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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission File No. 000-27582
SPEEDUS.COM, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-3853788
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
140 58th Street, Suite 7E, Brooklyn, NY 11220
(Address of Principal Executive Offices)
(718) 567-4300
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par
value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was $11,861,000 on March 26, 2001, based on
the closing trade price of the Common Stock on the NASDAQ National Market system
on that date.
The number of shares of Common Stock outstanding as of March 26, 2001 was
20,301,138.
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DOCUMENTS INCORPORATED BY REFERENCE
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SPEEDUS.COM, Inc.
TABLE OF CONTENTS
PART I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6 Selected Consolidated Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8 Consolidated Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief or
current expectations of the Company or its officers with respect to, among other
things, the ability of the Company to make capital expenditures, the ability to
incur additional debt, as necessary, to service and repay such debt, if any, as
well as other factors that may effect the Company's financial condition or
results of operations. Forward-looking statements may include, but are not
limited to, projections of revenues, income or losses, capital expenditures,
plans for future operations, financing needs or plans, compliance with covenants
in loan agreements, plans for liquidation or sale of assets or businesses, plans
relating to products or services of the Company, assessments of materiality,
predictions of future events, and the ability to obtain additional financing,
including the Company's ability to meet obligations as they become due, and
other pending and possible litigation, as well as assumptions relating to the
foregoing. All statements in this Form 10-K regarding industry prospects and the
Company's financial position are forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. The
Company undertakes no obligation to publicly release the result of any revisions
to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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PART I
ITEM 1. BUSINESS
The Company
We are developing and providing wireless data services that enable and
enhance the use of Internet-based content on mobile devices. We currently
provide free wireless e-mail and Internet content, including directories,
financial data, sports, news and entertainment, to consumers. We have expanded
our wireless data services to include products and services that enable
businesses to communicate efficiently and effectively with their mobile
workforce and customers in real time through a wide variety of mobile computing
and communications devices. In addition, we maintain a web site that provides
Internet users with information about high-speed Internet access. 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.
Our wireless data services
We have developed three new wireless services targeted to businesses and
professionals that improve business performance by providing access to timely
information wirelessly and enabling real-time transactions to occur between a
wireless device user and business applications or web sites. Our wireless data
services give business customers access to information that is normally
available only from a desktop computer connected to a local area network. We
currently provide our Speedia consumer service free of charge on a promotional
basis to over 13,000 users worldwide through our wireless portal located at
www.myspeedia.com. The Speedia consumer service provides users of wireless
devices and Internet-enabled telephones with access to e-mail and Internet
content, including directories, financial data, sports, news and entertainment.
We believe that our Speedia consumer service provides us with a valuable
marketing and testing tool for our revenue generating services, the WorkforceGo
and MobileCasting services, by allowing us to demonstrate a proven service while
at the same time generating name recognition in the industry. Our WorkforceGo
and MobileCasting services, which we launched in December 2000, will be targeted
to businesses and professionals and will provide a customized exchange of
information between businesses and their mobile workforce in addition to
delivering the same customized Internet content provided by our Speedia consumer
service. The WorkforceGo and MobileCasting services will be marketed and sold
through consulting businesses that have relationships with potential customers.
We have also commenced marketing our WorkforceGo and MobileCasting services
directly to businesses with mobile employees through direct mail, space
advertisement and at trade shows.
o Our WorkforceGo service. Our WorkforceGo service enables businesses
to provide software applications and data to mobile employees
through a wire or wireless Internet web connection. WorkforceGo
allows business customers to facilitate customized company intranet
communication on mobile devices, including e-mail, calendaring and
access to other workforce automation software. In addition, the
WorkforceGo service provides mobile employees with an integrated
suite of wireless portal services, such as real-time stock quotes,
traffic and weather reports, personalization capabilities and
location-based services that enable users to search for
location-based information, such as restaurants closest to the
mobile user's current location. Our WorkforceGo service helps mobile
employees increase their productivity and sales by aggregating
frequently used desktop applications, timely corporate information
and useful Internet content and services into a single personalized
portal that can be accessed from any mobile device. The content and
services accessible to each user can be personalized by such user
and managed by a single company administrator. The WorkforceGo
service also allows the user to download the most recent data to a
mobile device prior to leaving the office network in the event that
a wireless connection will not be available in the field. We began
offering this service in December 2000 and, to date, we have sold
our WorkforceGo service to one customer.
o Custom wireless application development. We provide the design,
programming, hosting and support of wireless products and services,
including services that convert existing corporate software
applications to a format that is easily accessed and viewed through
wireless devices, such as Internet-enabled cellular telephones. In
addition, we also design, program and host web sites that a customer
would use to conduct business, such as an e-commerce web site.
Through these services, we are able to rapidly develop wireless
applications because we can build them around the software that a
company is already using, thus providing an easy transition from
existing web based application access to wireless application
access.
We have developed the technology and have the trained staff to provide
these custom wireless product and services and overcome many of the existing
challenges faced by businesses, such as; supporting multiple wireless browsers
and devices and providing useful information and content on small wireless
screens. The expertise we
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provide allows an existing business to take full advantage of the efficiencies
created by mobile communications while maintaining its existing business
strategy.
MobileCasting. Our MobileCasting service allows businesses to send a
single message from a desktop computer or wireless device simultaneously to
multiple recipients on multiple devices. Messages can be sent to digital mobile
phones, Internet-enabled mobile phones, microbrowser-equipped mobile hand-held
devices that provide computing and information storage and retrieval
capabilities, also called personal digital assistants, microbrowser-equipped and
alphanumeric pagers, TV set top boxes and future release compatible devices.
Through the MobileCasting service, we have created an easy to use system for
sending messages to large groups and delivering each message to multiple devices
in a format that is appropriate for each specific device. MobileCasting provides
a flexible communications tool for the real-time distribution of important
corporate information to employees or customers. MobileCasting was marketed and
promoted in conjunction with WorkforceGo beginning in March 2001.
Our system architecture. Our wireless data services are provided using a
system architecture that is device-independent and which enables mobile devices
to support applications that rely on existing Internet technology standards. Our
system architecture is designed to make our data services fully accessible using
any number of wireless devices, including web browsers, personal digital
assistants and mobile telephones. Our server technology also allows us to
interface with the existing information management systems of our customers and
to communicate with a wide variety of operating systems. In addition, our system
architecture may be deployed for both small- and large-scale data service
applications.
We believe that our wireless data services will benefit individual and
business users in the following ways:
o Real-time access to information. Our services will provide
up-to-date and readily accessible information, thereby
enabling organizations to increase the efficiency and
connectivity of customers and field personnel on a real-time
basis.
o Rapid deployment of mobile applications that conform to
existing technology standards. As a result of the
compatibility of our system architecture with existing service
applications, databases and enterprise resource planning
systems, business customers can quickly and efficiently deploy
their mobile applications, without disrupting existing
operations and processes and without significant expenses that
normally result from a replacement of existing systems.
o Flexibility. Our system architecture is very flexible,
enabling businesses to interact with both small and large
numbers of field employees. Additionally, our system
architecture allows businesses to independently determine
which of their existing intranet applications and data bases
are integrated with our wireless data services.
o Centralized administration. Our services enable businesses to
centrally manage their mobile workforces using a web browser,
allowing systems administrators to update applications and
distribute them from a single location to dispersed mobile
devices. Our services also simplify information management and
maintenance by allowing businesses to create user accounts,
define user groups and control access.
High-speed Internet information tools
Our SPEED411(sm) portal, which is located at www.speedus.com and
www.speed411.com, promotes high-speed Internet access on a nationwide basis by
providing users with information on how to get high-speed access and how to take
advantage of offerings available to high-speed users. Our goal is to create a
comprehensive and up-to-date high-speed Internet providers database for all of
the major high-speed Internet providers throughout the United States. Each
provider in our directory has the ability to customize and manage its listing in
the directory. Currently 345 providers are listed in the directory, 46 of which
participate in our SpeedEmart(sm) program. Our SpeedEmart(sm) Partner Program
enables participating providers to offer their high-speed Internet services to
SPEED411(sm) visitors directly through our portal, in which case we are entitled
to receive a sales commission from such providers. To date, we have been
unsuccessful in collecting any commissions from providers in large part because
most customers wishing to subscribe for high-speed Internet access service
choose to speak directly with customer service personnel of the service
providers. Another feature of our SPEED411(sm) portal, the SPEEDCHECKsm
software, allows users to get an accurate measurement of their Internet access
speed.
Our SPEEDGADGET(sm) software enables users to check their Internet access
speed at any time without having a web browser open. The SPEEDGADGET(sm)
software provides a scrolling ticker giving users their Internet
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access speed and providing information relating to high-speed Internet access
providers. SPEEDGADGET(sm) includes a promotional insertion capability in the
scrolling ticker that can be used for advertising. We have also inserted pop-up
windows that are used for advertising. To date, there have been over 130,000
client installations of SPEEDGADGETsm. We distribute this on a promotional basis
and do not currently charge for the SPEEDGADGET(sm) software. As with our
Speedia consumer service, we believe that our SPEEDGADGET(sm) software provides
us with name recognition in the industry.
Through our SPEED411(sm) portal and our SPEEDGADGET(sm) software, we are
developing a database of high-speed Internet users, which represents a potential
customer base for any future products or services that we may develop.
Patent portfolio relating to high-speed wireless communications
Through our wholly owned subsidiary, Broadband Patents, LLC, as well as
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 patents with
expiration dates ranging from 2007 through 2017. 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 the licensing of this technology. We
have not currently licensed this technology to anyone. Many attempts to pursue
licensing of technology or patent infringement actions result in protracted and
expensive litigation with no results. 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.
The Company acquired 20% of CT&T and certain other rights from a U.S.
subsidiary of Philips Electronics, N. V. CT&T, which was formed by Shant S.
Hovnanian, our Chairman of the Board, President and Chief Executive Officer,
Vahak S. Hovnanian, a director of the Company, and Bernard B. Bossard, a former
director and officer of our Company, (collectively, the "Founders") and Philips,
is a holder of a portfolio of fundamental broadband wireless patents and
licenses. The acquisition of Philips' interest in CT&T was part of a settlement
of litigation commenced by M/A-COM, a unit of Tyco International Ltd. The
Company's portion of the settlement was $2.4 million and was expensed for the
year ended December 31, 1999. The Founders have agreed in principle to
contribute their 80% interest in CT&T to the Company as part of the settlement
agreement. The Company expects that the remaining 80% interests will be
contributed during the first six months of 2001.
Local multipoint distribution service license
We also own fixed wireless spectrum under a local multipoint distribution
service license covering the metropolitan New York area granted to us by the
Federal Communications Commission. We may commercialize this spectrum in the
future to support high-speed Internet access service if local multipoint
distribution service equipment becomes commercially available at a cost and with
performance levels that allow for commercial implementation on an economically
attractive basis.
Our commercial operating license was awarded to us by the Federal
Communications Commission in recognition of our efforts in developing and
deploying local multipoint distribution service technology, and for spearheading
its regulatory approval at the Federal Communications Commission. In September
1997, our pioneer local multipoint distribution service license was renewed as a
standard local multipoint distribution service license through February 1, 2006.
The license provides that the spectrum may be used for a wide variety of fixed
wireless purposes, including wireless local telephone service, high-speed
Internet access and two-way teleconferencing. The license covers 150 MHz of
spectrum in the 28 GHz range encompassing the New York Primary Metropolitan
Statistical Area, a region which includes the five boroughs of New York City as
well as the New York Counties of Westchester, Rockland, and Putnam. Under the
Federal Communications Commission's authorization, the license includes an
additional 150 MHz of spectrum until the first Ka-band satellite is launched, an
event which is not expected to occur prior to 2002.
From 1992 until November 1998, we operated a 49-channel subscription
television service under our license. In November 1998, we assigned an 850 MHz
portion of our license to WinStar Communications, Inc. as an alternative source
of financing that was needed at the time. In connection with this assignment, we
terminated our subscription television service because we no longer had
sufficient spectrum to deliver those services.
Competition
The market for business and consumer users of wireless mobile data
products and services is in its early stage and distinct categories for such
products and services are still evolving. In the mobile workforce market, two
models are emerging: the enterprise server model requires servers and
application software to be installed at the premises of the business. The
service provider model uses servers and applications that are housed offsite at
the service provider's data center. The consumer market utilizes primarily the
service provider model. Currently, we compete in the service provider market.
