the twelve months is primarily
attributable to the June 30, 2000 acquisition of the remaining 55% interest in
Speedia, as discussed above.
Depreciation and amortization increased $1,919,000 from $2,779,000 for the
twelve months ended December 31, 1999 to $4,698,000 for the twelve months ended
December 31, 2000. $1,186,000 of this increase is a result of amortization of
the goodwill resulting from the Speedia acquisition on June 30, 2000. This
goodwill was to be amortized over a period of three years. The balance of the
increase in depreciation and amortization for these periods is the result of
additions to property and equipment in connection with the build-out of the
Company's portal and amortization of a patent acquired by the Company during the
first quarter of 2000.
Equity in loss increased $219,000 from $351,000 for the twelve months
ended December 31, 1999 to $570,000 for the twelve months ended December 31,
2000. Through June 30, 2000, the Company accounted for its investment in 45% of
the interest in Speedia under the equity method. Subsequent to that date, upon
the acquisition of the remaining 55% interest in Speedia, the results of
operations of Speedia are included in the consolidated statements of operations.
In addition, Speedia's losses were higher in 2000 as the development of its
business continued since formation in 1999.
During the twelve months ended December 31, 2000, the Company recognized
an expense of $282,500 from the settlement of litigation. The Company had
outstanding long-term orders with CT&T for the purchase of equipment in the
amount of approximately $1,400,000 represented by set-top converters and
head-end equipment. The Company had not accepted billings for this equipment and
no amounts had been reflected in the Company's consolidated financial
statements. On September 12, 2000, the Company issued 80,000 shares of its
Common Stock to Titan in connection with the settlement of this dispute. The
Company has recorded this settlement in the consolidated statements of
operations for the twelve months ended December 31, 2000 based upon the closing
price of its common stock on September 12, 2000.
13
Other income decreased $524,000 from $624,000 for the twelve months ended
December 31, 1999 to $100,000 for the twelve months ended December 31, 2000.
This income is a result of the Company's negotiating settlements with vendors
and others.
Investment income increased $2,176,000 from $1,300,000 for
the twelve months ended December 31, 1999 to $3,487,000 for the twelve months
ended December 31, 2000 since the Company had more funds available for
investment. In addition, the Company realized gains of $797,000 from its
investment portfolio in 2000.
Related Party Transactions
We have signed an exclusive contract with Zargis Medical to design and
develop the wireless applications, as well as provide transaction processing to
support the commercial rollout of Zargis Medical's cardiac diagnostic products.
Our investment in Zargis Medical is accounted for using the equity method of
accounting. During the year ended December 31, 2001, no revenues were recorded
in connection with Zargis Medical.
The information under Item 11. 'Certain Relationships and Related
Transactions' of this Form 10-K is incorporated by reference.
Liquidity and Capital Resources
The Company has recorded operating losses and negative operating cash
flows in each year of its operations since inception.
The Company believes that consummation of the spectrum assignments in
November 1998 and October 1999 for net proceeds of approximately $15.5 million
and $19.8 million, respectively, after the repayment and repurchase of debt (in
the aggregate amount of approximately $11.2 million) and redemption of preferred
stock (approximately $4.6 million) in connection with the 1998 assignment as
required under those indentures and the sale of Common Stock in July 1999 for
net proceeds of approximately $19.8 million have provided sufficient liquidity
to finance its current level of operations and expected capital requirements
through the 2002 fiscal year. However, the Company does not expect to have
earnings from operations, exclusive of non-cash charges, until such time as it
substantially increases its customer base and/or forms a strategic alliance for
use of its capabilities in the future. We cannot predict when this will occur.
We have no material non-cancelable commitments and the amount of future capital
funding requirements will depend on a number of factors that we cannot quantify,
including the success of our business, the extent to which we expand our
high-speed Internet service if suitable equipment becomes available and the
types of services we offer, as well as other factors that are not within our
control, including competitive conditions, government regulatory developments
and capital costs.
We have a signed letter of intent for the purchase of a controlling
interest in a European style casual food service company. This company is
operating its first store in Manhattan and is currently planning expansion to
other locations. The amount of our commitment is $3,500,000, which funds will be
applied principally for its expansion. We will also enter into a management
services contract with this company that will result in direct revenues to us
apart from those arising out of our ownership interest. There can be no
assurance that this transaction will be consummated or consummated on these
terms.
We have invested a portion of our assets in a portfolio of marketable
securities consisting of publicly traded equity securities. We have also sold
publicly traded equity securities we do not own in anticipation of declines in
the fair market values of these securities. During the year ended December 31,
2001, we recognized realized gains on these transactions in the amount of
$9,324,000.
Internet broadcast stations used in our pilot high-speed Internet service
had an original cost of approximately $500,000 each. We cannot predict whether
new broadcast stations would be necessary or what they would cost in the future.
The lack of additional capital in the future could have a material adverse
effect on the Company's financial condition, operating results and prospects for
growth.
Recent Accounting Pronouncements
In July 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations" and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" were issued requiring business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadening the criteria for recording
intangible assets separate from goodwill. FAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and charged against results of operations only in the periods in
which the recorded value of goodwill and certain intangibles is more than its
fair value. However, as a result of continuing weak industry conditions and
lower market valuations, we determined that there were indications of impairment
to the carrying value of our goodwill and other purchased intangibles in
connection with our purchase in 2000 of the
14
remaining 55% interest in Speedia that we did not already own. Based on our
review, we recorded a charge of $3,779,000 in the fourth quarter of 2001 for the
impairment of goodwill and intangible assets associated with that acquisition.
As required, on January 1, 2002 we will adopt the provisions of each statement
that apply to intangible assets acquired prior to June 30, 2001. We do not
expect the adoption of these accounting standards to have a material effect on
our results of operations commencing January 1, 2002.
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", was issued.
SFAS No. 144 provides a single accounting model for long-lived assets to be
disposed of and changes the criteria that would have to be met to classify an
asset as held-for-sale. SFAS No. 144 retains the requirement of Accounting
Principles Board Opinion No. 30 to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for sale. SFAS
No. 144 is effective January 1, 2002 for the Company. We are currently
evaluating the impact of these statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments at December 31, 2001 consist primarily
of cash equivalents, which are subject to interest rate risk, and marketable
securities and securities sold and not purchased, which are subject to equity
price risk.
The carrying value of cash equivalents approximates market value since
these highly liquid, interest earning investments are invested in money market
funds. The Company's investment in marketable securities consists of publicly
traded equity securities classified as trading securities and are recorded at
fair market value. Securities sold and not repurchased are carried at the fair
market value of the securities.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and related Notes
thereto and the financial information required to be filed herewith are included
under Item 14 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and titles of the persons who
were directors and/or executive officers of the Company as of March 1, 2002.
Name Age Position
---- --- --------
Shant S. Hovnanian........ 42 Chairman of the Board of Directors, President,
Chief Executive Officer and Chief Financial
Officer
Vahak S. Hovnanian........ 70 Director
William F. Leimkuhler..... 50 Director
Jeffrey Najarian.......... 43 Director
Christopher Vizas......... 52 Director
Michael Bacon............. 36 Executive Vice President
John A. Kallassy.......... 37 Executive Vice President
Shant S. Hovnanian has served as our Chairman of the Board of Directors,
President and Chief Executive Officer since October 1995 and as Chief Financial
Officer since June 1998. Mr. Hovnanian is also Chairman of the Board of
Directors of VisionStar Incorporated. From June 1980 until January 1991, Mr.
