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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, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number: 000-27582
SPEEDUS CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3853788
(State or other jurisdiction of (I.R.S. Employer
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of outstanding shares of the registrant's common stock, par value
$.01 per share, as of November 12, 2003 was 16,214,089.
SPEEDUS CORP.
INDEX TO FORM 10-Q
Page
----
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Consolidated Balance Sheets as of September 30, 2003 (unaudited)
and December 31, 2002................................................. 3
Consolidated Statements of Operations (unaudited) for the
Three and Nine Months Ended September 30, 2003 and 2002............... 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2003 and 2002......................... 5
Notes to Consolidated Financial Statements (unaudited)................ 6-10
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 11-15
ITEM 3 -- Quantitative and Qualitative Disclosures About Market Risk............. 15
ITEM 4 -- Controls and Procedures................................................ 15
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings...................................................... 16
ITEM 2 -- Changes in Securities.................................................. 16
ITEM 3 -- Defaults Upon Senior Securities........................................ 16
ITEM 4 -- Submission of Matters to a Vote of Security Holders.................... 16
ITEM 5 -- Other Information...................................................... 16
ITEM 6 -- Exhibits and Reports on Form 8-K....................................... 16
Signature Page................................................................... 17
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14
of the Securities Exchange Act of 1934, as Adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002..................... 18
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14
of the Securities Exchange Act of 1934, as Adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002..................... 19
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act Of 2002........................................ 20
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act Of 2002........................................ 21
2
SPEEDUS CORP.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 23,097,199 $ 33,052,815
Marketable securities 7,940 879,194
Due from broker 8,113,073 11,728,880
Accounts and other receivables 42,500 40,099
Prepaid expenses and other 54,318 17,488
------------ ------------
Total current assets 31,315,030 45,718,476
Property and equipment, net of accumulated
depreciation of $1,983,818 and $2,015,662 565,204 819,714
Other intangible assets, net of accumulated
amortization of $852,171 and $418,929 2,241,373 1,651,071
Goodwill 890,356 1,760,106
Other assets 221,584 235,208
------------ ------------
Total assets $ 35,233,547 $ 50,184,575
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 130,088 $ 228,144
Accrued liabilities 1,544,434 1,734,252
Securities sold and not purchased 10,180,451 14,212,566
------------ ------------
Total current liabilities 11,854,973 16,174,962
Minority interest 1,087,232 1,591,557
Commitments and Contingencies -- --
Stockholders' equity:
Common stock ($.01 par value; 50,000,000
shares authorized; 21,472,338 and 21,384,838 214,723 213,848
shares issued)
Preferred stock ($.01 par value; 20,000,000 shares authorized):
Series A Junior Participating ($.01 par value; 4,000 shares
authorized; no shares issued
and outstanding) -- --
Additional paid-in-capital 90,376,057 90,289,432
Treasury stock (at cost; 5,255,449 and 4,418,577 shares) (5,247,640) (4,371,778)
Accumulated deficit (63,051,798) (53,713,446)
------------ ------------
Stockholders' equity 22,291,342 32,418,056
------------ ------------
Total liabilities and stockholders' equity $ 35,233,547 $ 50,184,575
============ ============
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,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 174,033 $ 149,176 $ 548,107 $ 709,350
------------ ------------ ------------ ------------
Expenses:
Selling, general and administrative 1,130,195 1,183,623 3,205,582 3,226,867
Research and development 479,207 225,744 1,236,874 708,928
Depreciation and amortization 273,196 180,363 748,809 5,104,892
Cost of sales 36,038 49,080 163,819 467,441
------------ ------------ ------------ ------------
Total operating expenses 1,918,636 1,638,810 5,355,084 9,508,128
------------ ------------ ------------ ------------
Operating loss (1,744,603) (1,489,634) (4,806,977) (8,798,778)
Investment income/(loss) (432,452) 1,857,127 (4,930,633) 2,876,999
Equity in loss of associated company 0 (151,970) (92,996) (369,819)
Minority interest 186,323 38,808 492,254 61,592
------------ ------------ ------------ ------------
Net earnings/(loss) $ (1,990,732) $ 254,331 $ (9,338,352) $ (6,230,006)
============ ============ ============ ============
Per share:
Basic earnings/(loss) per common share $ (0.12) $ 0.01 $ (0.56) $ (0.34)
============ ============ ============ ============
Weighted average common shares
outstanding 16,280,506 17,752,106 16,593,356 18,242,130
============ ============ ============ ============
Diluted earnings/(loss) per common share $ (0.12) $ 0.01 $ (0.56) $ (0.34)
============ ============ ============ ============
Weighted average common shares
outstanding 16,280,506 17,850,506 16,593,356 18,242,130
============ ============ ============ ============
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 30,
-------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (9,338,352) $ (6,230,006)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 748,809 5,104,892
Unrealized (gains)/losses 933,632 (343,740)
Equity in loss of associated company 92,996 369,819
Minority interest (492,254) (61,592)
Changes in operating assets and liabilities:
Marketable securities 872,764 (1,146,105)
Due from broker 3,615,807 (765,586)
Accounts and other receivables (2,401) 132,399
Prepaid expenses and other (36,830) 356,567
Other assets (109,420) (215,417)
Accounts payable (213,733) (211,210)
Accrued liabilities (203,203) 63,958
Securities sold and not purchased (4,967,257) 486,069
Other current liabilities (62,336) (368,740)
------------ ------------
Net cash used in operating activities (9,161,778) (2,828,692)
------------ ------------
Cash flows from investing activities:
Loans and other receivables, net of repayments 2,500 (119,891)
Loans to related parties -- (120,000)
Proceeds from sale of assets -- 553,122
Property and equipment additions (26,774) (14,185)
Acquisition of business, net of cash acquired 18,798 6,000
------------ ------------
Net cash provided by/(used in) investing activities (5,476) 305,046
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of options and warrants 87,500 --
Repurchase of stock (875,862) (1,464,536)
------------ ------------
Net cash used in financing activities (788,362) (1,464,536)
------------ ------------
Net increase/(decrease) in cash
and cash equivalents (9,955,616) (3,988,182)
Cash and cash equivalents, beginning of period 33,052,815 39,933,881
------------ ------------
Cash and cash equivalents, end of period $ 23,097,199 $ 35,945,699
============ ============
Supplemental information of business acquired:
Fair value of assets acquired:
Cash $ 18,798 6,000
Other current assets -- 13,000
Non current assets 34,283 196,166
Goodwill and other intangible assets 1,023,544 1,760,106
Less-liabilities assumed:
Current liabilities (218,946) (150,856)
Acquisition Costs -- (152,754)
Minority interest (857,679) (1,671,662)
------------ ------------
Cash paid -- --
less-cash acquired (18,798) (6,000)
------------ ------------
Acquisition of business, net of cash acquired $ 18,798 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. have been
prepared in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These financial statements do not include all information and
notes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the Company's 2002 audited consolidated financial statements and notes
thereto on Form 10-K.