Our competitors in the service provider market include Aether Systems, Inc.,
Viryanet Ltd, Infowave Software, Inc., AvantGo, Inc., GoAmerica Communications
Corp. and InfoSpace, Inc.
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Messaging outsourcers, application service providers, and other forms of
service providers may also compete with us depending on which wireless mobile
software products they use for their offerings. As we expect to expand our
business to cover a broader spectrum of wireless mobile data products and
services, it is possible that it may compete directly with these companies. In
addition, the wireless mobile data communications industry is subject to rapid
technological change and evolving industry standards. New competition may arise
from new technologies or new approaches to the market. Many of our present and
potential competitors have substantially greater financial, marketing, technical
and other resources than us and may succeed in establishing technology standards
or strategic alliances in the wireless mobile data communications market, obtain
more rapid market acceptance for their software products or otherwise gain a
competitive advantage.
Intellectual Property
Wireless data technologies. Our success depends significantly upon our
proprietary technology. To protect our proprietary rights, we rely on a
combination of copyright and trademark laws, trade secrets, confidentiality
agreements with employees and third parties and protective contractual
provisions. All of our employees have executed confidentiality and nonuse
agreements that transfer any rights they may have in copyrightable works or
patentable technologies to us. In addition, prior to entering into discussions
with potential content providers and affiliates regarding our business and
technologies, we generally require that such parties enter into nondisclosure
agreements with us. If these discussions result in a license or other business
relationship, we also generally require that the agreement setting forth the
parties' respective rights and obligations include provisions for the protection
of our intellectual property rights. For example, our standard affiliate
agreement provides that we retain ownership of all patents and copyrights in our
technology and requires our customers to display our copyright and trademark
notices.
We have applied for registration of our service marks and trademarks in
the United States and in other countries. We may not be successful in obtaining
the service marks and trademarks for which we have applied. To the extent we
consider it necessary, we may file patents to protect our technology. Patents
with respect to our technology may not be granted, and, if granted, patents may
be challenged or invalidated. In addition, issued patents may not provide us
with any competitive advantages and may be challenged by third parties.
Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products or services or obtain and use
information that we regard as proprietary. The laws of some foreign countries do
not protect proprietary rights to as great an extent as do the laws of the
United States. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively protect
our intellectual property, our business could suffer. Companies in the Internet
services industry have frequently resorted to litigation regarding intellectual
property rights. We may have to litigate to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
other parties' proprietary rights.
From time to time, we have received, and may receive in the future, notice
of claims of infringement of other parties' proprietary rights. Any such claims
could be time-consuming, result in costly litigation, divert management's
attention, cause product or service release delays, require us to redesign our
products or services or require us to enter into royalty or licensing
agreements. These royalty or licensing agreements, if required, may not be
available on acceptable terms or at all. If a successful claim of infringement
were made against us and we could not develop non-infringing technology or
license the infringed or similar technology on a timely and cost-effective
basis, our business could suffer.
Equipment and Facilities
The Company's Network Operations Center has a complete satellite downlink
facility with access to international media sources and a fully equipped data
center along with Cisco 7200 hardware and New Media Communication CyberStreamTM
TRX100 Linux based gateway transmitter hardware and software.
In addition to the NOC, the Company has a Manhattan point of presence
("POP"). The POP houses dial-up modems that support the Company's pilot Internet
access services.
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The principal physical assets incorporated in the Company's system consist
of headend equipment, 28GHz transmitters, fiber optic transmitters and
receivers, repeaters and customer premise equipment (antennas and the SPEED
modem), as well as office space.
Government Regulation
We are not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. However,
the grant, renewal and administration of spectrum licenses is regulated by the
Federal Communications Commission. Our local multipoint distribution service
license expires in February 2006. While the FCC has historically renewed
licenses as a matter of course, no license in the local multipoint distribution
service band has yet been up for renewal. A failure by the FCC to renew our
license could have a material adverse effect on the Company.
The wireless network carriers that connect us to our users are subject to
regulation by the Federal Communications Commission. Changes in FCC regulations
could affect the availability of wireless coverage. We could also be adversely
affected by regulations that govern or may in the future govern the Internet,
the allocation of radio frequencies or the placement of cellular towers.
Risk Factors
Risks related to our business generally
Although we have been a public company since February 1996, we reoriented our
business in 1999 and again in 2000 and our current business has not generated
any revenues to date.
At the time of our initial public offering, our business was primarily a
subscription television service. In November 1998, we terminated the
subscription television business and began a pilot program for the delivery of
high-speed Internet access. We encountered technical difficulties in the pilot
program and have recently reoriented our business on wireless data services and
secondarily on the provision of certain tools for high-speed Internet users.
Currently, our wireless data services and Internet tools are provided free of
charge to users and accordingly we have yet to generate any revenue from these
businesses.
We have recorded operating losses in each reporting period since our inception
and may never be profitable.
We have recorded operating losses and negative operating cash flows in
each reporting period since inception and, at December 31, 2000, had an
accumulated deficit of approximately $35.3 million. These losses and negative
operating cash flows are attributable to the start-up costs and expenses
incurred in connection with the commercial roll-out of our now-terminated
subscription television system, and expenses incurred in connection with the
local multipoint distribution service rulemaking proceeding. We believe that we
have sufficient liquidity to finance our current level of operations. However,
we do not expect to have a positive operating cash flow until such time as we
substantially increase our Internet customer base and/or form a strategic
alliance for use of our Internet capabilities in the future.
Our existing operations and infrastructure may not be adequate to manage the
growth necessary for successful implementation of our business plan.
Successful implementation of our business plan will require the management
of growth. Our existing operations and infrastructure may not be adequate to
manage such growth, and any steps taken to improve such systems and controls may
not be sufficient. Our future success will depend in part upon attracting and
retaining the services of current management and technical personnel. We also
may not be successful in attracting, assimilating
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and retaining new personnel in the future as future growth takes place. We do
not maintain "key person" life insurance policies on any of our key personnel.
Shant S. Hovnanian and Vahak S. Hovnanian, who in the aggregate own
approximately 32% of our common stock, may have the power acting together to
control the direction and future operations of our company.
Shant S. Hovnanian and Vahak S. Hovnanian in the aggregate own
approximately 32% of our outstanding common stock at March 1, 2001. As a result,
acting together they may have the power to elect all of the members of our Board
of Directors, amend our certificate of incorporation and by-laws and control the
direction and future operations of our Company, in each case without the
approval of any of our other stockholders.
Our stock price has historically been volatile, which may make it more difficult
for you to resell shares when you want at prices you find attractive.
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. During 2000, the high and low sale prices of our
common stock on the Nasdaq Stock Market ranged from $24.75 to $0.563. The
closing sale price of our common stock was $1 on March 26, 2001. Our stock price
may fluctuate in response to a number of events and factors, such as quarterly
variations in operating results, announcements of technological innovations or
new products and media properties by us or our competitors, the operating and
stock price performance of other companies that investors may deem comparable,
and news reports relating to trends in our markets.
Sales of shares of common stock by Shant S. Hovnanian and Vahak S. Hovnanian
could adversely affect the market price of the common stock.
Future sales of shares of common stock, or the availability of shares of
common stock for future sale, may adversely impact the market price of the
common stock prevailing from time to time. Sales of substantial amounts of our
common stock, or the perception that such sales could occur, could adversely
affect the prevailing market price of the common stock.
Shares of common stock held by Shant S. Hovnanian and Vahak S. Hovnanian
have been held by each of them for the requisite holding periods under Rule 144
under the Securities Act and may be sold thereunder in accordance with volume
restrictions.
Risks related to our wireless data services
The commercial viability of our wireless data services business plan is
unproven.
Because our wireless data infrastructure services are in an early stage of
development, our business model with respect to such services is not proven.
Accordingly, our prospects for generating revenues and profits are difficult to
predict.
The market for mobile devices is new, and the failure of this market to develop
as expected would harm our revenues.
The emergence of markets for our services is critically dependent upon the
rapid expansion of the market for mobile devices including personal digital
assistants, handheld computers, smart phones, pagers and other mobile devices.
This market has only recently emerged and is rapidly growing. This growth,
however, may not continue. Any slowdown in the growth of adoption of mobile
devices would likely reduce the demand for our services, causing our anticipated
service revenues to fall.
We are in a highly competitive industry, and some of our competitors may have
more resources than we do.
The market for wireless Internet products and services overall is highly
competitive and lacks significant barriers to entry, enabling new businesses to
enter this market relatively easily. Competition in the market for Internet
products and services may intensify in the future. Numerous well-established
companies and smaller entrepreneurial companies are focusing significant
resources on developing and marketing services that will compete with our
services. In addition, many of our current and potential competitors have
greater financial, technical, operational and marketing resources. We may not be
able to compete successfully against these competitors in selling our services.
Competitive pressures may also force prices for our Internet services down and
such price reductions may affect our revenues.
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Our future success will depend on our ability to anticipate and keep pace with
technological change, and if we experience delays in developing and introducing
software compatible with new products and technologies, our competitive
advantage will diminish.
The market for mobile Internet software is becoming highly competitive and
is characterized by evolving industry standards, rapid technological change and
frequent product introductions. To remain competitive, we must continuously
develop new products and services and adapt our software to function on new
devices and operating systems designed and marketed by other companies. The
development of software and services like ours can be difficult, time-consuming
and costly, and we could lose market share if we encounter delays in the
development and introduction of our future software products.
The emergence of a dominant platform for mobile devices could reduce our
potential customer base and revenues.
The marketplace for mobile devices is currently characterized by a number
of competing operating systems and standards for handheld devices and cellular
telephones. Currently, our potential customers often use a variety of mobile
devices with multiple connectivity options. One of the primary benefits of our
products is their ability to operate across a wide variety of platforms. If a
dominant platform for mobile devices emerges, the demand for interoperable
software may decline and the need for our software may diminish.
Risks related to our Internet portal business
Our SPEED411(sm) Portal will rely in part on revenues to be derived from
Internet advertising, which advertisers may not find attractive in the future,
causing our revenues to suffer.
We expect that a portion of our revenues will come from advertisements
displayed on our SPEED411(sm) Portal. Our ability to generate substantial
advertising revenue will depend upon the size and growth of our user base, the
user base being attractive to advertisers and the continued acceptance by
advertisers of the web as an advertising medium. If we are unsuccessful in
adapting to the needs of our advertisers, our future advertising revenue will
suffer.
We may have difficulty attracting and retaining users of our SPEED411(sm) Portal
services, and our ability to do so may be limited because we will not have a
direct billing relationship with users.
Our SPEED411(sm) Portal will link users with a network of e-commerce
companies, including retailers. However, we do not establish a direct billing
relationship with our users as a result of any purchases they may make. The
revenue that we will generate from our e-commerce services will be a commission
paid by the retailer. The user may contact that retailer directly in the future
rather than through our SPEED411(sm) Portal. If users bypass our Portal and
contact retailers directly, we will not receive any revenue for purchases made
through that contact.
Risks related to our high-speed Internet access service
We may be unable to solve ongoing technical difficulties in our deployment of a
new system architecture for our SPEED(sm) super high-speed Internet service.
Our super high-speed Internet service utilizes a new technology that has a
limited operating history and that remains subject to further development and
refinement. Our pilot program for this service has encountered a number of
technical problems in the installation of equipment at the subscriber sites,
which require us to develop new and often difficult solutions to these problems.
We may not be able to resolve these technical problems in the future, which
could adversely affect the results of the pilot program and our ability to
commercialize this service.
Equipment for our SPEED(sm) super high-speed Internet access service is not, and
may never be, available at a cost and with performance levels that allow for
commercial implementation on an economically attractive basis.
The equipment necessary to provide our SPEED(sm) super high-speed Internet
access service is not currently manufactured on a scale and at a cost suitable
for the commercialization of our service. Such equipment may never become
available at a cost and with performance levels that allow for commercial
implementation on an economically attractive basis.
Many financially stronger competitors with broader market coverage are offering
high-speed Internet access.
The market for Internet access and related services is highly competitive.
We expect local, regional and national Internet service providers to be
competitors for our super high-speed Internet access service. These Internet
service providers include large companies like @Home, America OnLine and ATT
World Net. Telephone
9
companies with digital subscriber line technology, which increases the effective
capacity of existing copper telephone cables, are among other competitors. Also,
cable operators with high-speed cable modems are among the other communications
companies also providing high-speed Internet access. Many of the competing
Internet service providers have, or can be expected to have, greater financial,
marketing and other resources than us. We may not be able to compete
successfully with these entities.