Hovnanian served as Executive Vice President of the V. S. Hovnanian Group (the
"Hovnanian Group"), consisting of home building operations, real estate
development and utility companies. In 1995, Mr. Hovnanian served as a U.S.
Delegate to the World Radio Conference of the International Telecommunications
Union in Geneva, Switzerland. Mr. Hovnanian is the son of Mr. Vahak S.
Hovnanian.
Vahak S. Hovnanian has served as a Director since October 1995. Mr.
Hovnanian has been Chairman of the Board and President of the Hovnanian Group
since 1968. Mr. Hovnanian is the father of Mr. Shant S. Hovnanian.
William F. Leimkuhler has served as a Director since September 2000. Mr.
Leimkuhler is the Director of Business Development of PAICE Corporation, a
privately held developer of advanced vehicle powertrains. From 1994 through
1999, he held various positions with Allen & Company, a New York investment
banking firm, initially serving as the firm's General Counsel. Prior to that,
Mr. Leimkuhler was a corporate partner with the New York law firm of Werbel &
Carnelutti (now Heller Ehrman White & McAuliffe).
Jeffrey Najarian has served as a Director since October 2000. Mr. Najarian
has been Chief Executive Officer of Starpoint Solutions, Inc., formerly TIS
Worldwide, Inc., since its inception in 1992. A creator and founder of
Starpoint, he has been instrumental in building one of the country's fastest
growing, privately-held companies, as cited by Inc. magazine. From 1984-1992,
Mr. Najarian worked at Setford-Shaw-Najarian, a recruiting/placement firm for
technology specialists, becoming a partner after only three years. He led the
staff in billing, propelling SSN to become a leading search firm for Wall Street
banks.
Christopher Vizas has served as a Director since July 2001. Mr. Vizas is a
Partner in East Wind Partners, an investment and advisory partnership focused on
technology and emerging markets. He serves on the Boards of Directors of several
developing companies, holding positions as a Director of W Networks, Inc. (a
digital radio company) and Millivision, Inc.(a millimeter imaging company) and
Chairman of the Board of i1, Inc.(an Asian software solutions company). From
January 1998 to June 2001, Mr. Vizas served as Chairman and Chief Executive
Officer of eGlobe, Inc., a turn-around situation which sought formal
reorganization under Chapter 11 of the United States Bankruptcy Code in April
2001. From October 1995 through October 1997, Mr. Vizas was a co-founder and
served as Chief Executive Officer of Quo Vadis International, an investment and
financial advisory firm. Before joining in the formation of Quo Vadis
International, he was Chief Executive Officer of Millennium Capital Development,
a merchant banking firm, and of its predecessor, Kouri Telecommunications &
Technology. Before joining Kouri, Mr. Vizas shared in the founding and
development of a series of technology companies, including Orion Network
Systems, Inc. of which he was a founder and a principal executive. From April
1987 to 1992, Mr. Vizas served as Vice Chairman of Orion, an international
satellite communications company, and served as a Director from 1982 until 1992.
Mr. Vizas has also held various positions in the United States government.
Michael Bacon has served as Executive Vice President of Operations since
June 1999. Prior to joining us, Mr. Bacon was employed by Booz Allen & Hamilton,
a leading international management and technology consulting
16
firm, since 1996. From 1994 to 1996, Mr. Bacon was with Deloitte & Touche
Consulting. In consulting, he led teams that recommended or implemented the
establishment of and improvement in service operations in a variety of
industries, including the telecommunications industry. Mr. Bacon previously
worked for three years at International Business Machines in marketing and sales
and for two years with General Electric Company where he developed information
systems.
John A. Kallassy has served as Executive Vice President and Chief
Marketing Officer since September 2000. Mr. Kallassy was the founder and CEO of
American Data Consultants, Inc., a B2B database marketing company. After the
sale of ADC to R.L. Polk in 1996, Mr. Kallassy was employed for three years at
R.L. Polk as a division president and later a corporate vice president where he
led the product management and analytical consulting groups.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended December 31, 2001,
2000 and 1999, the cash compensation we paid, as well as certain other
compensation paid or accrued for those years, to each of the most highly
compensated executive officers of the Company in 2001 (the "Named Executive
Officers") in all capacities in which they served. See Employment Agreements.
Summary Compensation Table
Annual Compensation
-------------------
Other Securities All Other
Compen- Underlying Compen-
Name and Principal Position Year Salary Bonus sation Options (#) sation
- ----------------------------- -------- -------- ------- ---------- ----------- ---------
Shant S. Hovnanian............. 2001 250,000 $ -- $ -- 127,700 $ --
Chairman of the Board of 2000 250,000 -- -- -- --
Directors, President, Chief 1999 250,000 -- -- 250,000 --
Executive Officer
and Chief Financial Officer
Michael Bacon.................. 2001 175,000 $ -- $ -- 162,500 $ --
Executive Vice President 2000 137,500 18,750 -- 100,000 --
1999 80,208 18,750 -- -- --
John A. Kallassy............... 2001 175,000 $50,000 $ -- 112,500 $ --
Executive Vice President 2000 58,333 12,500 -- 225,000 --
1999 -- -- -- -- --
17
Stock Option Grants Table
The following table sets forth information concerning individual grants of
options to purchase Common Stock made to Named Executive Officers during 2001.
Number % of Total
of Options Potential Realizable
Securities Granted to Value at Assumed
Underlying Employees in Exercise Annual Rates of Stock
Options fiscal or Base Expiration Price Appreciation for
Name Granted year Price Date Option Term
---- ------- ---- ----- ---- -----------
5% 10%
Shant S. Hovnanian 127,700 18.7% $1.00 4/3/11 80,000 204,000
Michael Bacon 75,000 11.0% 1.00 1/1/11 47,000 120,000
87,500 12.8% 1.00 4/3/11 55,000 139,000
John Kallassy 112,500 16.5% $1.00 4/3/11 71,000 179,000
For additional information regarding stock option grants to employees in
2001, see "Notes to Consolidated Financial Statements--Note 6, Stockholders'
Equity."
Aggregate Stock Option Exercise Table
The following table sets forth information regarding the number and value
of unexercised Options that were held by the Named Executive Officers as of
December 31, 2001. None of the Named Executive Officers exercised any options
during 2001.
Number of
Securities
Number of Underlying
Shares Unexercised Options Value of Unexercised
Acquired Value Exercisable/ In-the-Money Options
Name on Exercise Realized Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------- -------------------------
Shant S. Hovnanian... 0 $0 255,400/127,700 $0/0
Michael Bacon........ 0 0 125,000/137,500 0/0
John A. Kallassy..... 0 0 112,500/225,000 0/0
For additional information regarding stock option grants to employees in
2001, see "Notes to Consolidated Financial Statements--Note 6, Stockholders'
Equity."