Operating results for the three and nine months ended September 30, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
Financial statements and principles of consolidation
The consolidated financial statements include the accounts of Speedus and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Companies in which Speedus directly or indirectly owns more than 50% of
the outstanding voting securities or that Speedus has effective control over are
accounted for under the consolidation method of accounting. Under this method,
those companies' balance sheets and results of operations, from the date Speedus
acquired control, are included in Speedus' consolidated financial statements.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Other shareholders' interest in the net assets and operations of
these companies is reflected in the caption `Minority interest' in Speedus'
consolidated balance sheet and statements of operations.
The Company's share of earnings or losses of associated companies, that
are 20% to 50% owned, is included in the consolidated operating results using
the equity method of accounting.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of operating revenues and expenses during
the reporting periods. Actual results could differ from those estimates and the
difference could be material.
Marketable Securities
All marketable securities are defined as trading securities under the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." At September 30, 2003
and December 31, 2002, marketable securities consisted of publicly traded equity
securities and were recorded at fair market value. Their original cost was
$610,000 and $1,479,000, unrealized losses since acquisition were $602,000 and
$600,000 and the carrying value was $8,000 and $879,000, respectively. At
September 30, 2003, based upon the fair market value of these securities, 87%
was invested in technology companies and 13% was invested in other companies.
Securities Sold But Not Purchased
The Company may sell publicly traded equity securities it does not own in
anticipation of declines in the fair market values of the securities. When the
Company effects such transactions, it must borrow the securities it sold in
order to deliver them and settle the trades. The amounts shown on the balance
sheet as `Securities sold and not purchased' represent the value of these
securities at fair market value. At September 30, 2003 and December 31, 2002,
the Company had sold securities it had not purchased. The aggregate proceeds
were $7,074,000 and $12,001,000, unrealized losses since acquisition were
$3,106,000 and $2,212,000 and the carrying value of the securities was
$10,180,000 and $14,213,000, respectively. At September 30, 2003, based upon the
fair market value of these securities, 68% was invested in technology companies,
24% in medical device companies and 8% was invested in other companies.
Due From Broker
In connection with selling publicly traded securities that it does not
own, the Company is obligated to maintain balances with brokerage firms as
security for these transactions. At September 30, 2003 and December 31, 2002,
restricted cash balances in the amounts of $8,113,000 and $11,729,000,
respectively, were held by brokerage firms.
Concentrations of Credit Risk
Financial instruments that potentially could subject the Company to
concentrations of credit risk consist largely of cash equivalents and marketable
securities. These instruments are potentially subject to concentrations of
credit risk but the Company believes that this risk is limited due to
diversification and investments being made in investment grade securities.
6
The Company also sells publicly traded equity securities that it does not
own in anticipation of declines in the fair market values of the securities.
When the Company sells securities that it does not own, it must borrow the
securities it sold in order to deliver them and settle the trades. Thereafter,
the Company must buy the securities and deliver them to the lender of the
securities. The Company's potential for loss on these transactions is unlimited
since the value of the underlying security can keep increasing which could have
a material adverse effect on the Company's consolidated financial statements.
Long-lived Assets
The Company periodically evaluates the net realizable value of long-lived
assets, including fixed and intangible assets, relying on anticipated future
cash flows. The Company's evaluation of anticipated future cash flows considers
operating results, business plans and economic projections, as well as,
non-financial data such as market trends, product and development cycles, and
changes in management's market emphasis. An impairment in the carrying value of
an asset is recognized when the expected future operating cash flows derived
from the asset are less than its carrying value.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets in
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" which requires the use of a nonamortization
approach to account for purchased goodwill and certain intangibles. Under the
nonamortization approach, goodwill is not being amortized into results of
operations, but instead is reviewed for impairment annually. Goodwill, with a
balance of $1,760,000 at December 31, 2002 decreased $870,000 as a result of the
reduction in the Company's investment in F&B Gudtfood, resulting in a balance of
$890,000 recorded by the Company as goodwill at September 30, 2003.
Other intangible assets consist of: (i) the cost of a broadband patent and
(ii) medical technology in connection with the acquisition of a controlling
interest in Zargis Medical. Through the year ended December 31, 2002, the patent
was amortized over its life of fourteen years at the time of acquisition. During
the three months ended March 31, 2003, the Company reviewed the estimated useful
life of this patent in light of the continuing depressed economic state of the
telecommunications industry. As a result, effective January 1, 2003, the Company
considers the remaining useful life to be four years and has accounted for this
determination as a change in an estimate. This change increased net loss for the
nine and three months ended September 30, 2003 by $198,000 and $66,000,
respectively, and increased basic loss per share by $0.01 for the nine months
ended September 30, 2003. There was no effect on basic loss per common share for
the three months ended September 30, 2003. Medical technology is being amortized
over a period of three years. For the nine and three months ended September 30,
2003, amortization expense relating to intangible assets was $433,000 and
$173,000, respectively. For the nine and three months ended September 30, 2002,
amortization expense relating to intangible assets was $111,000 and $37,000,
respectively. The estimated amortization of other intangible assets for the
balance of fiscal 2003, fiscal years 2004, 2005 and 2006 is $188,000, $754,000,
$754,000 and $545,000, respectively.
