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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2003
or
|_| TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For 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 Number)
140 58th Street, Suite 7E, Brooklyn, NY 11220
(Address of Principal Executive Offices) (Zip code)
(718) 567-4300
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par
value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes |_| No |X|
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was $9,229,000 on June 30, 2003, based on the
closing trade price of the Common Stock on the NASDAQ SmallCap Market on that
date.
The number of shares of Common Stock outstanding as of March 25, 2004 was
16,325,007.
----------
DOCUMENTS INCORPORATED BY REFERENCE
None
SPEEDUS CORP.
TABLE OF CONTENTS
PART I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6 Selected Consolidated Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8 Consolidated Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
Item 9A Controls and Procedures
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and
Management
Item 13 Certain Relationships and Related Transactions
Item 14 Principal Accounting Fees and Services
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form
8-K
This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief or
current expectations of the Company or its officers with respect to, among other
things, the ability of the Company to make capital expenditures, the ability to
incur additional debt, as necessary, to service and repay such debt, if any, as
well as other factors that may effect the Company's financial condition or
results of operations. Forward-looking statements may include, but are not
limited to, projections of revenues, income or losses, capital expenditures,
plans for future operations, financing needs or plans, compliance with covenants
in loan agreements, plans for liquidation or sale of assets or businesses, plans
relating to products or services of the Company, assessments of materiality,
predictions of future events, and the ability to obtain additional financing,
including the Company's ability to meet obligations as they become due, and
other pending and possible litigation, as well as assumptions relating to the
foregoing. All statements in this Form 10-K regarding industry prospects and the
Company's financial position are forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. The
Company undertakes no obligation to publicly release the result of any revisions
to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
2
PART I
ITEM 1. BUSINESS
Business Activities
Speedus Corp. is a holding company that owns significant equity interests
in diverse businesses. We seek business opportunities across all industries for
potential transactions and relationships in which we can apply our current
resources and management strengths. The companies that we target, either public
or privately held, will be seeking growth or restructuring capital to pursue
near term business objectives in demonstrated markets. We will continue to
pursue opportunities involving our expertise in the medical device and wireless
markets as well as those areas involving our broadband assets as attractive
opportunities present themselves.
We have co-invested with Siemens Corporate Research, Inc., a subsidiary of
Siemens Corporation, in Zargis Medical Corp. to develop medical diagnostic
support service solutions that automatically analyze acoustical data from a
patient to determine physiological significant features useful in medical
diagnosis. The first Zargis clinical device, the Zargis Acoustic Cardioscan
(ZAC) will initially be targeted toward primary care physicians, to be used as
part of general medical examinations and physicals to detect murmurs which could
be a sign of valvular and congenital heart disease. We own 80% of F&B Gudtfood
Holding Corp., the creator and operator of the original Eurocentric "chic and
quick" cafe, which is operating its first store in Manhattan and is currently
planning expansion to other locations. We own a portfolio of patents that allow
for high-speed wireless communications. We also own fixed wireless spectrum in
the New York City metropolitan area that we may commercialize in the future to
support high-speed, or broadband, Internet access service.
Zargis Medical Corp. In January 2001, we co-invested with Siemens
Corporate Research, Inc., a subsidiary of Siemens Corporation, in Zargis Medical
Corp. to develop non-invasive, medical diagnostic support solutions that
automatically analyze acoustical data from a patient to determine
physiologically significant features useful in medical diagnosis. The
development of Zargis' patented technology is a pioneering effort in medicine
which uses advanced signal processing algorithms deployed on standard computer
platforms. The first Zargis device, the Zargis Acoustic Cardioscan (ZAC), will
initially be targeted toward primary care physicians to be used as part of
general medical examinations and physicals to detect murmurs which could be a
sign of valvular and congenital heart disease. General medical examinations,
according to the National Center for Health Statistics, totaled 64 million in
2000 for the US alone. Zargis is currently researching, and conducting trials
on, additional noninvasive diagnostic support tools that process acoustical data
from the body in order to provide an accurate and intelligible assessment of a
patient's health. These assessments may be used by physicians and other
healthcare providers to assist in the early identification or monitoring of
heart, lung, vascular and other conditions and to provide better patient
treatment.
We have signed an exclusive contract with Zargis to provide transaction
processing to support Zargis' medical products. Some of the major next steps
remaining for Zargis include continuing clinical trials for new applications of
the Zargis technology, FDA approval, and the formation of strategic partnerships
for industry and market acceptance.
In February 2003, we acquired a controlling interest in Zargis Medical for
an additional investment of $1,250,000. In July 2003, we increased our ownership
in Zargis Medical to 68.9% by investing an additional $2,000,000. As of December
31, 2003 and February 1, 2004, our ownership increased to 70.5% and 71.2%,
respectively, as a result of certain milestones not having been met.
F&B Gudtfood. We own 80% of F&B Gudtfood, the creator and operator of the
original Eurocentric "chic and quick" cafe, which is operating its first store
in Manhattan. The acquisition price was $3,500,000 in May 2002. In February
2003, we reduced our cash investment in F&B Gudtfood and received $1,775,000
while maintaining our original 51% interest. In December 2003, as a result of
renegotiation, our interest increased to 80% without an additional investment
and, under certain circumstances, could increase to 90%. We expect that F&B
Gudtfood will open its second location in Manhattan and begin selling F&B
Gudtfood franchises through its wholly owned subsidiary, F&B Gudtfood Franchise
Corp., in the second quarter of 2004. We have also entered into a management
services contract with F&B Gudtfood.
Broadband Patents. Through our wholly owned subsidiaries, Broadband
Patents, LLC and CellularVision Technology & Telecommunications, L.P., we have
accumulated a portfolio of patents that allow for high-speed wireless
communication systems with greater information content, reliability, clarity, or
more efficient use of licensed spectrum as compared to prior systems. We have
six domestic patents with expiration dates ranging from 2007 through 2017, with
approximately 60 international counterparts in 42 countries. Certain wireless
communications systems may employ a number of different combinations of our
patented technology to maximize operational and spectrum efficiency. While we
believe that it would be difficult for such a wireless communications system to
be constructed without using one or more of our patented technologies, it is a
lengthy and expensive
3
process to pursue licensing/patent infringement cases. We are evaluating a
strategy for the utilization of these patents in the future, which may include
pursuit of licensing or development of other strategic opportunities with users
of the underlying technology. However, due to the current depressed economic
state of the telecommunications industry, licensing activity for the patent
portfolio is not actively being pursued at this time. We have licensed
technology in the past, both domestically and internationally, but are not
currently receiving any license fees.
Local Multipoint Distribution Service (LMDS) license. We have an FCC
commercial operating license, awarded to us in recognition of our efforts in
developing and deploying LMDS technology and for spearheading its regulatory
approval at the FCC, which covers 150 MHz of spectrum in the New York City area.
The license has been renewed as a standard LMDS license through February 1,
2006. Under FCC authorization, the license includes an additional 150 MHz of
spectrum until the first Ka band satellite is launched, an event which is not
currently determinable. The license provides that the spectrum may be used for a
wide variety of fixed wireless purposes, including wireless local loop
telephony, high-speed Internet access and two-way teleconferencing.
We will not commence a full marketing effort using our LMDS technology
until new LMDS equipment becomes commercially available with cost and
performance that allow implementation of an economically viable business model.
We cannot determine when this will occur and this equipment may never be
available to us on this basis.
Other. We have invested a portion of our assets in a portfolio of
marketable securities consisting of publicly traded equity securities. We have
also sold publicly traded equity securities we do not own in anticipation of
declines in the fair market values of these securities.
We have generated operating losses and negative operating cash flows since
our inception and expect to continue to do so in the near future.
Competition
Many of our present and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do and therefore may be able to respond more quickly than we
can to new or changing opportunities, technologies, standards and customer
requirements.
Intellectual Property
To protect our proprietary rights, we rely on a combination of copyright
and trademark laws, trade secrets, confidentiality agreements with employees and
third parties and protective contractual provisions. All of our employees have
executed confidentiality and nonuse agreements that transfer any rights they may
have in copyrightable works or patentable technologies to us.
We have applied for registration of our service marks and trademarks in
the United States and in other countries. We may not be successful in obtaining
the service marks and trademarks for which we have applied. To the extent we
consider it necessary, we may file patents to protect our technology. Patents
with respect to our technology may not be granted, and, if granted, patents may
be challenged or invalidated. In addition, issued patents may not provide us
with any competitive advantages and may be challenged by third parties.
Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products or services or obtain and use
information that we regard as proprietary. The laws of some foreign countries do
not protect proprietary rights to as great an extent as do the laws of the
United States. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively protect
our intellectual property, our business could suffer. Companies have frequently
resorted to litigation regarding intellectual property rights. We may have to
litigate to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of other parties' proprietary
rights.
Government Regulation
In general, we are not currently subject to direct federal, state or local
government regulation, other than regulations that apply to businesses
generally. However, the grant, renewal and administration of spectrum licenses
is regulated by the Federal Communications Commission. Our local multipoint
distribution service license expires in February 2006. While the FCC has
historically renewed licenses as a matter of course, no license in the local
multipoint distribution service band has yet been up for renewal. A failure by
the FCC to renew our license could have an adverse effect on the Company.
In addition, medical devices such as ours are subject to strict regulation
by state and federal authorities, including the Food and Drug Administration and
comparable authorities in certain states. We are awaiting approval from the FDA
for the first Zargis device, the Zargis Acoustic Cardioscan (ZAC). There can be
no assurance that we will receive approval for our medical device.
4
Risk Factors
Risks related to our business generally
Although we have been a public company since February 1996, we have reoriented
our business several times and our current business has not generated any
significant revenues to date.
At the time of our initial public offering, our business was primarily a
subscription television service. In November 1998, we terminated the
subscription television business and began a limited pilot program for the
delivery of high-speed Internet access. We encountered technical difficulties in
this pilot program and reoriented our business on wireless data and other
services. We have not yet generated any significant revenue from these
businesses.
We have recorded operating losses in each reporting period since our inception
and may never be profitable.
We have recorded operating losses and negative operating cash flows in all
reporting periods since inception and, at December 31, 2003, had an accumulated
deficit of approximately $64.4 million. We believe that we have sufficient
liquidity to finance our current level of operations through the 2004 fiscal
year. However, we do not expect to have earnings from operations, exclusive of
non-cash charges, until such time as we substantially increase our customer base
and/or form a strategic alliance for use of our capabilities in the future.
Our existing operations and infrastructure may not be adequate to manage the
growth necessary for successful implementation of our business plan.
Successful implementation of our business plan will require the management
of growth. Our existing operations and infrastructure may not be adequate to
manage such growth, and any steps taken to improve such systems and controls may
not be sufficient. Our future success will depend in part upon attracting and
retaining the services of current management and technical personnel. We also
may not be successful in attracting, assimilating and retaining new personnel in
the future as future growth takes place. We do not maintain "key person" life
insurance policies on any of our key personnel.
Shant S. Hovnanian and Vahak S. Hovnanian, who in the aggregate own
approximately 40% of our Common Stock, may have the power acting together to
control the direction and future operations of our company.
Shant S. Hovnanian and Vahak S. Hovnanian in the aggregate own
approximately 40% of our outstanding Common Stock at March 15, 2004. As a
result, acting together they may have the power to elect all of the members of
our Board of Directors, amend our certificate of incorporation and by-laws and
control the direction and future operations of our Company, in each case without
the approval of any of our other stockholders.
Our stock price has historically been volatile, which may make it more difficult
for you to resell shares when you want at prices you find attractive.
The trading price of our Common Stock has been and may continue to be
subject to wide fluctuations. During 2003, 2002 and 2001, the high and low sale
prices of our Common Stock on the Nasdaq Stock Market ranged from $1.65 to
$0.71, $1.37 to $0.68 and $2.00 to $0.62, respectively. The closing sale price
of our Common Stock was $3.04 on March 22, 2004. Our stock price may fluctuate
in response to a number of events and factors, such as quarterly variations in
operating results, announcements of technological innovations or new products
and media properties by us or our competitors, the operating and stock price
performance of other companies that investors may deem comparable, and news
reports relating to trends in our markets.