Director Compensation
Our Directors who are not officers or employees ("Non-Employee Directors")
receive $500 per Board meeting and Board committee meeting attended. Upon their
initial election to the Board, new Non-Employee Directors are granted options to
purchase 5,000 shares of Common Stock that are fully vested and immediately
exercisable. Upon the date of each annual meeting, Non-Employee Directors are
granted options to purchase an additional 10,000 shares of Common Stock that are
fully vested and immediately exercisable. Our Directors of the Company who are
officers or employees do not receive any additional compensation for serving on
the Board or on any Board committee.
Employment Agreements
We entered into an employment agreement with Mr. Shant S. Hovnanian in
October 1995. The agreement provides that Mr. Hovnanian will act as our
President and Chief Executive Officer and will devote substantially all of
18
his working time and efforts to our affairs. The agreement has a one-year term
and provides for an annual salary of $250,000, effective February 7, 1996. Upon
the expiration of the initial employment term on February 7, 1997, the agreement
provides for automatic extensions on a month-to-month basis, unless terminated
by either party upon 30 days advance written notice. Mr. Hovnanian is continuing
to serve as Chairman, President and Chief Executive Officer pursuant to the
terms of this employment agreement.
We entered into an employment agreement effective June 1, 1999 with Mr.
Michael Bacon. The agreement provides that Mr. Bacon will act as our Executive
Vice President. The agreement, which has no term, provides for an annual salary
of $137,500, subject to periodic review, and bonuses aggregating $37,500 and an
increase in annual salary to $175,000 based on the executive's attainment of
certain performance goals. Under this agreement, Mr. Bacon was granted 100,000
options to purchase shares of our Common Stock at the market value as of the
effective date of the agreement. 25,000 options become exercisable each six
months after June 1, 1999. Effective January 15, 2001, Mr. Bacon's salary was
increased to $175,000.
We entered into an employment agreement effective September 5, 2000 with
Mr. John A. Kallassy. The agreement provides that Mr. Kallassy will act as our
Executive Vice President. The agreement, which has no term, provides for an
annual salary of $175,000, subject to periodic review, and annual bonuses
aggregating $50,000 based on the executive's attainment of certain performance
goals. Under this agreement, Mr. Kallassy was granted 225,000 options to
purchase shares of our Common Stock at the market value as of the effective date
of the agreement. 18,750 of these options were fully vested and immediately
exercisable at the date of grant. Of the balance, 18,750 options become
exercisable each three months after September 5, 2000.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 1, 2002 with
respect to the beneficial ownership of our stock by (i) each person known by us
to be the beneficial owner of more than 5% of the Common Stock; (ii) each person
serving as a director or director nominee of the Company; (iii) each of our
executive officers, and (iv) all of our directors and executive officers as a
group. Unless otherwise indicated, all shares are owned directly and the
indicated owner has sole voting and dispositive power with respect thereto.
Common Stock Beneficially
Owned (1)
-------------------------------------------
Beneficial Owner Number Percent
- ----------------------------------- ------------------- -----------------
Shant S. Hovnanian (2)(3).......... 3,887,102 20.6%
Vahak S. Hovnanian (4)(5).......... 2,834,677 15.0
William F. Leimkuhler (6).......... 70,250 *
Jeffrey Najarian (7)(8)............ 1,039,481 5.5
Christopher Vizas (9).............. 40,000 *
Michael Bacon (10) ................ 175,000 *
John A Kallassy (11) .............. 262,500 1.4
XO Communications, Inc. (12)....... 2,000,000 10.6
All Directors and Executive Officers as a group (total 7
persons)....................... 8,309,010 44.1%
* Less than 1% of the outstanding Common Stock
(1) Pursuant to the regulations of the Securities and Exchange Commission
(the "Commission"), shares are deemed to be "beneficially owned" by a person if
such person directly or indirectly has or shares (i) the power to vote or
dispose of such shares, whether or not such person has any pecuniary interest in
such shares, or (ii) the right to acquire the power to vote or dispose of such
shares within 60 days, including any right to acquire through the exercise of
any option, warrant or right.
(2) Includes options to purchase 319,250 shares of Common Stock pursuant
to the Stock Incentive Plan, which are fully vested and exercisable.
(3) Includes 100,000 shares of Common Stock owned by Mr. Shant S.
Hovnanian's minor child, Vahak Willem Hovnanian, for which Mr. Hovnanian, as
custodian, has sole voting power.
(4) Includes options to purchase 72,500 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically granted
upon election to the Board at the 2002 Annual Meeting.
(5) Includes 55,431 and 22,175 shares of Common Stock which Mr. Vahak S.
Hovnanian is required to sell upon the exercise of outstanding warrants at a per
share exercise price of $13.16 and $11.28, respectively. It also includes
100,000 shares of Common Stock that Mr. Hovnanian donated to The Vahak and Paris
Hasmig Foundation, Inc. that Mr. Hovnanian controls, as well as 312,655 shares
of Common Stock given to his wife, Paris Hasmig Hovnanian.
(6) Includes options to purchase 70,250 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically granted
upon election to the Board at the 2002 Annual Meeting.
(7) Includes options to purchase 50,000 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically granted
upon election to the Board at the 2002 Annual Meeting.
(8) Includes 989,481 shares of Common Stock owned by Starpoint Solutions,
Inc., of which Mr. Najarian is the Chief Executive Officer. Mr. Najarian
disclaims beneficial ownership of these shares.
(9) Includes options to purchase 40,000 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically granted
upon election to the Board at the 2002 Annual Meeting.
20
(10) Includes options to purchase 131,250 shares of Common Stock pursuant
to the Stock Incentive Plan, which are fully vested and exercisable.
(11) Includes options to purchase 187,500 shares of Common Stock pursuant
to the Stock Incentive Plan, which are fully vested and exercisable.
(12) Pursuant to a Stock Purchase Agreement dated as of June 13, 1999, the
Company is required to use its best efforts to cause an XO representative to be
elected to the Company's Board. To date, XO has not exercised this right.
Stockholders Agreements.
Verizon Communications, formerly Bell Atlantic Corporation, has the right
to appoint one director to the Board, so long as Verizon shall hold at least 1%
of the shares of Common Stock outstanding on a fully diluted basis. To date,
Verizon has not exercised this right.
Pursuant to a Stock Purchase Agreement dated as of June 13, 1999, the
Company is required to use its best efforts to cause an XO Communications, Inc.
representative to be elected to the Company's Board. To date, XO has not
exercised this right.
ITEM 13. Certain Relationships and Related Transactions
The information under `Director Compensation' included in Item 11. of this
Form 10-K is incorporated by reference.
During 2001, we issued an additional 300,000 shares of our Common Stock to
Starpoint Solutions, Inc. in connection with the 2000 purchase of the remaining
55% interest in Speedia, LLC that we did not already own. Mr. Jeffrey Najarian,
one of our directors, is the Chief Executive Officer of Starpoint.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) Financial Statements and Financial Schedule
(1) Consolidated Financial Statements Page(s)
Report of Independent Accountants.......................................................... 24
Consolidated Balance Sheets as of December 31, 2001 and 2000............................... 25
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and
1999....................................................................................... 26
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001, 2000 and 1999....................................... 27
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and
1999....................................................................................... 28
Notes to Consolidated Financial Statements................................................. 29-35
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the fourth quarter
of fiscal 2001.