Revenue Recognition
Revenues from F&B Gudtfood's operations are recorded on a cash basis.
The Company earned 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 were deferred until
the expiration of cancellation privileges and chargeback periods from carriers.
For the nine months ended September 30, 2002, the Company recognized revenues in
the amount of $428,000 from the sale and activation of wireless phones. No such
revenues were earned during the three months ended September 30, 2002 or the
nine and three months ended September 30, 2003.
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 nine and three months ended September 30, 2003, outstanding stock
options and warrants in the aggregate amounts of 2,036,530 and 2,009,281,
respectively, have been excluded from the diluted loss per share since their
effect would be antidilutive. For the nine months ended September 30, 2002,
outstanding stock options and warrants in the aggregate amount of 2,290,014 have
been excluded from the diluted loss per share since their effect would be
antidilutive. For the quarter ended September 30, 2002, the weighted average
common shares for diluted earnings per share were determined by adding weighted
average shares in the aggregate amount of 98,400 for the assumed exercise of
stock options and warrants to the weighted average shares outstanding for basic
earnings per share for a total of 17,850,506 weighted average shares outstanding
for diluted earnings per share.
Stock Options
The Company accounts for its employee stock options in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", as amended by SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123", which defines a "fair value method" of measuring and accounting for
compensation expense from employee stock options. This standard also allows
accounting for such options under the "intrinsic value method" in accordance
with Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to use the intrinsic value method and is
presenting pro forma disclosures of earnings and earnings per share as if the
fair value method of accounting was applied.
7
Pro forma earnings information giving effect to compensation expense based
upon the fair value at the date of grant in accordance with SFAS 123 for the
nine and three months ended September 30, 2003 and 2002 is summarized as
follows:
Three months ended September 30, Nine months ended September 30,
-------------------------------- --------------------------------
(unaudited) (unaudited)
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net earnings/(loss) as reported $ (1,990,732) $ 254,331 $ (9,338,352) $ (6,230,006)
After tax effect of pro forma compensation (98,054) (202,605) (293,985) (905,037)
------------ ------------ ------------ ------------
Pro forma net earnings/(loss) $ (2,088,786) $ 51,726 $ (9,632,337) $ (7,135,043)
============ ============ ============ ============
Earnings/(loss) per share:
Basic - as reported $ (0.12) $ 0.01 $ (0.56) $ (0.34)
============ ============ ============ ============
Basic - pro forma $ (0.13) $ 0.00 $ (0.58) $ (0.39)
============ ============ ============ ============
Diluted - as reported $ (0.12) $ 0.01 $ (0.56) $ (0.34)
============ ============ ============ ============
Diluted - pro forma $ (0.13) $ 0.00 $ (0.58) $ (0.39)
============ ============ ============ ============
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. Any variable interest entities created after January 31, 2003,
are immediately subject to the consolidation guidance of FIN 46. Since the
release of FIN 46, the FASB has issued numerous FASB Staff Positions (FSPs)
regarding FIN 46, three of which remain in proposed form. On October 9, 2003,
the FASB released FSP 46-6, which deferred the effective date for the
consolidation guidance of FIN 46 from July 1, 2003 to December 31, 2003, for
variable interest entities existing prior to February 1, 2003. The Company does
not expect that FIN 46 will have an impact on its financial statements.
In April 2003, Statement of Financial Accounting Standards No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
was issued. SFAS No. 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149, which is to be
applied prospectively, is effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated after June 30, 2003.
This standard did not have an impact on the Company's financial statements.
In May 2003, Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments With Characteristics of Both
Liabilities and Equity," was issued. SFAS No. 150 changes the classification in
the statement of financial position of certain common financial instruments from
either equity or mezzanine presentation to liabilities and requires an issuer of
those financial statements to recognize changes in fair value or redemption
amount, as applicable, in earnings. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and with one exception,
is effective at the beginning of the first interim period beginning after June
15, 2003. The effect of adopting SFAS No. 150 will be recognized as a cumulative
effect of an accounting change as of the beginning of the period of adoption.
Restatement of prior periods is not permitted. This standard did not have an
impact on the Company's financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
2. Related Party Transactions
a. The Company has signed an exclusive contract with Zargis Medical to
design and develop the wireless applications, as well as provide transaction
processing to support the commercial rollout of Zargis Medical's cardiac
diagnostic products.
b. The Company also entered into a management services contract with F&B
Gudtfood. In connection with the F&B Gudtfood acquisition, in May 2002 the
Company extended loans to two employees of F&B Gudtfood, who are also minority
shareholders of F&B Gudtfood aggregating $120,000. The loans, which can be
increased by $40,000 each under certain conditions, will be forgiven if certain
milestones are achieved.
3. Acquisitions
a. On February 28, 2003, the Company increased its investment in Zargis
Medical to 57.7% with an additional investment of $1,250,000 in newly issued
shares. Prior to February 28, 2003, the Company held a 46.4% interest in Zargis
and accounted for its investment under the equity method of accounting. On July
28, 2003, the Company increased its investment in Zargis Medical to 68.9% with
an additional investment of $2,000,000 in newly issued shares. If Zargis Medical
obtains required United States Food and Drug Administration approval by December
1, 2003 to begin marketing its medical device, the Company is obligated to
invest an
8
additional $2,000,000 in Zargis Medical.
