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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number: 000-27582
SPEEDUS CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3853788
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
140 58th Street, Suite 7E
Brooklyn, New York 11220
(Address of principal executive offices) (Zip Code)
718-567-4300
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
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 |_|
The number of outstanding shares of the registrant's common stock, par value
$.01 per share, as of May 9, 2003 was 16,805,189.
SPEEDUS CORP.
INDEX TO FORM 10-Q
Page
----
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002 ................................................................................. 3
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 2003 and 2002 ............................................................ 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 2003 and 2002 ............................................................ 5
Notes to Consolidated Financial Statements (unaudited) ................................................ 6-9
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................................. 10-13
ITEM 3 -- Quantitative and Qualitative Disclosures About Market Risk ............................................. 13
ITEM 4 -- Controls and Procedures ................................................................................ 14
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings ...................................................................................... 15
ITEM 2 -- Changes in Securities .................................................................................. 15
ITEM 3 -- Defaults Upon Senior Securities ........................................................................ 15
ITEM 4 -- Submission of Matters to a Vote of Security Holders .................................................... 15
ITEM 5 -- Other Information ...................................................................................... 15
ITEM 6 -- Exhibits and Reports on Form 8-K ....................................................................... 15
Signature Page ................................................................................................... 16
Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes -Oxley Act Of 2002 .............. 17
Certification of Chief Financial Officer Pursuant to Sect ion 302 of The Sarbanes-Oxley Act Of 2002 .............. 18
Exhibit 99.1: Certification of Chief Executive Officer Pursuant to U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002 .......................................... 19
Exhibit 99.2: Certification of Chief Financial Officer Pursuant to U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002 .......................................... 20
2
SPEEDUS CORP.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 31,312,072 $ 33,052,815
Marketable securities 403,018 879,194
Due from broker 8,316,926 11,728,880
Accounts and other receivables 42,500 40,099
Prepaid expenses and other 121,485 17,488
------------ ------------
Total current assets 40,196,001 45,718,476
Property and equipment, net of accumulated
depreciation of $1,863,007 and $2,015,662 741,821 819,714
Other intangible assets, net of accumulated
amortization of $522,121 and $418,929 1,547,879 1,651,071
Goodwill 1,371,365 1,760,106
Other assets 284,654 297,544
------------ ------------
Total assets $ 44,141,720 $ 50,246,911
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 297,969 $ 228,144
Accrued liabilities 1,459,887 1,734,252
Securities sold and not purchased 10,465,594 14,212,566
Other current liabilities 66,352 62,336
------------ ------------
Total current liabilities 12,289,802 16,237,298
Minority interest 955,700 1,591,557
Commitments and Contingencies -- --
Stockholders' equity:
Common stock ($.01 par value; 50,000,000
shares authorized; 21,384,838 shares issued 213,848 213,848
Preferred stock ($.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 90,289,432
Treasury stock (at cost; 4,559,449 and 4,418,577 shares) (4,478,953) (4,371,778)
Accumulated deficit (55,128,109) (53,713,446)
------------ ------------
Stockholders' equity 30,896,218 32,418,056
------------ ------------
Total liabilities and stockholders' equity $ 44,141,720 $ 50,246,911
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
SPEEDUS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended March 31,
----------------------------
2003 2002
------------ ------------
Revenues $ 169,807 $ 234,564
------------ ------------
Expenses:
Selling, general and administrative 1,006,462 1,053,104
Research and development 255,065 216,361
Depreciation and amortization 215,368 659,783
Cost of sales 48,300 205,272
------------ ------------
Total operating expenses 1,525,195 2,134,520
------------ ------------
Operating loss (1,355,388) (1,899,956)
Investment income/(loss) (47,530) 514
Equity in loss of associated company (92,996) (81,928)
Minority interest 81,251 --
------------ ------------
Net loss $ (1,414,663) $ (1,981,370)
============ ============
Per share:
Basic loss per common share $ (0.08) $ (0.10)
============ ============
Weighted average common shares
outstanding 16,883,034 18,910,607
============ ============
Diluted loss per common share $ (0.08) $ (0.10)
============ ============
Weighted average common shares
outstanding 16,883,034 18,910,607