ITEM 2. PROPERTIES
The Company leases 20,000 square feet of space at the Brooklyn Army
Terminal for its NOC, as well as, executive and administrative offices. This
lease expires in 2004 and provides for 2 five-year renewal options.
The Company also leases approximately 100 square feet of space on each of
14 rooftops for its Internet Broadcast Stations and relays. These leases,
several of which contain three-year to seven-year renewal options, expire from
2001 to 2003. The Company believes that leased space on rooftops in New York
City and other locations in the New York PMSA will be readily available to serve
as additional Internet Broadcast Stations.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and proceedings that occur in the
ordinary course of business. The Company believes it has substantial defenses to
a material portion of these claims and is prepared to pursue litigation if a
reasonable and structured settlement cannot be reached with the parties. Based
on information currently available, the Company believes that none of these
current claims or proceedings, either individually or in the aggregate, will
have a material effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders during the
fourth quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is listed for quotation on the NASDAQ National Market
system under the symbol "SPDE." Prior to January 6, 1999, our trading symbol was
"CVUS". The following table sets forth high, low and closing trade prices for
the Common Stock for the fiscal quarters indicated.
10
High Sale Low Sale Closing Sale
-------------- ---------------- ---------------
2000
- ----
First quarter $ 24.750 $ 4.500 $ 10.563
Second quarter 10.750 4.000 9.938
Third quarter 6.000 2.000 2.000
Fourth quarter 2.250 0.563 0.656
1999
- ----
First Quarter $ 4.500 $ 0.906 $ 2.719
Second Quarter 9.250 2.063 5.875
Third quarter 7.875 3.750 4.125
Fourth quarter 6.813 3.125 4.781
On March 26, 2001, the closing trade price of our Common Stock was $1 per
share. As of December 31, 2000, there were approximately 300 registered
shareholders and, to the best of our belief, approximately 12,000 beneficial
owners of our Common Stock. During the year ended December 31, 2000, we did not
make any sales of securities that were not registered under the Securities Act
of 1933, as amended (the "Securities Act").
We have never declared or paid any cash dividends on our Common Stock and
do not intend to declare or pay cash dividends on the Common Stock at any time
in the foreseeable future. Future earnings, if any, will be used for the
expansion of our business.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and Notes
thereto included elsewhere in this Form 10-K.
Year ended December 31,
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data)
Statement of Operations Data
Revenues $ 105 $ 612 $ 3,648 $ 4,943 $ 2,190
------------ ------------ ------------ ------------ ------------
Selling, general and administrative 7,191 5,425 9,691 13,259 10,223
Depreciation and amortization 4,698 2,779 6,174 3,881 2,258
Service costs -- -- 1,479 2,314 1,175
Bad debts -- -- 730 550 351
------------ ------------ ------------ ------------ ------------
Total operating expenses 11,889 8,204 18,074 20,004 14,007
------------ ------------ ------------ ------------ ------------
Operating loss (11,784) (7,592) (14,426) (15,061) (11,817)
Equity in loss of associated company (570) (351) -- -- --
Settlement of litigation (283) -- -- -- --
Net interest/investment income (expense) 3,478 1,278 (2,365) (202) 186
Unrealized gains/(losses) on investments (10) -- -- -- --
Other income 100 624 -- -- --
Gain on assignment of spectrum -- 19,442 28,066 -- --
Intellectual property settlement -- (2,425) -- -- --
Income taxes -- (330) (302) -- --
------------ ------------ ------------ ------------ ------------
Net earnings/(loss) $ (9,069) $ 10,646 $ 10,973 $ (15,263) $ (11,631)
============ ============ ============ ============ ============
Per Common Share
Basic earnings/(loss) $ (0.44) $ 0.58 $ 0.59 $ (0.95) $ (0.75)
Weighted average outstanding 20,445,586 18,465,974 16,551,417 16,000,000 15,576,478
Diluted earnings/(loss) $ (0.44) $ 0.57 $ 0.57 $ (0.95) $ (0.75)
Weighted average outstanding 20,445,586 18,680,082 17,612,443 16,000,000 15,576,478
December 31,
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(in thousands)
Balance Sheet Data
Cash and cash equivalents $ 38,595 $ 44,613 $ 12,902 $ 408 $ 19,600
Working capital (deficiency) 36,765 42,794 9,312 (7,029) 16,765
Net property and equipment 8,660 10,959 12,836 20,608 14,158
Total assets 57,628 55,769 25,915 23,154 35,924
Total debt -- 211 338 7,495 6,260
Total liabilities 2,773 1,969 3,868 11,464 8,972
Total equity 54,855 53,799 22,047 11,690 26,952
12
Summary of Quarterly Financial Data
(in thousands, except per share data)
Quarters Ended
--------------
2000 March 31 June 30 September 30 December 31 Year end
-------- ------- ------------ ----------- --------
Revenues $ 35 $ 23 $ 20 $ 27 $ 105
Selling, general and
administrative expenses 1,245 1,580 1,889 2,477 7,191
Operating loss (2,042) (2,329) (3,292) (4,121) (11,784)
Net earnings/(loss) $(1,678) $(1,730) $(2,988) $ (2,673) $ (9,069)
Per share (1):
Basic $ (0.08) $ (0.09) $ (0.14) $ (0.13) $ (0.44)
Diluted $ (0.08) $ (0.09) $ (0.14) $ (0.13) $ (0.44)
Quarters Ended
--------------
1999 March 31 June 30 September 30 December 31 Year end
-------- ------- ------------ ----------- --------
Revenues $ 15 $ 27 $ 510 $ 60 $ 612
Selling, general and
administrative expenses 1,147 1,456 1,329 1,494 5,426
Operating loss (1,812) (2,101) (1,523) (2,156) (7,592)
Gain on assignment
of spectrum -- -- -- 19,442 19,442
Intellectual property
settlement -- -- -- (2,425) (2,425)
Net earnings/(loss) $(1,263) $(2,115) $(1,207) $ 15,231 $ 10,646
Per share (1):
Basic $ (0.07) $ (0.12) $ (0.06) $ 0.77 $ 0.58
Diluted $ (0.07) $ (0.12) $ (0.06) $ 0.76 $ 0.57
(1) Earnings per share is computed separately for each period and, therefore,
the sum of the quarterly per share amounts may differ from the total for the
year.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto and the other financial
information appearing elsewhere in this Form 10-K.
Operations
We are developing and providing wireless data services that enable and
enhance the use of Internet-based content on mobile devices. We currently
provide on a promotional basis wireless e-mail and Internet content, including
directories, financial data, sports, news and entertainment, to consumers. We
have expanded our wireless data services to include products and services that
enable businesses to communicate efficiently and effectively with their mobile
workforce and customers in real time through a wide variety of mobile computing
and communications devices. In addition, we maintain a web site that provides
Internet users with information about high-speed Internet access. 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.
We changed our business focus in November 1998, terminating our
subscription television service. Since changing our focus, we have yet to
generate any revenue from our wireless data products and services business.
Since 1999, our only significant source of revenue was $550,000 received from XO
Communications, Inc. (formerly NEXTLINK Communications, Inc.) as discussed
below. The balance of revenues in 1999 and 2000, generally subscriber fees from
our pilot program for high-speed Internet service and co-hosting revenues from
the use of our Data Center, have not been material and future revenues from this
and our mobile wireless business are uncertain.
We have generated operating losses and negative operating cash flows since
our inception and expect to continue to do so in the future.
From 1992 until November 1998, we operated a 49-channel analog
subscription television service utilizing 1,300 MHz of spectrum under a LMDS
license from the FCC. The FCC commercial operating license was awarded to us in
recognition of our efforts in developing and deploying LMDS technology, and for
spearheading its regulatory approval at the FCC. In September 1997, our pioneer
LMDS license was renewed as a standard LMDS license through February 1, 2006.
The license provides that the spectrum may be used for a wide variety of fixed
wireless purposes, including wireless local loop telephony, high-speed Internet
access and two-way teleconferencing. The license covers 1,150 MHz of spectrum in
the 28 GHz range encompassing the New York Primary Metropolitan Statistical
Area, a region which includes the five boroughs of New York City as well as the
New York Counties of Westchester, Rockland, and Putnam. Under FCC authorization,
the license includes an additional 150 MHz of spectrum until the first Ka band
satellite is launched, an event which is not expected to occur prior to 2002.
In November 1998, we assigned an 850 MHz portion of our license to WinStar
Communications, Inc. ("WinStar") as an alternative source of financing that was
needed at the time. In connection with this assignment, we terminated our
subscription television service because we no longer had sufficient spectrum to
deliver those services. As a result, while we were able to repay, repurchase and
redeem debt (in the aggregate amount of approximately $11.2 million) and
preferred stock (approximately $4.6 million) in connection with the 1998
assignment as required under those indentures and substantially strengthen our
financial position, we eliminated the only source of revenues that we had at the
time. We are an emerging growth company with no certainty as to the amount of
future cash flows from operations.
In October 1999, we assigned a 150Mhz portion of our license to XO. From
July 1999 to October 1999, pending regulatory approval of the license
assignment, XO made monthly payments of approximately $172,000 to us.
Our SPEED411(sm) portal, which is located at www.speedus.com and
www.speed411.com, promotes high-speed Internet access on a nationwide basis by
providing users with information on how to get high-speed access and how to take
advantage of offerings available to high-speed users. The portal will give us an
opportunity to generate revenues from Web site advertising, referral fees and
commissions on product sales. Revenues to date from these sources have not been
material.
Currently, we are also conducting a limited pilot program of our SPEEDsm
broadband super high-speed Internet service and, at December 31, 2000, had less
than 100 subscribers. A full marketing effort will not commence until new LMDS
equipment becomes commercially available with cost and performance that allow
implementation of SPEED(sm) service on an economically attractive basis. We
cannot determine when this will occur and this equipment may never be available
to us on this basis. Revenues from our high-speed Internet service would consist
14
of subscriber fees, as well as the sales and installations of modems; however,
the pricing structure of the service could change in response to market and
other competitive conditions. Revenues to date from these sources have not been
material. We estimate that the total annual cost of the pilot program is
approximately $500,000.
Twelve Months Ended December 31, 2000 Compared to Twelve Months Ended December
31, 1999
Revenues decreased $507,000 from $612,000 for the twelve months ended
December 31, 1999 to $105,000 for the twelve months ended December 31, 2000.
Revenues for the twelve months ended December 31, 1999 include $550,000 received
from XO Communications, Inc. pending FCC approval of an assignment of 150 MHz of
the Company's LMDS license to XO. The balance of revenues for 1999, as well as
2000, reflects the early results of the Company's pilot program to connect its
first Internet subscribers and co-hosting revenues from use of the Company's
Data Center.
Selling, general and administrative expenses increased $1,766,000 from
$5,425,000 for the twelve months ended December 31, 1999 to $7,191,000 for the
twelve months ended December 31, 2000. Approximately $880,000 of this increase
is a result of the June 30, 2000 acquisition of the remaining 55% interest in
Speedia that the Company did not already own. This acquisition was accounted for
using the purchase method of accounting and the results of operations of Speedia
are included in the consolidated statements of operations beginning with the
quarter ended September 30, 2000. Selling, general and administrative expenses
also increased as a result of increases in compensation expense as a result of
additions to senior management, including research and development and the
Company's portal, and legal expenses in connection with intellectual property
matters.
Depreciation and amortization increased $1,919,000 from $2,779,000 for the
twelve months ended December 31, 1999 to $4,698,000 for the twelve months ended
December 31, 2000. $1,186,000 of this increase is a result of amortization of
the goodwill resulting from the Speedia acquisition on June 30, 2000. This
goodwill is being amortized over a period of three years. The balance of the
increase in depreciation and amortization for these periods is the result of
additions to property and equipment in connection with the build-out of the
Company's portal and amortization of a patent acquired by the Company during the
first quarter of 2000.
Equity in loss increased $219,000 from $351,000 for the twelve months
ended December 31, 1999 to $570,000 for the twelve months ended December 31,
2000. Through June 30, 2000, the Company accounted for its investment in 45% of
the interest in Speedia under the equity method. Subsequent to that date, upon
the acquisition of the remaining 55% interest in Speedia, the results of
operations of Speedia are included in the consolidated statements of operations.
In addition, Speedia's losses were higher in 2000 as the development of its
business continued since formation in 1999.