On several occasions through 2003, we were not in compliance with
Marketplace Rule 4450(a)(5), which requires listed companies to maintain a
closing bid price equal to or greater than $1.00. Most recently, in June 2003,
we received notice from Nasdaq that we had regained compliance with Marketplace
Rule 4450(a)(5) and the matter was closed.
If our Common Stock were delisted from Nasdaq, trading in our Common Stock
would have to be conducted on the OTC Bulletin Board or in the non-Nasdaq
over-the-counter market, also referred to as the "pink sheets". If that were to
occur, liquidity for our Common Stock could be significantly decreased which
could reduce the trading price and increase the transaction costs of trading
shares of our Common Stock.
At our last annual meeting, stockholders approved a proposal authorizing
our Board of Directors, through December 31, 2004, to effect a reverse stock
split of all the issued and outstanding shares, as well as treasury shares, of
our Common Stock at a ratio not to exceed one-for-six if necessary to continue
our listing on Nasdaq.
Sales of shares of Common Stock by Shant S. Hovnanian and Vahak S. Hovnanian
could adversely affect the market price of the Common Stock.
5
Future sales of shares of Common Stock, or the availability of shares of
Common Stock for future sale, may adversely impact the market price of the
Common Stock prevailing from time to time. Sales of substantial amounts of our
Common Stock, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock.
Shares of Common Stock held by Shant S. Hovnanian and Vahak S. Hovnanian
have been held by each of them for the requisite holding periods under Rule 144
under the Securities Act and may be sold thereunder in accordance with volume
restrictions.
Risks related to certain short-term investments
Securities that we invest in are subject to market price risks.
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 Company is seeking to eliminate the risk that it could be deemed to be an
investment company.
The Company has substantial liquidity. Although a portion of the Company's
cash is invested in securities, the Company is pursuing an acquisition strategy
that will, if successfully executed, eliminate any risk of it being deemed to be
an investment company.
Generally, a company must register under the Investment Company Act of
1940 and comply with significant restrictions on operations and transactions
with affiliates if its investment securities exceed 40% of the company's total
assets, or if it holds itself out as being primarily engaged in the business of
investing, owning or holding securities. If it is deemed to be an investment
company, it might need to dispose of or acquire investments in order to avoid
investment company status.
Risks related to investments in other companies
Ability to successfully identify investment opportunities
We will face substantial competition in identifying and closing
appropriate investment opportunities from, among others, venture capital firms,
large corporate investors and other publicly traded companies. These competitors
may limit our opportunity to acquire interests in new partner companies. In
addition, we may be unable to acquire interests in appropriate companies for
other reasons, including the inability to agree on terms, such as price and
ownership percentages, incompatibility between us and management and access to
sufficient funding. Our growth will be materially adversely affected if we
cannot successfully identify investments in a sufficient number of companies.
The value of our business may fluctuate because of companies that we may invest
in.
The value of our business may fluctuate because of companies that we may
invest in. These companies may be development stage or privately held companies
for which no public market exists for their stock. The valuations of our
investments in privately held companies that we may invest in are indeterminate
prior to their public offerings, and there can be no assurance that these
offerings will occur since they will be dependent upon the development of these
businesses, market conditions and other conditions over which we may have no
control.
Capital and management resources
There will be a number of special issues that we will have to address for
investment in start-up companies, including: the diversion of management
attention in connection with both negotiating and overseeing these transactions;
the potential issuance of additional shares of our Common Stock in connection
with these transactions, which could dilute the rights of existing shareholders,
and the need to incur additional debt in connection with these transactions. In
addition, many, if not all, of these start-up companies will face the same, or
similar, risks as we face in our own business.
Managing growth
Successful implementation of our business plan will require the management
of growth. We cannot assure you that our existing operations and infrastructure
will be adequate to manage such growth, or that any steps taken to improve such
systems and controls will be sufficient. Our future success will depend in part
upon attracting and
6
retaining the services of current management and technical personnel. We cannot
assure you that we will be successful in attracting, assimilating and retaining
new personnel in the future as future growth takes place.
Risks related to medical device companies
Risks related to government regulation and future regulatory requirements
Medical devices such as ours are subject to strict regulation by state and
federal authorities, including the Food and Drug Administration and comparable
authorities in certain states. We are awaiting approval from the FDA for the
first Zargis device, the Zargis Acoustic Cardioscan (ZAC). There can be no
assurance that we will receive approval for our medical device.
Manufacturers of medical devices are required to comply with very specific
rules and regulations concerning the testing, manufacturing, packaging, labeling
and marketing of medical devices. Failure to comply with applicable regulatory
requirements could result in, among other things, civil and criminal fines,
product recalls, detentions, seizures, injunctions and criminal prosecutions.
In addition, these regulations are subject to future change. We cannot
predict what material impact, if any, these changes might have on our business.
Future changes in regulations or enforcement policies could impose more
stringent requirements on us, compliance with which could adversely affect our
business.
Potential product recalls
In the event that any of our products prove to be defective, we could
voluntarily recall, or the FDA could require us to redesign or implement a
recall of, any defective product. There is a possibility that we may recall
products in the future and that future recalls could result in significant costs
to us and in significant negative publicity which could harm our ability to
market our products in the future.
We could be exposed to significant liability claims.
We could be exposed to significant liability claims if we are unable to
obtain insurance at acceptable costs and adequate levels or otherwise protect
ourselves against potential product liability claims.
The testing, manufacture, marketing and sale of medical devices involve
the inherent risk of liability claims. A successful product liability claim
could affect or prevent commercialization of our medical devices, or cause a
significant financial burden on us, or both, and could have a material adverse
effect on our business, financial condition, and ability to market our medical
devices.
Health care providers may not be able to obtain adequate levels of third-party
reimbursement.
The success of our product will depend to a significant extent on the
ability of health care providers to obtain adequate levels of third-party
reimbursement. The amount of reimbursement available may vary. The cost of
medical care is funded, in substantial part, by government insurance programs,
such as Medicare and Medicaid, and private and corporate health insurance plans.
Third-party payers may deny reimbursement at adequate levels if they determine
that a prescribed device or diagnostic procedure is not used in accordance with
cost-effective treatment methods as determined by the payer, or is experimental,
unnecessary or inappropriate. The inadequacy of the reimbursement would have a
material adverse effect on our business.
The medical device industry is characterized by rapid technological changes and
advances.
Although the Company believes that its products are technologically
current, the development of new technologies or refinements of existing ones by
the Company's competitors could at any time make the Company's existing products
technologically or economically obsolete. Although the Company is not aware of
any pending technological developments that would be likely to materially and
adversely affect its business or financial position, there can be no assurance
that such developments will not occur at any time.
We may rely on third parties to support the manufacture or commercialization of
our products.
We may rely on third parties, and possibly single third parties, to
manufacture or commercialize our products. Third parties may not perform their
obligations as expected. The amount and timing of resources that third parties
devote to manufacturing or commercializing our product may not be within our
control. The third party on which we rely to commercialize our products may not
be able to recruit and retain skilled sales representatives.
Furthermore, our interests may differ from those of the third party that
manufacture or commercializes our products. Disagreements that may arise with
the third party could limit the manufacture or commercialization of our
products, or result in litigation or arbitration, which would be time-consuming,
distracting and expensive. If the third party that supports the manufacture or
commercialization of our products breaches or terminates its agreement with
7
us, or fails to conduct its activities in a timely manner, such breach,
termination or failure could result in the disruption of our business and could
have a material adverse effect on our results of operations.
Risks related to our high-speed Internet access service
We may be unable to solve ongoing technical difficulties in our deployment and
equipment for our high-speed Internet access service is not, and may never be,
available at a cost and with performance levels that allow for commercial
implementation on an economically attractive basis.
Our super high-speed Internet service utilizes a new technology that has a
limited operating history and that remains subject to further development and
refinement.
The equipment necessary to provide our high-speed Internet access service
is not currently manufactured on a scale and at a cost suitable for the
commercialization of our service. Such equipment may never become available at a
cost and with performance levels that allow for commercial implementation on an
economically attractive basis.
Many financially stronger competitors with broader market coverage are offering
high-speed Internet access.
The market for Internet access and related services is highly competitive.
We expect local, regional and national Internet service providers to be
competitors for our super high-speed Internet access service. Telephone
companies with digital subscriber line technology, which increases the effective
capacity of existing copper telephone cables, are among other competitors. Also,
cable operators with high-speed cable modems are among the other communications
companies also providing high-speed Internet access. Many of the competing
Internet service providers have, or can be expected to have, greater financial,
marketing and other resources than us. We may not be able to compete
successfully with these entities.
ITEM 2. PROPERTIES
All of our properties are leased space. Information on our major locations
is presented below:
Square Lease Renewal
Location Use footage expiration options
-------- --- ------- ---------- -------
Brooklyn, NY Executive and administrative 20,000 2004 1 five-year
New York, NY F&B restaurant 1,300 2009 None
New York, NY F&B restaurant 1,500 2014 None
New York, NY Other 3,000 2004 None
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and proceedings that occur in the
ordinary course of business. The Company believes it has substantial defenses to
a material portion of these claims and is prepared to pursue litigation if a
reasonable and structured settlement cannot be reached with the parties. Based
on information currently available, the Company believes 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 business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders during the
fourth quarter of fiscal 2003.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Through October 21, 2002, our Common Stock was listed for quotation on the
Nasdaq National Market system. Since October 22, 2002, our Common Stock is
listed for quotation on the Nasdaq SmallCap Market. Our Common Stock trades
under the symbol "SPDE." The following table sets forth high, low and closing
trade prices for the Common Stock for the fiscal quarters indicated.
High Sale Low Sale Closing Sale
------------- ------------- --------------
2003
First quarter $ .820 $.710 $ .770
Second quarter 1.650 .730 1.180
Third quarter 1.600 .980 1.190
Fourth quarter 1.550 .950 1.390
2002
First quarter $1.100 $.760 $1.090
Second quarter 1.370 .890 .960
Third quarter .940 .700 .721
Fourth quarter .870 .680 .771
On several occasions through 2003, we were not in compliance with
Marketplace Rule 4450(a)(5), which requires listed companies to maintain a
closing bid price equal to or greater than $1.00. Most recently, in June 2003,
we received notice from Nasdaq that we had regained compliance with Marketplace
Rule 4450(a)(5) and the matter was closed.
At the Company's last annual meeting, stockholders approved a proposal
authorizing the Company's Board of Directors, through December 31, 2004, to
effect a reverse stock split of all the issued and outstanding shares, as well
as treasury shares, of the Company's Common Stock at a ratio not to exceed
one-for-six if necessary to continue the Company's listing on Nasdaq.
On March 22, 2004, the closing trade price of our Common Stock was $3.04
per share. As of December 31, 2003, there were approximately 300 registered
shareholders and, to the best of our belief, approximately 9,000 beneficial
owners of our Common Stock. During the year ended December 31, 2003, we did not
make any sales of securities that were not registered under the Securities Act
of 1933, as amended.
We have never declared or paid any cash dividends on our Common Stock and
do not intend to declare or pay cash dividends on the Common Stock at any time
in the foreseeable future. Future earnings, if any, will be used for the
expansion of our business.
Equity Compensation Plans
The following table sets forth certain information as of December 31, 2003
for all compensation plans, including individual compensation arrangements,
under which equity securities of the Company are authorized for issuance:
- ---------------------------------------------------------------------------------------------------------
Number of
securities to be
issued upon Weighted average
exercise of exercise price of Number of
outstanding outstanding securities
options, warrants options, warrants remaining available
Plan category and rights and rights for further issuance
------------- ---------- ---------- --------------------
- ---------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
security holders 1,777,465 $2.43 808,698
- ---------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders
- ---------------------------------------------------------------------------------------------------------
Total 1,777,465 $2.43 808,698
- ---------------------------------------------------------------------------------------------------------
9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and Notes
thereto included elsewhere in this Form 10-K.
