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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number: 000-27582
Speedus Corp.
(Exact name of registrant as specified in its charter)
Delaware 13-3853788
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 58th Street, Suite 7E
Brooklyn, New York 11220
(Address of principal executive offices) (Zip Code)
718-567-4300
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The number of outstanding shares of the registrant's common stock, par value
$.01 per share, as of November 11, 2002 was 16,966,261.
SPEEDUS CORP.
INDEX TO FORM 10-Q
Page(s)
------
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Consolidated Balance Sheets as of September 30,
2002 (unaudited) and December 31, 2001.......................... 3
Consolidated Statements of Operations (unaudited)
for the Three and Nine Months Ended September
30, 2002 and 2001............................................... 4
Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 2002 and 2001........... 5
Notes to Consolidated Financial Statements (unaudited).......... 6-7
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8-11
ITEM 3 -- Quantitative and Qualitative Disclosures About Market Risk...... 11
ITEM 4 -- Controls and Procedures......................................... 11
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings............................................... 12
ITEM 2 -- Changes in Securities........................................... 12
ITEM 3 -- Defaults Upon Senior Securities................................. 12
ITEM 4 -- Submission of Matters to a Vote of Security Holders............. 12
ITEM 5 -- Other Information............................................... 12
ITEM 6 -- Exhibits and Reports on Form 8-K................................ 12
Signature Page............................................................ 13
Certifications Pursuant to Section 302 of The Sarbanes-Oxley Act Of 2002.. 14
Exhibit 99: Certifications Pursuant to U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002................. 15
2
SPEEDUS CORP.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 35,945,699 $ 39,933,881
Marketable securities 1,187,525 31,471
Due from broker 5,686,763 4,921,177
Accounts and other receivables 40,099 670,120
Prepaid expenses and other 24,765 381,332
------------ ------------
Total current assets 42,884,851 45,937,981
Property and equipment, net of accumulated
depreciation of $2,048,717 and $9,650,192 971,667 5,828,315
Other intangible assets, net of accumulated
amortization of $381,964 and $271,071 1,688,036 1,798,929
Goodwill 1,760,106 --
Other assets 289,870 326,881
------------ ------------
Total assets $ 47,594,530 $ 53,892,106
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 118,661 $ 206,871
Accrued liabilities 1,553,028 1,461,460
Securities sold and not purchased 6,430,115 6,277,837
Other current liabilities 95,477 464,217
------------ ------------
Total current liabilities 8,197,281 8,410,385
Minority interest 1,610,070 --
Commitments and Contingencies -- --
Stockholders' equity:
Common stock ($.01 par value; 50,000,000
shares authorized; 21,384,838 shares issued 213,848 213,848
Preferred stock ($.01 par value; 20,000,000
shares authorized):
Series A Junior Participating ($.01 par value;
4,000 shares authorized; no shares issued
and outstanding) -- --
Additional paid-in-capital 90,289,432 90,289,432
Treasury stock (at cost; 3,632,732 and 2,277,532 shares) (3,880,625) (2,416,089)
Accumulated deficit (48,835,476) (42,605,470)
------------ ------------
Stockholders' equity 37,787,179 45,481,721
------------ ------------
Total liabilities and stockholders' equity $ 47,594,530 $ 53,892,106
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
SPEEDUS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 149,176 $ 19,891 $ 709,350 $ 66,272
------------ ------------ ------------ ------------
Expenses:
Selling, general and administrative 1,183,623 966,156 3,226,867 3,967,330
Research and development 225,744 379,674 708,928 1,307,879
Depreciation and amortization 180,363 1,334,809 5,104,892 4,119,103
Cost of sales 49,080 -- 467,441 --
------------ ------------ ------------ ------------
Total operating expenses 1,638,810 2,680,639 9,508,128 9,394,312
------------ ------------ ------------ ------------
Operating loss (1,489,634) (2,660,748) (8,798,778) (9,328,040)
Investment income 1,857,127 3,239,555 2,876,999 8,877,866
Equity in loss of associated company (151,970) (42,990) (369,819) (83,592)
Minority interest 38,808 -- 61,592 --
------------ ------------ ------------ ------------
Net earnings/(loss) $ 254,331 $ 535,817 $ (6,230,006) $ (533,766)
============ ============ ============ ============
Per share:
Basic earnings/(loss) per common share $ 0.01 $ 0.03 $ (0.34) $ (0.03)
============ ============ ============ ============
Weighted average common shares
outstanding 17,752,106 19,998,290 18,242,130 20,165,860
============ ============ ============ ============
Diluted earnings/(loss) per common share $ 0.01 $ 0.03 $ (0.34) $ (0.03)
============ ============ ============ ============