During the twelve months ended December 31, 2000, the Company recognized
an expense of $282,500 from the settlement of litigation. The Company had
outstanding long-term orders with CT&T for the purchase of equipment in the
amount of approximately $1,400,000 represented by set-top converters and
head-end equipment. This equipment, used in the Company's now discontinued
subscription television service, had been delivered to the Company but
experienced performance problems, as a result of which CT&T was involved in
litigation with Titan Corporation, the vendor of this equipment. The Company had
not accepted billings for this equipment and no amounts had been reflected in
the Company's consolidated financial statements. On September 12, 2000, the
Company issued 80,000 shares of its Common Stock to Titan in connection with the
settlement of this litigation. The Company has recorded this settlement in the
consolidated statements of operations for the twelve months ended December 31,
2000 based upon the closing price of its common stock on September 12, 2000.
Other income decreased $524,000 from $624,000 for the twelve months ended
December 31, 1999 to $100,000 for the twelve months ended December 31, 2000.
This income is a result of the Company's negotiating settlements with vendors
and others.
Interest and investment income increased $2,186,000 from $1,300,000 for
the twelve months ended December 31, 1999 to $3,486,000 for the twelve months
ended December 31, 2000 since the Company had more funds available for
investment. In addition, the Company realized gains of $797,000 from its
investment portfolio in 2000.
Net unrealized losses on investments amounted to $10,000 for the twelve
months ended December 31, 2000. No such losses were incurred in 1999.
Twelve Months Ended December 31, 1999 Compared to Twelve Months Ended December
31, 1998
Revenues decreased $3,036,000 from $3,648,000 for the twelve months ended
December 31, 1998 to $612,000 for the twelve months ended December 31, 1999.
This decrease is a result of the discontinuance of the
15
subscription television business in November 1998. Revenues for 1999 reflect the
early results of the Company's pilot program to connect its first Internet
subscribers and also include approximately $550,000 received from XO pending FCC
approval of the license assignment which occurred in October 1999.
Selling, general and administrative expenses decreased $4,265,000 from
$9,690,000 for the twelve months ended December 31, 1998 to $5,425,000 for the
twelve months ended December 31, 1999. This decrease is primarily attributable
to the termination of the subscription television business, including reduced
headcount-related costs as a result of personnel reductions during the third and
fourth quarters of 1998. This decrease is net of an increase in stock-based
compensation, which amounted to $615,000 for the twelve months ended December
31, 1999. During 1999, the Company issued warrants to purchase shares of the
Company's Common Stock and grants of Common Stock with an estimated fair value
aggregating approximately $615,000. Similar transactions during the year ended
December 31, 1998 were not material.
Depreciation and amortization decreased $3,395,000 from $6,174,000 for the
twelve months ended December 31, 1998 to $2,779,000 for the twelve months ended
December 31, 1999. This decrease was due primarily to the 1998 write off of
property and equipment previously used by the Company in its terminated
subscription television service.
Service costs amounted to $1,479,000 for the twelve months ended December
31, 1998. They are no longer incurred as a result of the termination of
subscription television services in early November 1998. Service costs are fees
paid to providers of television programming and royalties paid to CT&T under a
license agreement between CT&T and SPEEDUSNY.
Bad debts amounted to $730,000 for the twelve months ended December 31,
1998. They are no longer incurred as a result of the termination of subscription
television services. The Company will generally require residential subscribers
to its high-speed Internet service to provide credit card information for
monthly billings and therefore does not expect any material exposure for bad
debts in the future.
Equity in loss of associated company amounted to $351,000 for the twelve
months ended December 31, 1999. During 1999, the Company made cash investments
for a 45% equity interest in SPEEDIA, LLC which investment is being accounted
for under the equity method.
Other income amounted to $624,000 for the twelve months ended December 31,
1999. During 1999, the Company negotiated settlements with vendors. As of
December 31, 1998, the Company had unpaid amounts due to these entities in the
aggregate amount of $1,346,000. The Company has settled these billings for an
aggregate of $722,000, resulting in a savings of $624,000.
Interest and investment income increased $1,189,000 from $111,000 for the
twelve months ended December 31, 1998 to $1,300,000 for the twelve months ended
December 31, 1999 since the Company had more funds available for investment.
Interest expense and financing fees decreased $2,452,000 from $2,475,000
for the twelve months ended December 31, 1998 to $23,000 for twelve months ended
December 31, 1999. This decrease is due to the repayment or repurchase of
substantially all of the Company's outstanding debt in the fourth quarter of
1998.
During the year ended December 31, 1999, the Company recognized a gain of
$19,442,000 from the assignment of a portion of its spectrum, compared to a gain
in the amount of $28,066,000 during the year ended December 31, 1998.
During the year ended December 31, 1999, the Company recognized an expense
of $2,425,000 from the acquisition of intellectual property rights and the
settlement of litigation.
During the year ended December 31, 1999, the Company recorded a provision
for income taxes in the amount of $330,000 compared to $302,000 in 1998.
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended December
31, 1997
Revenues decreased $1,295,000 from $4,943,000 for the twelve months ended
December 31, 1997 to $3,648,000 for the twelve months ended December 31, 1998.
This decrease is a result of the termination of subscription television services
in early November 1998 and increased service cancellations during the third
quarter of 1998. The decrease is net of increases during the first six months of
1998 as a result of increases in the average subscriber base compared to 1997
and increases in fees charged to subscribers.
16
Service costs decreased $835,000 from $2,314,000 for the twelve months
ended December 31, 1997 to $1,479,000 for the twelve months ended December 31,
1998. This decrease is a result of the termination of subscription television
services in early November 1998, increased service cancellations during the
third quarter of 1998 and the termination of service from several premium
program providers. This decrease is net of increases during the first six months
of 1998 as a result of increases in the average subscriber base compared to
1997.
Selling, general and administrative expenses decreased $3,568,000 from
$13,259,000 for the twelve months ended December 31, 1997 to $9,691,000 for the
twelve months ended December 31, 1998. This decrease is primarily attributable
to reduced headcount-related costs as a result of personnel reductions at the
end of 1997 and during the first and third quarters of 1998. This decrease is
net of increases in legal expenses and other costs incurred in connection with
several financings during 1998 and defending against or settling certain claims
brought against the Company.
Depreciation and amortization increased $2,293,000 from $3,881,000 for the
twelve months ended December 31, 1997 to $6,174,000 for the twelve months ended
December 31, 1998. This increase is due primarily to 1998 having a full year of
depreciation on customer premises equipment, equipment for additional
transmitter sites and the continued build-out of the Company's customer
service/administrative facilities in 1997.
Bad debt expense increased $180,000 from $550,000 for the twelve months
ended December 31, 1997 to $730,000 for the twelve months ended December 31,
1998. This increase is a result of the Company's de-emphasis of subscription
television services, the related reductions in force and the termination of
service from several premium channel programmers. Prior to the termination of
subscription television services in early November 1998, the Company experienced
a high level of service cancellations and a drastic decrease in collections from
subscribers. While the Company has significantly increased its allowance for bad
debts at December 31, 1998 to reflect these developments, it is considering
several options to vigorously pursue collection of past due accounts.
Interest income decreased $539,000 from $650,000 for the twelve months
ended December 31, 1997 to $111,000 for the twelve months ended December 31,
1998. This decrease is primarily due to decreases in the Company's cash position
as it continued to fund operations and build out its network.
Interest expense and financing fees increased $1,624,000 from $851,000 for
the twelve months ended December 31, 1997 to $2,475,000 for twelve months ended
December 31, 1998. This increase is a result of a substantial increase in the
level of borrowings by the Company commencing in late 1997, some of which
involved the payment of financing fees, and the costs incurred in connection
with the redemption and repayment of debt.
During the year ended December 31, 1998, the Company recognized a gain of
$28,066,000 from the assignment of a portion of its spectrum.
During the year ended December 31, 1998, the Company recorded a provision
for income taxes in the amount of $302,000.
Liquidity and Capital Resources
The Company has recorded operating losses and negative operating cash
flows in each year of its operations since inception, primarily due to the
start-up costs in connection with the commercial roll-out of the Company's
system, slower than anticipated consumer acceptance of the Company's now
terminated subscription television services and expenses incurred in connection
with the LMDS rulemaking proceeding.
The Company believes that consummation of the spectrum assignments in
November 1998 and October 1999 for net proceeds of approximately $15.5 million
and $19.8 million, respectively, after the repayment and repurchase of debt (in
the aggregate amount of approximately $11.2 million) and redemption of preferred
stock (approximately $4.6 million) in connection with the 1998 assignment as
required under those indentures and the sale of Common Stock in July 1999 for
net proceeds of approximately $19.8 million have provided sufficient liquidity
to finance its current level of operations and expected capital requirements
through the 2001 fiscal year. However, the Company does not expect to have a
positive operating cash flow until such time as it substantially increases its
Internet customer base and/or forms a strategic alliance for use of its Internet
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.
17
Internet broadcast stations used in our pilot high-speed Internet service
had an original cost of approximately $500,000 each. Until new equipment becomes
available, if at all, we cannot predict whether new broadcast stations would be
necessary or what they would cost at that time. Our wireless data services for
mobile devices business is more adaptable for future growth and future capital
funding requirements would generally not be material.
Generally, our wireless data services will be priced based on the amount
of ongoing service usage that our customers utilize, either in the form of a
monthly fee for each registered user, or a fee for each wireless transaction
that is delivered through our services. Additionally, there are initial set-up
fees that will vary greatly depending on the amount of time and materials that
we incur in tailoring the services for each customer.
Our selling costs will increase as we market these products. However, most
of the costs associated with our wireless data services are labor related and
these costs will only be incurred as new business is signed. The hardware cost
associated with maintaining the services will not increase significantly with
added customers.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments at December 31, 2000 consist primarily
of cash equivalents, which are subject to interest rate risk, and marketable
securities and securities sold and not repurchased, which are subject to equity
price risk.
The carrying value of cash equivalents approximates market value since
these highly liquid, interest earning investments have short maturities. There
was no significant investment in marketable securities, which consist of
publicly traded equity securities classified as trading securities and were
recorded at fair market value. Securities sold and not repurchased are carried
at the fair market value of the securities.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and related Notes
thereto and the financial information required to be filed herewith are included
under Item 14 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and titles of the persons who
were directors and/or executive officers of the Company as of March 21, 2001.
Name Age Position
- ------------------------------------ ------ -------------------------------------
Shant S. Hovnanian................. 41 Chairman of the Board of Directors,
President, Chief Executive Officer
and Chief Financial Officer
Vahak S. Hovnanian................. 69 Director
William F. Leimkuhler.............. 49 Director
Jeffrey Najarian................... 42 Director
Michael Bacon...................... 35 Executive Vice President
John A. Kallassy................... 36 Executive Vice President
Shant S. Hovnanian has served as our Chairman of the Board of Directors,
President and Chief Executive Officer since October 1995 and as Chief Financial
Officer since June 1998. Mr. Hovnanian is also Chairman of the Board of
Directors of VisionStar Incorporated. From June 1980 until January 1991, Mr.
Hovnanian served as Executive Vice President of the V. S. Hovnanian Group (the
"Hovnanian Group"), consisting of home building operations, real estate
development and utility companies. In 1995, Mr. Hovnanian served as a U.S.
Delegate to the World Radio Conference of the International Telecommunications
Union in Geneva, Switzerland. Mr. Hovnanian is the son of Mr. Vahak S.
Hovnanian.
Vahak S. Hovnanian has served as a Director since October 1995. Mr.
Hovnanian has been Chairman of the Board and President of the Hovnanian Group
since 1968. Mr. Hovnanian is the father of Mr. Shant S. Hovnanian.
William F. Leimkuhler is the Director of Business Development of PAICE
Corporation, a privately held developer of advanced vehicle powertrains. From
1994 through 1999, he held various positions with Allen & Company, a New York
investment banking firm, initially serving as the firm's General Counsel. Prior
to that, Mr. Leimkuhler was a corporate partner with the New York law firm of
Werbel & Carnelutti (now Heller Ehrman White & McAuliffe).
Jeffrey Najarian has been Chief Executive Officer of Starpoint Solutions,
Inc., formerly TIS Worldwide, Inc., since its inception in 1992. A creator and
founder of Starpoint, he has been instrumental in building one of the country's
fastest growing, privately-held companies, as cited by Inc. magazine. From
1984-1992, Mr. Najarian worked at Setford-Shaw-Najarian, a recruiting/placement
firm for technology specialists, becoming a partner after only three years. He
led the staff in billing, propelling SSN to become a leading search firm for
Wall Street banks.