Year ended December 31,
----------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data
Revenues $ 711 $ 907 $ 69 $ 105 $ 612
Total operating expenses 7,581 11,380 16,353 11,889 8,204
----------------------------------------------------------------------------------------
Operating loss (6,870) (10,473) (16,284) (11,784) (7,592)
Net interest/investment income/(loss) (4,520) (194) 9,059 3,468 1,278
Minority interest 779 80 -- -- --
Equity in loss of associated company (93) (521) (125) (570) (351)
Other income -- -- 86 100 624
Settlement of litigation -- -- -- (283) --
Gain on assignment of spectrum -- -- -- -- 19,442
Intellectual property settlement -- -- -- -- (2,425)
Income taxes -- -- -- -- (330)
----------------------------------------------------------------------------------------
Net earnings/(loss) $ (10,704) $ (11,108) $ (7,264) $ (9,069) $ 10,646
========================================================================================
Per Common Share
Basic earnings/(loss) $ (0.65) $ (0.62) $ (0.36) $ (0.44) $ 0.58
Weighted average outstanding 16,498,267 17,927,000 19,947,784 20,445,586 18,465,974
Diluted earnings/(loss) $ (0.65) $ (0.62) $ (0.36) $ (0.44) $ 0.57
Weighted average outstanding 16,498,267 17,927,000 19,947,784 20,445,586 18,680,082
December 31,
----------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data
Cash and cash equivalents $ 19,419 $ 33,053 $ 39,934 $ 38,595 $ 44,613
Working capital 18,355 29,544 37,528 36,765 42,794
Net property and equipment 420 820 5,828 8,660 10,959
Net other intangible assets 2,042 1,651 1,799 2,197 --
Goodwill 621 1,760 -- 6,049 --
Total assets 28,510 50,185 53,892 57,628 55,769
Minority interest 531 1,592 -- -- --
Total debt -- -- -- -- 211
Total liabilities 6,990 16,175 8,410 2,773 1,969
Total equity 20,989 32,418 45,482 54,855 53,799
In October 1999, the Company assigned a 150MHz portion of its FCC license to an
unaffiliated third party. In connection with this transaction, the Company
recognized a gain in the amount of $19,442,000.
In June 2000, the Company purchased the remaining 55% interest in Speedia, LLC
that it did not already own. This acquisition was accounted for using the
purchase method of accounting and the results of operations of Speedia have been
included in the consolidated statements of operations for the periods subsequent
to June 30, 2000.
Included in operating expenses for the year ended December 31, 2001 is a charge
in the amount of $3,779,000 for the impairment of goodwill and intangible assets
associated with Speedia, LLC.
Included in operating expenses for the year ended December 31, 2002 is a charge
in the amount of $3,650,000 for property and equipment taken out of service.
In May 2002, the Company acquired a majority interest in F&B Gudtfood This
acquisition was accounted for using the purchase method of accounting and the
results of operations of F&B Gudtfood have been included in the consolidated
statements of operations for the periods subsequent to May 6, 2002. At December
31, 2003, the Company's ownership interest in F&B Gudtfood was 80%. For
additional information, see 'Business Activities' under Item 1. 'Business'.
In February 2003, the Company acquired a majority interest in Zargis Medical.
This acquisition was accounted for using the purchase method of accounting and
the results of operations of Zargis Medical have been included in the
consolidated statements of operations for the periods subsequent to February 28,
2003. At December 31, 2003, the Company's ownership interest in Zargis Medical
was 70.5%. For additional information, see 'Business Activities' under Item 1.
'Business'.
For additional information on these transactions, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Operations
Speedus Corp. is a holding company that owns significant equity interests
in diverse businesses. We seek business opportunities across all industries for
potential transactions and relationships in which we can apply our current
resources and management strengths. The companies that we target, either public
or privately held, will be seeking growth or restructuring capital to pursue
near term business objectives in demonstrated markets. We will continue to
pursue opportunities involving our expertise in the medical device and wireless
markets as well as those areas involving our broadband assets as attractive
opportunities present themselves.
We have co-invested with Siemens Corporate Research, Inc., a subsidiary of
Siemens Corporation, in Zargis Medical Corp. to develop medical diagnostic
support service solutions that automatically analyze acoustical data from a
patient to determine physiological significant features useful in medical
diagnosis. The first Zargis clinical device, the Zargis Acoustic Cardioscan
(ZAC) will initially be targeted toward primary care physicians, to be used as
part of general medical examinations and physicals to detect murmurs which could
be a sign of valvular and congenital heart disease. We own 80% of F&B Gudtfood
Holding Corp., the creator and operator of the original Eurocentric "chic and
quick" cafe, which is operating its first store in Manhattan and is currently
planning expansion to other locations. We own a portfolio of patents that allow
for high-speed wireless communications. We also own fixed wireless spectrum in
the New York City metropolitan area that we may commercialize in the future to
support high-speed, or broadband, Internet access service.
Zargis Medical Corp. In January 2001, we co-invested with Siemens
Corporate Research, Inc., a subsidiary of Siemens Corporation, in Zargis Medical
Corp. to develop non-invasive, medical diagnostic support solutions that
automatically analyze acoustical data from a patient to determine
physiologically significant features useful in medical diagnosis. The
development of Zargis' patented technology is a pioneering effort in medicine
which uses advanced signal processing algorithms deployed on standard computer
platforms. The first Zargis device, the Zargis Acoustic Cardioscan (ZAC), will
initially be targeted toward primary care physicians to be used as part of
general medical examinations and physicals to detect murmurs which could be a
sign of valvular and congenital heart disease. General medical examinations,
according to the National Center for Health Statistics, totaled 64 million in
2000 for the US alone. Zargis is currently researching, and conducting trials
on, additional noninvasive diagnostic support tools that process acoustical data
from the body in order to provide an accurate and intelligible assessment of a
patient's health. These assessments may be used by physicians and other
healthcare providers to assist in the early identification or monitoring of
heart, lung, vascular and other conditions and to provide better patient
treatment.
We have signed an exclusive contract with Zargis to provide transaction
processing to support Zargis' medical products. Some of the major next steps
remaining for Zargis include continuing clinical trials for new applications of
the Zargis technology, FDA approval, and the formation of strategic partnerships
for industry and market acceptance.
In February 2003, we acquired a controlling interest in Zargis Medical for
an additional investment of $1,250,000. In July 2003, we increased our ownership
in Zargis Medical to 68.9% by investing an additional $2,000,000. As of December
31, 2003 and February 1, 2004, our ownership increased to 70.5% and 71.2%,
respectively, as a result of certain milestones not having been met.
F&B Gudtfood. We own 80% of F&B Gudtfood, the creator and operator of the
original Eurocentric "chic and quick" cafe, which is operating its first store
in Manhattan. The acquisition price was $3,500,000 in May 2002. In February
2003, we reduced our cash investment in F&B Gudtfood and received $1,775,000
while maintaining our original 51% interest. In December 2003, as a result of
renegotiation,our interest increased to 80% without an additional investment
and, under certain circumstances, could increase to 90%. We expect that F&B
Gudtfood will open its second location in Manhattan and begin selling F&B
Gudtfood franchises through its wholly owned subsidiary, F&B Gudtfood Franchise
Corp., in the second quarter of 2004. We have also entered into a management
services contract with F&B Gudtfood.
Broadband Patents. Through our wholly owned subsidiaries, Broadband
Patents, LLC and CellularVision Technology & Telecommunications, L.P., we have
accumulated a portfolio of patents that allow for high-speed wireless
communication systems with greater information content, reliability, clarity, or
more efficient use of licensed spectrum as compared to prior systems. We have
six domestic patents with expiration dates ranging from 2007 through 2017, with
approximately 60 international counterparts in 42 countries. Certain wireless
communications systems may employ a number of different combinations of our
patented technology to maximize operational and spectrum efficiency. While we
believe that it would be difficult for such a wireless communications system to
be constructed without using one or more of our patented technologies, it is a
lengthy and expensive process to pursue licensing/patent infringement cases. We
are evaluating a strategy for the utilization of these patents
11
in the future, which may include pursuit of licensing or development of other
strategic opportunities with users of the underlying technology. However, due to
the current depressed economic state of the telecommunications industry,
licensing activity for the patent portfolio is not actively being pursued at
this time. We have licensed technology in the past, both domestically and
internationally, but are not currently receiving any license fees.
Local Multipoint Distribution Service (LMDS) license. We have an FCC
commercial operating license, awarded to us in recognition of our efforts in
developing and deploying LMDS technology and for spearheading its regulatory
approval at the FCC, which covers 150 MHz of spectrum in the New York City area.
The license has been renewed as a standard LMDS license through February 1,
2006. Under FCC authorization, the license includes an additional 150 MHz of
spectrum until the first Ka band satellite is launched, an event which is not
currently determinable. The license provides that the spectrum may be used for a
wide variety of fixed wireless purposes, including wireless local loop
telephony, high-speed Internet access and two-way teleconferencing.
We will not commence a full marketing effort using our LMDS technology
until new LMDS equipment becomes commercially available with cost and
performance that allow implementation of an economically viable business model.
We cannot determine when this will occur and this equipment may never be
available to us on this basis.
Other. We have invested a portion of our assets in a portfolio of
marketable securities consisting of publicly traded equity securities. We have
also sold publicly traded equity securities we do not own in anticipation of
declines in the fair market values of these securities.
We have generated operating losses and negative operating cash flows since
our inception and expect to continue to do so in the near future.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements. The preparation
of those financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of operating revenues and expenses during the reporting periods. Actual
results could differ from those estimates. For a description of all of our
accounting policies, see Note 2 to our consolidated financial statements
included in this 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, included in
intangible assets, which had a carrying value of $1.2 million at December 31,
2003 and currently do not generate significant revenues or cash flows. However,
as of December 31, 2003, we estimated that, based upon our review of recent
transactions and other factors, the fair value of our remaining FCC license and
certain patents that have no carrying value on our books would generate
sufficient cash to fully realize our assets described above as of December 31,
2003. 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, 2003, we also reviewed
the carrying value of goodwill in the amount of $0.6 million at that time, and
estimated based upon our review, taking into account such factors as projected
operations and Company's redemption rights in connection with the investment,
that there had been no impairment to this carrying value.
Contingencies. We account for contingencies in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies". SFAS
No. 5 requires that we record an estimated loss when information available prior
to issuance of our financial statements indicates that it is probable that an
asset has been
12
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies such as environmental, legal and income tax matters requires
us to use our judgment. While we believe that our accruals for these matters are
adequate, if the actual loss is significantly different than the estimated loss,
our results of operations will be affected in the period that the difference is
known.
Twelve Months Ended December 31, 2003 Compared to Twelve Months Ended December
31, 2002
Revenues decreased $196,000 from $907,000 for the twelve months ended
December 31, 2002 to $711,000 for the twelve months ended December 31, 2003.
$428,000 of this net decrease is a result of revenues recognized in 2002 from
the sale and activation of wireless phones through the Company's online cell
phone store, 007phones. No such revenues were recognized in 2003. The decrease
in revenues is net of an increase recognized by F&B Gudtfood in the amount of
$260,000 from $446,000 in 2002 to $706,000 in 2003. F&B Gudtfood is included in
the consolidated financial statements of the Company since May 6, 2002, the date
of acquisition of a majority interest.
Selling, general and administrative expenses decreased $144,000 from
$4,639,000 for the twelve months ended December 31, 2002 to $4,495,000 for the
twelve months ended December 31, 2003. This decrease is net of increases in the
amounts of $600,000 and $502,000 compared to 2002 as a result of increases
attributable to F&B Gudtfood and Zargis Medical, respectively, which 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 $759,000 from $946,000 for the
twelve months ended December 31, 2002 to $1,705,000 for the twelve months ended
December 31, 2003. $839,000 of this net increase is 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 $4,119,000 from $5,278,000 for the
twelve months ended December 31, 2002 to $1,159,000 for the twelve months ended
December 31, 2003. Approximately $3,650,000 of this net decrease is a result of
a charge during 2002 for property and equipment taken out of service.
Depreciation and amortization also decreased 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 decrease in depreciation and
amortization is net of an increase in the amount of $220,000 for amortization of
medical technology during 2003 resulting from the Zargis acquisition.
Cost of sales decreased $293,000 from $516,000 for the twelve months ended
December 31, 2002 to $223,000 for the twelve months ended December 31, 2003.