Weighted average common shares
outstanding 17,850,506 20,005,002 18,242,130 20,165,860
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
SPEEDUS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended September
----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net earnings/(loss) $ (6,230,006) $ (533,766)
Adjustments to reconcile net earnings/(loss) to
net cash used in operating activities:
Depreciation and amortization 5,104,892 4,119,103
Stock based compensation -- 653,000
Equity in loss of associated company 369,819 83,592
Minority interest (61,592) --
Changes in operating assets and liabilities:
Marketable securities (1,156,054) 38,518
Due from broker (765,586) (7,925,157)
Accounts and other receivables 132,399 (223,152)
Prepaid expenses and other 356,567 62,098
Other assets (215,417) 2,225
Accounts payable (211,210) (12,021)
Accrued liabilities 63,958 76,420
Securities sold and not purchased 152,278 5,920,793
Other current liabilities (368,740) (6,672)
------------ ------------
Net cash provided by/(used in) operating activities (2,828,692) 2,254,981
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets 553,122 --
Loans and other receivables, net of repayments (119,891) --
Loans to related parties (120,000) --
Acquisition of business, net of cash acquired 6,000 --
Investment in associated company -- (200,000)
Property and equipment additions (14,185) (400,913)
------------ ------------
Net cash provided by/(used in) investing activities 305,046 (600,913)
------------ ------------
Cash flows from financing activities:
Repurchase of stock (1,464,536) (1,330,031)
Proceeds from exercise of stock options or warrants -- 500
------------ ------------
Net cash provided by/(used in) financing activities (1,464,536) (1,329,531)
------------ ------------
Net increase/(decrease) in cash
and cash equivalents (3,988,182) 324,537
Cash and cash equivalents, beginning of period 39,933,881 38,594,815
------------ ------------
Cash and cash equivalents, end of period $ 35,945,699 $ 38,919,352
============ ============
Supplemental information of business acquired:
Fair value of assets acquired:
Cash $ 6,000 $ --
Other current assets 13,000 --
Non-current assets 196,166 --
Goodwill 1,760,106 --
Less - liabilities assumed:
Current liabilities (150,856) --
Acquisition costs (152,754)
Minority interest (1,671,662) --
------------ ------------
Cash paid -- --
less - cash acquired (6,000) --
------------ ------------
Acqusition of business, net of cash acquired $ (6,000) $ --
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
SPEEDUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements of Speedus Corp., formerly
SPEEDUS.COM, Inc., have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These financial statements
do not include all information and notes required by generally accepted
accounting principles for complete financial statements. These financial
statements should be read in conjunction with the Company's 2001 audited
consolidated financial statements and notes thereto on Form 10-K.
Operating results for the three and nine months ended September 30, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
Principles of Consolidation
The unaudited consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Companies in which Speedus directly or indirectly owns more than 50% of
the outstanding voting securities or that Speedus has effective control over are
accounted for under the consolidation method of accounting. Under this method,
those companies' balance sheets and results of operations, from the date Speedus
acquired control, are included in Speedus' consolidated financial statements.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The interest in the net assets and operations of these companies'
other stockholders is reflected in the caption `Minority interest' in Speedus'
consolidated balance sheet and statements of operations.
The Company's share of earnings or losses of associated companies, that
are 20% to 50% owned, is included in the consolidated operating results using
the equity method of accounting.
Marketable Securities
All marketable securities are defined as trading securities under the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." At September 30, 2002,
marketable securities consisted of publicly traded equity securities and were
recorded at fair market value. Their original cost was $1,830,000, unrealized
losses were $642,000 and the carrying value was $1,188,000.
Securities Sold But Not Purchased
The Company may sell publicly traded equity securities it does not own in
anticipation of declines in the fair market values of the securities. When the
Company effects such transactions, it must borrow the securities it sold in
order to deliver them and settle the trades. The amounts shown on the balance
sheet as `Securities sold and not purchased' represent the value of these
securities at fair market value. At September 30, 2002, the Company had sold
securities it had not purchased. The aggregate proceeds were $6,952,000,
unrealized gains were $522,000 and the market value of the securities was
$6,430,000.
