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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, 2004
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of outstanding shares of the registrant's common stock, par value
$.01 per share, as of May 12, 2004 was 16,257,007.
SPEEDUS CORP.
INDEX TO FORM 10-Q
Page
----
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Consolidated Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003 ......................................................................... 3
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 2004 and 2003 .................................................... 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 2004 and 2003 .................................................... 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 ........................................................................... 13-14
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings ................................................................................. 15
ITEM 2 -- Changes in Securities and Use of Proceeds ......................................................... 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
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act Of
2002 .......................................................................................... 17
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act Of
2002 .......................................................................................... 18
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002 ..................................... 19
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002 ..................................... 20
2
SPEEDUS CORP.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 29,825,608 $ 19,419,197
Marketable securities 887,077 2,086,638
Due from broker 782,200 3,713,146
Prepaid expenses and other 202,650 83,222
Accounts and other receivables 52,783 42,500
------------ ------------
Total current assets 31,750,318 25,344,703
Property and equipment, net of accumulated
depreciation of $2,101,991 and $2,003,862 500,137 419,868
Other intangible assets, net of accumulated
amortization of $1,238,838 and $1,051,493 1,854,706 2,042,051
Goodwill 620,875 620,875
Other assets 83,854 82,563
------------ ------------
Total assets $ 34,809,890 $ 28,510,060
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 131,184 $ 151,258
Accrued liabilities 1,041,778 1,432,426
Securities sold and not purchased 1,810,968 5,406,135
------------ ------------
Total current liabilities 2,983,930 6,989,819
Minority interest 389,684 531,055
Commitments and Contingencies
Stockholders' equity:
Common stock ($.01 par value; 50,000,000
shares authorized; 21,583,656 and 21,516,088 215,837 215,161
shares issued)
Preferred stock ($.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 90,520,332 90,442,120
Treasury stock (at cost; 5,273,649 and 5,257,649 shares) (5,294,152) (5,250,552)
Accumulated deficit (54,005,741) (64,417,543)
------------ ------------
Stockholders' equity 31,436,276 20,989,186
------------ ------------
Total liabilities and stockholders' equity $ 34,809,890 $ 28,510,060
============ ============
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,
---------------------------------
2004 2003
------------ ------------
Revenues $ 151,015 $ 169,807
------------ ------------
Expenses:
Selling, general and administrative 992,714 926,583
Technology settlement expenses 2,928,583 0
Research and development 370,745 334,944
Depreciation and amortization 285,476 215,368
Cost of sales 44,944 48,300
------------ ------------
Total operating expenses 4,622,462 1,525,195
------------ ------------
Operating loss (4,471,447) (1,355,388)
Gain from technology settlement 15,000,000 0
Investment income/(loss) (258,122) (47,530)
Minority interest 141,371 81,251
Equity in loss of associated company 0 (92,996)
------------ ------------
Net earnings/(loss) $ 10,411,802 $ (1,414,663)
============ ============
Per share:
Basic earnings/(loss) per common share $ 0.64 $ (0.08)
============ ============
Weighted average common shares
outstanding - basic 16,287,986 16,883,034
============ ============
Diluted earnings/(loss) per common share $ 0.62 $ (0.08)
============ ============
Weighted average common shares
outstanding - diluted 16,866,170 16,883,034
============ ============
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,
---------------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net earnings/(loss) $ 10,411,802 $ (1,414,663)
Adjustments to reconcile net earnings/(loss) to
net cash provided by/(used in) operating activities:
Depreciation and amortization 285,476 215,368
Unrealized investment losses 487,491 461,887
Equity in loss of associated company -- 92,996
Minority interest (141,371) (81,251)
Stock based compensation 11,320 --
Changes in operating assets and liabilities:
Marketable securities 869,070 434,790
Due from broker 2,930,946 3,411,954
Accounts and other receivables (10,283) (2,401)
Prepaid expenses and other (119,428) (103,997)
Other assets (1,291) (172,490)
Accounts payable (20,074) (45,852)
Accrued liabilities (390,648) (287,750)
Securities sold and not purchased (3,752,167) (4,167,473)
Other current liabilities -- 4,016
------------ ------------
Net cash provided by/(used in) operating activities 10,560,843 (1,654,866)
------------ ------------
Cash flows from investing activities:
Property and equipment additions (178,400) --
Loans and other receivables, net of repayments -- 2,500
Acquisition of business, net of cash acquired -- 18,798
------------ ------------
Net cash provided by/(used in) investing activities (178,400) 21,298
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of options or warrants 67,568 --
Repurchase of stock (43,600) (107,175)
------------ ------------
Net cash provided by/(used in) financing activities 23,968 (107,175)
------------ ------------
Net increase/(decrease) in cash
and cash equivalents 10,406,411 (1,740,743)
Cash and cash equivalents, beginning of period 19,419,197 33,052,815
------------ ------------
Cash and cash equivalents, end of period $ 29,825,608 $ 31,312,072
============ ============
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 2003 audited consolidated financial statements and notes
thereto on Form 10-K.