Michael Bacon has served as Executive Vice President of Operations since
June 1999. Prior to joining us, Mr. Bacon was employed by Booz Allen & Hamilton,
a leading international management and technology consulting firm, since 1996.
From 1994 to 1996, Mr. Bacon was with Deloitte & Touche Consulting. In
consulting, he led teams that recommended or implemented the establishment of
and improvement in service operations in a variety of industries, including the
telecommunications industry. Mr. Bacon previously worked for three years at
International Business Machines in marketing and sales and for two years with
General Electric Company where he developed information systems.
John A. Kallassy has served as Executive Vice President and Chief
Marketing Officer since September 2000. Mr. Kallassy was the founder and CEO of
American Data Consultants, Inc., a B2B database marketing company. After the
sale of ADC to R.L. Polk in 1996, Mr. Kallassy was employed for three years at
R.L. Polk as a division president and later a corporate vice president where he
led the product management and analytical consulting groups.
19
ITEM 11. EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended December 31, 2000,
1999 and 1998, the cash compensation we paid, as well as certain other
compensation paid or accrued for those years, to each of the most highly
compensated executive officers of the Company in 2000 (the "Named Executive
Officers") in all capacities in which they served. See Employment Agreements.
Summary Compensation Table
Annual Compensation
----------------------------------
Other
Annual Securities All Other
Compen- Underlying Compen-
Name and Principal Position Year Salary Bonus sation Options(#) sation
--------------------------- ---- ------ ----- ------ ---------- ------
Shant S. Hovnanian 2000 $250,000 -- $ -- -- $ --
Chairman of the Board of 1999 250,000 -- -- 250,000 --
Directors, President, Chief 1998 250,000 -- -- 5,400 --
Executive Officer
and Chief Financial Officer
Michael Bacon 2000 $137,500 $18,750 $ -- -- $ --
Executive Vice President 1999 80,208 18,750 -- 100,000 --
1998 -- -- -- -- --
John A. Kallassy 2000 $ 58,333 $12,500 $ -- 225,000 $ --
Executive Vice President 1999 -- -- -- -- --
1998 -- -- -- -- --
Stock Option Grants Table
The following table sets forth information concerning individual grants of
options to purchase Common Stock made to Named Executive Officers during 2000.
Potential Realizable
Number of % of Total Value at Assumed
Securities Options Granted Annual Rates of Stock
Underlying to Employees in Exercise or Expiration Price Appreciation for
Name Options Granted fiscal year Base Price Date Option Term
---- --------------- ---------------- ---------- ---------- --------------------------
5% 10%
------------ ------------
John A. Kallassy........... 225,000 38.6% $ 3.00 9/5/10 $425,000 $1,076,000
For additional information regarding stock option grants to employees in
2000, see "Notes to Consolidated Financial Statements--Note 6, Stockholders'
Equity."
20
Aggregate Stock Option Exercise Table
The following table sets forth information regarding the number and value
of unexercised Options that were held by the Named Executive Officers as of
December 31, 2000. None of the Named Executive Officers exercised any options
during 2000.
Number of
Securities
Underlying
Number of Unexercised
Shares Options Value of Unexercised
Acquired Value Exercisable/ In-the-Money Options
Name on Exercise Realized Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------- -------------------------
Shant S. Hovnanian.. 0 $0 255,400/0 $0/0
Michael Bacon....... 0 0 75,000/25,000 0/0
John A. Kallassy.... 0 0 37,500/187,500 0/0
For additional information regarding stock option grants to employees in
2000, see "Notes to Consolidated Financial Statements--Note 6, Stockholders'
Equity."
Director Compensation
Our Directors who are not officers or employees ("Non-Employee Directors")
receive $500 per Board meeting and Board committee meeting attended. Upon their
initial election to the Board, new Non-Employee Directors are granted options to
purchase 5,000 shares of Common Stock that are fully vested and immediately
exercisable. Upon the date of each annual meeting, Non-Employee Directors are
granted options to purchase an additional 10,000 shares of Common Stock that are
fully vested and immediately exercisable. Our Directors of the Company who are
officers or employees do not receive any additional compensation for serving on
the Board or on any Board committee.
Employment Agreements
We entered into an employment agreement with Mr. Shant S. Hovnanian in
October 1995. The agreement provides that Mr. Hovnanian will act as our
President and Chief Executive Officer and will devote substantially all of his
working time and efforts to our affairs. Under this agreement, Mr. Hovnanian may
devote such working time and efforts to CT&T and its affiliates as the due and
faithful performance of his obligations under the agreement permits. The
agreement has a one-year term and provides for an annual salary of $250,000,
effective February 7, 1996. Upon the expiration of the initial employment term
on February 7, 1997, the agreement provides for automatic extensions on a
month-to-month basis, unless terminated by either party upon 30 days advance
written notice. Mr. Hovnanian is continuing to serve as Chairman, President and
Chief Executive Officer pursuant to the terms of this employment agreement.
We entered into an employment agreement effective June 1, 1999 with Mr.
Michael Bacon. The agreement provides that Mr. Bacon will act as our Executive
Vice President. The agreement, which has no term, provides for an annual salary
of $137,500, subject to periodic review, and bonuses aggregating $37,500 and an
increase in annual salary to $175,000 based on the executive's attainment of
certain performance goals. Under this agreement, Mr. Bacon was granted 100,000
options to purchase shares of our Common Stock at the market value as of the
effective date of the agreement. 25,000 options become exercisable each six
months after June 1, 1999. Effective January 15, 2001, Mr. Bacon's salary was
increased to $175,000.
We entered into an employment agreement effective September 5, 2000 with
Mr. John A. Kallassy. The agreement provides that Mr. Kallassy will act as our
Executive Vice President. The agreement, which has no term, provides for an
annual salary of $175,000, subject to periodic review, and annual bonuses
aggregating $50,000 based on the executive's attainment of certain performance
goals. Under this agreement, Mr. Kallassy was granted 225,000 options to
purchase shares of our Common Stock at the market value as of the effective date
of the agreement. 18,750 of these options were fully vested and immediately
exercisable at the date of grant. Of the balance, 18,750 options become
exercisable each three months after September 5, 2000.
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 21, 2001 with
respect to the beneficial ownership of our stock by (i) each person known by us
to be the beneficial owner of more than 5% of the Common Stock; (ii) each person
serving as a director or director nominee of the Company; (iii) each of our
executive officers, and (iv) all of our directors and executive officers as a
group. Unless otherwise indicated, all shares are owned directly and the
indicated owner has sole voting and dispositive power with respect thereto.
Common Stock
Beneficially
Owned (1)
-----------------------------------
Beneficial Owner Number Percent
- ------------------------------------------------ ------------------ --------------
Shant S. Hovnanian (2)(3)................. 3,878,929 19.1%
Vahak S. Hovnanian (4)(5)................. 2,861,655 14.1
William F. Leimkuhler (6)................. 43,500 *
Jeffrey Najarian (7)(8)................... 948,181 4.7
Michael Bacon (9) ........................ 75,000 *
John A Kallassy (10) ..................... 111,250 *
XO Communications, Inc. (11).............. 2,000,000 9.9
All Directors and Executive Officers as a
group (total 6 persons)................ 7,918,515 39.0%
* Less than 1% of the outstanding Common Stock
(1) Pursuant to the regulations of the Securities and Exchange Commission
(the "Commission"), shares are deemed to be "beneficially owned" by a person if
such person directly or indirectly has or shares (i) the power to vote or
dispose of such shares, whether or not such person has any pecuniary interest in
such shares, or (ii) the right to acquire the power to vote or dispose of such
shares within 60 days, including any right to acquire through the exercise of
any option, warrant or right.
(2) Includes options to purchase 255,400 shares of Common Stock pursuant
to the Stock Incentive Plan, which are fully vested and exercisable.
(3) Includes 100,000 shares of Common Stock owned by Mr. Shant S.
Hovnanian's minor child, Vahak Willem Hovnanian, for which Mr. Hovnanian, as
custodian, has sole voting power.
(4) Includes options to purchase 45,000 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically granted
upon election to the Board at the 2001 Annual Meeting.
(5) Includes 55,431 and 22,175 shares of Common Stock which Mr. Vahak S.
Hovnanian is required to sell upon the exercise of outstanding warrants at a per
share exercise price of $13.16 and $11.28, respectively. It also includes
100,000 shares of Common Stock that Mr. Hovnanian donated to The Vahak and Paris
Hasmig Foundation, Inc. that Mr. Hovnanian controls, as well as 312,655 shares
of Common Stock given to his wife, Paris Hasmig Hovnanian.
(6) Includes options to purchase 43,500 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically granted
upon election to the Board at the 2001 Annual Meeting.
(7) Includes options to purchase 30,000 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically granted
upon election to the Board at the 2001 Annual Meeting.
(8) Includes 918,181 shares of Common Stock owned by Starpoint Solutions,
Inc., of which Mr. Najarian is the Chief Executive Officer. Mr. Najarian
disclaims beneficial ownership of these shares.
(9) Includes options to purchase 75,000 shares of Common Stock pursuant to
Mr. Bacon's employment agreement, which are fully vested and exercisable.
(10) Includes options to purchase 56,250 shares of Common Stock pursuant
to Mr. Kallassy's employment agreement, which are fully vested and exercisable.
22
(11) Pursuant to a Stock Purchase Agreement dated as of June 13, 1999, the
Company is required to use its best efforts to cause an XO representative to be
elected to the Company's Board. To date, XO has not exercised this right.
Stockholders Agreements.
Verizon Communications, formerly Bell Atlantic Corporation, has the right
to appoint one director to the Board, so long as Verizon shall hold at least 1%
of the shares of Common Stock outstanding on a fully diluted basis. To date,
Verizon has not exercised this right.
Pursuant to a Stock Purchase Agreement dated as of June 13, 1999, the
Company is required to use its best efforts to cause an XO Communications, Inc.
representative to be elected to the Company's Board. To date, XO has not
exercised this right.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CT&T License Agreement. Shant S. Hovnanian, our Chairman of the Board,
President and Chief Executive Officer, Vahak S. Hovnanian, a Director of the
Company, and Bernard B. Bossard, a former Director and officer of the Company,
are 80% controlling owners of CT&T. We have operated our super high-speed
broadband wireless network under a technology license from CT&T. See Item 1.
Business - 'Patent portfolio relating to high-speed wireless communications' and
'Risk Factors' for additional information on the Founders' agreement in
principle to contribute their 80% in CT&T to us.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Schedule
(1) Consolidated Financial Statements Page(s)
------
Report of Independent Accountants.................................. 27
Consolidated Balance Sheets as of December 31, 2000 and 1999....... 28
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998................................. 29
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998............... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998................................. 31
Notes to Consolidated Financial Statements......................... 32-39
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the fourth quarter
of fiscal 2000.
(c) Exhibits
3.1a Certificate of Incorporation. (1)
3.1b Certificate of Ownership and Merger of CVUSA Merger Corporation With
and Into Cellularvision USA, Inc. (2)
3.2 By-laws. (1)
4.1 Form of Common Stock Certificate. (1)
4.2 Stockholders Agreement, dated as of January 12, 1996, by and among
CellularVision USA, Inc., Shant S. Hovnanian, Bernard B. Bossard and
Vahak S. Hovnanian. (1)
4.3 Form of Rights Agreement between SPEEDUS.COM, Inc. and Equiserve
Trust Company, N.A., as Rights Agent. The Rights Agreement includes
as Exhibit A the Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock of SPEEDUS.COM,
Inc., as Exhibit B the form of Rights Certificate and as Exhibit C
the form of Summary of Rights to Purchase Shares of Series A Junior
Participating Preferred Stock. (3)
10.1 Amended and Restated License Agreement, together with Addendum to
License Agreement, each dated as of July 7, 1993, by and between
CellularVision Technology & Telecommunications, L.P. and
CellularVision of New York, L.P. and certain amendments and
supplements thereto. (1)
10.2a CellularVision USA, Inc. 1995 Stock Incentive Plan. (1)
10.2b CellularVision USA, Inc. 1995 Stock Incentive Plan. (Amended and
Restated as of December 2, 1998) (4)
10.2c CellularVision USA, Inc. 1995 Stock Incentive Plan. (Amended and
Restated as of June 2, 2000) (5)
10.3 Employment Agreement, dated as of October 18, 1995, between
CellularVision USA, Inc. and Shant S. Hovnanian. (1)
10.4 Intercompany Agreement, dated January 12, 1996, by and among
CellularVision USA, Inc., CellularVision Technology &
Telecommunications, L.P., CellularVision of New York, L.P., Shant S.