(c) Exhibits
3.1a Certificate of Incorporation. (1)
3.1b Certificate of Ownership and Merger of CVUSA Merger Corporation With and Into Cellularvision
USA, Inc. (2)
3.2 By-laws. (1)
4.1 Form of Common Stock Certificate. (1)
4.2 Stockholders Agreement, dated as of January 12, 1996, by and among CellularVision USA, Inc.,
Shant S. Hovnanian, Bernard B. Bossard and Vahak S. Hovnanian. (1)
4.3 Form of Rights Agreement between SPEEDUS.COM, Inc. and Equiserve Trust Company, N.A., as
Rights Agent. The Rights Agreement includes as Exhibit A the Certificate of Designation,
Preferences and Rights of Series A Junior Participating Preferred Stock of SPEEDUS.COM, Inc.,
as Exhibit B the form of Rights Certificate and as Exhibit C the form of Summary of Rights to
Purchase Shares of Series A Junior Participating Preferred Stock. (3)
10.1 SPEEDUS.COM, Inc. 1995 Stock Incentive Plan. (Amended and Restated as of July 19, 2001) (4)
10.2 Employment Agreement, dated as of October 18, 1995, between CellularVision USA, Inc. and
Shant S. Hovnanian.(1)
10.3 Amended and Restated Agreement of Limited Partnership of CellularVision of New York, L.P.,
dated as of July 7, 1993, by and between Hye Crest Management, Inc., Bell Atlantic
Ventures, XXIII, Inc. and the limited partners set forth on the signature page thereto. (1)
10.4 Agreement of Lease, dated May 9, 1994, by and between Cellular Vision of New York and New
York City Economic Development Corporation and Sublease, dated March 8, 1995, between
CellularVision of New York, L.P. and Harvard Fax, Inc. (1)
10.5 Agreement, dated as of January 12, 1996, by and among CellularVision USA, Inc., CellularVision
of New York, L.P., Hye Crest Management, Inc., Shant S. Hovnanian, Vahak S. Hovnanian,
Bernard B. Bossard and Bell Atlantic Ventures XXIII, Inc. (1)
10.6 Stock Purchase Agreement, dated as of June 13, 1999, between SPEEDUS.COM, INC. and
NEXTLINK Communications, Inc. (5)
22
10.7 Strategic Agreement, dated as of June 13, 1999, between SPEEDUS.COM, INC. and NEXTLINK
Communications, Inc. (5)
10.8 Amended and Restated Agreement to Assign LMDS License, dated as of June 13, 1999, between
SPEEDUS.COM. Inc., SPEEDUSNY, L.P. and NEXTLINK Communications, Inc. (6)
10.9 Share Exchange Agreement, dated as of June 30, 2000, among SPEEDUS.COM, Inc., TIS
Worldwide, Inc. and Daniel Doyon (7)
21 Subsidiaries of SPEEDUS.COM, Inc. (1)
24.1 Consent of PricewaterhouseCoopers LLP (8)
- ------------------
(1) Incorporated by reference to the Company's Registration
Statement in Form S-1 (File No. 33-98340) which was declared
effective by the Commission on February 7, 1996.
(2) Incorporated by reference to the Company's Form 10-K filed on
March 31, 1999.
(3) Incorporated by reference to the Company's Form 8-K filed on
January 16, 2001.
(4) Incorporated by reference to the Company's Definitive Proxy
Statement filed on July 27, 2001.
(5) Incorporated by reference to the Company's Form 8-K filed on
June 28, 1999.
(6) Incorporated by reference to the Company's Form 8-K filed on
October 26, 1999.
(7) Incorporated by reference to the Company's Form 8-K/A filed on
July 17, 2000.
(8) Filed herewith.
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SPEEDUS.COM, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
SPEEDUS.COM, Inc. and its subsidiaries (the "Company") at December 31, 2001 and
December 31, 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 29, 2002
24
SPEEDUS.COM, Inc.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 39,933,881 $ 38,594,815
Marketable securities 31,471 68,166
Due from broker 4,921,177 624,790
Accounts and other receivables 670,120 94,816
Prepaid expenses and other 381,332 62,098
Due from affiliates -- 93,112
------------ ------------
Total current assets 45,937,981 39,537,797
Property and equipment, net of accumulated
depreciation of $9,650,192 and $9,198,902 5,828,315 8,659,977
Other intangible assets, net of accumulated
amortization of $271,071 and $173,214 1,798,929 2,196,786
Other assets 326,881 1,184,735
Goodwill, net of accumulated
amortization of $1,185,724 in 2000 -- 6,048,889
------------ ------------
Total assets $ 53,892,106 $ 57,628,184
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 206,871 $ 270,202
Accrued liabilities 1,461,460 1,532,542
Securities sold and not purchased 6,277,837 952,032
Other current liabilities 464,217 18,005
------------ ------------
Total current liabilities 8,410,385 2,772,781
Commitments and Contingencies -- --
Stockholders' equity:
Common stock ($.01 par value; 40,000,000
shares authorized; 21,384,838 and 21,034,838
shares issued) 213,848 210,348
Preferred stock ($.01 par value; 20,000,000
shares authorized):
Series A Junior Participating ($.01 par value;
4,000 shares authorized; no shares issued
and outstanding) -- --
Additional paid-in-capital 90,289,432 90,292,432
Treasury stock (at cost; 2,277,532 and 309,800 shares) (2,416,089) (305,741)
Accumulated deficit (42,605,470) (35,341,636)
------------ ------------
Stockholders' equity 45,481,721 54,855,403
------------ ------------
Total liabilities and stockholders' equity $ 53,892,106 $ 57,628,184
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
25
SPEEDUS.COM, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues $ 68,847 $ 105,395 $ 612,135
------------ ------------ ------------
Expenses:
Selling, general and administrative 5,263,179 5,844,260 4,409,046
Research and development 1,716,118 1,346,549 1,016,489
Depreciation and amortization 9,373,353 4,697,823 2,778,623
------------ ------------ ------------
Total operating expenses 16,352,650 11,888,632 8,204,158
------------ ------------ ------------
Operating loss (16,283,803) (11,783,237) (7,592,023)
Investment income 9,058,801 3,475,789 1,300,469
Equity in loss of associated company (125,297) (569,782) (350,722)
Other income 86,465 99,856 623,804
Settlement of litigation -- (282,500) --
Interest expense -- (8,793) (22,590)
------------ ------------ ------------
Loss before gain on assignment of spectrum,
intellectual property settlement
and provision for income taxes (7,263,834) (9,068,667) (6,041,062)
Gain on assignment of spectrum -- -- 19,442,000
Intellectual property settlement -- -- (2,425,000)
------------ ------------ ------------
Earning/(loss) before provision for
income taxes (7,263,834) (9,068,667) 10,975,938
Provision for income taxes -- -- 330,000
------------ ------------ ------------
Net earning/(loss) $ (7,263,834) $ (9,068,667) $ 10,645,938
============ ============ ============
Per share:
Basic earnings (loss) per common share $ (0.36) $ (0.44) $ 0.58
============ ============ ============
Weighted average common shares
outstanding 19,947,784 20,445,586 18,465,974
============ ============ ============
Diluted earnings (loss) per common share $ (0.36) $ (0.44) $ 0.57
============ ============ ============
Weighted average common shares
outstanding 19,947,784 20,445,586 18,680,082
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
26
SPEEDUS.COM, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 2000 and 2001
Common Stock Additional Total
-------------------------- Paid-in- Treasury Accumulated Shareholders'
Amount Shares capital Stock Deficit Equity
------------ ----------- -------------- -------------- -------------- --------------
Balance, January 1, 1999 ...... $ 171,314 17,131,357 $ 58,794,847 $ -- $ (36,918,907) $ 22,047,254
Issuance of common stock .. 25,396 2,539,602 20,407,852 20,433,248
Common stock issuance costs (558,000) (558,000)
Stock based compensation .. 1,231,000 1,231,000
Net earnings .............. 10,645,938 10,645,938
------------ ----------- -------------- -------------- -------------- --------------