$381,000 of this net decrease is a result of costs recognized in 2002 from the
sale and activation of wireless phones through the Company's online cell phone
store, 007phones. No such costs were incurred in 2003. The decrease in cost of
sales is net of an increase attributable to F&B Gudtfood in the amount of
$88,000 from $135,000 in 2002 to $223,000 in 2003. F&B Gudtfood is included in
the consolidated financial statements of the Company since May 6, 2002, the date
of acquisition of a majority interest.
Investment loss increased $4,326,000 from a net loss in the amount of
$194,000 for the twelve months ended December 31, 2002 to a net loss in the
amount of $4,520,000 for the twelve months ended December 31, 2003. This
increase is primarily a result of realized and unrealized losses. Realized
gains/(losses) decreased $7,804,000 from net gains of $1,136,000 for the twelve
months ended December 31, 2002 to net losses of $6,668,000 for the twelve months
ended December 31, 2003. Unrealized gains/(losses) decreased $2,148,000 from net
losses of $2,255,000 for the twelve months ended December 31, 2002 to net losses
of $107,000 for the twelve months ended December 31, 2003. Investment gains or
losses will fluctuate based upon changes in the market value of the underlying
investments and are not necessarily indicative of the results that may be
expected for any future periods.
Equity in loss of associated company decreased $428,000 from $521,000 for
the twelve months ended December 31, 2002 to $93,000 for the twelve months ended
December 31, 2003. These amounts reflect the Company's share in Zargis Medical's
operations, accounted for under the equity method prior to February 28, 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 $699,000 from $80,000 for the twelve months
ended December 31, 2002 to $779,000 for the twelve months ended December 31,
2003. These amounts represent the interest of minority stockholders in the
losses of F&B Gudtfood and Zargis Medical since the dates of acquisition of a
majority interest.
13
Twelve Months Ended December 31, 2002 Compared to Twelve Months Ended December
31, 2001
Revenues increased $838,000 from $69,000 for the twelve months ended
December 31, 2001 to $907,000 for the twelve months ended December 31, 2002.
$446,000 of this net increase is a result of revenues recognized by F&B Gudtfood
since May 6, 2002, the date of acquisition and $428,000 of this net 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.
Selling, general and administrative expenses decreased $624,000 from
$5,263,000 for the twelve months ended December 31, 2001 to $4,639,000 for the
twelve months ended December 31, 2002. This decrease 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 selling, general and administrative expenses of F&B Gudtfood since the date
of acquisition in the amount of $506,000.
Research and development expenses decreased $770,000 from $1,716,000 for
the twelve months ended December 31, 2001 to $946,000 for the twelve months
ended December 31, 2002. This decrease is primarily attributable to decreases in
compensation and employee related expenses as a result of staff reductions.
Depreciation and amortization decreased $4,095,000 from $9,373,000 for the
twelve months ended December 31, 2001 to $5,278,000 for the twelve months ended
December 31, 2002. An aggregate decrease in the amount of $6,299,000 is a result
of the 2001 amortization of goodwill and intangibles resulting from the Speedia
acquisition in 2000, including a charge in the amount of $3,779,000 during 2001
for the impairment of goodwill and intangible assets associated with that
acquisition, eliminating the remaining balance of goodwill and those intangible
assets. The 2002 decrease was somewhat offset by a charge in the amount of
$3,650,000 during the three months ended June 30, 2002 for property and
equipment taken out of service. The balance of the decrease during 2002 is
generally a result of assets becoming fully depreciated, as well as depreciation
no longer being taken on the property and equipment taken out of service.
Cost of sales amounted to $516,000 for the twelve months ended December
31, 2002. $135,000 of this amount represents costs incurred by F&B Gudtfood
since the date of acquisition and $381,000 of this amount represents 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.
Investment income/(loss) decreased $9,253,000 from a net gain in the
amount of $9,059,000 for the twelve months ended December 31, 2001 to a net loss
in the amount of $194,000 for the twelve months ended December 31, 2002. This
decrease is primarily a result of realized and unrealized gains/(losses).
Realized gains/(losses) decreased $8,188,000 from net gains of $9,324,000 for
the twelve months ended December 31, 2001 to net gains of $1,136,000 for the
twelve months ended December 31, 2002. Unrealized gains/(losses) increased
$1,468,000 from net losses of $787,000 for the twelve months ended December 31,
2001 to net losses of $2,255,000 for the twelve months ended December 31, 2002.
Investment gains or losses will fluctuate based upon changes in the market value
of the underlying investments and are not necessarily indicative of the results
that may be expected for any future periods.
Equity in loss of associated company increased $396,000 from $125,000 for
the twelve months ended December 31, 2001 to $521,000 for the twelve months
ended December 31, 2002. These amounts reflect the Company's share in Zargis
Medical's operations, accounted for under the equity method.
Minority interest amounted to $80,000 the twelve months ended December 31,
2002. This amount represents the interest of minority stockholders in the
operations of F&B Gudtfood since the date of acquisition.
During the twelve months ended December 31, 2001, the Company recognized
other income in the amount of $86,000 from the sale of certain assets. During
the twelve months ended December 31, 2002, no such transactions occurred.
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 $12.9 million for the year ended
December 31, 2003 compared to net cash used in operating activities of $5.0
million for the year ended December 31, 2002. The net increase of $7.9 million
was substantially the result of a $2.3 million net decrease in open investment
positions and unrealized
14
losses and a decrease in depreciation and amortization of $4.1 million,
including a $3.7 million charge during 2002 for property and equipment taken out
of service.
Net cash used in financing activities was $0.7 million for the year ended
December 31, 2003 compared to $2.0 million for the year ended December 31, 2002.
This decrease of $1.3 million was substantially the result of decreased
repurchases of treasury stock during 2003.
At December 31, 2003, the Company's future minimum lease payments due
under noncancelable leases aggregated $1,989,000. $345,000, $210,000, $211,000,
$215,000 and $220,000 of this amount is due during the years ending December 31,
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 2004
fiscal year. However, the Company does not expect to have earnings from
operations until such time as it substantially increases its customer base
and/or forms a strategic alliance for use of its capabilities in the future. We
cannot predict when this will occur. We have no material non-cancelable
commitments and the amount of future capital funding requirements will depend on
a number of factors that we cannot quantify, including the success of our
business, the extent to which we expand our high-speed Internet service if
suitable equipment becomes available and the types of services we offer, as well
as other factors that are not within our control, including competitive
conditions, government regulatory developments and capital costs. The lack of
additional capital in the future could have a material adverse effect on the
Company's financial condition, operating results and prospects for growth.
We have invested a portion of our assets in a portfolio of marketable
securities consisting of publicly traded equity securities. We purchase these
securities in anticipation of increases in the fair market values of the
securities. We have also sold publicly traded equity securities we do not own in
anticipation of declines in the fair market values of these securities. When we
sell securities that we do not own, we must borrow the securities we sold in
order to deliver them and settle the trades. Thereafter, we must buy the
securities and deliver them to the lender of the securities. Our potential for
loss on these transactions is unlimited since the value of the underlying
security can keep increasing.
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. Throughout 2003, the FASB released numerous proposed and final
FASB Staff Positions (FSPs) regarding FIN 46, which both clarified and modified
FIN 46's provisions. In December 2003, the FASB issued Interpretation No. 46
(FIN 46-R), which will replace FIN 46 upon its effective date. FIN 46-R retains
many of the basic concepts introduced in FIN 46; however, it also introduces a
new scope exception for certain types of entities that qualify as a business as
defined in FIN 46-R, revises the method of calculating expected losses and
residual returns for determination of the primary beneficiary, includes new
guidance for assessing variable interests, and codifies certain FSPs on FIN 46.
This standard did not have an impact on the Company's 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 (1)
instruments entered into or modified after May 31, 2003 and (2) pre-existing
instruments as of July 1, 2003. In November 2003, through the issuance of FSP
150-3, the FASB indefinitely deferred the effective date of certain provisions
of SFAS No. 150, including mandatorily redeemable instruments as they relate to
minority interests in consolidated finite-lived entities. This standard did not
have an impact on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
15
The Company's financial instruments at December 31, 2003 consist primarily of
cash equivalents, which are subject to interest rate risk, and marketable
securities and securities sold and not purchased, which are subject to equity
price risk.
As part of our overall investment strategy, we invest in publicly traded
equity securities. We purchase these securities in anticipation of increases in
the fair market values of the securities. We also sell publicly traded equity
securities that we do not own in anticipation of declines in the fair market
values of the securities. When we sell securities that we do not own, we must
borrow the securities we sold in order to deliver them and settle the trades.
Thereafter, we must buy the securities and deliver them to the lender of the
securities. Our potential for loss on these transactions is unlimited since the
value of the underlying security can keep increasing which could have a material
adverse effect on the Company's consolidated financial statements.
The carrying value of cash equivalents approximates market value since
these highly liquid, interest earning investments are invested in money market
funds. The Company's investment in marketable securities consists of publicly
traded equity securities classified as trading securities and are recorded at
fair market value. Securities sold and not repurchased are carried at the fair
market value of the securities.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and related Notes
thereto and the financial information required to be filed herewith are included
under Item 15 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) 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 have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter ended December 31, 2003 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and titles of the persons who
were directors and/or executive officers of the Company as of March 15, 2004.
Name Age Position
---- --- --------
Shant S. Hovnanian.......................... 44 Chairman of the Board of Directors,
President and Chief Executive Officer
Vahak S. Hovnanian.......................... 72 Director
William F. Leimkuhler....................... 52 Director
Jeffrey Najarian............................ 45 Director
Christopher Vizas........................... 54 Director
Thomas M. Finn.............................. 56 Secretary, Treasurer and Chief Financial
Officer
Michael Bacon............................... 38 Executive Vice President
John A. Kallassy............................ 39 Executive Vice President
Shant S. Hovnanian has served as our Chairman of the Board of Directors,
President and Chief Executive Officer since October 1995. From June 1980 until
January 1991, Mr. Hovnanian served as Executive Vice President of the V. S.
Hovnanian Group (the "Hovnanian Group"), consisting of home building operations,
real estate development and utility companies. In 1995, Mr. Hovnanian served as
a U.S. Delegate to the World Radio Conference of the International
Telecommunications Union in Geneva, Switzerland. Mr. Hovnanian is the son of Mr.
Vahak S. Hovnanian.
Vahak S. Hovnanian has served as a Director since October 1995. Mr.
Hovnanian has been Chairman of the Board and President of the Hovnanian Group
since 1968. Mr. Hovnanian is the father of Mr. Shant S. Hovnanian.
William F. Leimkuhler has served as a Director since September 2000. Mr.
Leimkuhler is the General Counsel and Director of Business Development of Paice
Corporation, a privately held developer of advanced vehicle powertrains. From
1994 through 1999, he held various positions with Allen & Company, a New York
investment banking firm, initially serving as the firm's General Counsel. Prior
to that, Mr. Leimkuhler was a corporate partner with the New York law firm of
Werbel & Carnelutti (now Heller Ehrman White & McAuliffe).
Jeffrey Najarian has served as a Director since October 2000. Mr. Najarian
has been Chief Executive Officer of Starpoint Solutions, Inc., formerly TIS
Worldwide, Inc., since its inception in 1992. A creator and founder of
Starpoint, he has been instrumental in building one of the country's fastest
growing, privately-held companies, as cited by Inc. magazine. From 1984-1992,
Mr. Najarian worked at Setford-Shaw-Najarian, a recruiting/placement firm for
technology specialists, becoming a partner after only three years. He led the
staff in billing, propelling SSN to become a leading search firm for Wall Street
banks.
Christopher Vizas has served as a Director since July 2001. Mr. Vizas is a
principal in the strategic advisory firm of East Wind Partners. At East Wind, he
is involved in the development of telecommunications and technology businesses
in North America, Europe and Asia, particularly in the regulatory issues and
relationships with governments essential to those businesses and in their
financial structuring and restructuring; in his engagements with East Wind, he
has served in interim roles as CFO and CEO of developing companies. He serves as
non-executive Chairman of the Board of i1, Inc., a privately held, Chinese
software provider, as well as a member of the Boards of a few other privately
held companies. Mr. Vizas' positions during the 1990s included Chairman of
eGlobe, Inc, a turn around company reorganized under Chapter 11 of the
Bankruptcy Act, CEO of Quo Vadis International, Managing Director of Kouri
Capital Group and its Telecommunications & Technology affiliate, and founder and
Vice Chairman of Orion Network Systems. Earlier in his career, he was a founder
and part of the management in Trinity Cellular and Asia Pacific Space &
Communications. Mr. Vizas served in the White House Office of Telecommunications
Policy in the Ford Administration, as Special Counsel to the U.S. Privacy
Commission, and on congressional staff.