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
SPEEDUS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (1,414,663) $ (1,981,370)
Adjustments to reconcile net loss to
net cash provided by/(used in) operating activities:
Depreciation and amortization 215,368 659,783
Unrealized (gains)/losses 461,887 727,880
Equity in loss of associated company 92,996 81,928
Minority interest (81,251) --
Changes in operating assets and liabilities:
Marketable securities 434,790 (8,226)
Due from broker 3,411,954 (319,495)
Accounts and other receivables (2,401) 101,003
Prepaid expenses and other (103,997) 205,272
Other assets (172,490) 13,200
Accounts payable (46,852) 209,607
Accrued liabilities (287,750) (177,751)
Securities sold and not purchased (4,167,473) 455,392
Other current liabilities 4,016 (203,359)
------------ ------------
Net cash provided by/(used in) operating activities (1,654,866) (236,136)
------------ ------------
Cash flows from investing activities:
Loans and other receivables, net of repayments 2,500 (146,563)
Proceeds from sale of assets -- 553,122
Acquisition of business, net of cash acquired 18,798 --
------------ ------------
Net cash provided by/(used in) investing activities 21,298 406,559
------------ ------------
Cash flows from financing activities:
Repurchase of stock (107,175) (489,935)
------------ ------------
Net cash provided by/(used in) financing activities (107,175) (489,935)
------------ ------------
Net increase/(decrease) in cash
and cash equivalents (1,740,743) (319,512)
Cash and cash equivalents, beginning of period 33,052,815 39,933,881
------------ ------------
Cash and cash equivalents, end of period $ 31,312,072 $ 39,614,369
============ ============
Supplemental information of business acquired:
Fair value of assets acquired:
Cash $ 18,798 $ --
Non current assets 34,283 --
Goodwill 481,009 --
Less-liabilities assumed:
Current liabilities (218,946) --
Minority interest (315,144) --
------------ ------------
Cash paid -- --
less-cash acquired 18,798 --
------------ ------------
Acquisition of business, net of cash acquired $ (18,798) $ --
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
SPEEDUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements of Speedus Corp. have been
prepared in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These financial statements do not include all information and
notes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the Company's 2002 audited consolidated financial statements and notes
thereto on Form 10-K.
Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
Financial statements and principles of consolidation
The consolidated financial statements include the accounts of Speedus and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Companies in which Speedus directly or indirectly owns more than 50% of
the outstanding voting securities or that Speedus has effective control over are
accounted for under the consolidation method of accounting. Under this method,
those companies' balance sheets and results of operations, from the date Speedus
acquired control, are included in Speedus' consolidated financial statements.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Other shareholders' interest in the net assets and operations of
these companies is reflected in the caption 'Minority interest' in Speedus'
consolidated balance sheet and statements of operations.
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.
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 and the
difference could be material.
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 March 31, 2003 and
December 31, 2002, marketable securities consisted of publicly traded equity
securities and were recorded at fair market value. Their original cost was
$1,080,000 and $1,479,000, unrealized losses were $677,000 and $600,000 and the
carrying value was $403,000 and $879,000, respectively. For the three months
ended March 31, 2003 and 2002, unrealized gains/(losses) were $(41,000) and
$7,000, respectively.
Securities Sold But 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 amounts shown on the balance
sheet as `Securities sold and not purchased' represent the value of these
securities at fair market value. At March 31, 2003 and December 31, 2002, the
Company had sold securities it had not purchased. The aggregate proceeds were
$9,404,000 and $12,001,000, unrealized (losses) were $(1,062,000) and
$(2,212,000) and the market value of the securities was $10,466,000 and
$14,213,000, respectively. For the three months ended March 31, 2003 and 2002,
unrealized (losses) were $(421,000) and $(735,000), respectively.
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 March 31, 2003 and December 31, 2002,
restricted cash balances in the amounts of $8,317,000 and $11,729,000,
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.
The Company also sells publicly traded equity securities that it does not
own in anticipation of declines in the fair market values of the securities.
When the Company sells securities that it does not own, it must borrow the
securities it sold in order to deliver them and settle the trades. Thereafter,
the Company must buy the securities and deliver them to the lender of the
securities. The
6
Company's potential for loss on these transactions is unlimited since the value
of the underlying security can keep increasing which could have a material
adverse effect on the Company's consolidated financial statements.