During the nine months ended September 30, 2002 and 2001, realized gains
in the amounts of $1,132,000 and $7,608,000, respectively, were recorded and
included in Investment Income in the accompanying Consolidated Statements of
Operations.
Due From Broker
In connection with selling publicly traded securities that it does not
own, the Company is obligated to maintain balances with brokerage firms as
security for these transactions. At September 30, 2002 and December 31, 2001,
restricted cash balances in the amounts of $5,687,000 and $4,921,000,
respectively, were held by brokerage firms.
Long-lived Assets
The Company periodically evaluates the net realizable value of long-lived
assets, including fixed assets and equity method investments, relying on
anticipated future cash flows. The Company's evaluation of anticipated future
cash flows considers operating results, business plans and economic projections,
as well as, non-financial data such as market trends, product and development
cycles, and changes in management's market emphasis. An impairment in the
carrying value of an asset is recognized when the expected future operating cash
flows derived from the asset are less than its carrying value.
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", was issued.
SFAS No. 144 provides a single accounting model for long-lived assets to be
disposed of and changes the criteria that would have to be met to classify an
asset as held-for-sale. SFAS No. 144 retains the requirement of Accounting
Principles Board Opinion No. 30 to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for sale. SFAS
No. 144 is effective January 1, 2002 for the Company. During the nine months
ended September 30, 2002, the Company recorded a charge, included in
`Depreciation and
6
amortization' in the accompanying Consolidated Statements of Operations, in the
amount of $3,650,000 for property and equipment taken out of service.
Other Intangible Assets
Other intangible assets consist of the cost of a patent which is being
amortized over its remaining life of fourteen years at the time of acquisition.
In July 2001, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" was issued. FAS No. 142 requires the use
of a nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and charged against results of operations only in the periods in
which the recorded value of goodwill and certain intangibles is more than its
fair value. This accounting standard had no material effect on our results of
operations.
Revenue Recognition
The Company earns fees from a licensee for the sale and activation of
wireless phones. In accordance with the provisions of the Securities and
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements", these revenues and associated costs are deferred until
the expiration of cancellation privileges and chargeback periods from carriers.
At September 30, 2002, the amount recorded for these deferred revenues was not
material.
Revenues from F&B Gudtfood's operations are recorded as services are
rendered.
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 quarters ended September 30, 2002 and 2001, the weighted average
common shares for diluted earnings per share were determined by adding weighted
average shares in the amount of 72,691 and 6,712, respectively, for the assumed
exercise of stock options and weighted average shares in the amount of 25,709
and 0, respectively, for the assumed exercise of warrants to the weighted
average shares outstanding for basic earnings per share for a total of
17,850,506 and 20,005,002, respectively, weighted average shares outstanding for
diluted earnings per share.
For the nine months ended September 30, 2002 and 2001, weighted average
common shares for the assumed exercise or conversion of stock options in the
amounts of 50,026 and 5,693, respectively, and warrants in the amounts of 17,139
and 121,797, respectively, have been excluded from the diluted loss per share
since their effect would be antidilutive.
2. Acquisition and Investment in Associated Company
On May 6, 2002, the Company acquired a 51% interest in F&B Gudtfood, the
creator and operator of the original Eurocentric "chic and quick" cafe, which is
operating its first store in Manhattan and is currently planning expansion to
other locations. The acquisition price was $3,500,000, which funds will be
applied principally for its expansion.
This acquisition was accounted for using the purchase method of
accounting. The results of operations of F&B Gudtfood have been included in the
consolidated statements of operations from the date of acquisition. The excess
of the purchase price over the fair value of the net assets acquired was
approximately $1.8 million and has been recorded as goodwill. For the year ended
December 31, 2001, on an unaudited basis, revenues and the operating loss of F&B
Gudtfood were $606,000 and $22,000, respectively. The Company does not have
sufficient information to present pro forma information on a quarterly basis
without undue burden and expense.
In connection with this acquisition, the Company extended loans to two
minority shareholders of F&B Gudtfood aggregating $120,000. The loans, which can
be increased by $40,000 each under certain conditions, will be forgiven if
certain milestones are achieved.
3. 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.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the corresponding discussion
and analysis included in the Company's Report on Form 10-K for the year ended
December 31, 2001.