This acquisition was accounted for using the purchase method of
accounting. The results of operations of Zargis Medical have been included in
the consolidated statements of operations from the date of acquisition. An
aggregate of $1,024,000, representing the excess of the purchase price over the
fair value of the net assets acquired, has been allocated as medical technology
to an intangible asset and will be amortized over a period of three years.
Unaudited pro forma operating results of the Company as though the
acquisition of Zargis Medical had occurred at the beginning of each period
presented, are as follows:
Three months
ended Nine months
September 30, ended September 30,
------------- ---------------------------
(unaudited) (unaudited)
2002 2003 2002
------------- ----------- -----------
Revenues $ 149,176 $ 548,107 $ 709,350
Operating loss $(1,896,897) $(5,257,112) $(9,831,907)
Net earnings/(loss) $ 99,171 $(9,635,078) $(6,651,591)
Basic and diluted earnings/(loss) per share $ 0.01 $ (0.58) $ (0.36)
b. On May 6, 2002, the Company acquired a 51% interest in F&B Gudtfood,
the creator and operator of the original Eurocentric "chic and quick" cafe,
which is operating its first store in Manhattan and is currently planning
expansion to other locations. The acquisition price was $3,500,000, which funds
will be applied principally for its expansion. On February 8, 2003, the Company
reduced its cash investment in F&B Gudtfood and received $1,775,000 while
maintaining its 51% interest.
4. Legal Proceedings
The Company is subject to various claims and proceedings that occur in the
ordinary course of business. The Company believes it has substantial defenses to
a material portion of these claims and is prepared to pursue litigation if a
reasonable and structured settlement cannot be reached with the parties. Based
on information currently available, the Company believes it is remote that the
ultimate resolution of these current claims or proceedings, either individually
or in the aggregate, will have a material effect on its financial position,
results of operations or cash flows.
5. Business Segment Information
The following table sets forth the Company's financial performance by
reportable operating segment for the nine and three months ended September 30,
2003 and 2002. F&B Gudtfood and Zargis Medical are included in the consolidated
financial statements of the Company since May 6, 2002 and February 28, 2003,
respectively, the dates of acquisition of majority interests. During the nine
months ended September 30, 2002, the Company recognized revenues in the amount
of $428,000 from the sale and activation of wireless phones through the
Company's online cell phone store, 007phones. No revenues were recognized in
connection with 007 phones during the nine and three months ended September 30,
2003 or the three months ended September 30, 2002.
Nine months ended September 30, 2003
------------------------------------------------------------
Corporate
F&B Zargis and other Totals
--- ------ --------- ------
Revenues from external customers $ 544,811 $ 0 $ 3,296 $ 548,107
Depreciation and amortization 18,600 5,849 724,360 748,809
Operating loss (382,834) (1,143,977) (3,280,166) (4,806,977)
Investment income/(loss) 14,309 0 (4,944,942) (4,930,633)
Goodwill and other intangible assets 890,356 899,877 1,341,496 3,131,729
Fixed assets 129,348 27,312 408,544 565,204
Total assets 1,213,641 1,790,370 32,229,536 35,233,547
Three months ended September 30, 2003
------------------------------------------------------------
Corporate
F&B Zargis and other Totals
--- ------ --------- ------
Revenues from external customers $ 172,973 $ 0 $ 1,060 $ 174,033
Depreciation and amortization 6,200 1,985 265,011 273,196
Operating loss (147,894) (610,246) (986,463) (1,744,603)
Investment income/(loss) 2,967 0 (435,419) (432,452)
9
Nine months ended September 30, 2002
------------------------------------------
Corporate
F&B and other Totals
--- --------- ------
Revenues from external customers $ 273,679 $ 435,671 $ 709,350
Depreciation and amortization 10,333 5,094,559 5,104,892
Operating loss (196,576) (8,602,202) (8,798,778)
Investment income/(loss) 22,814 2,854,185 2,876,999
Goodwill and other intangible assets 1,760,106 1,688,036 3,448,142
Fixed assets 128,687 842,980 971,667
Total assets 3,379,344 44,215,186 47,594,530
Three months ended September 30, 2002
------------------------------------------
Corporate
F&B and other Totals
--- --------- ------
Revenues from external customers $ 154,936 $ (5,760) $ 149,176
Depreciation and amortization 10,333 170,030 180,363
Operating loss (141,647) (1,347,987) (1,489,634)
Investment income/(loss) 14,383 1,842,744 1,857,127
The Company has no foreign operations. During the nine and three months
ended September 30, 2003 and 2002, the Company did not have sales to any
individual customer greater than 10% of total Company revenues. The Company's
accounting policies for segments are the same as those described in Note 1.
6. Stockholders' Equity
Treasury Stock
In March 2003, the Company's Board of Directors approved an extension of
the Company's stock repurchase program for up to an additional $1 million of the
Company's common stock for an aggregate authorization of $5.5 million. Through
November 12, 2003, the Company has repurchased 5,258,249 shares of its Common
Stock for an aggregate cost of $5,251,000.
7. Commitments and Contingencies
If Zargis Medical obtains required United States Food and Drug
Administration approval by December 1, 2003 to begin marketing its medical
device, the Company is obligated to invest an additional $2,000,000 in Zargis
Medical.
8. Subsequent Events
a. Based upon subsequent transactions and fair market values as of November 13,
2003, the Company has incurred an aggregate of $1,398,000 in realized and
unrealized losses in its investment portfolio since September 30, 2003.
b. On November 14, 2003, the Company submitted a proposal to acquire all of the
assets and operations of Globalstar. Terms are confidential because of the
competitive nature of the bankruptcy sale process. In the event that the
proposal by the Company is accepted, the closing of the transaction would be
subject to a number of conditions, including FCC and Bankruptcy Court approval,
and there is no assurance that the transaction would close.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the corresponding discussion
and analysis included in the Company's Report on Form 10-K for the year ended
December 31, 2002.