Hovnanian, Bernard B. Bossard and Vahak S. Hovnanian. (1)
24
10.5 Second Addendum to License Agreement, dated as of January 12, 1996,
by and between CellularVision Technology & Telecommunications, L.P.
and CellularVision of New York, L.P. (1)
10.6 Corporate Name License and Grant of Future Licenses Agreement, dated
as of January 12, 1996, by and between CellularVision Technology &
Telecommunications, L.P. and CellularVision USA, Inc. (1)
10.7 Amended and Restated Agreement of Limited Partnership of
CellularVision of New York, L.P., dated as of July 7, 1993, by and
between Hye Crest Management, Inc., Bell Atlantic Ventures, XXIII,
Inc. and the limited partners set forth on the signature page
thereto. (1)
10.8 Master Amendment Agreement, dated as of October 8, 1993, by and
among Vahak S. Hovnanian, Shant S. Hovnanian, Bernard B. Bossard,
Hye Crest Management, Inc., Suite 12 Group, CellularVision of New
York, L.P., CellularVision Technology & Telecommunications, L.P.,
Bell Atlantic Ventures XIII, Inc. and Philips PGNY Corp. (1)
10.9 Second Master Amendment Agreement, dated as of December 29, 1993, by
and among Hye Crest Management, Inc., Suite 12 Group, CellularVision
of New York, L.P., CellularVision Technology & Telecommunications,
L.P., Bell Atlantic Ventures XXIII, Inc., Philips PGNY Corp., Morgan
Guaranty Trust Company of New York, as trustee of the Commingled
Pension Trust Fund (Multi-Market Special Investment) of Morgan
Guaranty Trust Company of New York, and as Investment Manager and
Agent for an Institutional Investor. (1)
10.10 Agreement of Lease, dated May 9, 1994, by and between Cellular
Vision of New York and New York City Economic Development
Corporation and Sublease, dated March 8, 1995, between
CellularVision of New York, L.P. and Harvard Fax, Inc. (1)
10.11 Agreement, dated as of January 12, 1996, by and among CellularVision
USA, Inc., CellularVision of New York, L.P., Hye Crest Management,
Inc., Shant S. Hovnanian, Vahak S. Hovnanian, Bernard B. Bossard and
Bell Atlantic Ventures XXIII, Inc. (1)
10.12 Stock Purchase Agreement, dated as of June 13, 1999, between
SPEEDUS.COM, INC. and NEXTLINK Communications, Inc. (6)
10.13 Strategic Agreement, dated as of June 13, 1999, between SPEEDUS.COM,
INC. and NEXTLINK Communications, Inc. (6)
10.14 Amended and Restated Agreement to Assign LMDS License, dated as of
June 13, 1999, between SPEEDUS.COM. Inc., SPEEDUSNY, L.P. and
NEXTLINK Communications, Inc. (7)
10.15 Share Exchange Agreement, dated as of June 30, 2000, among
SPEEDUS.COM, Inc., TIS Worldwide, Inc. and Daniel Doyon (8)
21 Subsidiaries of SPEEDUS.COM, Inc. (1)
23.1 Consent of PricewaterhouseCoopers LLP (9)
24.1 Powers of Attorney (9)
27 Financial Data Schedule (9)
- -------------------
(1) Incorporated by reference to the Company's Registration Statement in
Form S-1 (File No. 33-98340) which was declared effective by the
Commission on February 7, 1996.
(2) Incorporated by reference to the Company's Form 10-K filed on March
31, 1999.
(3) Incorporated by reference to the Company's Form 8-K filed on January
16, 2001.
(4) Incorporated by reference to the Company's Definitive Proxy
Statement filed on August 30, 1999.
(5) Incorporated by reference to the Company's Definitive Proxy
Statement filed on June 30, 2000.
(6) Incorporated by reference to the Company's Form 8-K filed on June
28, 1999.
25
(7) Incorporated by reference to the Company's Form 8-K filed on October
26, 1999.
(8) Incorporated by reference to the Company's Form 8-K/A filed on July
17, 2000.
(9) Filed herewith.
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SPEEDUS.COM, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
SPEEDUS.COM, Inc. and its subsidiaries at December 31, 2000 and December 31,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
April 2, 2001
27
SPEEDUS.COM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2000 1999
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 38,594,815 $ 44,613,101
Marketable securities 68,166 --
Due from broker 624,790 --
Prepaid expenses and other 62,098 50,000
Due from affiliates 93,112 93,112
Accounts and other receivables 94,816 8,064
------------ ------------
Total current assets 39,537,797 44,764,277
Property and equipment, net of accumulated
depreciation of $9,198,902 and $8,092,906 8,659,977 10,958,977
Goodwill, net of accumulated
amortization of $1,185,724 in 2000 6,048,889 --
Other intangible assets, net of accumulated
amortization of $173,214 in 2000 2,196,786 --
Other assets 1,184,735 46,036
------------ ------------
Total assets $ 57,628,184 $ 55,769,290
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 270,202 $ 554,739
Accrued liabilities 1,532,542 1,065,236
Securities sold and not repurchased 952,032 --
Other current liabilities 18,005 138,937
Current portion of notes payable -- 210,938
------------ ------------
Total current liabilities 2,772,781 1,969,850
Commitments and Contingencies -- --
Stockholders' equity:
Common stock ($.01 par value; 40,000,000
shares authorized; 21,034,838 and 19,670,959
shares issued) 210,348 196,710
Preferred stock ($.01 par value; 20,000,000
shares authorized):
Series A Convertible ($1,000 stated value;
10,000 shares authorized; no shares issued -- --
and outstanding)
Additional paid-in-capital 90,292,432 79,875,699
Treasury stock (at cost; 309,800 shares in 2000) (305,741) --
Accumulated deficit (35,341,636) (26,272,969)
------------ ------------
Stockholders' equity 54,855,403 53,799,440
------------ ------------
Total liabilities and stockholders' equity $ 57,628,184 $ 55,769,290
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
28
SPEEDUS.COM, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
------------------------------------------------
2000 1999 1998
------------ ------------ -------------
Revenues $ 105,395 $ 612,135 $ 3,647,671
------------ ------------ ------------
Expenses:
Selling, general and administrative 7,190,809 5,425,535 9,690,439
Depreciation and amortization 4,697,823 2,778,623 6,174,393
Service costs -- -- 1,479,360
Bad debts -- -- 730,050
------------ ------------ ------------
Total operating expenses 11,888,632 8,204,158 18,074,242
------------ ------------ ------------
Operating loss (11,783,237) (7,592,023) (14,426,571)
Equity in loss of associated company (569,782) (350,722) --
Settlement of litigation (282,500) -- --
Other income 99,856 623,804 --
Interest and investment income 3,485,804 1,300,469 110,719
Unrealized gains/(losses) on investments (10,015) -- --
Interest expense and financing fees (8,793) (22,590) (2,475,247)
------------ ------------ ------------
Loss before gain on assignment of spectrum,
intellectual property settlement
and provision for income taxes (9,068,667) (6,041,062) (16,791,099)
Gain on assignment of spectrum -- 19,442,000 28,066,109
Intellectual property settlement -- (2,425,000) --
------------ ------------ ------------
Earnings/(loss) before provision for
income taxes (9,068,667) 10,975,938 11,275,010
Provision for income taxes -- 330,000 302,000
------------ ------------ ------------
Net earnings/(loss) $ (9,068,667) $ 10,645,938 $ 10,973,010
============ ============ ============
Per share:
Basic earnings (loss) per common share $ (0.44) $ 0.58 $ 0.59
============ ============ ============
Weighted average common shares
outstanding 20,445,586 18,465,974 16,551,417
============ ============ ============
Diluted earnings (loss) per common share $ (0.44) $ 0.57 $ 0.57
============ ============ ============
Weighted average common shares
outstanding 20,445,586 18,680,082 17,612,443
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
29
SPEEDUS.COM, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Total
Common Preferred Additional Treasury Accumulated Shareholders'
Stock Stock Paid-in-capital Stock Deficit Equity
------------- ------------ ----------------- --------- --------------- --------------
Balance, January 1, 1998 $ 160,000 $ -- $ 58,267,533 $ -- $(46,737,829) $ 11,689,704
Issuance of common stock 1,100 1,100
Issuance of preferred stock 3,500,000 3,500,000
Conversion of secured note 8,837 491,163 500,000
Conversion of preferred stock 1,421 (37,000) 35,579 --
Dividends on preferred stock 21 507 (88,728) (88,200)
Redemption of preferred stock (3,463,000) (1,065,360) (4,528,360)
Retirement of common stock (65) 65 --
Net earnings 10,973,010 10,973,010
--------- ---------- ------------ --------- ------------ ------------
Balance, December 31, 1998 171,314 -- 58,794,847 -- (36,918,907) 22,047,254
Issuance of common stock 25,396 20,407,852 20,433,248
Common stock issuance costs (558,000) (558,000)
Stock based compensation 1,231,000 1,231,000
Net earnings 10,645,938 10,645,938
--------- ---------- ------------ --------- ------------ ------------
Balance, December 31, 1999 196,710 -- 79,875,699 -- (26,272,969) 53,799,440
Issuance of common stock 13,638 8,919,733 8,933,371
Repurchase of common stock (305,741) (305,741)
Stock based compensation 1,497,000 1,497,000
Net loss (9,068,667) (9,068,667)
--------- ---------- ------------ --------- ------------ ------------
Balance, December 31, 2000 $ 210,348 $ -- $ 90,292,432 $(305,741) $(35,341,636) $ 54,855,403
========= ========== ============ ========= ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
30
SPEEDUS.COM, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------------------------
2000 1999 1998
--------------- -------------- -------------
Cash flows from operating activities:
Net earnings/(loss) $ (9,068,667) $ 10,645,938 $ 10,973,010
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,697,823 2,778,623 6,174,393
Stock based compensation 844,000 615,000 --
Equity in loss of associated company 569,782 350,722 --
Settlement of litigation 282,500 -- --
Amortization of placement fees -- -- 65,590
Provision for doubtful accounts -- -- 730,050
Gain on assignment of spectrum -- (19,442,000) (28,066,109)
Noncash increase in notes payable -- -- 250,000
Changes in assets and liabilities:
Marketable securities (68,166) -- --
Due from broker (624,790) -- --
Due from affiliates -- (6,668) 94,568
Prepaid expenses and other (12,098) (26,652) 88,710
Accounts receivable (86,752) (8,064) 503,451
Other assets (485,699) 21,129 104,646
Notes receivable -- -- 171,245
Accounts payable (284,537) (1,964,606) 646,028
Other current liabilities (120,932) (64,875) 201,051
Securities sold and not repurchased 952,032 -- --
Accrued liabilities 467,306 257,737 (1,285,649)
------------ ------------ ------------
Net cash used in operating activities (2,938,198) (6,843,716) (9,349,016)
------------ ------------ ------------
Cash flows from investing activities:
Net proceeds from assignment of spectrum -- 19,750,000 31,041,378
Property and equipment additions (1,039,885) (901,232) (1,174,898)
Investment in associated company (954,957) (350,722) --
Intangible assets (570,000) -- --
------------ ------------ ------------
Net cash provided by (used in)
investing activities (2,564,842) 18,498,046 29,866,480
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of options and warrants 1,433 433,248 --
Repurchase of stock (305,741) -- --
Proceeds from sale of stock -- 19,750,000 3,501,100
Proceeds from notes payable -- -- 4,691,147
Repayment of notes payable (210,938) (126,562) (11,598,807)
Redemption of preferred stock -- -- (4,616,560)
------------ ------------ ------------
Net cash (used in) provided by
financing activities (515,246) 20,056,686 (8,023,120)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (6,018,286) 31,711,016 12,494,344
Cash and cash equivalents, beginning of period 44,613,101 12,902,085 407,741
------------ ------------ ------------
Cash and cash equivalents, end of period $ 38,594,815 $ 44,613,101 $ 12,902,085
============ ============ ============
Supplemental Cash Flow Disclosures:
Cash paid for interest during the period $ 8,793 22,238 $ 1,161,379
============ ============ ============
Cash paid for income taxes during the period $ -- $ 302,000 $ --
============ ============ ============
Noncash transactions - common stock:
Issued for convertible debt $ -- $ -- $ 500,000
============ ============ ============
Issued for intangible assets $ 1,800,000 $ -- $ --
============ ============ ============
Issued/contingently issuable for acquisition $ 6,849,438 $ -- $ --
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
31
SPEEDUS.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Organization
SPEEDUS.COM, Inc. ("SPEEDUS.COM"), a Delaware corporation, was formed in
October 1995 as CellularVision USA, Inc. ("CVUS") to combine the ownership of
predecessor companies that were under common control. In January 1999, through a
'short form merger' as allowed under Delaware law, CVUS changed its name to
SPEEDUS.COM. Unless the context requires otherwise, the term Company includes
SPEEDUS.COM and its wholly owned subsidiaries.