Long-lived Assets
The Company periodically evaluates the net realizable value of long-lived
assets, including fixed and intangible assets, 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.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets in
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" which requires the use of a nonamortization
approach to account for purchased goodwill and certain intangibles. Under the
nonamortization approach, goodwill is not being amortized into results of
operations, but instead is reviewed for impairment annually. Goodwill, with a
balance of $1,760,000 at December 31, 2002, increased $481,000 as a result of
the acquisition of a controlling interest in Zargis Medical and decreased
$870,000 as a result of the reduction in the Company's investment in F&B
Gudtfood, resulting in a balance of $1,371,000 recorded by the Company as
goodwill at March 31, 2003.
Other intangible assets consist of the cost of a patent which, through the
year ended December 31, 2002, was amortized over its life of fourteen years at
the time of acquisition. During the three months ended March 31, 2003, the
Company reviewed the estimated useful life of this patent in light of the
continuing depressed economic state of the telecommunications industry. As a
result, effective January 1, 2003, the Company considers the remaining useful
life to be four years and has accounted for this determination as a change in an
estimate. This change increased net loss for the three months ended March 31,
2003 by $66,000. There was no effect on basic loss per common share.
Revenue Recognition
Revenues from F&B Gudtfood's operations are recorded on a cash basis.
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 until
the expiration of cancellation privileges and chargeback periods from carriers.
At March 31, 2003, the amount recorded for these deferred revenues was not
material. During the three months ended March 31, 2002, the Company recorded
revenues in the amount of $231,000 in connection with the sale and activation of
wireless phones.
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 three months ended March 31, 2003 and 2002, outstanding stock
options and warrants in the amounts of 1,939,780 and 2,268,236, respectively,
have been excluded from the diluted loss per share since their effect would be
antidilutive.
Stock Options
The Company accounts for its employee stock options in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", as amended by SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123", which defines a "fair value method" of measuring and accounting for
compensation expense from employee stock options. This standard also allows
accounting for such options under the "intrinsic value method" in accordance
with Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to use the intrinsic value method and is
presenting pro forma disclosures of earnings and earnings per share as if the
fair value method of accounting was applied.
Pro forma earnings information giving effect to compensation expense based
upon the fair value at the date of grant in accordance with SFAS 123 for the
three months ended March 31, 2003 and 2002 is summarized as follows:
7
Three months ended March 31,
----------------------------
(unaudited)
2003 2002
------------ ------------
Net loss as reported $ (1,414,663) $ (1,981,370)
After tax effect of pro forma compensation (122,194) (224,927)
------------ ------------
Pro forma net loss $ (1,536,857) $ (2,206,297)
============ ============
Loss per share:
Basic - as reported $ (0.08) $ (0.10)
============ ============
Basic - pro forma $ (0.09) $ (0.12)
============ ============
Diluted - as reported $ (0.08) $ (0.10)
============ ============
Diluted - pro forma $ (0.09) $ (0.12)
------------ ------------
2. Related Party Transactions
a. 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.
b. The Company also entered into a management services contract with F&B
Gudtfood. In connection with the F&B Gudtfood acquisition, in May 2002 the
Company extended loans to two employees of F&B Gudtfood, who are also minority
shareholders of F&B Gudtfood aggregating $120,000. The loans, which can be
increased by $40,000 each under certain conditions, will be forgiven if certain
milestones are achieved.
3. Acquisitions
a. On February 28, 2003, the Company increased its investment in Zargis
Medical to 57.7% with an additional investment of $1,250,000 in newly issued
shares. Prior to February 28, 2003, the Company held a 46.4% interest in Zargis
and accounted for its investment under the equity method of accounting.
This acquisition was accounted for using the purchase method of
accounting. The results of operations of Zargis Medical have been included in
the consolidated statements of operations from the date of acquisition. The
allocation of the excess of the purchase price over the fair value of the net
assets acquired of $481,000 is preliminary. The Company expects to finalize its
purchase price allocation during 2003 and this final allocation could change the
current allocation to goodwill. To the extent that the allocation changes from
goodwill, increased amortization or a write-off of up to $481,000 could result.
Unaudited pro forma operating results of the Company as though the
acquisition of Zargis Medical had occurred on January 1, 2002, are as follows:
Three months ended March 31,
----------------------------
(unaudited)
2003 2002
----------- -----------
Revenues $ 169,807 $ 234,564
Operating loss $(1,555,811) $(2,068,790)
Net loss $(1,437,311) $(1,997,722)
Basic and diluted loss per share $ (0.09) $ (0.11)
b. On May 6, 2002, the Company acquired a 51% interest in F&B Gudtfood,
the creator and operator of the original Eurocentric "chic and quick" cafe,
which is operating its first store in Manhattan and is currently planning
expansion to other locations. The acquisition price was $3,500,000, which funds
will be applied principally for its expansion. On February 8, 2003, we reduced
our investment in F&B Gudtfood and received $1,775,000 while maintaining our 51%
interest.