Thomas M. Finn has served as Secretary, Treasurer and Chief Financial
Officer since March 2003. Mr. Finn has been a consultant since 1994. Prior to
that time, Mr. Finn was employed by Integrated Resources, Inc., a diversified
financial services firm, and was the Chief Financial Officer of Integrated's
publicly-traded investment programs. Previously, Mr. Finn was an Audit Manager
for Deloitte & Touche LLP.
17
Michael Bacon has served as Executive Vice President of Operations since
June 1999. Prior to joining us, Mr. Bacon was employed by Booz Allen & Hamilton,
a leading international management and technology consulting firm, since 1996.
From 1994 to 1996, Mr. Bacon was with Deloitte & Touche Consulting. In
consulting, he led teams that recommended or implemented the establishment of
and improvement in service operations in a variety of industries, including the
telecommunications industry. Mr. Bacon previously worked for three years at
International Business Machines in marketing and sales and for two years with
General Electric Company where he developed information systems.
John A. Kallassy has served as Executive Vice President and Chief
Marketing Officer since September 2000. Mr. Kallassy was the founder and CEO of
American Data Consultants, Inc., a B2B database marketing company. After the
sale of ADC to R.L. Polk in 1996, Mr. Kallassy was employed for three years at
R.L. Polk as a division president and later a corporate vice president where he
led the product management and analytical consulting groups.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended December 31, 2003,
2002 and 2001, the cash compensation we paid, as well as certain other
compensation paid or accrued for those years, to each of the most highly
compensated executive officers of the Company in 2003 (the "Named Executive
Officers") in all capacities in which they served. See Employment Agreements.
Summary Compensation Table
Annual Compensation
--------------------------------------
Other Securities All Other
Compen- Underlying Compen-
Name and Principal Position Year Salary Bonus sation (1) Options (#) sation
--------------------------- ---- ------ ----- ---------- ----------- ------
Shant S. Hovnanian .................. 2003 $ 250,000 $ -- $ 140,000 -- $ --
Chairman of the Board of Directors, 2002 250,000 50,000 78,000 250,000 --
President and Chief Executive Officer 2001 250,000 -- -- 127,700 --
Thomas M. Finn ...................... 2003 $ 152,000 $ -- $ -- 100,000 $ --
Secretary, Treasurer and Chief 2002 -- -- -- -- --
Financial Officer 2001 -- -- -- -- --
Michael Bacon ....................... 2003 $ 175,000 $ -- $ -- -- $ --
Executive Vice President 2002 175,000 -- -- -- --
2001 175,000 -- -- 162,500 --
John Kallassy ....................... 2003 $ 175,000 $ 50,000 $ -- -- $ --
Executive Vice President 2002 175,000 50,000 -- -- --
2001 175,000 50,000 -- 112,500 --
(1) Under the terms of his employment contract, Mr. Hovnanian is entitled
to certain benefits. See 'Employment Agreements'. The amount shown in the table
above represents the total cost of these items to the Company without adjustment
for the portion of these costs allocable to business use by the Company.
18
Stock Option Grants Table
The following table sets forth information concerning individual grants of
options to purchase Common Stock made to Named Executive Officers during 2003.
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Price Appreciation for
Underlying Employees in Option Term
Options fiscal Exercise or Expiration -----------
Name Granted year Base Price Date 5% 10%
---- ------- ---- ----------- ---- -- ---
Thomas M. Finn 100,000 71.4% $1.175 6/10/13 $74,000 $187,000
For additional information regarding stock option grants to employees in
2003, see "Notes to Consolidated Financial Statements--Note 5, Stockholders'
Equity."
Aggregate Stock Option Exercise Table
The following table sets forth information regarding the number and value
of unexercised options that were held by the Named Executive Officers as of
December 31, 2003. None of the Named Executive Officers exercised any options
during 2003.
Number of Securities
Number of Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
Shant S. Hovnanian 0 $ -- 633,100 / 0 $125,003 / $ 0
Thomas M. Finn 0 -- 87,574 / 45,834 16,989 / 9,854
Michael Bacon 0 -- 262,500 / 0 63,375 / 0
John Kallassy 0 -- 337,500 / 0 43,875 / 0
For additional information regarding stock option grants to employees in
2003, see "Notes to Consolidated Financial Statements--Note 5, Stockholders'
Equity."
Director Compensation
During 2003, our Directors who are not officers or employees
("Non-Employee Directors") received an annual retainer of $24,000. Mr.
Leimkuhler received an additional retainer for services as a Director of two of
the Company's majority-owned subsidiaries, as lead outside director of the
Company and as the Chairman of the Company's Audit Committee in the aggregate
amount of $48,000. In addition, upon their initial election to the Board, new
Non-Employee Directors are granted options to purchase 5,000 shares of Common
Stock that are fully vested and immediately exercisable. Upon the date of each
annual meeting, Non-Employee Directors are granted options at fair market value
to purchase an additional 10,000 shares of Common Stock that are fully vested
and immediately exercisable. Our Directors of the Company who are officers or
employees do not receive any additional compensation for serving on the Board or
on any Board committee.
Employment Agreements
In April 2002, the Compensation Committee of the Board of Directors
approved a new employment agreement for Mr. Shant S. Hovnanian, effective as of
April 25, 2002. The agreement provides that Mr. Hovnanian will act as our
President and Chief Executive Officer. The agreement has a three-year term and
provides for an annual salary of $250,000. Under the agreement, Mr. Hovnanian is
entitled to be considered for annual performance based bonuses targeted at 50%
or greater of his base salary and a contingent bonus based on certain
performance factors, use of a Company apartment and car, a country club
membership and a $1,000,000 term life insurance policy with the beneficiary
designated by Mr. Hovnanian. Under the agreement, Mr. Hovnanian was also granted
250,000 options to purchase shares of our Common Stock at the market value as of
the effective date of the agreement. The options are fully vested and
immediately exercisable.
19
We entered into an employment agreement effective June 1, 1999 with Mr.
Michael Bacon. The agreement provides that Mr. Bacon will act as our Executive
Vice President. The agreement, which has no term, provides for an annual salary
of $137,500, subject to periodic review, and bonuses aggregating $37,500 and an
increase in annual salary to $175,000 based on the executive's attainment of
certain performance goals. Under this agreement, Mr. Bacon was granted 100,000
options to purchase shares of our Common Stock at the market value as of the
effective date of the agreement. 25,000 options become exercisable each six
months after June 1, 1999. Effective January 15, 2001, Mr. Bacon's salary was
increased to $175,000.
We entered into an employment agreement effective September 5, 2000 with
Mr. John A. Kallassy. The agreement provides that Mr. Kallassy will act as our
Executive Vice President. The agreement, which has no term, provides for an
annual salary of $175,000, subject to periodic review, and annual bonuses
aggregating $50,000 based on the executive's attainment of certain performance
goals. Under this agreement, Mr. Kallassy was granted 225,000 options to
purchase shares of our Common Stock at the market value as of the effective date
of the agreement. 18,750 of these options were fully vested and immediately
exercisable at the date of grant. Of the balance, 18,750 options become
exercisable each three months after September 5, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKDOLDER MATTERS
The following table sets forth information as of March 15, 2004 with
respect to the beneficial ownership of our stock by (i) each person known by us
to be the beneficial owner of more than 5% of the Common Stock; (ii) each person
serving as a director or director nominee of the Company; (iii) each of our
executive officers, and (iv) all of our directors and executive officers as a
group. Unless otherwise indicated, all shares are owned directly and the
indicated owner has sole voting and dispositive power with respect thereto.
Common Stock
Beneficially
Owned (1)
--------------------------------
Beneficial Owner Number Percent
- ---------------------------------------------------- -------------- ------------
Shant S. Hovnanian (2)(3).......................... 4,272,254 26.2%
Vahak S. Hovnanian (4)(5).......................... 2,943,655 18.0
William F. Leimkuhler (6).......................... 90,250 *
Jeffrey Najarian (7)............................... 70,000 *
Christopher Vizas (8).............................. 60,000 *
Thomas M. Finn (9)................................. 92,157 *
Michael Bacon (10) ................................ 262,500 1.6
John A Kallassy (11) .............................. 427,500 2.6
XO Communications, Inc. ........................... 2,000,000 12.3
All Directors and Executive Officers as a group (total 8
persons)....................................... 8,218,316 50.3%
* Less than 1% of the outstanding Common Stock
(1) Pursuant to the regulations of the Securities and Exchange Commission
(the "Commission"), shares are deemed to be "beneficially owned" by a person if
such person directly or indirectly has or shares (i) the power to vote or
dispose of such shares, whether or not such person has any pecuniary interest in
such shares, or (ii) the right to acquire the power to vote or dispose of such
shares within 60 days, including any right to acquire through the exercise of
any option, warrant or right.
(2) Includes options to purchase 633,100 shares of Common Stock pursuant
to the Stock Incentive Plan, which are fully vested and exercisable.
(3) Includes 100,000 shares of Common Stock owned by Mr. Shant S.
Hovnanian's minor child, Vahak Willem Hovnanian, for which Mr. Hovnanian, as
custodian, has sole voting power.
(4) Includes options to purchase 92,500 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically granted
upon election to the Board at the 2003 Annual Meeting.
(5) Includes 55,431 and 22,175 shares of Common Stock which Mr. Vahak S.
Hovnanian is required to sell upon the exercise of outstanding warrants at a per
share exercise price of $13.16 and $11.28, respectively.
(6) Includes options to purchase 90,250 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically
20
granted upon election to the Board at the 2003 Annual Meeting.
(7) Includes options to purchase 70,000 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically granted
upon election to the Board at the 2003 Annual Meeting.
(8) Includes options to purchase 60,000 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable, including
options for 10,000 shares of Common Stock that will be automatically granted
upon election to the Board at the 2003 Annual Meeting.
(9) Includes options to purchase 92,157 shares of Common Stock pursuant to
the Stock Incentive Plan, which are fully vested and exercisable.
(10) Includes options to purchase 262,500 shares of Common Stock pursuant
to the Stock Incentive Plan, which are fully vested and exercisable.
(11) Includes options to purchase 337,500 shares of Common Stock pursuant
to the Stock Incentive Plan, which are fully vested and exercisable.
Stockholders Agreements.
Verizon Communications, formerly Bell Atlantic Corporation, has the right
to appoint one director to the Board, so long as Verizon shall hold at least 1%
of the shares of Common Stock outstanding on a fully diluted basis.
Pursuant to a Stock Purchase Agreement dated as of June 13, 1999, the
Company is required to use all reasonable efforts, subject to fiduciary duties
under applicable law, to cause an XO Communications, Inc. representative to be
elected to the Company's Board.
Equity Compensation Plans
The following table sets forth certain information as of December 31, 2003
for all compensation plans, including individual compensation arrangements,
under which equity securities of the Company are authorized for issuance.
- --------------------------------------------------------------------------------------------------------
Number of
securities to be
issued upon Weighted average
exercise of exercise price of Number of
outstanding outstanding securities
options, warrants options, warrants remaining available
Plan category and rights and rights for further issuance
------------- ---------- ---------- --------------------
- --------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
security holders 1,777,465 $2.43 808,698
- --------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders
- --------------------------------------------------------------------------------------------------------
Total 1,777,465 $2.43 808,698
- --------------------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under `Director Compensation' included in Item 11. of this
Form 10-K is incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees represent fees for services rendered in connection with the
annual audit and quarterly reviews of the Company's financial statements. For
the years ended December 31, 2003 and 2002, the Company paid or accrued $166,200
and $126,800, respectively, for audit fees to PricewaterhouseCoopers LLP.
Audit - Related Fees represent fees for services rendered in connection
with assurance and related services that are reasonably related to the
performance of the audit or review of the financial statements and are not
reported as Audit Fees. For the years ended December 31, 2003 and 2002, the
Company did not pay or accrue any amounts for audit related fees.