Cautionary Statement Regarding Forward-Looking Information
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-Q contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These statements appear in a number of places in this Form 10-Q
and include statements regarding the intent, belief or current expectations of
the Company or its officers with respect to, among other things, the ability of
the Company to make capital expenditures, the ability to incur additional debt,
as necessary, to service and repay such debt, if any, as well as other factors
that may effect the Company's financial condition or results of operations.
Forward-looking statements may include, but are not limited to, projections of
revenues, income or losses, capital expenditures, plans for future operations,
financing needs or plans, compliance with covenants in loan agreements, plans
for liquidation or sale of assets or businesses, plans relating to products or
services of the Company, assessments of materiality, predictions of future
events, and the ability to obtain additional financing, including the Company's
ability to meet obligations as they become due, and other pending and possible
litigation, as well as assumptions relating to the foregoing. All statements in
this Form 10-Q regarding industry prospects and the Company's financial position
are forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Business Activities
Speedus Corp. is a holding company that owns significant equity interests
in diverse businesses. We seek business opportunities across all industries for
potential transactions and relationships in which we can apply our current
resources and management strengths. We are particularly focused on companies
with sound business plans and existing revenue bases that require growth
capital. We will continue to pursue opportunities involving our wireless
expertise and broadband assets as attractive opportunities present themselves.
The companies that we target, either public or privately held and regardless of
industry, will be seeking growth or restructuring capital to pursue near term
business objectives in demonstrated markets.
We have co-invested with Siemens Corporate Research, Inc., a subsidiary of
Siemens Corporation, in Zargis Medical Corp. to develop a service solution,
initially targeted toward primary care physicians, that would be used as part of
general medical examinations for the early screening and detection of valvular
and congenital heart disease. We have acquired a 51% interest in F&B Gudtfood,
the creator and operator of the original Eurocentric "chic and quick" cafe,
which is operating its first store in Manhattan and is currently planning
expansion to other locations. We own a portfolio of patents that allow for
high-speed wireless communications. We also developed and launched an online
cell phone store, 007Phones, which we now license to a third-party. We also own
fixed wireless spectrum in the New York City metropolitan area that we may
commercialize in the future to support high-speed, or broadband, Internet access
service.
Zargis Medical Corp. In January 2001, we co-invested with Siemens
Corporate Research, Inc., a subsidiary of Siemens Corporation, in a new company,
Zargis Medical Corp. Zargis Medical is building a service solution, initially
targeted toward primary care physicians that would be used as part of general
medical examinations for the early screening and detection of valvular and
congenital heart disease. General medical examinations, according to the
National Center for Health Statistics, totaled 46 million in 1999 for the US
alone. We have signed an exclusive contract with Zargis Medical to design and
develop the wireless applications, as well as provide transaction processing to
support the commercial rollout of Zargis Medical's cardiac diagnostic products.
Under this contract, using a combination of wireless and wired technology,
Speedia Wireless, our wholly owned subsidiary, has demonstrated the ability to
transfer the heart sound file from a physician's office to the SPEEDUS Data
Center which will enable Zargis Medical to pursue a business model based on a
fee per usage basis. Some of the major next steps remaining for Zargis Medical
include clinical trials, FDA approval, marketing and roll-out, along with the
formation of strategic partnerships.
F&B Gudtfood. In May 2002, we acquired a 51% interest in F&B Gudtfood, the
creator and operator of the original Eurocentric "chic and quick" cafe, which is
operating its first store in Manhattan and is currently planning expansion to
other locations. The acquisition price was $3,500,000, which funds will be
applied principally for its expansion. We also entered into a management
services contract with this company that will result in direct revenues to us
apart from those arising out of our ownership interest although these revenues
will be eliminated on our consolidated financial statements.
Broadband Patents. Through our wholly owned subsidiaries, Broadband
Patents, LLC and CellularVision Technology & Telecommunications, L.P., we have
accumulated a portfolio of patents that allow for high-speed wireless
communication systems with greater information content, reliability, clarity, or
more efficient use of licensed spectrum as compared to prior systems. We have
five domestic patents with expiration dates ranging from 2007 through 2017, with
numerous international counterparts. Any particular
8
wireless communications system may employ a number of different combinations of
our patented technology to maximize operational and spectrum efficiency. While
we believe that it would be difficult for any wireless communications company to
construct a system without using one or more of our patented technologies, it is
a lengthy and expensive process to pursue licensing/patent infringement cases.