This acquisition was accounted for using the purchase method of
accounting. The results of operations of F&B Gudtfood have been included in the
consolidated statements of operations from the date of acquisition. The excess
of the purchase price, as reduced, over the fair value of the net assets
acquired was approximately $0.9 million and has been recorded as goodwill.
The Company does not have sufficient information to present pro forma
information for the quarter ended March 31, 2002 without undue burden and
expense.
4. 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 it is remote
8
that the ultimate resolution of these current claims or proceedings, either
individually or in the aggregate, will have a material effect on its business.
5. Business Segment Information
The following table sets forth the Company's financial performance by
reportable operating segment for the quarter ended March 31, 2003. F&B Gudtfood
and Zargis Medical are included in the consolidated financial statements of the
Company since May 6, 2002 and February 28, 2003, respectively, the dates of
acquisition of majority interests. As a result, there is no segment information
presented for the quarter ended March 31, 2002. During the quarter ended March
31, 2002, substantially all of the Company's revenues were from the sale and
activation of wireless phones through the Company's online cell phone store,
007phones. The Company now licenses the cell phone store to a third party and
license fees are less than revenues from sale and activation. No revenues were
recognized in connection with 007 phones during the three months ended March 31,
2003.
Corporate
F&B Zargis and other Totals
--- ------ --------- ------
Revenues from external customers $ 168,451 $ -- $ 1,356 $ 169,807
Depreciation and amortization 6,200 756 208,412 215,368
Operating loss (84,091) (138,343) (1,132,954) (1,355,388)
Investment income/(loss) 7,699 0 (55,229) (47,530)
Goodwill and other intangible assets 890,356 481,009 1,547,879 2,919,244
Fixed assets 113,854 33,526 594,441 741,821
Total assets 1,386,421 778,932 41,976,367 44,141,720
The Company has no foreign operations. During the quarter ended March 31,
2003, the Company did not have sales to any individual customer greater than 10%
of total Company revenues. The Company's accounting policies for segments are
the same as those described in Note 1.
6. Stockholders' Equity
Treasury Stock
In March 2003, the Company's Board of Directors approved an extension of
the Company's stock repurchase program for up to an additional $1 million of the
Company's common stock for an aggregate authorization of $5.5 million. Through
May 15, 2003, the Company has repurchased 4,583,749 shares of its Common Stock.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the corresponding discussion
and analysis included in the Company's Report on Form 10-K for the year ended
December 31, 2002.
Cautionary Statement Regarding Forward-Looking Information
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-Q contain
"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-Q
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-Q 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.
Business Activities
Speedus Corp. is a holding company that owns significant equity interests
in diverse businesses. 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 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 have acquired a 51% interest in F&B Gudtfood,
the creator and operator of the original Eurocentric "chic and quick" cafe,
which is operating its first store in Manhattan and is currently planning
expansion to other locations. We own a portfolio of patents that allow for
high-speed wireless communications. We also developed and launched an online
cell phone store, 007Phones, which we now license to a third-party. 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.
Zargis Medical Corp. 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.
In February 2003, we acquired a controlling interest in Zargis Medical.
The additional investment of $1,250,000 was represented by amounts outstanding
to the Company by Zargis Medical at December 31, 2002 in the amount of $250,000
and an additional cash investment of $1,000,000.
F&B Gudtfood. In May 2002, we acquired a 51% interest in F&B Gudtfood, the
creator and operator of the original Eurocentric "chic and quick" cafe, which is
operating its first store in Manhattan and is currently planning expansion to
other locations. The acquisition price was $3,500,000, which funds will be
applied principally for its expansion. We also entered into a management
services contract with F&B Gudtfood.
10
On February 8, 2003, we reduced our investment in F&B Gudtfood and
received $1,775,000 while maintaining our 51% interest.
Broadband Patents. 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. 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 depressed
economic state of the telecommunications industry, licensing activity for the
patent portfolio is not actively being pursued at this time. 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.
007Phones. 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.