Cautionary Statement Regarding Forward-Looking Information
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-Q contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These statements appear in a number of places in this Form 10-Q
and include statements regarding the intent, belief or current expectations of
the Company or its officers with respect to, among other things, the ability of
the Company to make capital expenditures, the ability to incur additional debt,
as necessary, to service and repay such debt, if any, as well as other factors
that may effect the Company's financial condition or results of operations.
Forward-looking statements may include, but are not limited to, projections of
revenues, income or losses, capital expenditures, plans for future operations,
financing needs or plans, compliance with covenants in loan agreements, plans
for liquidation or sale of assets or businesses, plans relating to products or
services of the Company, assessments of materiality, predictions of future
events, and the ability to obtain additional financing, including the Company's
ability to meet obligations as they become due, and other pending and possible
litigation, as well as assumptions relating to the foregoing. All statements in
this Form 10-Q regarding industry prospects and the Company's financial position
are forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Business Activities
Speedus Corp. is a holding company that owns significant equity interests
in diverse businesses. We seek business opportunities across all industries for
potential transactions and relationships in which we can apply our current
resources and management strengths. We are particularly focused on companies
with sound business plans and existing revenue bases that require growth
capital. We will continue to pursue opportunities involving our wireless
expertise and broadband assets as attractive opportunities present themselves.
The companies that we target, either public or privately held and regardless of
industry, will be seeking growth or restructuring capital to pursue near term
business objectives in demonstrated markets.
We have co-invested with Siemens Corporate Research, Inc., a subsidiary of
Siemens Corporation, in Zargis Medical Corp. to develop a service solution,
initially targeted toward primary care physicians, that would be used as part of
general medical examinations for the early screening and detection of valvular
and congenital heart disease. We have acquired a 51% interest in F&B Gudtfood,
the creator and operator of the original Eurocentric "chic and quick" cafe,
which is operating its first store in Manhattan and is currently planning
expansion to other locations. We own a portfolio of patents that allow for
high-speed wireless communications. We also own fixed wireless spectrum in the
New York City metropolitan area that we may commercialize in the future to
support high-speed, or broadband, Internet access service.
Zargis Medical Corp. In January 2001, we co-invested with Siemens
Corporate Research, Inc., a subsidiary of Siemens Corporation, in a new company,
Zargis Medical Corp. Zargis Medical is building a service solution, initially
targeted toward primary care physicians that would be used as part of general
medical examinations for the early screening and detection of valvular and
congenital heart disease. General medical examinations, according to the
National Center for Health Statistics, totaled 46 million in 1999 for the US
alone. We have signed an exclusive contract with Zargis Medical to design and
develop the wireless applications, as well as provide transaction processing to
support the commercial rollout of Zargis Medical's cardiac diagnostic products.
Under this contract, using a combination of wireless and wired technology,
Speedia Wireless, our wholly owned subsidiary, has demonstrated the ability to
transfer the heart sound file from a physician's office to the Speedus Data
Center which will enable Zargis Medical to pursue a business model based on a
fee per usage basis. Some of the major next steps remaining for Zargis Medical
include clinical trials, FDA approval, marketing and roll-out, along with the
formation of strategic partnerships.
In February 2003, we acquired a controlling interest in Zargis Medical for
an additional investment of $1,250,000. In July 2003, we increased our
investment in Zargis Medical to 68.9% by an additional $2,000,000. If Zargis
Medical obtains required United States Food and Drug Administration approval by
December 1, 2003 to begin marketing its medical device, the Company is obligated
to invest an additional $2,000,000 in Zargis Medical.
F&B Gudtfood. In May 2002, we acquired a 51% interest in F&B Gudtfood, the
creator and operator of the original Eurocentric "chic and quick" cafe, which is
operating its first store in Manhattan and is currently planning expansion to
other locations. The acquisition price was $3,500,000, which funds will be
applied principally for its expansion. We also entered into a management
services contract with F&B Gudtfood. On February 8, 2003, we reduced our cash
investment in F&B Gudtfood and received $1,775,000 while maintaining our 51%
interest.
11
Broadband Patents. Through our wholly owned subsidiaries, Broadband
Patents, LLC and CellularVision Technology & Telecommunications, L.P., we have
accumulated a portfolio of patents that allow for high-speed wireless
communication systems with greater information content, reliability, clarity, or
more efficient use of licensed spectrum as compared to prior systems. We have
five domestic patents with expiration dates ranging from 2007 through 2017, with
numerous international counterparts. Any particular wireless communications
system may employ a number of different combinations of our patented technology
to maximize operational and spectrum efficiency. While we believe that it would
be difficult for any wireless communications company to construct a system
without using one or more of our patented technologies, it is a lengthy and
expensive process to pursue licensing/patent infringement cases. We are
evaluating a strategy for the utilization of these patents in the future, which
may include pursuit of licensing or development of other strategic opportunities
with users of the underlying technology. However, due to the current depressed
economic state of the telecommunications industry, licensing activity for the
patent portfolio is not actively being pursued at this time. We have licensed
technology in the past, both domestically and internationally, but are not
currently receiving any license fees. Currently, we have instituted litigation
in the New York courts against an international licensee in Canada.
Local Multipoint Distribution Service license. We have an FCC commercial
operating license, awarded to us in recognition of our efforts in developing and
deploying LMDS technology and for spearheading its regulatory approval at the
FCC, which covers 150 MHz of spectrum in the New York City area. The license has
been renewed as a standard LMDS license through February 1, 2006. Under FCC
authorization, the license includes an additional 150 MHz of spectrum until the
first Ka band satellite is launched, an event which is not currently
determinable. The license provides that the spectrum may be used for a wide
variety of fixed wireless purposes, including wireless local loop telephony,
high-speed Internet access and two-way teleconferencing.