Balance, December 31, 1999 .... 196,710 19,670,959 79,875,699 -- (26,272,969) 53,799,440
Issuance of common stock .. 13,638 1,363,879 8,919,733 8,933,371
Repurchase of common stock (305,741) (305,741)
Stock based compensation .. 1,497,000 1,497,000
Net loss .................. (9,068,667) (9,068,667)
------------ ----------- -------------- -------------- -------------- --------------
Balance, December 31, 2000 .... 210,348 21,034,838 90,292,432 (305,741) (35,341,636) 54,855,403
Issuance of common stock .. 3,000 300,000 (3,000) --
Exercise of warrants ...... 500 50,000 500
Repurchase of common stock (2,110,348) (2,110,348)
Net loss .................. (7,263,834) (7,263,834)
------------ ----------- -------------- -------------- -------------- --------------
Balance, December 31, 2001 .... $ 213,848 21,384,838 $ 90,289,432 $ (2,416,089) $ (42,605,470) $ 45,481,721
============ =========== ============== ============== ============== ==============
SPEEDUS.COM, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net earnings/(loss) $ (7,263,834) $ (9,068,667) $ 10,645,938
Adjustments to reconcile net earnings/(loss)to net
cash provided by/(used in) operating activities:
Depreciation and amortization 9,373,353 4,697,823 2,778,623
Stock based compensation 653,000 844,000 615,000
Equity in loss of associated company 125,297 569,782 350,722
Other income (86,465) -- --
Settlement of litigation -- 282,500 --
Gain on assignment of spectrum -- -- (19,442,000)
Changes in operating assets and liabilities:
Marketable securities 36,695 (68,166) --
Due from broker (4,296,387) (624,790) --
Accounts and other receivables (22,182) (86,752) (8,064)
Prepaid expenses and other (319,234) (12,098) (26,652)
Due from affiliates 93,112 -- (6,668)
Other assets 12,900 (485,699) 21,129
Accounts payable (63,331) (284,537) (1,964,606)
Accrued liabilities (71,082) 467,306 257,737
Securities sold and not purchased 5,325,805 952,032 --
Other current liabilities 446,212 (120,932) (64,875)
------------ ------------ ------------
Net cash provided by/(used in)
operating activities 3,943,859 (2,938,198) (6,843,716)
------------ ------------ ------------
Cash flows from investing activities:
Investment in associated companies (400,000) (954,957) (350,722)
Property and equipment additions (94,945) (1,039,885) (901,232)
Net proceeds from assignment of spectrum -- -- 19,750,000
Intangible assets -- (570,000) --
------------ ------------ ------------
Net cash provided by/(used in)
investing activities (494,945) (2,564,842) 18,498,046
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of options and warrants 500 1,433 433,248
Repurchase of stock (2,110,348) (305,741) --
Proceeds from sale of stock -- -- 19,750,000
Repayment of notes payable -- (210,938) (126,562)
------------ ------------ ------------
Net cash provided by/(used in)
financing activities (2,109,848) (515,246) 20,056,686
------------ ------------ ------------
Net increase/(decrease) in cash
and cash equivalents 1,339,066 (6,018,286) 31,711,016
Cash and cash equivalents, beginning of period 38,594,815 44,613,101 12,902,085
------------ ------------ ------------
Cash and cash equivalents, end of period $ 39,933,881 $ 38,594,815 $ 44,613,101
============ ============ ============
Supplemental Cash Flow Disclosures:
Cash paid for interest during the period $ -- $ 8,793 $ 22,238
============ ============ ============
Cash paid for income taxes during the period $ -- $ -- $ 302,000
============ ============ ============
Noncash transactions - common stock:
Issued for intangible assets $ -- $ 1,800,000 $ --
============ ============ ============
Issued/contingently issuable for acquisition $ -- $ 6,849,438 $ --
============ ============ ============
Noncash transaction:
Accounts receivable from sale of other assets $ 553,122 $ -- $ --
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements
27
SPEEDUS.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Organization
SPEEDUS.COM, Inc. ("SPEEDUS.COM"), a Delaware corporation, was formed in
October 1995 as CellularVision USA, Inc. ("CVUS") to combine the ownership of
predecessor companies that were under common control. In January 1999, through a
`short form merger' as allowed under Delaware law, CVUS changed its name to
SPEEDUS.COM. Unless the context requires otherwise, the term Company includes
SPEEDUS.COM and its wholly owned subsidiaries.
Business and FCC License
The Company has co-invested with Siemens Corporate Research, Inc., a
subsidiary of Siemens Corporation, in Zargis Medical Corp. to develop a service
solution, initially targeted toward primary care physicians that would be used
as part of general medical examinations for the early screening and detection of
valvular and congenital heart disease. The Company will continue to explore
additional acquisitions in emerging-growth companies. The Company owns a
portfolio of patents that allow for high-speed wireless communications. The
Company also owns fixed wireless spectrum in the New York City metropolitan area
that it may commercialize in the future to support high-speed, or broadband,
Internet access service. During 2001, the Company also developed and launched an
online cell phone store, 007Phones, which it now licenses to a third-party.
From 1992 until November 1998, the Company operated a 49-channel analog
subscription television service utilizing 1,300 MHz of spectrum under a LMDS
license from the FCC. The FCC commercial operating license was awarded to the
Company in recognition of its efforts in developing and deploying LMDS
technology, and for spearheading its regulatory approval at the FCC. In
September 1997, the Company's pioneer LMDS license was renewed as a standard
LMDS license through February 1, 2006. The license provides that the spectrum
may be used for a wide variety of fixed wireless purposes, including wireless
local loop telephony, high-speed Internet access and two-way teleconferencing.
The license covers 1,150 MHz of spectrum in the 28 GHz range encompassing the
New York Primary Metropolitan Statistical Area, a region which includes the five
boroughs of New York City as well as the New York Counties of Westchester,
Rockland, and Putnam. Under FCC authorization, the license includes an
additional 150 MHz of spectrum until the first Ka band satellite is launched, an
event which is not currently determinable.
In November 1998, as a result of the assignment of 850 MHz of spectrum,
the Company terminated its subscription television service. In October 1999, the
Company assigned an additional 150 MHz of spectrum.
2. Summary of Significant Accounting Policies
Financial statements and principles of consolidation
The consolidated financial statements include the accounts of SPEEDUS.COM
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. The Company's share of earnings or losses
of associated companies, that are 20% to 50% owned, is included in the
consolidated operating results using the equity method of accounting. During
2001, the Company's ownership interest in Zargis Medical (49% at December 31,
2001) and during 1999 and through June 30, 2000, the Company's 45% ownership
interest in Speedia LLC (see Note 4) were accounted for using the equity method
of accounting.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 dates of the financial
statements and the reported amounts of operating revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid interest earning investments with
original maturities of three months or less to be cash equivalents. At December
31, 2001 cash equivalents consisted of money market funds. At December 31, 2000,
cash equivalents consisted of commercial paper and money market funds.