We are evaluating a strategy for the utilization of these patents in the future,
which may include pursuit of licensing or development of other strategic
opportunities with users of the underlying technology. However, due to the
current economic state of the telecommunications industry, licensing activity
for the patent portfolio is not actively being pursued. We have licensed
technology in the past, both domestically and internationally, but are not
currently receiving any license fees. Currently, we have instituted litigation
in the New York courts against an international licensee in Canada.
007Phones. In August 2001, we launched 007Phones.com, an e-commerce portal
designed to provide consumers and businesses with an easy-to-use, online method
of researching and purchasing wireless phones and carrier services. We now
license 007Phones.com to a third-party.
LMDS license. We have an FCC commercial operating license, awarded to us
in recognition of our efforts in developing and deploying LMDS technology and
for spearheading its regulatory approval at the FCC, which covers 150 MHz of
spectrum in the New York City area. The license has been renewed as a standard
LMDS license through February 1, 2006. Under FCC authorization, the license
includes an additional 150 MHz of spectrum until the first Ka band satellite is
launched, an event which is not currently determinable. The license provides
that the spectrum may be used for a wide variety of fixed wireless purposes,
including wireless local loop telephony, high-speed Internet access and two-way
teleconferencing. Currently, we are conducting a limited pilot program of our
SPEEDsm broadband super high-speed Internet service and, at September 30, 2002,
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 SPEEDsm service on an economically attractive basis. We
cannot determine when this will occur and this equipment may never be available
to us on this basis. Revenues from our high-speed Internet service would consist
of subscriber fees, as well as the sales and installations of modems; however,
the pricing structure of the service could change in response to market and
other competitive conditions. Revenues to date from these sources have not been
material.
Operations
Since terminating our subscription television service in November 1998, we
have yet to generate any material revenue from our wireless data products and
services business. Revenues from 1999 to 2001, generally subscriber fees from
our pilot program for high-speed Internet service and co-hosting revenues from
the use of our Data Center, have not been material and future revenues from this
and our mobile wireless business are uncertain. We have also generated operating
losses and negative operating cash flows since our inception and expect to
continue to do so in the near future. In 2002, we recognized revenues from the
sale and activation of wireless phones. However, these amounts are expected to
decrease in the future. The Company now licenses the cell phone store to a third
party and license fees are less than revenues from sale and activation. In 2002,
we also recognized revenues from the operations of F&B Gudtfood from the date of
acquisition.
Subject to our discretion, we invest a portion of our assets in a
portfolio of marketable securities consisting of publicly traded equity
securities. We have also sold publicly traded equity securities we do not own in
anticipation of declines in the fair market values of these securities. During
the nine months ended September 30, 2002, we recognized net realized gains on
these transactions in the amount of $1,132,000. Since inception of our
investment activities in late 1999, and through the nine months ended September
30, 2002, we have recognized net realized gains on these transactions in the
aggregate amount of $11,253,000.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements. The preparation
of those financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of operating revenues and expenses during the reporting periods. Actual
results could differ from those estimates. For a description of all of our
accounting policies, see Note 2 to our consolidated financial statements
included in our 2001 Form 10-K and Note 1 to our consolidated financial
statements included in this Form 10-Q. However, we believe the following
critical accounting policies affect the more significant judgments and estimates
used in the preparation of our consolidated financial statements.
Financial instruments. Our financial instruments consist primarily of cash
equivalents, marketable securities and securities sold and not purchased. The
carrying value of cash equivalents approximates market value since these highly
liquid, interest earning investments are invested in money market funds.
Marketable securities consist of publicly traded equity securities classified as
trading securities and are recorded at fair market value. Securities sold and
not repurchased are carried at the fair market value of the securities.
Significant changes in the market value of securities that we invest in could
have a material impact on our financial position and results of operations.
Long-lived assets. Long-lived assets, including fixed assets, goodwill,
equity method investments and other intangibles, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
any such asset may not be recoverable through estimated future cash flows from
that asset. The estimate of cash flow is based upon, among other things, certain
9
assumptions about expected future operating performance. Specifically, we own
broadband assets, including fixed and intangible assets, which had a carrying
value of $1.9 million at September 30, 2002 and currently do not generate
significant revenues or cash flows. Absent increased revenues and cash flows in
the future, however, we estimate that, based upon our review of recent
transactions and other factors, the fair value of our remaining FCC license and
certain patents that have no carrying value on our books would generate
sufficient cash to fully realize our assets described above. These estimates may
differ from actual results due to, among other things, technological changes,
economic conditions, changes to our business model or changes in our operating
performance.