Business and FCC License
The Company is developing and providing wireless data services that enable
and enhance the use of Internet-based content on mobile devices. The Company has
expanded its wireless data services to include products and services that enable
businesses to communicate efficiently and effectively with their mobile
workforce and customers in real time through a wide variety of mobile computing
and communications devices. In addition, the Company maintains a web site that
provides Internet users with information about high-speed Internet access. The
Company also owns fixed wireless spectrum in the New York City metropolitan area
that it may commercialize in the future to support high-speed, or broadband,
Internet access service.
From 1992 until November 1998, the Company operated a 49-channel analog
subscription television service utilizing 1,300 MHz of spectrum under a LMDS
license from the FCC. The FCC commercial operating license was awarded to the
Company in recognition of its efforts in developing and deploying LMDS
technology, and for spearheading its regulatory approval at the FCC. In
September 1997, the Company's pioneer LMDS license was renewed as a standard
LMDS license through February 1, 2006. The license provides that the spectrum
may be used for a wide variety of fixed wireless purposes, including wireless
local loop telephony, high-speed Internet access and two-way teleconferencing.
The license covers 1,150 MHz of spectrum in the 28 GHz range encompassing the
New York Primary Metropolitan Statistical Area, a region which includes the five
boroughs of New York City as well as the New York Counties of Westchester,
Rockland, and Putnam. Under FCC authorization, the license includes an
additional 150 MHz of spectrum until the first Ka band satellite is launched, an
event which is not expected to occur prior to 2002.
In November 1998, as a result of the assignment of 850 MHz of spectrum,
the Company terminated its subscription television service. In October 1999, the
Company assigned an additional 150 MHz of spectrum.
2. Summary of Significant Accounting Policies
Financial statements and principles of consolidation
The consolidated financial statements include the accounts of SPEEDUS.COM
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. The Company's share of earnings or losses
of associated companies, that are 20% to 50% owned, is included in the
consolidated operating results using the equity method of accounting.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of operating revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid interest earning investments with
original maturities of three months or less to be cash equivalents. At December
31, 2000 and 1999, cash equivalents consisted of commercial paper and money
market funds.
Marketable Securities
32
All marketable securities are defined as trading securities under the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." At December 31, 2000,
marketable securities consisted of publicly traded equity securities and were
recorded at fair market value. Their original cost was $628,000, unrealized
losses were $560,000 and the carrying value was $68,000. There were no
investments in marketable securities at December 31, 1999.
During the year ended December 31, 2000, realized gains in the amount of
$797,000 were recorded and included in Interest and Investment Income in the
accompanying Consolidated Statements of Operations. Realized gains and losses
during the years ended December 31, 1999 and 1998 were not material.
Securities sold but not purchased
The Company may sell equity securities it does not own in anticipation of
declines in the fair market values of the securities. When the Company effects
such transactions, it must borrow the securities it sold in order to deliver
them and settle the trades. The amount shown on the balance sheet as 'Securities
sold but not purchased' represents the value of these securities at fair market
value. At December 31, 2000, the Company had sold securities it had not
purchased. The aggregate proceeds were $1,502,000, unrealized gains were
$550,000 and the market value of the securities was $952,000.
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 this risk is limited due to diversification and investments
being made in investment grade securities.
Property and Equipment
Transmission and headend equipment, customer premises equipment, office
equipment and leasehold improvements are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets, ranging from
two to seven years.
Through the quarter ended September 30, 2000, fiber optic lines were
depreciated over an estimated useful life of 40 years. Commencing with the
quarter ended December 31, 2000, the Company considers the remaining useful life
to be ten years and accounted for this determination as a change in an estimate.
The effect of this change is not material.
Effective January 1, 1999, the Company adopted Statement of Position 98-1
("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." In accordance with SOP 98-1, the Company has
capitalized certain internal use software and Web site development costs. These
costs are depreciated using the straight-line method over an estimated useful
life of two years.
Through the year ended December 31, 1998, in connection with the Company's
subscription television service, subcontractor labor and materials incurred in
connection with the installation of customer premises equipment were capitalized
and depreciated over the shorter of the estimated average period that the
subscribers were expected to remain connected to the Company's system, or five
years. Depreciation on customer premises equipment commenced the month following
installation of the equipment. In November 1998, as a result of the assignment
of 850 MHz of spectrum, the Company terminated its subscription television
service. As a result, the Company wrote off property and equipment with a
carrying value aggregating approximately $2,842,000, which amount has been
included in 'Gain on assignment of spectrum' in 1998.
When assets are fully depreciated, it is the Company's policy to remove
the costs and related accumulated depreciation from its books and records.
Long-lived assets
The Company periodically evaluates the net realizable value of long-lived
assets, including fixed assets and other assets, relying on a number of factors
including operating results, business plans, economic projections and
anticipated future cash flows. In addition, the Company's evaluation considers
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.
33
Goodwill and Other Intangible Assets
Goodwill, the excess of cost over the net assets of Speedia, LLC (see Note
4) at the time of acquisition, is amortized on a straight-line basis over three
years.
Other intangible assets consist of the cost of a software license, which
is being amortized over its estimated useful life of three years, and a patent,
which is being amortized over its remaining life of fourteen years at the time
of acquisition.
Through the year ended December 31, 1998, in connection with the Company's
subscription television service, the costs of field studies to determine
line-of-sight transmission capabilities were capitalized and amortized over five
years by the straight-line method. If a site was abandoned or deemed inoperable,
all costs associated with that site were charged to expense. As a result of the
termination of its subscription television business in 1998, the Company wrote
off intangible assets with a carrying value of approximately $133,000, which
amount has been included in 'Gain on assignment of spectrum' in 1998.
Revenue Recognition
Revenue is recognized when earned. Through the year ended December 31,
1998, the majority of the Company's revenues to date were derived from
subscriber fees from the Company's subscription television service, billed one
month in advance and recorded as revenue in the period in which the service was
provided. Deferred revenue associated with advance billings was recorded as a
current liability. In November 1998, as a result of the assignment of 850 MHz of
spectrum, the Company terminated its subscription television service.
Debt Placement Fees
Unamortized debt issuance costs were amortized over the term of the
related debt by the effective interest rate method.
Income Taxes
As required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company is required to provide for deferred
tax assets or liabilities arising due to temporary differences between the book
and tax basis of assets and liabilities existing at the time of the consummation
of the incorporation transactions immediately prior to the Company's initial
public offering in 1996.
As of December 31, 2000, the Company has a deferred tax asset of
approximately $18.1 million and an offsetting valuation allowance of the same
amount. As of December 31, 1999 and 1998, the Company recorded a deferred tax
asset of approximately $9.1 million and $14.2 million, respectively, primarily
related to operating losses and the difference between the book and tax basis of
the Company's investment in CVNY. An offsetting valuation allowance of $9.1
million and $14.2 million, respectively, was established as the Company had no
ability to carryback its losses and a limited earnings history. For the years
ended December 31, 1999 and 1998, the Company has recorded a provision for
income tax of $330,000 and $302,000, respectively, relating to Federal and State
Alternative Minimum Taxes. This provision was calculated after recognizing a
deferred tax benefit of approximately $5,000,000 in each year relating to
carryforward losses.
For the years ended December 31, 1999 and 1998, the provision for taxes
was comprised of $235,000 and $302,000, respectively, for federal taxes and
$95,000 and $124,000 (the latter included in selling, general and administrative
expenses), respectively, for state taxes.
A reconciliation of the Company's effective income tax rate and the
federal tax rate is as follows:
2000 1999 1998
---- ---- ----
Statutory rate (34%) 34% 34%
Permanent difference - stock based compensation 3% 2% --
State income taxes, net of federal benefit (3%) 1% --
Change in valuation allowance 34% (34%) (31%)
---- ---- ----
Effective rate --% 3% 3%
==== ==== ====
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $38.2 million. If not utilized, the net operating loss
carryforwards will expire in various amounts through 2021.
34
Earnings Per Share
Basic and diluted earnings/(loss) per common share are determined in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share".
For the year ended December 31, 2000, basic and diluted net loss available
for common shareholders was equal to net loss. Stock options and warrants have
been excluded from the diluted loss per share since their effect would be
antidilutive.
For the year ended December 31, 1999, basic and diluted net earnings
available for common shareholders was equal to net earnings. The weighted
average common shares for diluted earnings per share were determined by adding
weighted average shares in the amounts of 42,221 and 171,887 for the assumed
exercise or conversion of stock options and warrants, respectively, to the
weighted average shares outstanding for basic earnings per share for a total of
18,680,082 weighted average shares outstanding for diluted earnings per share.
For the year ended December 31, 1998, basic net earnings available for
common shareholders in the amount of $9,818,922 was determined by subtracting an
aggregate of $1,154,088, representing the redemption premium and dividends on
the Convertible Preferred Stock, from net earnings of $10,973,010. Diluted net
earnings available for common shareholders in the amount of $9,981,093 was
determined by subtracting the redemption premium in the amount of $1,065,360
from, and adding interest expense on convertible debt in the amount of $73,443
to, net earnings of $10,973,010. The weighted average common shares for diluted
earnings per share were determined by adding weighted average shares in the
amounts of 1,470, 133,740, 212,578 and 713,238 for the assumed exercise or
conversion of stock options, warrants, convertible debt and convertible
preferred stock, respectively, to the weighted average shares outstanding for
basic earnings per share for a total of 17,612,443 weighted average shares
outstanding for diluted earnings per share.
3. Related Party Transactions
CT&T License Agreement
In July 1993, the Company entered into a license agreement with
CellularVision Technology and Telecommunications, L.P. ("CT&T") for use of
certain patented technologies owned by CT&T and for CT&T know-how related to the
LMDS technology. CT&T is 80% owned by Shant S. Hovnanian, the Chairman of the
Board, President, and Chief Executive Officer of the Company, Vahak S.
Hovnanian, a director of the Company, and Bernard B. Bossard, a former officer
and director of the Company, (collectively, the "Founders"). The license
agreement granted the Company the right to utilize the licensed LMDS technology.
Under the license agreement, CT&T earned a royalty equal to 7.5% of gross
revenues on a quarterly basis. The license was to remain in effect until either
the expiration, revocation or invalidation of CT&T patent rights directly
related to the operation of the Company's system, or the year 2028, subject to
earlier termination upon the occurrence of certain events. The license fee was
$288,000 for the year ended December 31, 1998. There were no license fees for
the years ended December 31, 1999 or 2000.
Under the license agreement, CT&T may charge the Company a fee of up to
2.5% of the value of equipment purchased through CT&T, and the Company's ability
to procure capital equipment relating to its system from sources other than CT&T
had been limited. Pursuant to an amendment dated January 12, 1996, subject to
certain conditions and except for outstanding purchase orders, the Company is
under no obligation to continue to purchase equipment or supplies from CT&T,
although it may continue to do so. The total amount of equipment purchased from
CT&T for the year ended December 31, 1999 was $563,000. No equipment was
purchased from CT&T during 1998 or 2000.
See Note 9 for additional information on CT&T.
4. Acquisition
On June 30, 2000, the Company purchased the remaining 55% interest in
Speedia, LLC that it did not already own. The Company issued an aggregate of
950,000 shares of its Common Stock to Speedia's selling shareholders, Starpoint
Solutions, Inc. (formerly TIS Worldwide, Inc.) and Daniel Doyon (collectively,
the "Sellers).
This acquisition was accounted for using the purchase method of
accounting. The results of operations of Speedia have been included in the
consolidated statements of operations for the periods subsequent to June 30,
2000. The excess of the purchase price, valued at approximately $6.8 million
(including the value of shares issuable and contingently issuable as discussed
below), over the fair value of the net assets acquired was approximately $7.2
35
million which has been recorded as goodwill and is being amortized over a period
of 3 years.