Tax Fees represent fees for services rendered in connection with tax
compliance, tax advice and tax planning. For the years ended December 31, 2003
and 2002, the Company paid or accrued $70,000 and $120,000, respectively, for
tax fees to PricewaterhouseCoopers LLP.
21
All Other Fees represent fees for services rendered other than those
described above. For the years ended December 31, 2003 and 2002, the Company did
not pay or accrue any amounts for these services.
The Audit Committee of the Company's Board of Directors has established a
policy requiring its pre-approval of all audit and non-audit services provided
by its independent auditors. The policy requires the general pre-approval of
annual audit services and all other permitted services.
All of the audit and non-audit services described above were approved by
the Audit Committee and not pursuant to the waiver of pre-approval provisions
set forth in applicable rules of the SEC.
22
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Schedule
(1) Consolidated Financial Statements Page(s)
-------
Report of Independent Auditors............................................................ 25
Consolidated Balance Sheets as of December 31, 2003 and 2002.............................. 26
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and
2001...................................................................................... 27
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2003, 2002 and 2001...................................... 28
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and
2001...................................................................................... 29
Notes to Consolidated Financial Statements................................................ 30-38
(b) Reports on Form 8-K
A Form 8-K was filed on November 20, 2003 to report third quarter 2003
results, as announced in a press release dated November 14, 2003.
(c) Exhibits
3.1a Certificate of Incorporation. (1)
3.1b Certificate of Ownership and Merger of CVUSA Merger Corporation With
and Into CellularVision USA, Inc. (2)
3.2 By-laws. (1)
4.1 Form of Common Stock Certificate. (1)
4.2 Stockholders Agreement, dated as of January 12, 1996, by and among
CellularVision USA, Inc., Shant S. Hovnanian, Bernard B. Bossard and
Vahak S. Hovnanian. (1)
4.3 Form of Rights Agreement between SPEEDUS.COM, Inc. and Equiserve
Trust Company, N.A., as Rights Agent. The Rights Agreement includes
as Exhibit A the Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock of SPEEDUS.COM,
Inc., as Exhibit B the form of Rights Certificate and as Exhibit C
the form of Summary of Rights to Purchase Shares of Series A Junior
Participating Preferred Stock. (3)
10.1 SPEEDUS.COM, Inc. 1995 Stock Incentive Plan. (Amended and Restated
as of July 19, 2001) (4)
10.2 Employment Agreement, dated as of April 25, 2002, between
SPEEDUS.COM, Inc. and Shant S. Hovnanian. (7)
10.3 Amended and Restated Agreement of Limited Partnership of
CellularVision of New York, L.P., dated as of July 7, 1993, by and
between Hye Crest Management, Inc., Bell Atlantic Ventures, XXIII,
Inc. and the limited partners set forth on the signature page
thereto. (1)
10.4 Agreement, dated as of January 12, 1996, by and among CellularVision
USA, Inc., CellularVision of New York, L.P., Hye Crest Management,
Inc., Shant S. Hovnanian, Vahak S. Hovnanian, Bernard B. Bossard and
Bell Atlantic Ventures XXIII, Inc. (1)
10.5 Stock Purchase Agreement, dated as of June 13, 1999, between
SPEEDUS.COM, INC. and NEXTLINK Communications, Inc. (5)
10.6 Strategic Agreement, dated as of June 13, 1999, between SPEEDUS.COM,
INC. and NEXTLINK Communications, Inc. (5)
10.7 Amended and Restated Agreement to Assign LMDS License, dated as of
June 13, 1999, between SPEEDUS.COM. Inc., SPEEDUSNY, L.P. and
NEXTLINK Communications, Inc. (6)
21 Subsidiaries of SPEEDUS.COM, Inc. (1)
23
23.1 Consent of PricewaterhouseCoopers LLP (7)
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 (7).
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 (7).
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 (7).
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 (7).
- ----------
(1) Incorporated by reference to the Company's Registration Statement in
Form S-1 (File No. 33-98340) which was declared effective by the
Commission on February 7, 1996.
(2) Incorporated by reference to the Company's Form 10-K filed on March
31, 1999.
(3) Incorporated by reference to the Company's Form 8-K filed on January
16, 2001.
(4) Incorporated by reference to the Company's Definitive Proxy
Statement filed on July 27, 2001.
(5) Incorporated by reference to the Company's Form 8-K filed on June
28, 1999.
(6) Incorporated by reference to the Company's Form 8-K filed on October
26, 1999.
(7) Filed herewith.
24
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Speedus Corp.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a) present fairly, in all material respects, the
financial position of Speedus Corp. and its subsidiaries (the "Company") at
December 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 30, 2004
25
SPEEDUS CORP.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,419,197 $ 33,052,815
Marketable securities 2,086,638 879,194
Due from broker 3,713,146 11,728,880
Prepaid expenses and other 83,222 17,488
Accounts and other receivables 42,500 40,099
------------ ------------
Total current assets 25,344,703 45,718,476
Property and equipment, net of accumulated
depreciation of $2,003,862 and $2,015,662 419,868 819,714
Other intangible assets, net of accumulated
amortization of $1,051,493 and $418,929 2,042,051 1,651,071
Goodwill 620,875 1,760,106
Other assets 82,563 235,208
------------ ------------
Total assets $ 28,510,060 $ 50,184,575
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 151,258 $ 228,144
Accrued liabilities 1,432,426 1,734,252
Securities sold and not purchased 5,406,135 14,212,566
------------ ------------
Total current liabilities 6,989,819 16,174,962
Minority interest 531,055 1,591,557
Commitments and Contingencies
Stockholders' equity:
Common stock ($.01 par value; 50,000,000
shares authorized; 21,516,088 and 21,384,838 215,161 213,848
shares issued)
Preferred stock ($.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 90,442,120 90,289,432
Treasury stock (at cost; 5,257,649 and 4,418,577 shares) (5,250,552) (4,371,778)
Accumulated deficit (64,417,543) (53,713,446)
------------ ------------
Stockholders' equity 20,989,186 32,418,056
------------ ------------
Total liabilities and stockholders' equity $ 28,510,060 $ 50,184,575
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
26
SPEEDUS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
--------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues $ 710,786 $ 906,809 $ 68,847
------------ ------------ ------------
Expenses:
Selling, general and administrative 4,494,589 4,639,394 5,263,179
Research and development 1,705,233 946,482 1,716,118
Depreciation and amortization 1,158,753 5,277,956 9,373,353
Cost of sales 222,662 515,956 --
------------ ------------ ------------
Total operating expenses 7,581,237 11,379,788 16,352,650
------------ ------------ ------------
Operating loss (6,870,451) (10,472,979) (16,283,803)
Investment income/(loss) (4,519,600) (194,280) 9,058,801
Minority interest 778,950 80,105 --
Equity in loss of associated company (92,996) (520,822) (125,297)
Other income -- -- 86,465
------------ ------------ ------------
Net loss $(10,704,097) $(11,107,976) $ (7,263,834)
============ ============ ============
Per share:
Basic loss per common share $ (0.65) $ (0.62) $ (0.36)
============ ============ ============
Weighted average common shares
outstanding 16,498,267 17,927,000 19,947,784
============ ============ ============
Diluted loss per common share $ (0.65) $ (0.62) $ (0.36)
============ ============ ============
Weighted average common shares
outstanding 16,498,267 17,927,000 19,947,784
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
27
SPEEDUS CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 2001, 2002 and 2003
Common Stock Treasury Stock Total
----------------------- Additional ------------------------- Accumulated Shareholders'
Amount Shares Paid-in-capital Amount Shares Deficit Equity
--------- ---------- --------------- ----------- ----------- ------------ -----------
Balance, January 1, 2001 $ 210,348 21,034,838 $90,292,432 $ (305,741) 309,800 $(35,341,636) $54,855,403
Issuance of common stock 3,000 300,000 (3,000) 0
Exercise of options or
warrants 500 50,000 500
Repurchase of common stock (2,110,348) 1,967,732 (2,110,348)
Net loss (7,263,834) (7,263,834)
--------- ---------- ----------- ----------- ----------- ------------ -----------
Balance, December 31, 2001 213,848 21,384,838 90,289,432 (2,416,089) 2,277,532 (42,605,470) 45,481,721
Repurchase of common stock (1,955,689) (2,141,045) (1,955,689)
Net loss (11,107,976) (11,107,976)
--------- ---------- ----------- ----------- ----------- ------------ -----------
Balance, December 31, 2002 213,848 21,384,838 90,289,432 (4,371,778) 4,418,577 (53,713,446) 32,418,056
Exercise of options or
warrants 1,313 131,250 129,938 131,251
Stock based compensation 22,750 22,750
Repurchase of common stock (878,774) 839,072 (878,774)
Net loss (10,704,097) (10,704,097)
--------- ---------- ----------- ----------- ----------- ------------ -----------
Balance, December 31, 2003 $ 215,161 21,516,088 $90,442,120 $(5,250,552) 5,257,649 $(64,417,543) $20,989,186
========= ========== =========== =========== =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
28
SPEEDUS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(10,704,097) $(11,107,976) $ (7,263,834)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,158,753 5,277,956 9,373,353
Unrealized (gains)/losses 107,055 2,254,593 787,000
Equity in loss of associated company 92,996 520,822 125,297
Minority interest (778,950) (80,105) --
Stock based compensation 22,750 -- 653,000
Other income -- -- (86,465)
Changes in operating assets and liabilities:
Marketable securities (556,548) (848,169) 660
Due from broker 8,015,734 (6,807,703) (4,296,387)
Accounts and other receivables (2,401) 132,399 (22,182)
Prepaid expenses and other (65,734) 363,844 (319,234)
Other assets (62,851) (162,397) 12,900
Due from affiliates -- -- 93,112
Accounts payable (192,563) (73,727) (63,331)
Accrued liabilities (405,095) 254,936 (71,082)
Securities sold and not purchased (9,564,382) 5,680,582 4,574,840
Other current liabilities -- (401,881) 446,212
------------ ------------ ------------
Net cash used in operating activities (12,935,333) (4,996,826) 3,943,859
------------ ------------ ------------
Cash flows from investing activities:
Loans and other receivables, net of repayments 2,500 (115,916) --
Loans to related parties 120,000 (373,426) --
Property and equipment additions (92,060) 1,669 (94,945)
Acquisition of business, net of cash acquired 18,798 6,000 --
Proceeds from sale of assets -- 553,122 --
Investment in associated company -- -- (400,000)
------------ ------------ ------------
Net cash provided by/(used in) investing activities 49,238 71,449 (494,945)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of warrants 131,251 -- 500
Repurchase of stock (878,774) (1,955,689) (2,110,348)
------------ ------------ ------------
Net cash used in financing activities (747,523) (1,955,689) (2,109,848)
------------ ------------ ------------
Net increase/(decrease) in cash
and cash equivalents (13,633,618) (6,881,066) 1,339,066
Cash and cash equivalents, beginning of period 33,052,815 39,933,881 38,594,815
------------ ------------ ------------
Cash and cash equivalents, end of period $ 19,419,197 $ 33,052,815 $ 39,933,881
============ ============ ============
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) (1,591,557) --
------------ ------------ ------------
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.
29
SPEEDUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Organization
Speedus Corp. ("Speedus" or the "Company"), a Delaware corporation, was
formed in October 1995 as CellularVision USA, Inc. ("CVUS") to combine the
ownership of predecessor companies that were under common control. In January
1999, through a `short form merger' as allowed under Delaware law, CVUS changed
its name to SPEEDUS.COM, Inc. In June 2002, in the same manner, SPEEDUS.COM,
Inc. changed its name to Speedus Corp. Unless the context requires otherwise,
the term Company includes Speedus and its wholly- and majority-owned
subsidiaries.
Business activities
Speedus Corp. is a holding company that owns significant equity interests
in diverse businesses. We seek business opportunities across all industries for
potential transactions and relationships in which we can apply our current
resources and management strengths. The companies that we target, either public
or privately held, will be seeking growth or restructuring capital to pursue
near term business objectives in demonstrated markets. We will continue to
pursue opportunities involving our expertise in the medical device and wireless
markets as well as those areas involving our broadband assets as attractive
opportunities present themselves.