We are conducting a limited pilot program of our SPEEDsm broadband super
high-speed Internet service. A full marketing effort will not commence until new
LMDS equipment becomes commercially available with cost and performance that
allow implementation of 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.
Other. We have invested a portion of our assets in a portfolio of
marketable securities consisting of publicly traded equity securities. We have
also sold publicly traded equity securities we do not own in anticipation of
declines in the fair market values of these securities.
We have generated operating losses and negative operating cash flows since
our inception and expect to continue to do so in the near future.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements. The preparation
of those financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of operating revenues and expenses during the reporting periods. Actual
results could differ from those estimates. For a description of all of our
accounting policies, see Note 1 to our consolidated financial statements
included in this Form 10-Q and Note 2 to our consolidated financial statements
included in our 2002 Form 10-K. However, we believe the following critical
accounting policies affect the more significant judgments and estimates used in
the preparation of our consolidated financial statements.
Financial instruments. Our financial instruments consist primarily of cash
equivalents, marketable securities and securities sold and not purchased. The
carrying value of cash equivalents approximates market value since these highly
liquid, interest earning investments are invested in money market funds.
Marketable securities consist of publicly traded equity securities classified as
trading securities and are recorded at fair market value, i.e., closing prices
quoted on established securities markets. Securities sold and not repurchased
are also carried at the fair market value of the securities. Significant changes
in the market value of securities that we invest in could have a material impact
on our financial position and results of operations.
Long-lived assets. Long-lived assets, including fixed assets, goodwill and
other intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of any such asset may not be
recoverable through estimated future cash flows from that asset. The estimate of
cash flow is based upon, among other things, certain assumptions about expected
future operating performance. Specifically, we own broadband assets, including
fixed and intangible assets, which had a carrying value of $1.8 million and $1.5
million at December 31, 2002 and September 30, 2003, respectively, and currently
do not generate significant revenues or cash flows. However, as of December 31,
2002, we estimated that, based upon our review of recent transactions and other
factors, the fair value of our remaining FCC license and certain patents that
have no carrying value on our books would generate sufficient cash to fully
realize our assets described above as of December 31, 2002. This estimate
evaluated the recovery of these broadband assets compared to the fair value of
our remaining FCC license and certain patents as a group since it represents the
lowest level for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. These estimates may differ
from actual results due to, among other things, technological changes, economic
conditions, changes to our business model or changes in our operating
performance. As of December 31, 2002, we also reviewed the carrying value of
goodwill in the amount of $1.8 million at that time, and estimated based upon
our review, taking into account such factors as
12
projected operations and Company's redemption rights in connection with the
investment, that there had been no impairment to this carrying value.
Contingencies. We account for contingencies in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies". SFAS
No. 5 requires that we record an estimated loss when information available prior
to issuance of our financial statements indicates that it is probable that an
asset has been impaired or a liability has been incurred at the date of the
financial statements and the amount of the loss can be reasonably estimated.
Accounting for contingencies such as environmental, legal and income tax matters
requires us to use our judgment. While we believe that our accruals for these
matters are adequate, if the actual loss is significantly different than the
estimated loss, there could be a material adverse effect on our financial
statements.
Nine and Three Months Ended September 30, 2003 Compared to Nine and Three Months
Ended September 30, 2002
Revenues decreased $161,000 from $709,000 for the nine months ended
September 30, 2002 to $548,000 for the nine months ended September 30, 2003 and
increased $25,000 from $149,000 for the three months ended September 30, 2002 to
$174,000 for the three months ended September 30, 2003. $428,000 of the net
decrease for the nine month periods is a result of revenues recognized from the
sale and activation of wireless phones through the Company's online cell phone
store, 007phones, during the 2002 periods. No such revenues were earned during
the three months ended September 30, 2002 or the nine and three months ended
September 30, 2003. The decrease in revenues is net of increases in revenues
recognized by F&B Gudtfood in the amounts of $271,000 (from $274,000 to
$545,000) and $18,000 (from $155,000 to $173,000) during the nine and three
months ended September 30, 2003, respectively, compared to the 2002 periods. F&B
Gudtfood is included in the consolidated financial statements of the Company
since May 6, 2002, the date of acquisition of a majority interest.
Selling, general and administrative expenses decreased $21,000 from
$3,227,000 for the nine months ended September 30, 2002 to $3,206,000 for the
nine months ended September 30, 2003 and decreased $54,000 from $1,184,000 for
the three months ended September 30, 2002 to $1,130,000 for the three months
ended September 30, 2003. These decreases are net of increases in the amounts of
$735,000 and $218,000 for the nine and three months ended September 30, 2003,
respectively, compared to the 2002 periods as a result of increases in selling,
general and administrative expenses of F&B Gudtfood and Zargis Medical. F&B
Gudtfood and Zargis Medical are included in the consolidated financial
statements of the Company since May 6, 2002 and February 28, 2003, respectively,
the dates of acquisition of majority interests. The net decreases are a result
of decreases in legal expenses, and compensation and employee related expenses
as a result of staff reductions by Speedus.
Research and development expenses increased $528,000 from $709,000 for the
nine months ended September 30, 2002 to $1,237,000 for the nine months ended
September 30, 2003 and increased $253,000 from $226,000 for the three months
ended September 30, 2002 to $479,000 for the three months ended September 30,
2003. $534,000 and $242,000 of the net increase for the nine and three months
ended September 30, 2003, respectively, compared to the 2002 periods are a
result of Zargis Medical's inclusion in the consolidated financial statements of
the Company since February 28, 2003, the date of acquisition of a majority
interest. These increases are net of decreases in compensation and employee
related expenses as a result of staff reductions by Speedus.