Contingencies. We account for contingencies in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies". SFAS
No. 5 requires that we record an estimated loss when information available prior
to issuance of our financial statements indicates that it is probable that an
asset has been impaired or a liability has been incurred at the date of the
financial statements and the amount of the loss can be reasonably estimated.
Accounting for contingencies such as environmental, legal and income tax matters
requires us to use our judgment. While we believe that our accruals for these
matters are adequate, if the actual loss is significantly different than the
estimated loss, our results of operations may be misstated.
Nine and Three Months Ended September 30, 2002 Compared to Nine and Three Months
Ended September 30, 2001
Revenues increased $643,000 from $66,000 for the nine months ended
September 30, 2001 to $709,000 for the nine months ended September 30, 2002 and
increased $129,000 from $20,000 for the three months ended September 30, 2001 to
$149,000 for the three months ended September 30, 2002. For the nine and three
months ended September 30, 2002, $428,000 and $0, respectively, of this increase
is a result of revenues recognized from the sale and activation of wireless
phones through the Company's online cell phone store, 007phones, which the
Company now licenses to a third-party. In accordance with the provisions of the
Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements", these revenues and associated costs are
deferred due to cancellation privileges and chargebacks from carriers. Revenues
to be recognized in the future from the sale and activation of wireless phones
are expected to decrease. The Company now licenses the cell phone store to a
third party and license fees are less than revenues from sale and activation.
For the nine and three months ended September 30, 2002, $274,000 and $155,000,
respectively, of this increase is a result of revenues recognized by F&B
Gudtfood since the date of acquisition.
Selling, general and administrative expenses decreased $740,000 from
$3,967,000 for the nine months ended September 30, 2001 to $3,227,000 for the
nine months ended September 30, 2002 and increased $218,000 from $966,000 for
the three months ended September 30, 2001 to $1,184,000 for the three months
ended September 30, 2002. The decrease for the nine months ended September 30,
2002 is primarily attributable to decreases in compensation and employee related
expenses as a result of staff reductions and decreases in stock based
compensation. This decrease was offset by, and the increase for the three months
ended September 30, 2002 was caused by, selling, general and administrative
expenses of F&B Gudtfood since the date of acquisition.
Research and development expenses decreased $599,000 from $1,308,000 for
the nine months ended September 30, 2001 to $709,000 for the nine months ended
September 30, 2002 and decreased $154,000 from $380,000 for the three months
ended September 30, 2001 to $226,000 for the three months ended September 30,
2002. This decrease is primarily attributable to decreases in compensation and
employee related expenses as a result of staff reductions.
Depreciation and amortization increased $986,000 from $4,119,000 for the
nine months ended September 30, 2001 to $5,105,000 for the nine months ended
September 30, 2002 and decreased $1,155,000 from $1,335,000 for the three months
ended September 30, 2001 to $180,000 for the three months ended September 30,
2002. Approximately $3,650,000 of the increase for the nine months ended
September 30, 2002 is a result of a charge during the three months ended June
30, 2002 for property and equipment taken out of service, net of a decrease in
the amounts of $1,815,000 for the amortization of the goodwill recorded during
the nine months ended September 30, 2001 resulting from the Speedia acquisition
on June 30, 2000. This goodwill was being amortized over a period of three
years. The Company recorded a charge of $3,779,000 in the fourth quarter of 2001
for the impairment of goodwill and intangible assets associated with that
acquisition, eliminating the remaining balance of goodwill and those intangible
assets.
Cost of sales amounted to $467,000 and $49,000 for the nine and three
months ended September 30, 2002, respectively. $381,000 of these costs for the
nine month ended September 30, 2002, which were previously deferred, represent
the direct cost and expenses related to the sale and activation of wireless
phones through the Company's online cell phone store, 007phones, as discussed
above. For the nine and three months ended September 30, 2002, $86,000 and
$49,000, respectively, represents the costs of sales recorded by F&B Gudtfood
since the date of acquisition.
Investment income decreased $6,001,000 from $8,878,000 for the nine months
ended September 30, 2001 to $2,877,000 for the nine months ended September 30,
2002 and decreased $1,383,000 from $3,240,000 for the three months ended
September 30, 2001 to $1,857,000 for the three months ended September 30, 2002.