We have co-invested with Siemens Corporate Research, Inc., a subsidiary of
Siemens Corporation, in Zargis Medical Corp. to develop medical diagnostic
support service solutions that automatically analyze acoustical data from a
patient to determine physiological significant features useful in medical
diagnosis. The first Zargis clinical device, the Zargis Acoustic Cardioscan
(ZAC) will initially be targeted toward primary care physicians, to be used as
part of general medical examinations and physicals to detect murmurs which could
be a sign of valvular and congenital heart disease. We own 80% of F&B Gudtfood
Holding Corp., the creator and operator of the original Eurocentric "chic and
quick" cafe, which is operating its first store in Manhattan and is currently
planning expansion to other locations. We own a portfolio of patents that allow
for high-speed wireless communications. We also own fixed wireless spectrum in
the New York City metropolitan area that we may commercialize in the future to
support high-speed, or broadband, Internet access service.
2. Summary of Significant Accounting Policies
Financial statements and principles of consolidation
The consolidated financial statements include the accounts of Speedus and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Companies in which Speedus directly or indirectly owns more than 50% of
the outstanding voting securities or that Speedus has effective control over are
accounted for under the consolidation method of accounting. Under this method,
those companies' balance sheets and results of operations, from the date Speedus
acquired control, are included in Speedus' consolidated financial statements.
The interest in the net assets and operations of these companies' other
stockholders is reflected in the caption `Minority interest' in Speedus'
consolidated balance sheet and statements of operations.
The Company's share of earnings or losses of associated companies, that
are 20% to 50% owned, is included in the consolidated operating results using
the equity method of accounting.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of operating revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid interest earning investments with
original maturities of three months or less to be cash equivalents. At December
31, 2003 and 2002, cash equivalents consisted of money market funds.
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 December 31, 2003 and
2002, marketable securities consisted of publicly traded equity securities and
were recorded at fair market value. Their original cost was $2,040,000 and
$1,479,000, unrealized gains/(losses) since acquisition were
30
$47,000 and $(600,000) and the carrying value was $2,087,000 and $879,000,
respectively. At December 31, 2003, based upon the fair market value of these
securities, 100% was invested in technology companies.
Securities sold and 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 December 31, 2003 and 2002, the Company had
sold securities it had not purchased. The aggregate proceeds were $4,514,000 and
$12,001,000, unrealized gains/(losses) since acquisition were $(892,000) and
$(2,212,000) and the market value of the securities was $5,406,000 and
$14,213,000, respectively. At December 31, 2003, based upon the fair market
value of these securities, 94% was invested in technology companies and 6% was
invested in other companies.
During the years ended December 31, 2003, 2002 and 2001, realized
gains/(losses) in the amounts of $(6,668,000), $1,136,000 and $9,324,000 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 December 31, 2003 and 2002, restricted cash
balances in the amounts of $3,713,000 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, amounts due
from brokers and marketable securities. These instruments are potentially
subject to concentrations of credit risk but the Company believes that this risk
is limited due to diversification and investments being made in investment grade
securities.
The Company also sells publicly traded equity securities that it does not
own in anticipation of declines in the fair market values of the securities.
When the Company sells securities that it does not own, it must borrow the
securities it sold in order to deliver them and settle the trades. Thereafter,
the Company must buy the securities and deliver them to the lender of the
securities. The 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.
Property and Equipment
Transmission equipment, customer premises equipment, office equipment and
leasehold improvements are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, ranging from two to seven
years. Fiber optic lines are depreciated over an estimated useful life of 10
years.
When assets are fully depreciated, it is the Company's policy to remove
the costs and related accumulated depreciation from its books and records.
During the year ended December 31, 2002, the Company recorded a charge,
included in 'Depreciation and amortization' in the accompanying Consolidated
Statements of Operations, in the amount of $3,650,000 for property and equipment
taken out of service.
Long-lived assets
The Company periodically evaluates the net realizable value of long-lived
assets, including fixed and intangible assets, relying on anticipated future
cash flows. The Company's evaluation of anticipated future cash flows considers
operating results, business plans and economic projections, as well as,
non-financial data such as market trends, product and development cycles, and
changes in management's market emphasis. An impairment in the carrying value of
an asset is recognized when the expected future operating cash flows derived
from the asset are less than its carrying value.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets in
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" which requires the use of a nonamortization
approach to account for purchased goodwill and certain intangibles. Under the
nonamortization approach, goodwill is not being amortized into results of
operations, but instead is reviewed for impairment at least annually and charged
against results of operations only in the periods in which the recorded value of
goodwill and certain intangibles is more than its fair value. Goodwill in
connection with the acquisition of F&B Gudtfood, with a balance of $1,760,000 at
December 31, 2002, decreased $1,139,000 as a result of the reduction in the
Company's investment in F&B Gudtfood and changes in the Company's ownership
percentage, resulting in a balance of $621,000 recorded by the Company as
goodwill at December 31, 2003.
31
The Company owns broadband assets, included in intangible assets, with a
carrying value of $1.2 million at December 31, 2003 and currently does not
generate significant revenues or cash flows. However, the Company estimated
that, based upon its review of recent transactions and other factors, the fair
value of its remaining FCC license and certain patents that have no carrying
value on its books would generate sufficient cash to fully realize its assets
described above. This estimate evaluated the recovery of these broadband assets
compared to the fair value of the 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.
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 during 2003. 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 considered the remaining useful life to be four
years and has accounted for this determination as a change in an estimate.
Medical technology, in the aggregate amount of $1,024,000 with accumulated
amortization in the amount of $220,000 at December 31, 2003, is being amortized
over a period of three years.
Amortization expense relating to intangible assets for the years ended
December 31, 2003, 2002 and 2001 amounted to $633,000, $148,000 and $398,000,
respectively. The estimated annual amortization expense for 2004, 2005 and 2006,
the expiration of the remaining useful life of the Company's intangible assets
at December 31, 2003, is $750,000, $750,000 and $542,000, respectively.
The Company reviewed the carrying value of goodwill in the amount of $0.6
million at December 31, 2003, and estimated based upon its review, taking into
account such factors as projected operations and Company's redemption rights in
connection with the investment, that there has been no impairment to this
carrying value.
As a result of continuing weak industry conditions and lower market
valuations, we determined that there were indications of impairment to the
carrying value of our goodwill and other purchased intangibles in connection
with our purchase in 2000 of the remaining 55% interest in Speedia, LLC that we
did not already own. Based on our review, we recorded a charge of $3,779,000,
included in `Depreciation and amortization' for the year ended December 31,
2001, for the impairment of intangible assets associated with that acquisition.
Revenue Recognition
Revenues from F&B Gudtfood's operations are recorded on a cash basis.
During 2002, the Company earned fees from 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.
Income Taxes
As required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company is required to provide for deferred
tax assets or liabilities arising due to temporary differences between the book
and tax basis of the Company's assets and liabilities.
As of December 31, 2003, the Company has a deferred tax asset of
approximately $27.2 million, relating primarily to operating losses.. An
offsetting valuation allowance of $27.2 million has been established as the
Company had no ability to carryback its losses and a limited earnings history.
A reconciliation of the Company's effective income tax rate and the
federal tax rate is as follows:
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Statutory rate (34%) (34%) (34%)
Permanent difference - stock based compensation 0% 0% 3%
State and local income taxes, net of federal benefit (10%) (10%) (11%)
Change in valuation allowance 44% 44% 42%
---- ---- ----
Effective rate --% --% --%
==== ==== ====
At December 31, 2003, the Company had net operating loss carryforwards of
approximately $19 million which expire between 2005 and 2025. Under the
provisions of the Internal Revenue Code, certain substantial
32
changes in the Company's stock ownership may result in a limitation on the
amounts of net operating loss carryforwards which can be utilized in future
years.
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 years ended December 31, 2003, 2002 and 2001, basic and diluted
net loss available for common shareholders was equal to net loss. Outstanding
stock options and warrants in the weighted average amounts of 2,021,000,
2,248,000 and 2,158,000 for the years ended December 31, 2003, 2002 and 2001,
respectively, have been excluded from the diluted loss per share since their
effect would be antidilutive.
Stock Options
The Company accounts for its employee stock options in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", as amended by SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123", which defines a "fair value method" of measuring and accounting for
compensation expense from employee stock options. This standard also allows
accounting for such options under the "intrinsic value method" in accordance
with Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to use the intrinsic value method. 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 years ended
December 31, 2003, 2002 and 2001 is summarized as follows:
2003 2002 2001
-------------- -------------- --------------
Net loss as reported $ (10,704,097) $ (11,107,976) $ (7,263,834)
After tax effect of pro forma compensation (267,000) (1,108,000) (975,000)
-------------- -------------- --------------
Pro forma net loss $ (10,971,097) $ (12,215,976) $ (8,238,834)
============== ============== ==============
Loss per share:
Basic - as reported $ (0.65) $ (0.62) $ (0.36)
============== ============== ==============
Basic - pro forma $ (0.66) $ (0.68) $ (0.41)
============== ============== ==============
Diluted - as reported $ (0.65) $ (0.62) $ (0.36)
============== ============== ==============
Diluted - pro forma $ (0.66) $ (0.68) $ (0.41)
============== ============== ==============
In determining fair value, the stock options were valued using the
Black-Scholes option pricing model. Key assumptions used in valuing the options
granted during the years ended December 31, 2003, 2002 and 2001 are summarized
as follows:
2003 2002 2001
------------ ------------ ------------
Risk free investment rate 2% 4% 6%
Expected lives 3 years 3 years 3 years
Expected volatility factors 51% 175% 175%
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. Throughout 2003, the FASB released numerous proposed and final
FASB Staff Positions (FSPs) regarding FIN 46, which both clarified and modified
FIN 46's provisions. In December 2003, the FASB issued Interpretation No. 46
(FIN 46-R), which will replace FIN 46 upon its effective date. FIN 46-R retains
many of the basic concepts introduced in FIN 46; however, it also introduces a
new scope exception for certain types of entities that qualify as a business as
defined in FIN 46-R, revises the method of calculating expected losses and
residual returns for determination of the primary beneficiary, includes new
guidance for assessing variable interests, and codifies certain FSPs on FIN 46.
This standard did not have an impact on the Company's 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
33
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 (1)
instruments entered into or modified after May 31, 2003 and (2) pre-existing
instruments as of July 1, 2003. In November 2003, through the issuance of FSP
150-3, the FASB indefinitely deferred the effective date of certain provisions
of SFAS No. 150, including mandatorily redeemable instruments as they relate to
minority interests in consolidated finite-lived entities. This standard did not
have an impact on the Company's financial statements.
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. Prior to February
28, 2003, the Company held a 46.4% interest in Zargis and accounted for its
investment under the equity method of accounting. On July 28, 2003, the Company
increased its ownership in Zargis Medical to 68.9% with an additional investment
of $2,000,000. As of December 31, 2003 and February 1, 2004, our ownership
increased to 70.5% and 71.2%, respectively, as a result of certain milestones
not having been met.
This acquisition was accounted for using the purchase method of
accounting. The results of operations of Zargis Medical have been included in
the consolidated statements of operations from the date of acquisition. The
$3,250,000 aggregate purchase price was allocated as follows: $3,269,000 to
cash, $34,000 to non current assets, $1,024,000 to other intangible assets,
$(219,000) to current liabilities and $(858,000) to minority interest. An
aggregate of $1,024,000, representing the excess of the purchase price over the
fair value of the net assets acquired, has been allocated as medical technology
to an intangible asset and will be amortized over a period of three years.
Unaudited pro forma operating results of the Company as though the
acquisition of Zargis Medical had occurred at the beginning of each period
presented, are as follows:
Years ended December 31,
-------------------------------
(unaudited)
2003 2002
------------ ------------
Revenues $ 710,786 $ 906,809
Operating loss $ (7,405,880) $(11,978,236)
Net loss $(11,086,116) $(11,728,288)
Basic and diluted loss per share $ (0.67) $ (0.65)
b. On May 6, 2002, the Company acquired a 51% interest in F&B Gudtfood,
the creator and operator of the original Eurocentric "chic and quick" cafe,
which is operating its first store in Manhattan and is currently planning
expansion to other locations. The acquisition price was $3,500,000. On February
8, 2003, the Company reduced its cash investment in F&B Gudtfood and received
$1,775,000 while maintaining its 51% interest. In December 2003, as a result of
renegotiation, our interest increased to 80% without an additional investment
and, under certain circumstances, could increase to 90%.