28
Marketable Securities
All marketable securities are defined as trading securities under the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." At December 31, 2001 and
2000, marketable securities consisted of publicly traded equity securities and
were recorded at fair market value. Their original cost was $631,000 and
$628,000, unrealized losses were $600,000 and $560,000 and the carrying value
was $31,000 and $68,000, respectively.
Securities sold and not purchased
The Company may sell publicly traded equity securities it does not own in
anticipation of declines in the fair market values of the securities. When the
Company effects such transactions, it must borrow the securities it sold in
order to deliver them and settle the trades. The amount shown on the balance
sheet as `Securities sold and not purchased' represents the value of these
securities at fair market value. At December 31, 2001 and 2000, the Company had
sold securities it had not purchased. The aggregate proceeds were $5,504,000 and
$1,502,000, unrealized gains/(losses) were $(774,000) and $550,000 and the
market value of the securities was $6,278,000 and $952,000, respectively.
During the years ended December 31,2001 and 2000, realized gains in the
amount of $9,324,000 and $797,000 were recorded and included in Investment
Income in the accompanying Consolidated Statements of Operations. Realized gains
and losses during the year ended December 31, 1999 were not material.
Due from broker
In connection with selling publicly traded securities that it does not
own, the Company is obligated to maintain balances with brokerage firms as
security for these transactions. At December 31, 2001 and 2000, restricted cash
balances in the amounts of $4,921,000 and $625,000, respectively, were held by
brokerage firms.
Concentrations of Credit Risk
Financial instruments that potentially could subject the Company to
concentrations of credit risk consist largely of cash equivalents and marketable
securities. These instruments are potentially subject to concentrations of
credit risk but the Company believes that this risk is limited due to
diversification and investments being made in investment grade securities.
Property and Equipment
Transmission and headend equipment, customer premises equipment, office
equipment and leasehold improvements are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets, ranging from
two to seven years.
Through the quarter ended September 30, 2000, fiber optic lines were
depreciated over an estimated useful life of 40 years. Commencing with the
quarter ended December 31, 2000, the Company considers the remaining useful life
to be ten years and accounted for this determination as a change in an estimate.
The effect of this change is not material.
Effective January 1, 1999, the Company adopted Statement of Position 98-1
("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." In accordance with SOP 98-1, the Company has
capitalized certain internal use software and Web site development costs. These
costs are depreciated using the straight-line method over an estimated useful
life of two years.
When assets are fully depreciated, it is the Company's policy to remove
the costs and related accumulated depreciation from its books and records.
Long-lived assets
The Company periodically evaluates the net realizable value of long-lived
assets, including fixed assets and equity method investments, relying on
anticipated future cash flows. The Company's evaluation of anticipated future
cash flows considers operating results, business plans and economic projections,
as well as, non-financial data such as market trends, product and development
cycles, and changes in management's market emphasis. An impairment in the
carrying value of an asset is recognized when the expected future operating cash
flows derived from the asset are less than its carrying value.
29
Goodwill and Other Intangible Assets
Goodwill, the excess of cost over the net assets of Speedia, LLC (see Note
4) at the time of acquisition, was amortized on a straight-line basis over three
years.
Other intangible assets consist of the cost of a software license, which
was being amortized over its estimated useful life of three years, and a patent,
which is being amortized over its remaining life of fourteen years at the time
of acquisition.
However, as a result of continuing weak industry conditions and lower
market valuations, we determined that there were indications of impairment to
the carrying value of our goodwill and other purchased intangibles in connection
with our purchase in 2000 of the remaining 55% interest in Speedia that we did
not already own. Based on our review, we recorded a charge of $3,779,000 in the
fourth quarter of 2001 for the impairment of intangible assets associated with
that acquisition. This charge is included in "Depreciation and amortization" for
the year ended December 31, 2001.
Revenue Recognition
The Company earns fees from a licensee for the sale and activation of
wireless phones. In accordance with the provisions of the Securities and
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements", these revenues and associated costs are deferred due to
cancellation privileges and chargebacks from carriers. At December 31, 2001,
there is $455,000 and $381,000 included in `Other current liabilities' and
`Prepaid expenses and other', respectively, representing these deferred revenues
and deferred charges, respectively.
Income Taxes
As required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company is required to provide for deferred
tax assets or liabilities arising due to temporary differences between the book
and tax basis of the Company's assets and liabilities.
As of December 31, 2001, the Company has a deferred tax asset of
approximately $20.7 million, relating primarily to operating losses, and an
offsetting valuation allowance of the same amount. As of December 31, 2000 and
1999, the Company recorded a deferred tax asset of approximately $18.1 million
and $9.1 million, respectively, primarily related to operating losses and the
difference between the book and tax basis of the Company's assets. An offsetting
valuation allowance of $18.1 million and $9.1 million, respectively, was
established as the Company had no ability to carryback its losses and a limited
earnings history. For the year ended December 31, 1999, the Company has recorded
a provision for income tax of $330,000 relating to Federal and State Alternative
Minimum Taxes.
For the year ended December 31, 1999, the provision for taxes was
comprised of $235,000 for federal taxes and $95,000 for state taxes.
A reconciliation of the Company's effective income tax rate and the
federal tax rate is as follows:
2001 2000 1999
---- ---- ----
Statutory rate (34%) (34%) 34%
Permanent difference - stock based compensation 3% 3% 2%
State income taxes, net of federal benefit (11%) ( 3%) 1%
Change in valuation allowance 42% (34%) (34%)
---- ---- ----
Effective rate --% --% 3%
==== ==== ====
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $42.9 million. If not utilized, the net operating loss
carryforwards will expire in various amounts through 2023.
Earnings Per Share
Basic and diluted earnings/(loss) per common share are determined in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share".
For the year ended December 31, 2001 and 2000, basic and diluted net loss
available for common shareholders was equal to net loss. Weighted average shares
for the assumed exercise or conversion of stock options and warrants in the
amounts of 88,068 and 102,338, respectively, for the year ended December 31,
2001 and
30
104,607 and 261,598, respectively, for the year ended December 31, 2000 have
been excluded from the diluted loss per share since their effect would be
antidilutive.
a. For the year ended December 31, 1999, basic and diluted net earnings
available for common shareholders was equal to net earnings. The weighted
average common shares for diluted earnings per share were determined by adding
weighted average shares in the amounts of 42,221 and 171,887 for the assumed
exercise or conversion of stock options and warrants, respectively, to the
weighted average shares outstanding for basic earnings per share for a total of
18,680,082 weighted average shares outstanding for diluted earnings per share.
3. Related Party Transactions
a. In July 1993, the Company entered into a license agreement with
CellularVision Technology and Telecommunications, L.P. CT&T owns a portfolio of
fundamental broadband wireless patents and licenses. The Company has operated
its super high-speed Internet broadband wireless network under a technology
license from CT&T.