Operating results for the three months ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004.
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.
The interest in the net assets and operations of these companies' other
stockholders 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, 2004 and
December 31, 2003, marketable securities consisted of publicly traded equity
securities and were recorded at fair market value. Their original cost was
$1,442,000 and $2,040,000, unrealized gains/(losses) since acquisition were
$(555,000) and $47,000 and the fair market value was $887,000 and $2,087,000,
respectively. At March 31, 2004, based upon the fair market value of these
securities, 100% was invested in technology companies.
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, 2004 and December 31, 2003, the
Company had sold securities it had not purchased. The aggregate proceeds were
$1,654,000 and $4,514,000, unrealized losses since acquisition were $157,000 and
$892,000 and the fair market value of the securities was $1,811,000 and
$5,406,000, respectively. At March 31, 2004, based upon the fair market value of
these securities, 100% was invested in technology companies.
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, 2004 and December 31, 2003,
restricted cash balances in the amounts of $782,000 and $3,713,000,
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, amounts due
from brokers 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 at least annually 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. Goodwill in
connection with the acquisition of F&B Gudtfood had a balance of $621,000 at
December 31, 2003 and March 31, 2004.
Other intangible assets consist of: (i) the cost of a broadband patent and
(ii) medical technology in connection with the acquisition of a controlling
interest in Zargis Medical. Through the year ended December 31, 2002, the patent
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. Medical technology, in the aggregate
amount of $1,024,000 with accumulated amortization in the amount of $304,000 at
March 31, 2004, is being amortized over a period of three years.
For the three months ended March 31, 2004 and 2003, amortization expense
relating to intangible assets was $187,000 and $103,000, respectively. The
estimated amortization of intangible assets for the balance of fiscal 2004 and
fiscal years 2005 and 2006, the expiration of the remaining useful life of the
Company's intangible assets, is $562,000, $749,000 and $544,000, respectively.
Revenue Recognition
Revenues from F&B Gudtfood's operations are recorded on a cash basis.
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 quarter ended March 31, 2004, the weighted average common shares
for diluted earnings per share were determined by adding weighted average shares
in the aggregate amount of 578,184 for the assumed exercise of stock options and
warrants, calculated using the treasury stock method, to the weighted average
shares outstanding for basic earnings per share for a total of 16,866,170
weighted average shares outstanding for diluted earnings per share. For the
quarters ended March 31, 2004 and 2003, outstanding stock options and warrants
in the weighted average amount of 852,165 and 2,088,681, 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.