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 $0.6 million and has been recorded as goodwill.
Unaudited pro forma operating results of the Company as though the
acquisition of F&B Gudtfood had occurred at the beginning of the period
presented, are as follows:
Year ended
December 31,
2002
------------
(unaudited)
Revenues $ 1,175,523
Operating loss $(10,457,705)
Net loss $(11,092,702)
Basic and diluted net loss per share $ (0.62)
34
4. Property and Equipment
Property and equipment consists of the following:
December 31,
-----------------------------
2003 2002
----------- -----------
Leasehold improvements $ 2,136,006 $ 2,120,107
Office equipment 287,724 269,732
Transmission equipment 0 258,037
Fiber optics 0 187,500
----------- -----------
2,423,730 2,835,376
Less accumulated depreciation (2,003,862) (2,015,662)
----------- -----------
Property and equipment $ 419,868 $ 819,714
=========== ===========
Depreciation expense was $526,000, $5,130,000 (including a charge in the
amount of $3,650,000 for property and equipment taken out of service) and
$2,988,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
5. Stockholders' Equity
Stock Options
The Company's 1995 Stock Incentive Plan, as amended, provides for the
grant of various stock-based incentives, including non-qualified and incentive
stock options. The Plan has reserved 2,750,000 shares of Common Stock of the
Company for issuance to employees, directors and consultants, including an
additional 500,000 shares approved by stockholders in each of 1999, 2000 and
2001.
Stock option activity and weighted average prices for the three years
ended December 31, 2003 is summarized as follows:
2003 2002 2001
------------------------- ------------------------ ----------------------
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at January 1 1,701,524 $ 2.61 1,604,980 $ 2.90 1,052,094 $ 4.22
Granted 140,000 1.21 290,000 1.08 682,246 1.02
Exercised -- -- -- -- -- --
Cancelled (64,059) 4.51 (193,456) 2.66 (129,360) 3.77
---------- ---------- ----------
Outstanding at December 31 1,777,465 $ 2.43 1,701,524 $ 2.61 1,604,980 $ 2.90
========== ========== ==========
Exercisable at December 31 1,731,631 $ 2.47 1,405,436 $ 2.87 840,817 $ 4.09
========== ========== ==========
Available for grant at December 31 808,698 884,639 981,183
========== ========== ==========
The following table summarizes information concerning currently
outstanding and exercisable stock options at December 31, 2003:
Stock options outstanding Stock options exercisable
-------------------------------------------- -----------------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise prices Options life (years) price Options price
----------------- ------------- ------------ --------------- ------------ ---------------
$ 0.83 - 1.00 588,556 7 $ 0.98 588,556 $ 0.98
1.07 - 2.08 450,000 6 1.22 404,166 1.22
3.00 - 4.84 691,500 6 3.99 691,500 3.99
5.20 - 9.88 32,409 4 7.00 32,409 7.00
13.75 - 15.00 15,000 5 14.17 15,000 14.17
------------ -----------
1,777,465 1,731,631
============ ===========
Warrants
The Company accounts for warrants granted to non-employees under the
provisions of Statement of Financial Accounting Standards No. 123 and Emerging
Issues Task Force No. 96-18, "Accounting for equity instruments that are issued
to other than employees for acquiring or in conjunction with selling, goods and
services". The fair value of the warrants at the time of issuance was determined
using the Black-Scholes option-pricing model. Expenses are recognized over the
service terms.
35
Warrant activity and weighted average prices for the three years ended
December 31, 2003 is summarized as follows:
2003 2002 2001
----------------------- ----------------------- ----------------------
Warrants Price Warrants Price Warrants Price
-------- ----- -------- ----- -------- -----
Outstanding at January 1 413,256 $ 5.64 663,256 $ 4.94 713,256 $ 4.60
Granted -- -- -- -- -- --
Exercised (131,250) 1.00 -- -- (50,000) 0.01
Cancelled (125,000) 4.78 (250,000) 3.79 -- --
-------- -------- --------
Outstanding at December 31 157,006 $ 10.21 413,256 $ 5.64 663,256 $ 4.94
======== ======== ========
Exercisable at December 31 157,006 $ 10.21 413,256 $ 5.64 663,256 $ 4.94
======== ======== ========
Warrants outstanding and exercisable at December 31, 2003 have exercise
prices ranging from $1.00 to $15.03 and a weighted average remaining life of 2
years.
At December 31, 2003, the Company under certain circumstances may be
obligated to grant 20,000 warrants at an exercise price of $1.10.
Treasury Stock
During the years ended December 31, 2003, 2002 and 2001, the Company
repurchased 839,072, 2,141,045 and 1,967,732 shares, respectively, of its own
Common Stock.
Stockholder Rights Plan
On January 11, 2001, the Company's Board of Directors adopted a
stockholder rights plan in which preferred stock purchase rights will be
distributed as a dividend at the rate of one right for each share of the
Company's Common Stock.
Each right generally will entitle stockholders, in certain circumstances,
to buy one one-ten thousandth of a newly issued share of Series A Junior
Participating Preferred Stock of the Company at an exercise price of $50.00. The
rights generally will be exercisable and transferable apart from the Common
Stock only if a person or group acquires beneficial ownership of 17% or more of
the Common Stock or commences a tender or exchange offer upon consummation of
which such person or group would beneficially own 17% or more of the Common
Stock.
If any person becomes the beneficial owner of 17% or more of the Company's
Common Stock, then each right not owned by a 17% or more stockholder or certain
related parties will entitle its holder to purchase, at the right's then-current
exercise price, shares of Common Stock (or, in certain circumstances as
determined by the Board, cash, other property, or other securities) having a
value of twice the right's exercise price. In addition, if, after any person has
become a 17% or more stockholder, the Company is involved in a merger or other
business combination transaction with another person in which its Common Stock
is changed or converted, or sells 50% or more of its assets or earning power to
another person, each right will entitle its holder to purchase, at the right's
then-current exercise price, shares of common stock of such other person having
a value of twice the right's exercise price.
The Company will generally be entitled to redeem the rights at $.01 per
right at any time until the tenth day following public disclosure that a person
or group has become the beneficial owner of 17% or more of the Company's common
stock. The rights will expire on January 26, 2011.
Reverse Stock Split
At the Company's 2003 annual meeting, stockholders approved a proposal
authorizing the Company's Board of Directors in its discretion, through December
31, 2004, to effect a reverse stock split of all the issued and outstanding
shares, as well as treasury shares, of the Company's Common Stock at a ratio not
to exceed one-for-six if necessary to continue the Company's listing on Nasdaq.
As of December 31, 2003, the reverse stock split had not been implemented.
6. Commitments and Contingencies
Noncancelable Leases
At December 31, 2003, future minimum lease payments due under
noncancelable leases are as follows:
36
2004 $ 345,000
2005 210,000
2006 211,000
2007 215,000
2008 220,000
Thereafter 788,000
-----------
$ 1,989,000
===========
Rent expense was approximately $401,000, $355,000 and $294,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.
Indemnification
As permitted under Delaware law, the Company's Certificate of
Incorporation and By-Laws provide circumstances by which the Company shall
indemnify each director, officer, employee or agent of the Company. The maximum
potential exposure under these provisions is unlimited; however, the Company has
an Officers and Directors insurance policy that limits its exposure and enables
it to recover a portion of any amounts paid. The Company has not provided for
any potential exposure under these provisions at December 31, 2003.
7. 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 business.
8. Business Segment Information
The following table sets forth the Company's financial performance by
reportable operating segment for the years ended December 31, 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 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 2003.
Year ended December 31, 2003
-----------------------------------------------------------------
Corporate
F&B Zargis and other Totals
--- ------ --------- ------
Revenues from external customers $ 705,916 $ 0 $ 4,870 $ 710,786
Depreciation and amortization 43,077 20,915 1,094,761 1,158,753
Operating loss (786,042) (1,529,290) (4,555,119) (6,870,451)
Investment income/(loss) 16,466 0 (4,536,066) (4,519,600)
Goodwill and other intangible assets 620,875 803,747 1,238,304 2,662,926
Fixed assets 169,035 24,205 226,628 419,868
Total assets 762,689 1,397,079 26,350,292 28,510,060
Year ended December 31, 2002
-------------------------------------------------
Corporate
F&B and other Totals
--- --------- ------
Revenues from external customers $ 445,841 $ 460,968 $ 906,809
Depreciation and amortization 3,946 5,274,010 5,277,956
Operating loss (267,136) (10,205,843) (10,472,979)
Investment income/(loss) 35,591 (229,871) (194,280)
Goodwill and other intangible assets 1,760,106 1,651,071 3,411,177
Fixed assets 120,054 699,660 819,714
Total assets 3,211,582 46,972,993 50,184,575
The Company has no foreign operations. During the years ended December 31,
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.
37
9. Selected Quarterly Data (unaudited)
Quarterly financial information is summarized in the table below (amounts
in thousands, except per share amounts):
Year ended December 31, 2003
-------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Revenues $ 170 $ 204 $ 174 $ 163
Selling, general and
administrative expenses 927 1,149 1,130 1,289
Research and development 335 423 479 468
Cost of sales 48 79 36 60
Operating loss (1,355) (1,707) (1,745) (2,063)
Investment income/(loss) (48) (4,451) (432) 411
Net earnings/(loss) $(1,415) $(5,933) $(1,991) $(1,365)
Per share (1):
Basic $ (0.08) $ (0.36) $ (0.12) $ (0.08)
Diluted $ (0.08) $ (0.36) $ (0.12) $ (0.08)
Year ended December 31, 2002
-------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Revenues $ 235 $ 325 $ 149 $ 198
Selling, general and
administrative expenses 1,053 990 1,184 1,412
Research and development 216 267 226 237
Cost of sales 205 213 49 49
Operating loss (1,899) (5,409) (1,490) (1,675)
Investment income/(loss) 1 1,019 1,857 (3,071)
Net earnings/(loss) $(1,981) $(4,503) $ 254 $(4,878)
Per share (1):
Basic $ (0.10) $ (0.25) $ 0.01 $ (0.29)
Diluted $ (0.10) $ (0.25) $ 0.01 $ (0.29)
(1) Earnings per share is computed separately for each period. Therefore,
the sum of the quarterly per share amounts may differ from the total for
the year.
10. Subsequent Events
In February 2004, the Company's wholly-owned subsidiary, CellularVision
Technology & Telecommunications, L.P., received approximately $12.1 million,
after the expenses described below, from a former international licensee in
settlement of litigation that CT&T instituted in May 2001.
In connection with the settlement and as provided under the terms of his
2002 employment agreement, Shant S. Hovnanian, Chairman of the Board and Chief
Executive Officer of the Company, received a contingent participation in the
proceeds of the settlement in the amount of approximately $2.8 million. In
addition, approximately $0.1 million in legal and other closing costs was paid
at closing to unaffiliated third parties.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in New York, New York
on March 30, 2004.
SPEEDUS CORP.
s/s Shant S. Hovnanian
----------------------
Shant S. Hovnanian
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
s/s Shant S. Hovnanian Chairman of the Board of Directors, March 30, 2004
- --------------------------- President and Chief Executive Officer
Shant S. Hovnanian
s/s Thomas M. Finn Treasurer and Chief Financial Officer March 30, 2004
- ---------------------------
Thomas M. Finn
s/s Stephen D. Quinn Controller and Chief Accounting Officer March 30, 2004
- ---------------------------
Stephen D. Quinn
s/s Vahak S. Hovnanian Director March 30, 2004
- ---------------------------
Vahak S. Hovnanian
s/s William F. Leimkuhler Director March 30, 2004
- ---------------------------
William F. Leimkuhler
s/s Jeffrey Najarian Director March 30, 2004
- ---------------------------
Jeffrey Najarian
s/s Christopher Vizas Director March 30, 2004
- ---------------------------
Christopher Vizas