Depreciation and amortization decreased $4,356,000 from $5,105,000 for the
nine months ended September 30, 2002 to $749,000 for the nine months ended
September 30, 2003 and increased $93,000 from $180,000 for the three months
ended September 30, 2002 to $273,000 for the three months ended September 30,
2003. Approximately $3,650,000 of the net decrease for the nine month period is
a result of a charge during the six and three months ended June 30, 2002 for
property and equipment taken out of service, net of an increase in the amount of
$124,000 for amortization of medical technology during the nine months ended
September 30, 2003 resulting from the Zargis acquisition. Depreciation and
amortization also decreased during the nine month periods as a result of assets
becoming fully depreciated, as well as depreciation no longer being taken on the
property and equipment taken out of service during 2002. The increase for the
three month periods is a result of $71,000 in amortization of medical technology
resulting from the Zargis acquisition.
Cost of sales decreased $303,000 from $467,000 for the nine months ended
September 30, 2002 to $164,000 for the nine months ended September 30, 2003 and
decreased $13,000 from $49,000 for the three months ended September 30, 2002 to
$36,000 for the three months ended September 30, 2003. $381,000 of the net
decrease for the nine month period is a result of the direct cost and expenses
related to the sale and activation of wireless phones through the Company's
online cell phone store, 007phones, during the 2002 period. No such expenses
were incurred during the three months ended September 30, 2002 or the nine and
three months ended September 30, 2003. The decrease in cost of sales is net of
increases in cost of sales recorded by F&B Gudtfood in the amount of $78,000
during the nine months ended September 30, 2003 compared to the 2002 period. F&B
Gudtfood is included in the consolidated financial statements of the Company
since May 6, 2002, the date of acquisition of a majority interest.
Investment income/(loss) decreased $7,808,000 from income of $2,877,000
for the nine months ended September 30, 2002 to a loss of $4,931,000 for the
nine months ended September 30, 2003 and decreased $2,289,000 from income of
$1,857,000 for the three months ended September 30, 2002 to a loss of $432,000
for the three months ended September 30, 2003. These changes are primarily a
result of the recognition of realized and unrealized gains/(losses) during these
periods. The Company records marketable securities and securities sold and not
purchased at the fair market value of the securities. The amount of these
realized and unrealized gains or losses will fluctuate based upon changes in the
market value of the underlying investments and are not necessarily indicative
13
of the results that may be expected for any future periods. Realized
gains/(losses) decreased $5,340,000 from net gains of $1,115,000 for the nine
months ended September 30, 2002 to net losses of $4,225,000 for the nine months
ended September 30, 2003. Unrealized gains/(losses) decreased $2,237,000 from
net gains of $1,405,000 for the nine months ended September 30, 2002 to net
losses of $832,000 for the nine months ended September 30, 2003.
Equity in loss of associated company decreased $277,000 from $370,000 for
the nine months ended September 30, 2002 to $93,000 for the nine months ended
September 30, 2003. $152,000 was recorded for the three months ended September
30, 2002. No amounts were recorded for the three months ended September 30,
2003. These amounts reflect the Company's share in Zargis Medical's operations,
accounted for under the equity method, through February 27, 2003. Zargis Medical
is included in the consolidated financial statements of the Company since
February 28, 2003, the date of acquisition of a majority interest.
Minority interest increased $430,000 from $62,000 for the nine months
ended September 30, 2002 to $492,000 for the nine months ended September 30,
2003 and increased $147,000 from $39,000 for the three months ended September
30, 2002 to $186,000 for the three months ended September 30, 2003. This amount
represents the interest of minority stockholders in the losses of F&B Gudtfood
and Zargis Medical during the nine and three months ended September 30, 2003.
Related Party Transactions
We have signed an exclusive contract with Zargis Medical to design and
develop the wireless applications, as well as provide transaction processing to
support the commercial rollout of Zargis Medical's cardiac diagnostic products.
We also entered into a management services contract with F&B Gudtfood. In
connection with the F&B Gudtfood acquisition, in May 2002 the Company extended
loans to two employees of F&B Gudtfood, who are also minority shareholders of
F&B Gudtfood aggregating $120,000. The loans, which can be increased by $40,000
each under certain conditions, will be forgiven if certain milestones are
achieved.
Liquidity and Capital Resources
The Company has recorded operating losses and negative operating cash
flows in each year of its operations since inception.
Net cash used in operating activities was $9.2 million for the nine months
ended September 30, 2003 compared to net cash used in operating activities of
$2.8 million for the nine months ended September 30, 2002. Cash was used by
operating activities in the nine months ended September 30, 2003 to fund the net
loss for the period. While the net loss increased from the net loss for the nine
months ended September 30, 2002 by $3.1 million, after adjustment for non-cash
charges, including depreciation and amortization and unrealized losses, the
increase in cash used was greater.
Net cash used in investing activities was $5,000 for the nine months ended
September 30, 2003 compared to net cash provided by investing activities of $0.3
million for the nine months ended September 30, 2002. This net decrease was
substantially the result of proceeds received in 2002 from the sale of assets,
net of loans extended in connection with the start-up of 007Phones.com and the
acquisition of a controlling interest in F&B Gudtfood.
Net cash used in financing activities was $0.8 million for the nine months
ended September 30, 2003 compared to $1.5 million for the nine months ended
September 30, 2002. This decrease of $0.7 million was a result of decreased
repurchases of treasury stock during 2003.
At September 30, 2003, the Company's future minimum lease payments due
under noncancelable leases aggregated $946,000. $335,000, $111,000, $112,000,
$116,000 and $119,000 of this amount is due during the twelve months ending
September 30, 2004, 2005, 2006, 2007 and 2008, respectively, and the balance is
payable thereafter.