Unaudited 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 quarters ended March 31, 2004 and 2003 is summarized as follows:
7
Three months ended March 31,
--------------------------------
2004 2003
------------ ------------
Net earnings/(loss) as reported $ 10,411,802 $ (1,414,663)
After tax effect of pro forma compensation 0 (122,194)
------------ ------------
Pro forma net earnings/(loss) $ 10,411,802 $ (1,536,857)
============ ============
Earnings/(loss) per share:
Basic - as reported $ 0.64 $ (0.08)
============ ============
Basic - pro forma $ 0.64 $ (0.09)
============ ============
Diluted - as reported $ 0.62 $ (0.08)
============ ============
Diluted - pro forma $ 0.62 $ (0.09)
============ ============
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
2. 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. 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. On July 28, 2003, the Company
increased its ownership in Zargis Medical to 68.9% with an additional investment
of $2,000,000. As of December 31, 2003 and February 1, 2004, our ownership
increased to 70.5% and 71.2%, respectively, as a result of certain milestones
not having been met.
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
$3,250,000 aggregate purchase price was allocated as follows: $3,269,000 to
cash, $34,000 to non current assets, $1,024,000 to other intangible assets,
$(219,000) to current liabilities and $(858,000) to minority interest. An
aggregate of $1,024,000, representing the excess of the purchase price over the
fair value of the net assets acquired, has been allocated as medical technology
to an intangible asset and will be amortized over a period of three years.
Unaudited pro forma operating results of the Company for the three months
ended March 31, 2003, as though the acquisition of Zargis Medical had occurred
on January 1, 2003, are as follows:
Revenues $ 169,807
Operating loss $ (1,555,811)
Net loss $ (1,437,311)
Basic and diluted loss per share $ (0.09)
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. On February
8, 2003, the Company reduced its cash investment in F&B Gudtfood and received
$1,775,000 while maintaining its 51% interest. In December 2003, as a result of
renegotiation, our interest increased to 80% without an additional investment
and, under certain circumstances, could increase to 90%.
3. 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 12, 2004, the Company has repurchased 5,326,649 shares of its Common Stock
for an aggregate cost of $5,414,000.
4. Gain from Technology Settlement
In February 2004, the Company's wholly-owned subsidiary, CellularVision
Technology & Telecommunications, L.P., received $15 million from a former
international licensee in settlement of litigation that CT&T instituted in May
2001.
In connection with the settlement and as provided under the terms of his
2002 employment agreement, Shant S. Hovnanian, Chairman of the Board and Chief
Executive Officer of the Company, received a contingent participation in the
proceeds of the settlement in the amount of approximately $2.8 million. In
addition, approximately $0.1 million in legal and other closing costs was paid
at closing to unaffiliated third parties. These expenses are included in
Technology Settlement Expenses for the three months ended March 31, 2004 in the
accompanying consolidated statement of operations.
5. Business Segment Information
The following table sets forth the Company's financial performance by
reportable operating segment for the three months ended March 31, 2004 and 2003.
F&B Gudtfood and Zargis Medical are included in the consolidated financial
statements of the
8
Company since May 6, 2002 and February 28, 2003, respectively, the dates of
acquisition of majority interests.
Three months ended March 31, 2004
---------------------------------------------------------------------
Corporate
F&B Zargis and other Totals
--- ------ --------- ------
Revenues from external customers $ 149,165 $ 0 $ 1,850 $ 151,015
Depreciation and amortization 10,037 3,107 272,332 285,476
Operating loss (124,136) (373,496) (3,890,418) (4,388,050)
Investment income/(loss) 1,391 2,914 (262,427) (258,122)
Goodwill and other intangible assets 620,875 719,594 1,135,112 2,475,581
Fixed assets 324,147 34,348 141,642 500,137
Total assets 782,288 874,183 33,153,419 34,809,890
Three months ended March 31, 2003
---------------------------------------------------------------------
Corporate
F&B Zargis and other Totals
--- ------ --------- ------
Revenues from external customers $ 168,451 $ 0 $ 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 three months ended March
31, 2004 and 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. 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 that the
ultimate resolution of these current claims or proceedings, either individually
or in the aggregate, will have a material effect on its financial position,
results of operations or cash flows.
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, 2003.
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. The companies that we target, either public
or privately held, will be seeking growth or restructuring capital to pursue
near term business objectives in demonstrated markets. We will continue to
pursue opportunities involving our expertise in the medical device and wireless
markets as well as those areas involving our broadband assets as attractive
opportunities present themselves.