CT&T was 80% owned by Shant S. Hovnanian, the Chairman of the Board,
President, and Chief Executive Officer of the Company, Vahak S. Hovnanian, a
director of the Company, and Bernard B. Bossard, a former officer and director
of the Company, (collectively, the "Founders"). The remaining 20% of CT&T was
owned by a U.S. subsidiary of Philips Electronics, N. V. ("Philips")
In connection with the settlement of litigation commenced by M/A-COM, a
unit of Tyco International Ltd., during 2000 the Company acquired Philips 20%
interest in CT&T. In addition, the Founders contributed their 80% interest in
CT&T to the Company as part of the settlement agreement. The Company's portion
of the settlement was $2.4 million and was expensed during the year ended
December 31, 1999.
b. The Company has signed an exclusive contract with Zargis Medical to
design and develop the wireless applications, as well as provide transaction
processing to support the commercial rollout of Zargis Medical's cardiac
diagnostic products. During the year ended December 31, 2001, no revenues were
recorded in connection with Zargis Medical.
4. Acquisition
On June 30, 2000, the Company purchased the remaining 55% interest in
Speedia, LLC that it did not already own. The Company issued an aggregate of
950,000 shares of its Common Stock to Speedia's selling shareholders, Starpoint
Solutions, Inc. (formerly TIS Worldwide, Inc.) and Daniel Doyon (collectively,
the "Sellers). Thereafter, as a result of not having met certain contingencies,
the Company was obligated to issue an additional 300,000 shares of its Common
Stock.
This acquisition was accounted for using the purchase method of
accounting. The results of operations of Speedia have been included in the
consolidated statements of operations for the periods subsequent to June 30,
2000. The excess of the purchase price, valued at approximately $6.8 million
(including the value of the additional shares), over the fair value of the net
assets acquired was approximately $7.2 million which has been recorded as
goodwill and was being amortized over a period of 3 years. However, as a result
of continuing weak industry conditions and lower market valuations, we
determined that there were indications of impairment to the carrying value of
our goodwill and other purchased intangibles in connection with our purchase in
2000 of the remaining 55% interest in Speedia that we did not already own. Based
on our review, we recorded a charge of $3,779,000 in the fourth quarter of 2001
to write off the value of goodwill and intangible assets associated with that
acquisition.
Unaudited pro forma operating results of the Company as though the
acquisition of Speedia had occurred on January 1, 1999, with adjustment to give
effect to the amortization of goodwill, are as follows:
Year ended December 31,
-----------------------
2000 1999
---- ----
Revenues $ 129,765 $ 612,819
Operating loss $(14,060,088) $(10,713,719)
Net earnings/(loss) $(10,863,736) $ 7,874,964
Basic and diluted net earnings/(loss) per share $ (0.51) $ 0.40
31
5. Property and Equipment
Property and equipment consists of the following:
December 31,
------------------------
2001 2000
---------- ----------
Transmission and headend equipment........ $11,476,412 $12,371,232
Customer premises equipment .............. 684,400 2,041,294
Leasehold improvements ................... 2,111,076 2,107,313
Office equipment ......................... 480,609 613,030
Fiber optics ............................. 375,000 375,000
Equipment deposits ....................... 351,010 351,010
---------- ----------
15,478,507 17,858,879
Less--accumulated depreciation ........... 9,650,192 9,198,902
---------- ----------
Property and equipment.... $5,828,315 $8,659,977
========== ==========
Depreciation expense was approximately $2,988,000, $3,430,000 and
$2,779,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
6. Stockholders' Equity
Stock Options
The Company's 1995 Stock Incentive Plan, as amended, provides for the
grant of various stock-based incentives, including non-qualified and incentive
stock options. The Plan has reserved 2,250,000 shares of Common Stock of the
Company for issuance to employees, directors and consultants, including an
additional 500,000 shares approved by stockholders in each of 1999, 2000 and
2001.
During 1999, a total of 462,516 non-qualified stock options were granted
at exercise prices ranging from $3.59 to $5.34 per share, 62,900 options were
exercised and 7,250 options were cancelled. All options were granted at the
market price per share on the date of grant and have ten-year terms. The
weighted average exercise price for the 540,616 options outstanding at December
31, 1999, 112,979 of which were exercisable, was $4.86 per share. At December
31, 1999, there were 1,046,484 shares available for future grant.
During 2000, a total of 582,750 non-qualified stock options were granted
at exercise prices ranging from $2.08 to $13.75 per share, 937 options were
exercised and 70,335 options were cancelled. All options were granted at the
market price per share on the date of grant and have ten-year terms. The
weighted average exercise price for the 1,052,094 options outstanding at
December 31, 2000, 567,761 of which were exercisable, was $4.22 per share. At
December 31, 2000, there were 1,034,069 shares available for future grant.
During 2001, a total of 682,246 non-qualified stock options were granted
at exercise prices ranging from $0.825 to $1.75 per share, no options were
exercised and 129,360 options were cancelled. All options were granted at the
market price per share on the date of grant and have ten-year terms. The
weighted average exercise price for the 1,604,980 options outstanding at
December 31, 2001, 840,817 of which were exercisable, was $2.90 per share. At
December 31, 2001, there were 981,183 shares available for future grant.
The Company accounts for the cost of stock-based compensation plans in
accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees." Since all options to date have been granted at the market price
per share on the date of grant, no compensation expense has been recognized by
the Company for its stock-based compensation plans during the years ended
December 31, 2001, 2000 and 1999. If the Company had determined compensation
expense based upon the fair value at the date of grant in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," compensation expense would have been $975,000, $1,154,000 and
$1,081,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
On a pro forma basis, for the years ended December 31, 2001, 2000 and 1999: (i)
net earnings/(loss) would have been $(8,239,000), $(10,223,000) and $9,565,000,
respectively; (ii) basic earnings/(loss) per share would have been $(0.41),
$(0.50) and $0.52, respectively, and (iii) diluted earnings/(loss) per share
would have been $(0.41), $(0.50) and $0.51, respectively.
32
In determining fair value, the stock options were valued using the
Black-Scholes option pricing model. Key assumptions used in valuing the options
granted during 2001 included a risk-free interest rate of 6.0%, an expected life
of 3 years and a volatility factor of 175%.
Warrants
The Company accounts for warrants granted to non-employees under the
provisions of Statement of Financial Accounting Standards No. 123 and Emerging
Issues Task Force No. 96-18, "Accounting for equity instruments that are issued
to other than employees for acquiring or in conjunction with selling, goods and
services". The fair value of the warrants at the time of issuance was determined
using the Black-Scholes option-pricing model. Expenses are recognized over the
service terms.
Warrants to purchase up to 190,862 shares of Common Stock of the Company,
issued in 1995, were outstanding at December 31, 2000. Of this amount, an
aggregate of up to 113,256 shares were issuable by the Company, and 77,606
shares were issuable by Vahak S. Hovnanian, a director of the Company, from his
Common Stock holdings. The warrants issued by the Company have a ten-year term
and an exercise price ranging from $12.50 to $15.03 per share.
During 1999, a total of 550,000 warrants were issued at exercise prices
ranging from $1 to $4.97 per share and 377,000 warrants were exercised. The
warrants have three to five-year terms.