The Company believes that it has sufficient liquidity to finance its
current level of operations and expected capital requirements through the next
twelve months. However, the Company does not expect to have earnings from
operations until such time as it substantially increases its customer base
and/or forms a strategic alliance for use of its capabilities in the future. We
cannot predict when this will occur. We have no material non-cancelable
commitments and the amount of future capital funding requirements will depend on
a number of factors that we cannot quantify, including the success of our
business, the extent to which we expand our high-speed Internet service if
suitable equipment becomes available and the types of services we offer, as well
as other factors that are not within our control, including competitive
conditions, government regulatory developments and capital costs. The lack of
additional capital in the future could have a material adverse effect on the
Company's financial condition, operating results and prospects for growth.
We have invested a portion of our assets in a portfolio of marketable
securities consisting of publicly traded equity securities. We purchase these
securities in anticipation of increases in the fair market values of the
securities. We have also sold publicly traded equity securities we do not own in
anticipation of declines in the fair market values of these securities. When we
sell securities that we do not own, we must borrow the securities we sold in
order to deliver them and settle the trades. Thereafter, we must buy the
securities and deliver them to the lender of the securities. Our potential for
loss on these transactions is unlimited since the value of the underlying
security can keep increasing.
14
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. Any variable interest entities created after January 31, 2003,
are immediately subject to the consolidation guidance of FIN 46. Since the
release of FIN 46, the FASB has issued numerous FASB Staff Positions (FSPs)
regarding FIN 46, three of which remain in proposed form. On October 9, 2003,
the FASB released FSP 46-6, which deferred the effective date for the
consolidation guidance of FIN 46 from July 1, 2003 to December 31, 2003, for
variable interest entities existing prior to February 1, 2003. The Company does
not expect that FIN 46 will have an impact on its financial statements.
In April 2003, Statement of Financial Accounting Standards No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
was issued. SFAS No. 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149, which is to be
applied prospectively, is effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated after June 30, 2003.
This standard did not have an impact on the Company's financial statements.
In May 2003, Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments With Characteristics of Both
Liabilities and Equity," was issued. SFAS No. 150 changes the classification in
the statement of financial position of certain common financial instruments from
either equity or mezzanine presentation to liabilities and requires an issuer of
those financial statements to recognize changes in fair value or redemption
amount, as applicable, in earnings. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and with one exception,
is effective at the beginning of the first interim period beginning after June
15, 2003. The effect of adopting SFAS No. 150 will be recognized as a cumulative
effect of an accounting change as of the beginning of the period of adoption.
Restatement of prior periods is not permitted. This standard did not have an
impact on the Company's financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments at September 30, 2003 consist
primarily of cash equivalents, which are subject to interest rate risk, and
marketable securities and securities sold and not purchased, which are subject
to equity price risk.
As part of our overall investment strategy, we invest in publicly traded
equity securities. We purchase these securities in anticipation of increases in
the fair market values of the securities. We also sell publicly traded equity
securities that we do not own in anticipation of declines in the fair market
values of the securities. When we sell securities that we do not own, we must
borrow the securities we sold in order to deliver them and settle the trades.
Thereafter, we must buy the securities and deliver them to the lender of the
securities. Our potential for loss on these transactions is unlimited since the
value of the underlying security can keep increasing which could have a material
adverse effect on the Company's consolidated financial statements.
The carrying value of cash equivalents approximates market value since
these highly liquid, interest earning investments are invested in money market
funds. The Company's investment in marketable securities consists of publicly
traded equity securities classified as trading securities and are recorded at
fair market value. Securities sold and not repurchased are carried at the fair
market value of the securities.
ITEM 4. CONTROLS AND PROCEDURES
Management of the Company, including the Chief Executive Officer and the
Chief Financial Officer, evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based upon that evaluation, the Company's Chief
Executive Officer and the Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report for the information required to be disclosed by the
Company in the reports it files or submits under the Securities Exchange Act of
1934, as amended, to be recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There has been no change in the Company's internal control over financial
reporting during the fiscal quarter ended September 30, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 4 to the accompanying consolidated financial statements is
incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting of shareholders held on July 28, 2003, the Company
submitted the following matters to a vote of its shareholders, all of which were
approved:
1. Election of Directors:
Name of Director Votes For Votes Withheld
---------------- ---------- --------------
Shant S. Hovnanian 12,828,078 349,588
Vahak S. Hovnanian 12,826,528 351,138
William F. Leimkuhler 12,868,828 308,838
Jeffrey Najarian 12,868,128 309,538
Christopher Vizas 13,108,802 68,864
2. Appointment of PricewaterhouseCoopers LLP as independent auditors of
the Company:
Votes For Votes Against Abstentions
---------- ------------- -----------
13,140,482 27,839 9,345
3. Approval of an amendment to the Company's Certificate of Incorporation,
as amended, to enable the Company to effect a reverse stock split of all
of the issued and outstanding shares of the Company's Common Stock at a
ratio not to exceed one-for-six:
Votes For Votes Against Abstentions
---------- ------------- -----------
12,910,382 258,529 8,755
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit number 31.1 Certification of Chief Executive Officer Pursuant
To Rule 13a-14 of the Securities Exchange Act of
1934, As Adopted Pursuant To Section 302 of The
Sarbanes-Oxley Act Of 2002.
Exhibit number 31.2 Certification of Chief Financial Officer Pursuant
To Rule 13a-14 of the Securities Exchange Act of
1934, As Adopted Pursuant To Section 302 of The
Sarbanes-Oxley Act Of 2002.
Exhibit number 32.1 Certification of Chief Executive Officer Pursuant
To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 2002.
Exhibit number 32.2 Certification of Chief Financial Officer Pursuant
To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 2002.
b. Current Reports on Form 8-K:
A Form 8-K was filed on August 20, 2003 to report second quarter
2003 results, as announced in a press release dated August 18, 2003.
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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, 2003 By: /s/ Shant S. Hovnanian
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Shant S. Hovnanian
Chairman of the Board, President
and Chief Executive Officer
Date: November 14, 2003 By: /s/ Thomas M. Finn
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Thomas M. Finn
Treasurer and Chief Financial Officer
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