We have co-invested with Siemens Corporate Research, Inc., a subsidiary of
Siemens Corporation, in Zargis Medical Corp. to develop medical diagnostic
support service solutions that automatically analyze acoustical data from a
patient to determine physiological significant features useful in medical
diagnosis. The first Zargis clinical device, the Zargis Acoustic Cardioscan
(ZAC) will initially be targeted toward primary care physicians, to be used as
part of general medical examinations and physicals to detect murmurs which could
be a sign of valvular and congenital heart disease. We own 80% of F&B Gudtfood
Holding Corp., 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 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 Zargis Medical
Corp. to develop non-invasive, medical diagnostic support solutions that
automatically analyze acoustical data from a patient to determine
physiologically significant features useful in medical diagnosis. The
development of Zargis' patented technology is a pioneering effort in medicine
which uses advanced signal processing algorithms deployed on standard computer
platforms. The first Zargis device, the Zargis Acoustic Cardioscan (ZAC), will
initially be targeted toward primary care physicians to be used as part of
general medical examinations and physicals to detect murmurs which could be a
sign of valvular and congenital heart disease. General medical examinations,
according to the National Center for Health Statistics, totaled 64 million in
2000 for the US alone. Zargis is currently researching, and conducting trials
on, additional noninvasive diagnostic support tools that process acoustical data
from the body in order to provide an accurate and intelligible assessment of a
patient's health. These assessments may be used by physicians and other
healthcare providers to assist in the early identification or monitoring of
heart, lung, vascular and other conditions and to provide better patient
treatment.
We have signed an exclusive contract with Zargis to provide transaction
processing to support Zargis' medical products. Some of the major next steps
remaining for Zargis include continuing clinical trials for new applications of
the Zargis technology, FDA approval, and the formation of strategic partnerships
for industry and market acceptance.
In February 2003, we acquired a controlling interest in Zargis Medical for
an additional investment of $1,250,000. In July 2003, we increased our ownership
in Zargis Medical to 68.9% by investing an additional $2,000,000. As of December
31, 2003 and February 1, 2004, our ownership increased to 70.5% and 71.2%,
respectively, as a result of certain milestones not having been met.
10
F&B Gudtfood. We own 80% of F&B Gudtfood, the creator and operator of the
original Eurocentric "chic and quick" cafe, which is operating its first store
in Manhattan. The acquisition price was $3,500,000 in May 2002. In February
2003, we reduced our cash investment in F&B Gudtfood and received $1,775,000
while maintaining our original 51% interest. In December 2003, as a result of
renegotiation, our interest increased to 80% without an additional investment
and, under certain circumstances, could increase to 90%. We expect that F&B
Gudtfood will open its second location in Manhattan and begin selling F&B
Gudtfood franchises through its wholly owned subsidiary, F&B Gudtfood Franchise
Corp., in the second quarter of 2004. We have also entered into a management
services contract with F&B Gudtfood.
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
six domestic patents with expiration dates ranging from 2007 through 2017, with
approximately 60 international counterparts in 42 countries. Certain wireless
communications systems 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 such a wireless communications system to
be constructed 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.
Local Multipoint Distribution Service (LMDS) 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 will not commence a full marketing effort using our LMDS technology
until new LMDS equipment becomes commercially available with cost and
performance that allow implementation of an economically viable business model.
We cannot determine when this will occur and this equipment may never be
available to us on this basis.
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 2003 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 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 a broadband patent, included
in intangible assets, which had a carrying value of $1.2 million and $1.1
million at December 31, 2003 and March 31, 2004, respectively, and currently do
not generate significant revenues or cash flows. However, as of December 31,
2003, 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 value on our books would
11
generate sufficient cash to fully realize this asset as of December 31, 2003.
This estimate evaluated the recovery of this broadband asset 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, 2003, we also reviewed
the carrying value of goodwill in the amount of $0.6 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 will be affected in the period that
the difference is known.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Revenues decreased $19,000 from $170,000 for the three months ended March
31, 2003 to $151,000 for the three months ended March 31, 2004. This decrease is
primarily attributable to unfavorable weather conditions during the 2004 period.