These changes are primarily a result of the recognition of realized and
unrealized gains/(losses) during those periods. The Company's policy is to
record marketable securities and securities sold and not purchased at the fair
market value of the securities. The amount of these realized and unrealized
gains or losses will fluctuate based upon changes in the market value of the
underlying investments and are not necessarily indicative of the results that
may be expected for any future periods. Realized gains/(losses) decreased
$6,476,000 from net gains of $7,608,000 for the nine months ended September 30,
2001 to net gains of $1,132,000 for the nine months ended September 30, 2002.
10
Equity in loss increased $286,000 from $84,000 for the nine months ended
September 30, 2001 to $370,000 for the nine months ended September 30, 2002 and
increased $109,000 from $43,000 for the three months ended September 30, 2001 to
$152,000 for the three months ended September 30, 2002. The 2001 period reflects
the Company's share (47% at September 30, 2002) in Zargis Medical's operations,
accounted for under the equity method.
Minority interest amounted to $62,000 and $39,000 for the nine and three
months ended September 30, 2002, respectively. These amounts represent the
interest of minority stockholders in the operations of F&B Gudtfood since the
date of acquisition.
Net loss amounted to $6,230,000 for the nine months ended September 30,
2002 compared to a loss of $534,000 for the nine months ended September 30,
2001, primarily as a result of a charge during the 2002 period for property and
equipment taken out of service and the gains from investments recognized by the
Company during the 2001 period. The results for the nine and three months ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for any future periods.
Liquidity and Capital Resources
The Company has recorded operating losses and negative operating cash
flows in each year of its operations since inception.
The Company believes that consummation of spectrum assignments in November
1998 and October 1999 for net proceeds of approximately $15.5 million and $19.8
million, respectively, after the repayment and repurchase of debt (in the
aggregate amount of approximately $11.2 million) and redemption of preferred
stock (approximately $4.6 million) in connection with the 1998 assignment as
required under those indentures and the sale of Common Stock in July 1999 for
net proceeds of approximately $19.8 million have provided sufficient liquidity
to finance its current level of operations and expected capital requirements
through the 2002 fiscal year. However, the 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.
The Company does not expect to have earnings from operations, exclusive of
non-cash charges, until such time as it substantially increases its customer
base and/or forms a strategic alliance for use of its capabilities in the
future. We cannot predict when this will occur. We have no material
non-cancelable commitments and the amount of future capital funding requirements
will depend on a number of factors that we cannot quantify, including the
success of our business, the extent to which we expand our high-speed Internet
service if suitable equipment becomes available and the types of services we
offer, as well as other factors that are not within our control, including
competitive conditions, government regulatory developments and capital costs.
We have invested a portion of our assets in a portfolio of marketable
securities consisting of publicly traded equity securities. We have also sold
publicly traded equity securities we do not own in anticipation of declines in
the fair market values of these securities. During the nine months ended
September 30, 2002, we recognized realized gains on these transactions in the
amount of $1,132,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments at September 30, 2002 consist
primarily of cash equivalents, which are subject to interest rate risk, and
marketable securities and securities sold and not purchased, which are subject
to equity price risk.
The carrying value of cash equivalents approximates market value since
these highly liquid, interest earning investments are invested in money market
funds. The Company's investment in marketable securities consists of publicly
traded equity securities classified as trading securities and are recorded at
fair market value. Securities sold and not purchased are carried at the fair
market value of the securities.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14
under the Securities Exchange Act of 1934, as amended. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in the Company's periodic SEC filings.
There have been no significant changes in the Company's internal controls
or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 2 to the accompanying consolidated financial statements is
incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
11
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit number 99.1 Certifications Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act
Of 2002.
b. Current Reports on Form 8-K:
None.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Speedus Corp.
Date: November 14, 2002 By: /s/ Shant S. Hovnanian
-------------------------------------
Shant S. Hovnanian
Chairman of the Board and Chief
Executive Officer
Date: November 14, 2002 By: /s/ Angela M. Vaccaro
-------------------------------------
Angela M. Vaccaro
Controller and Chief Accounting Officer
13
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Shant S. Hovnanian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Speedus Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Shant S. Hovnanian
Name: Shant S. Hovnanian
Title: Chairman of the Board of Directors,
Chief Executive Officer and Chief Financial Officer
Date: November 14, 2002
14