Local Multipoint Distribution Service license. We have an FCC commercial
operating license, awarded to us in recognition of our efforts in developing and
deploying LMDS technology and for spearheading its regulatory approval at the
FCC, which covers 150 MHz of spectrum in the New York City area. The license has
been renewed as a standard LMDS license through February 1, 2006. 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. 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.
We are conducting a limited pilot program of our SPEED(SM) broadband super
high-speed Internet service. 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. During 2002, we recorded an impairment charge in
the amount of $3,650,000 for property and equipment taken out of service,
generally related to the pilot program.
Other. 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.
We have generated operating losses and negative operating cash flows since
our inception and expect to continue to do so in the near future.
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 1 to our consolidated financial statements
included in this Form 10-Q and Note 2 to our consolidated financial statements
included in our 2002 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.
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, i.e., closing prices
quoted on established securities markets. Securities sold and not repurchased
are also 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 $1.8 million and $1.5 million at December 31, 2002 and March 31, 2003,
respectively, and currently do not generate significant revenues or cash flows.
However, as of December 31, 2002, we estimated 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
11
value on our books would generate sufficient cash to fully realize our assets
described above as of December 31, 2002. This estimate evaluated the recovery of
these broadband assets compared to the fair value of our remaining FCC license
and certain patents as a group since it represents the lowest level for which
identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities. 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. As of December
31, 2002, we also reviewed the carrying value of goodwill in the amount of $1.8
million at that time, and estimated based upon our review, taking into account
such factors as projected operations and Company's redemption rights in
connection with the investment, that there had been no impairment to this
carrying value.
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.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Revenues decreased $65,000 from $235,000 for the three months ended March
31, 2002 to $170,000 for the three months ended March 31, 2003. $231,000 of this
net decrease is a result of revenues recognized from the sale and activation of
wireless phones through the Company's online cell phone store, 007phones, during
the three months ended March 31, 2002. The Company now licenses the cell phone
store to a third party and license fees are less than revenues from sale and
activation. No revenues were recognized in connection with 007 phones during the
three months ended March 31, 2003. The decrease in revenues is net of an
increase in the amount of $168,000 as a result of revenues recognized by F&B
Gudtfood during the three months ended March 31, 2003. F&B Gudtfood is included
in the consolidated financial statements of the Company since May 6, 2002, the
date of acquisition of a majority interest.
Selling, general and administrative expenses decreased $47,000 from
$1,053,000 for the three months ended March 31, 2002 to $1,006,000 for the three
months ended March 31, 2003. The decrease is primarily attributable to decreases
in compensation and employee related expenses as a result of staff reductions.
This decrease is net of increases as a result of selling, general and
administrative expenses of F&B Gudtfood and Zargis Medical in the amounts of
$168,000 and $138,000, respectively, during the three months ended March 31,
2003. F&B Gudtfood and Zargis Medical are included in the consolidated financial
statements of the Company since May 6, 2002 and February 28, 2003, respectively,
the dates of acquisition of majority interests.
Research and development expenses increased $39,000 from $216,000 for the
three months ended March 31, 2002 to $255,000 for the three months ended March
31, 2003. This increase is primarily attributable to increases in compensation
and employee related expenses.
Depreciation and amortization decreased $445,000 from $660,000 for the
three months ended March 31, 2002 to $215,000 for the three months ended March
31, 2003. This decrease is generally a result of assets becoming fully
depreciated, as well as depreciation no longer being taken on the property and
equipment taken out of service during 2002.
Cost of sales decreased $157,000 from $205,000 for the three months ended
March 31, 2002 to $48,000 for the three months ended March 31, 2003. $205,000 of
this net decrease is a result of the direct cost and expenses related to the
sale and activation of wireless phones through the Company's online cell phone
store, 007phones, during the three months ended March 31, 2002. No expenses were
incurred in connection with 007 phones during the three months ended March 31,
2003. The decrease in cost of sales is net of an increase in the amount of
$48,000 as a result of costs incurred by F&B Gudtfood during the three months
ended March 31, 2003. F&B Gudtfood is included in the consolidated financial
statements of the Company since May 6, 2002, the date of acquisition of a
majority interest.
Investment income/(loss) decreased $49,000 from a net gain in the amount
of $1,000 for the three months ended March 31, 2002 to a net loss in the amount
of $48,000 for the three months ended March 31, 2003. This decrease is primarily
a result of realized and unrealized gains/(losses). Realized gains/(losses)
decreased $1,814,000 from net gains of $585,000 for the three months ended March
31, 2002 to net losses of $1,229,000 for the three months ended March 31, 2003.