Selling, general and administrative expenses increased $66,000 from
$927,000 for the three months ended March 31, 2003 to $993,000 for the three
months ended March 31, 2004. This increase is primarily a result of an increase
in selling, general and administrative expenses of Zargis Medical. Zargis
Medical is included in the consolidated financial statements of the Company
since February 28, 2003, the date of acquisition of a majority interest.
During the three months ended March 31, 2004, the Company incurred
$2,929,000 in expenses in connection with a technology settlement in the amount
of $15,000,000. No such expenses were recognized during the three months ended
March 31, 2003. In connection with the settlement and as provided under the
terms of his 2002 employment agreement, Shant S. Hovnanian, Chairman of the
Board and Chief Executive Officer of the Company, received a contingent
participation in the proceeds of the settlement in the amount of approximately
$2.8 million during the three months ended March 31, 2004.
Research and development expenses increased $36,000 from $335,000 for the
three months ended March 31, 2003 to $371,000 for the three months ended March
31, 2004. This increase is primarily a result of an increase in research and
development expenses of Zargis Medical. Zargis Medical is included in the
consolidated financial statements of the Company since February 28, 2003, the
date of acquisition of a majority interest.
Depreciation and amortization increased $70,000 from $215,000 for the
three months ended March 31, 2003 to $285,000 for the three months ended March
31, 2004. This increase is primarily a result of the amortization of medical
technology during the three months ended March 31, 2004 resulting from the
Zargis Medical acquisition.
Cost of sales decreased $3,000 from $48,000 for the three months ended
March 31, 2003 to $45,000 for the three months ended March 31, 2004. This
decrease is primarily a result of a lower level of revenues during the three
months ended March 31, 2004.
During the three months ended March 31, 2004, the Company recorded a gain
from technology settlement in the amount of $15,000,000. No such gain was
recognized during the three months ended March 31, 2003.
Investment loss increased $210,000 from a loss of $48,000 for the three
months ended March 31, 2003 to a loss of $258,000 for the three months ended
March 31, 2004. These changes are primarily a result of the recognition of
realized and unrealized gains/(losses) during these periods. The Company records
marketable securities and securities sold and not purchased at the fair market
value of the securities. The amount of these realized and unrealized 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. Realized losses decreased $710,000 from net
losses of $1,129,000 for the three months ended March 31, 2003 to net losses of
$419,000 for the three months ended March 31, 2004. Unrealized gains decreased
$1,008,000 from net gains of $1,124,000 for the three months ended March 31,
2003 to net gains of $116,000 for the three months ended March 31, 2004.
Minority interest increased $60,000 from $81,000 for the three months
ended March 31, 2003 to $141,000 for the three months ended March 31, 2004. This
amount represents the interest of minority stockholders in the losses of F&B
Gudtfood and Zargis Medical.
Equity in loss of associated company amounted to $93,000 for the three
months ended March 31, 2003. This amount reflects the Company's share in Zargis
Medical's operations, accounted for under the equity method, through February
27, 2003. Zargis Medical is included in the consolidated financial statements of
the Company since February 28, 2003, the date of acquisition of a majority
interest. As a result, no amount was recorded for the three months ended March
31, 2004.
12
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 provided by operating activities was $10.6 million for the three
months ended March 31, 2004 compared to net cash used in operating activities of
$1.7 million for the three months ended March 31, 2003. This net increase in
cash provided was primarily the result of a gain from technology settlement in
the amount of $15 million recognized during the three months ended March 31,
2004, reduced by $2.9 million in technology settlement expenses. In February
2004, the Company's wholly-owned subsidiary, CellularVision Technology &
Telecommunications, L.P., received $15 million from a former international
licensee in settlement of litigation that CT&T instituted in May 2001. In
connection with the settlement and as provided under the terms of his 2002
employment agreement, Shant S. Hovnanian, Chairman of the Board and Chief
Executive Officer of the Company, received a contingent participation in the
proceeds of the settlement in the amount of approximately $2.8 million during
the three months ended March 31, 2004.