At December 31, 2000, the Company was obligated to issue in the aggregate
an additional 183,334 shares of its Common Stock to the Sellers since 90% of
VisionStar Incorporated was not effectively contributed to the Company within 6
months from June 30, 2000. VisionStar, a company whose majority shareholder is
Shant S. Hovnanian, a co-founder and Chairman and Chief Executive Officer of the
Company, holds a license from the FCC, granted in May 1997, to construct, launch
and operate a Ka-band telecommunications satellite positioned over the
continental United States. A Special Committee of the Company's Board of
Directors was evaluating Mr. Hovnanian's offer for the contribution of his
interest in VisionStar to the Company. On September 22, 2000, the Company
announced that discussions on the offer of Mr. Hovnanian have been terminated.
In addition, an aggregate of an additional 183,334 shares will be issued
to the Sellers if the Company's share price does not reach $10 per share within
180 days from February 9, 2001.
Unaudited pro forma operating results of the Company as though the
acquisition of Speedia had occurred on January 1, 1999, with adjustment to give
effect to the amortization of goodwill, are as follows:
Year ended December 31,
-----------------------
2000 1999
---- ----
Revenues $ 129,765 $ 612,819
Operating loss $ (14,060,088) $ (10,713,719)
Net earnings/(loss) $ (10,863,736) $ 7,874,964
Basic and diluted net earnings/(loss) per share $ (0.51) $ 0.40
5. Property and Equipment
Property and equipment consists of the following:
December 31,
-------------------------------
2000 1999
----------- ----------
Transmission and headend equipment..................... $12,371,232 $11,770,012
Customer premises equipment ........................... 2,041,294 3,618,008
Leasehold improvements ................................ 2,107,313 2,259,957
Office equipment ...................................... 613,030 542,967
Fiber optics .......................................... 375,000 375,000
Equipment deposits .................................... 351,010 485,939
---------- ----------
17,858,879 19,051,883
Less--accumulated depreciation ........................ 9,198,902 8,092,906
---------- ----------
Property and equipment................. $8,659,977 $10,958,977
========== ===========
Depreciation expense was approximately $3,430,000, $2,779,000 and
$6,104,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
6. Stockholders' Equity
Common Stock
In July 1999, the Company issued 2,000,000 shares of its Common Stock to
XO Communications, Inc. for $20,000,000.
Stock Options
The Company's 1995 Stock Incentive Plan, as amended, (the "Plan") provides
for the grant of various stock-based incentives, including non-qualified and
incentive stock options. The Plan has reserved 2,250,000 shares of Common Stock
of the Company for issuance to employees, directors and consultants, including
an additional 500,000 shares approved by stockholders in each of 1999 and 2000.
During 1998, a total of 91,700 non-qualified stock options were granted at
an exercise price of $.89 and 191,600 options were cancelled. All options were
granted at the market price per share on the date of grant and have ten-year
terms. The weighted average exercise price for the 148,250 options outstanding
at December 31, 1998, all
36
of which were exercisable, was $4.06 per share. At December 31, 1998, there were
1,101,750 shares available for future grant. During 1999, a total of 462,516
non-qualified stock options were granted at exercise prices ranging from $3.59
to $5.34 per share, 62,900 options were exercised and 7,250 options were
cancelled. All options were granted at the market price per share on the date of
grant and have ten-year terms. The weighted average exercise price for the
540,616 options outstanding at December 31, 1999, 112,979 of which were
exercisable, was $4.86 per share. At December 31, 1999, there were 1,046,484
shares available for future grant.
During 2000, a total of 582,750 non-qualified stock options were granted
at exercise prices ranging from $2.08 to $13.75 per share, 937 options were
exercised and 70,335 options were cancelled. All options were granted at the
market price per share on the date of grant and have ten-year terms. The
weighted average exercise price for the 1,052,094 options outstanding at
December 31, 2000, 567,761 of which were exercisable, was $4.22 per share. At
December 31, 2000, there were 1,034,069 shares available for future grant.
The Company accounts for the cost of stock-based compensation plans in
accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees." Since all options to date have been granted at the market price
per share on the date of grant, no compensation expense has been recognized by
the Company for its stock-based compensation plans during the years ended
December 31, 2000, 1999 and 1998. If the Company had determined compensation
expense based upon the fair value at the date of grant in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," compensation expense would have been $1,154,000, $1,081,000 and
$70,000 for the years ended December 31, 2000, 1999 and 1998, respectively. On a
pro forma basis, for the years ended December 31, 2000, 1999 and 1998: (i) net
earnings/(loss) would have been $(10,223,000), $9,565,000 and $10,900,000,
respectively; (ii) basic earnings/(loss) per share would have been $(0.50),
$0.52 and $0.59, respectively, and (iii) diluted earnings/(loss) per share would
have been $(0.50), $0.51 and $0.57, respectively.
In determining fair value, the stock options were valued using the
Black-Scholes option pricing model. Key assumptions used in valuing the options
granted during 2000 included a risk-free interest rate of 6.0%, an expected life
of 4 years and a volatility factor of 125%.
Warrants
Warrants to purchase up to 190,862 shares of Common Stock of the Company,
issued in 1995, were outstanding at December 31, 2000. Of this amount, an
aggregate of up to 113,256 shares were issuable by the Company, and 77,606
shares were issuable by Vahak S. Hovnanian, a director of the Company, from his
Common Stock holdings. The warrants issued by the Company have a ten-year term
and an exercise price ranging from $12.50 to $15.03 per share.
During 1998, a total of 302,000 warrants were issued at exercise prices
ranging from $.01 to $5 per share. No warrants were exercised. The warrants have
five-year terms.
During 1999, a total of 550,000 warrants were issued at exercise prices
ranging from $1 to $4.97 per share and 377,000 warrants were exercised. The
warrants have three to five-year terms.
During 2000, a total of 125,000 warrants were issued at an exercise price
of $4.78 per share. No warrants were exercised. The warrants have five-year
terms.
488,256 of the 713,256 outstanding warrants at December 31, 2000 have
registration rights in respect of the shares of Common Stock issuable upon
exercise.
In connection with the issuance of warrants and grants of Common Stock,
during the years ended December 31, 2000 and 1999, stock based compensation in
the aggregate amounts of $844,000 and $1,231,000, respectively, for financial
advisory and other services was recorded. These amounts are included in selling,
general and administrative expenses in the amounts of $844,000 and $615,000 in
2000 and 1999, respectively, common stock issuance costs in the amount of
$308,000 in 1999 and gain on assignment of spectrum in the amount of $308,000 in
1999.
7. Sale of Spectrum
a. In October 1999, pursuant to an agreement dated June 13, 1999, as
amended, between the Company and XO Communications, Inc. the Company consummated
the assignment of 150 MHz of spectrum to XO for $20,000,000 in cash. The
transaction was subject to regulatory approval, which was received. From July
1999 to
37
October 1999, pending regulatory approval of the license assignment, XO made
monthly payments of approximately $172,000 to the Company. In connection with
this transaction, the Company incurred closing costs and commissions in the
aggregate amount of approximately $308,000.
b. In November 1998, pursuant to an agreement dated July 10, 1998, as
amended, between the Company and WinStar Communications, Inc. ("WinStar"), the
Company consummated the assignment of 850 MHz of spectrum to WinStar for
$32,500,000 in cash. The transaction was subject to regulatory and shareholder
approval, both of which were received. At the time of closing, the Company
repaid $3,500,000 which it had borrowed from WinStar in July 1998. The Company
had used these loan proceeds to meet outstanding obligations and finance its
operations pending the closing. As previously indicated, at the time of closing
or shortly thereafter, the Company also repaid the Subordinated Exchange Notes
held by Morgan Guaranty for an aggregate amount of $6,569,355, redeemed the
Convertible Preferred Stock held by Marshall for an aggregate amount of
$4,616,560 and repurchased the Secured Convertible Promissory Note held by
Newstart for an aggregate amount of $1,093,339. In connection with this
transaction, the Company paid an investment banking fee of $1,050,000 and
incurred other closing costs in the aggregate amount of approximately $409,000.
The assignment of spectrum required the Company to terminate its subscription
television services. As a result, the Company wrote off property and equipment
and intangible assets with a carrying value aggregating approximately
$2,975,000, which amount has been included in 'Gain on assignment of spectrum'.
8. Commitments and Contingencies
Noncancellable Leases
At December 31, 2000, future minimum lease payments due under
noncancelable leases are as follows:
2001....................................... $ 841,000
2002....................................... 422,000
2003....................................... 284,000
2004....................................... 189,000
2005....................................... 103,000
Thereafter................................. 189,000
----------
Total......................... $2,028,000
==========
Rent expense was approximately $300,000, $295,000 and $766,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
9. Intellectual Property and Settlement of Litigation
The Company acquired 20% of CT&T and certain other rights from a U.S.
subsidiary of Philips Electronics, N. V. ("Philips"). CT&T is a holder of a
portfolio of fundamental broadband wireless patents and licenses. The Company
has operated its super high-speed Internet broadband wireless network under a
technology license from CT&T.
The acquisition of Philips' interest in CT&T was part of a settlement of
litigation commenced by M/A-COM, a unit of Tyco International Ltd. The Company's
portion of the settlement was $2.4 million which has been expensed for the year
ended December 31, 1999. The Founders have agreed in principle to contribute
their 80% interest in CT&T to the Company as part of the settlement agreement.
10. Legal Proceedings
The Company is subject to various claims and proceedings that occur in the
ordinary course of business. The Company believes it has substantial defenses to
a material portion of these claims and is prepared to pursue litigation if a
reasonable and structured settlement cannot be reached with the parties. Based
on information currently available, the Company believes that none of these
current claims or proceedings, either individually or in the aggregate, will
have a material effect on its business.
11. Subsequent Events
a. On January 11, 2001, the Company's Board of Directors adopted a
stockholder rights plan in which preferred stock purchase rights (the "Rights")
will be distributed as a dividend at the rate of one Right for each share of the
Company's Common Stock.
Each Right generally will entitle stockholders, in certain circumstances,
to buy one one-ten
38
thousandth of a newly issued share of Series A Junior Participating Preferred
Stock of the Company at an exercise price of $50.00. The Rights generally will
be exercisable and transferable apart from the Common Stock only if a person or
group acquires beneficial ownership of 17% or more of the Common Stock or
commences a tender or exchange offer upon consummation of which such person or
group would beneficially own 17% or more of the Common Stock.
If any person becomes the beneficial owner of 17% or more of the Company's
Common Stock, then each Right not owned by a 17% or more stockholder or certain
related parties will entitle its holder to purchase, at the right's then-current
exercise price, shares of Common Stock (or, in certain circumstances as
determined by the Board, cash, other property, or other securities) having a
value of twice the Right's exercise price. In addition, if, after any person has
become a 17% or more stockholder, the Company is involved in a merger or other
business combination transaction with another person in which its Common Stock
is changed or converted, or sells 50% or more of its assets or earning power to
another person, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, shares of common stock of such other person having
a value of twice the Right's exercise price.
The Company will generally be entitled to redeem the Rights at $.01 per
Right at any time until the tenth day following public disclosure that a person
or group has become the beneficial owner of 17% or more of the Company's common
stock. The Rights will expire on January 26, 2011.
b. In January 2001, the Company and Siemens Corporate Research, Inc., a
subsidiary of Siemens Corporation, co-invested in a new company, Zargis Medical
Corp. Zargis was formed to develop and market advanced diagnostic decision
support products and services for primary care physicians and other Healthcare
professionals. Speedia Wireless, a wholly owned subsidiary of the Company, has
signed an exclusive contract with Zargis to design and develop the wireless
applications for Zargis, as well as provide transaction processing to support
the commercial rollout of Zargis' cardiac diagnostic products.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in New York, New York
on April 2, 2001.
SPEEDUS.COM, Inc.
s/s Shant S. Hovnanian
----------------------------------------
Shant S. Hovnanian
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
s/s Shant S. Hovnanian Chairman of the Board of Directors, April 2, 2001
- -------------------------------------------- President and Chief Executive and Chief
Shant S. Hovnanian Financial Officer
* Controller and Chief Accounting Officer April 2, 2001
- -------------------------------------------
Angela M. Vaccaro
* Director April 2, 2001
- ------------------------------------------
Vahak S. Hovnanian
* Director April 2, 2001
- -------------------------------------------
William F. Leimkuhler
* Director April 2, 2001
- --------------------------------------------
Jeffrey Najarian
* By: s/s Shant S. Hovnanian
- -------------------------------------------
Attorney-in-fact