During 2000, a total of 125,000 warrants were issued at an exercise price
of $4.78 per share. No warrants were exercised. The warrants have five-year
terms.
During 2001, no warrants were issued and warrants to purchase 50,000
shares of Common Stock were exercised.
At December 31, 2001, there were outstanding warrants to purchase an
aggregate of 663,256 shares of Common Stock with exercise prices ranging from
$1.00 to $15.03 and a weighted average price of $4.94.
During the years ended December 31, 2001, 2000 and 1999, stock based
compensation in the aggregate amounts of $653,000, $844,000 and $1,231,000,
respectively, for financial advisory and other services was recorded. These
amounts are included in selling, general and administrative expenses in the
amounts of $653,000, $844,000 and $615,000 in 2001, 2000 and 1999, respectively,
common stock issuance costs in the amount of $308,000 in 1999 and gain on
assignment of spectrum in the amount of $308,000 in 1999.
Stockholder Rights Plan
On January 11, 2001, the Company's Board of Directors adopted a
stockholder rights plan in which preferred stock purchase rights will be
distributed as a dividend at the rate of one right for each share of the
Company's Common Stock.
Each right generally will entitle stockholders, in certain circumstances,
to buy one one-ten thousandth of a newly issued share of Series A Junior
Participating Preferred Stock of the Company at an exercise price of $50.00. The
rights generally will be exercisable and transferable apart from the Common
Stock only if a person or group acquires beneficial ownership of 17% or more of
the Common Stock or commences a tender or exchange offer upon consummation of
which such person or group would beneficially own 17% or more of the Common
Stock.
If any person becomes the beneficial owner of 17% or more of the Company's
Common Stock, then each right not owned by a 17% or more stockholder or certain
related parties will entitle its holder to purchase, at the right's then-current
exercise price, shares of Common Stock (or, in certain circumstances as
determined by the Board, cash, other property, or other securities) having a
value of twice the right's exercise price. In addition, if, after any person has
become a 17% or more stockholder, the Company is involved in a merger or other
business combination transaction with another person in which its Common Stock
is changed or converted, or sells 50% or more of its assets or earning power to
another person, each right will entitle its holder to purchase, at the right's
then-current exercise price, shares of common stock of such other person having
a value of twice the right's exercise price.
The Company will generally be entitled to redeem the rights at $.01 per
right at any time until the tenth day following public disclosure that a person
or group has become the beneficial owner of 17% or more of the Company's common
stock. The rights will expire on January 26, 2011.
7. Sale of Spectrum
33
In October 1999, pursuant to an agreement dated June 13, 1999, as amended,
between the Company and XO Communications, Inc. the Company consummated the
assignment of 150 MHz of spectrum to XO for $20,000,000 in cash. The transaction
was subject to regulatory approval, which was received. From July 1999 to
October 1999, pending regulatory approval of the license assignment, XO made
monthly payments of approximately $172,000 to the Company. In connection with
this transaction, the Company incurred closing costs and commissions in the
aggregate amount of approximately $308,000.
8. Commitments and Contingencies
Noncancelable Leases
At December 31, 2001, future minimum lease payments due under
noncancelable leases are as follows:
2002................................................. $ 345,000
2003................................................. 233,000
2004................................................. 189,000
2005................................................. 103,000
2006................................................. 103,000
Thereafter........................................... 86,000
---------
Total................................... $1,059,000
=========
Rent expense was approximately $294,000, $300,000 and $295,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
9. Legal Proceedings
The Company is subject to various claims and proceedings that occur in the
ordinary course of business. The Company believes it has substantial defenses to
a material portion of these claims and is prepared to pursue litigation if a
reasonable and structured settlement cannot be reached with the parties. Based
on information currently available, the Company believes that none of these
current claims or proceedings, either individually or in the aggregate, will
have a material effect on its business.
10. Selected Quarterly Data (unaudited)
Quarterly financial information is summarized in the table below (amounts
in thousands, except per share amounts):
34
Year ended December 31, 2001
-------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------- ----------------------------------- ---------------
Revenues $ 25 $ 22 $ 20 $ 2
Selling, general and
administrative expenses 1,537 1,464 966 1,296
Research and development 485 443 380 408
Operating loss (3,382) (3,285) (2,661) (6,956)
Investment income/(loss) 5,879 (240) 3,240 181
Net earnings/(loss) $ 2,476 $ (3,546) $ 536 $(6,730)
Per share (1):
Basic $ 0.12 $ (0.18) $ 0.03 $ (0.35)
Diluted $ 0.12 $ (0.18) $ 0.03 $ (0.35)
Year ended December 31, 2000
-------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------- ----------------- -------------- ---------------
Revenues $ 35 $ 23 $ 20 $ 27
Selling, general and
administrative expenses 1,040 1,255 1,480 2,069
Research and development 205 325 409 408
Operating loss (2,042) (2,329) (3,292) (4,120)
Investment income/(loss) 601 937 488 1,450
Net earnings/(loss) $ (1,678) $ (1,730) $(2,988) $(2,673)
Per share (1):
Basic $ (0.08) $ (0.09) $ (0.14) $ (0.13)
Diluted $ (0.08) $ (0.09) $ (0.14) $ (0.13)
During the fourth quarter of 2001, as a result of continuing weak industry
conditions and lower market valuations, the Company undertook a review of its
business model. As a result, the Company determined to not actively pursue new
initiatives in the wireless market and undertook a downsizing of Speedia and its
personnel. In June 2000, the Company had recorded $7.2 million in goodwill as a
result of the purchase of the remaining 55% interest in Speedia that it did not
already own and was amortizing this goodwill over a period of three years
commencing in the third quarter of 2000. As a result of its review and
downsizing, however, the Company determined that there were indications of
impairment to the carrying value of its goodwill and other purchased intangibles
in connection with this acquisition and recorded a charge of $3,779,000 in the
fourth quarter of 2001 for the impairment of goodwill and intangible assets
associated with that acquisition.
11. Subsequent Events (unaudited)
In February 2002, the Company signed a letter of intent for the purchase
of a controlling interest in a European style casual food service company. This
company is operating its first store in Manhattan and is currently planning
expansion to other locations. The amount of the Company's commitment is
$3,500,000, which funds will be applied principally for its expansion. The
Company will also enter into a management services contract with this company
that will result in direct revenues to the Company apart from those arising out
of its ownership interest. There can be no assurance that this transaction will
be consummated or consummated on these terms.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in New York, New York
on April 1, 2002.
SPEEDUS.COM, Inc.
s/s Shant S. Hovnanian
--------------------------------------
Shant S. Hovnanian
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
s/s Shant S. Hovnanian Chairman of the Board of Directors, April 1, 2002
- --------------------------- President and Chief Executive and Chief
Shant S. Hovnanian Financial Officer
s/s Angela M. Vaccaro Controller and Chief Accounting Officer April 1, 2002
- ---------------------------
Angela M. Vaccaro
s/s Vahak S. Hovnanian Director April 1, 2002
- ---------------------------
Vahak S. Hovnanian
s/s William F. Leimkuhler Director April 1, 2002
- -------------------------
William F. Leimkuhler
s/s Jeffrey Najarian Director April 1, 2002
- ---------------------------
Jeffrey Najarian
s/s Christopher Vizas Director April 1, 2002
- ---------------------------
Christopher Vizas
36