Net cash used in investing activities was $178,000 for the three months
ended March 31, 2004 compared to net cash provided by investing activities of
$21,000 for the three months ended March 31, 2003. This net increase in cash
used in investing activities was primarily the result of property and equipment
additions.
Net cash provided by financing activities was $24,000 for the three months
ended March 31, 2004 compared to net cash used in financing activities of
$107,000 for the three months ended March 31, 2003. This increase in cash
provided by financing activities was primarily the result of proceeds received
from the exercise of options and warrants and decreased repurchases of treasury
stock.
At March 31, 2004, the Company's future minimum lease payments due under
noncancelable leases aggregated $1,903,000. $287,000, $210,000, $212,000,
$216,000 and $222,000 of this amount is due during the twelve months ending
March 31, 2005, 2006, 2007, 2008 and 2009, respectively, and the balance is
payable thereafter.
The Company believes that it has sufficient liquidity to finance its
current level of operations and expected capital requirements through the next
twelve months. 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, 2004 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.
ITEM 4. CONTROLS AND PROCEDURES
Management of the Company, including the Chief Executive Officer and the
Chief Financial Officer, evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based upon that evaluation, the Company's Chief
Executive Officer and the Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report for the information
13
required to be disclosed by the Company in the reports it files or submits under
the Securities Exchange Act of 1934, as amended, to be recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There has been no change in the Company's internal control over financial
reporting during the fiscal quarter ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 6 to the accompanying consolidated financial statements is
incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Stock repurchase program:
- ---------------------------------------------------------------------------------------------------------
(d) Maximum
number (or
Approximate
(c) Total number Dollar Value) of
of Shares (or Shares (or Units)
Units) Purchased that May Yet Be
(a) Total Number (b) Average Price as Part of Publicly Purchased Under
of Shares (or Paid per Share (or Announced Plans the Plans or
Period Units) Purchased Unit) or Programs Programs (1)
- ---------------------------------------------------------------------------------------------------------
January 1, 2004 -
January 31, 2004 0 $ 0 0 $249,448
- ---------------------------------------------------------------------------------------------------------
February 1, 2004 -
February 29, 2004 0 0 0 249,448
- ---------------------------------------------------------------------------------------------------------
March 1, 2004 -
March 31, 2004 16,000 2.72 16,000 205,848
- ---------------------------------------------------------------------------------------------------------
Total 16,000 2.72 16,000
- ---------------------------------------------------------------------------------------------------------
(1) On November 21, 2000, the Company announced that its Board of Directors had
approved a stock repurchase program for the repurchase of up to $1,000,000 of
Company stock through open market as well as privately negotiated transactions.
Thereafter, the Board of Directors approved increases to the program in the
aggregate amount of $4,500,000.
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 31.1 Certification of Chief Executive
Officer Pursuant To Rule 13a-14 of the
Securities Exchange Act of 1934, As Adopted
Pursuant To Section 302 of The
Sarbanes-Oxley Act Of 2002.
Exhibit number 31.2 Certification of Chief Financial
Officer Pursuant To Rule 13a-14 of the
Securities Exchange Act of 1934, As Adopted
Pursuant To Section 302 of The
Sarbanes-Oxley Act Of 2002.
Exhibit number 32.1 Certification of Chief
Executive Officer Pursuant To 18
U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002.
Exhibit number 32.2 Certification of Chief
Financial Officer Pursuant To 18
U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002.
b. Current Reports on Form 8-K:
A Form 8-K was filed on February 12, 2004 reporting Item 5 and Item 11.
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 14, 2004 By: /s/ Shant S. Hovnanian
--------------------------
Shant S. Hovnanian
Chairman of the Board, President and
Chief Executive Officer
Date: May 14, 2004 By: /s/ Thomas M. Finn
--------------------------
Thomas M. Finn
Treasurer and Chief Financial Officer
16