Unrealized losses decreased $266,000 from net losses of $728,000 for the three
months ended March 31, 2002 to net losses of $462,000 for the three months ended
March 31, 2003. 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 of associated company increased $11,000 from $82,000 for
the three months ended March 31, 2002 to $93,000 for the three months ended
March 31, 2003. These amounts reflect the Company's share in Zargis Medical's
operations, accounted for under the equity method, through February 27, 2003 in
the case of the 2003 amount. Zargis Medical is included in the consolidated
financial statements of the Company since February 28, 2003, the date of
acquisition of a majority interest.
Minority interest amounted to $81,000 for the three months ended March 31,
2003. This amount represents the interest of minority stockholders in the losses
of F&B Gudtfood and Zargis Medical during the three months ended March 31, 2003.
12
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.
We also entered into a management services contract with F&B Gudtfood. In
connection with the F&B Gudtfood acquisition, in May 2002 the Company extended
loans to two employees of F&B Gudtfood, who are also minority shareholders of
F&B Gudtfood aggregating $120,000. The loans, which can be increased by $40,000
each under certain conditions, will be forgiven if certain milestones are
achieved.
Liquidity and Capital Resources
The Company has recorded operating losses and negative operating cash
flows in each year of its operations since inception.
Net cash used in operating activities was $1.7 million for the three
months ended March 31, 2003 compared to net cash used in operating activities of
$0.2 million for the three months ended March 31, 2002. Cash was used by
operating activities in the three months ended March 31, 2003 to fund the net
loss for the period. While the net loss decreased from the net loss for the
three months ended March 31, 2002, after adjustment for non-cash charges,
including depreciation and amortization and unrealized losses, the cash used was
greater. Cash was also used in the 2003 period to reduce the amount of open
transactions included under 'Securities sold and not purchased'.
Net cash provided by investing activities was $21,000 for the three months
ended March 31, 2003 compared to net cash provided by investing activities of
$0.4 million for the three months ended March 31, 2002. This net decrease was
substantially the result of proceeds received in 2002 from the sale of assets.
Net cash used in financing activities was $0.1 million for the three
months ended March 31, 2003 compared to $0.5 million for the three months ended
March 31, 2002. This decrease of $0.4 million was a result of decreased
repurchases of treasury stock during 2003.
At March 31, 2003, the Company's future minimum lease payments due under
noncancelable leases aggregated $439,000. $274,000 and $109,000 of this amount
is due during the twelve months ended March 31, 2003 and 2004, respectively, and
the balance is payable thereafter with no material amount due in any one year.
The Company believes that it has sufficient liquidity to finance its
current level of operations and expected capital requirements through the 2003
fiscal year. However, the Company does not expect to have earnings from
operations 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. 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.
We have invested a portion of our assets in a portfolio of marketable
securities consisting of publicly traded equity securities. We purchase these
securities in anticipation of increases in the fair market values of the
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. 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 is unlimited since the value of the underlying
security can keep increasing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments at March 31, 2003 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.
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 is unlimited since the
value of the underlying security can keep increasing which could have a material
adverse effect on the Company's consolidated financial statements.
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.
13
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14
under the Securities Exchange Act of 1934, as amended. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in the Company's periodic SEC filings.
There have been no significant changes in the Company's internal controls
or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 4 to the accompanying consolidated financial statements is
incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit number 99.1 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002.
Exhibit number 99.2 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002.
b. Current Reports on Form 8-K:
None.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPEEDUS CORP.
Date: May 15, 2003 By: /s/ Shant S. Hovnanian
----------------------
Shant S. Hovnanian
Chairman of the Board, President and
Chief Executive Officer
Date: May 15, 2003 By: /s/ Thomas M. Finn
------------------
Thomas M. Finn
Treasurer and Chief Financial Officer
16
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Shant S. Hovnanian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Speedus Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Shant S. Hovnanian
----------------------
Name: Shant S. Hovnanian
Title: Chairman of the Board, President and Chief Executive Officer
Date: May 15, 2003
17
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Thomas M. Finn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Speedus Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Thomas M. Finn
------------------
Name: Thomas M. Finn
Title: Treasurer and Chief Financial Officer
Date: May 15, 2003
18