UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _______________________ Commission file number: 000-27582 Speedus Corp. (Exact name of registrant as specified in its charter) Delaware 13-3853788 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 140 58th Street, Suite 7E Brooklyn, New York 11220 (Address of principal executive offices) (Zip Code) 718-567-4300 (Registrant's telephone number, including area code) SPEEDUS.COM, Inc. (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of outstanding shares of the registrant's common stock, par value $.01 per share, as of August 5, 2002 was 17,752,106. SPEEDUS CORP. INDEX TO FORM 10-Q Page(s) PART I -- FINANCIAL INFORMATION ITEM 1 -- Financial Statements Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001 ......................................... 3 Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2002 and 2001 ............. 4 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2002 and 2001 ....................... 5 Notes to Consolidated Financial Statements (unaudited) ........ 6-7 ITEM 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 8-11 ITEM 3 -- Quantitative and Qualitative Disclosures About Market Risk ...... 11 PART II -- OTHER INFORMATION ITEM 1 -- Legal Proceedings ............................................... 12 ITEM 2 -- Changes in Securities ........................................... 12 ITEM 3 -- Defaults Upon Senior Securities ................................. 12 ITEM 4 -- Submission of Matters to a Vote of Security Holders ............. 12 ITEM 5 -- Other Information ............................................... 12 ITEM 6 -- Exhibits and Reports on Form 8-K ................................ 12 Signature Page ............................................................ 13 2 SPEEDUS CORP. CONSOLIDATED BALANCE SHEETS June 30, December 31, 2002 2001 ------------ ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 37,252,294 $ 39,933,881 Marketable securities 1,487,887 31,471 Due from broker 4,476,489 4,921,177 Accounts and other receivables 49,157 670,120 Prepaid expenses and other 13,528 381,332 ------------ ------------ Total current assets 43,279,355 45,937,981 Property and equipment, net of accumulated depreciation of $2,244,803 and $9,650,192 1,100,881 5,828,315 Other intangible assets, net of accumulated amortization of $345,000 and $271,071 1,725,000 1,798,929 Goodwill 1,755,006 -- Other assets 348,939 326,881 ------------ ------------ Total assets $ 48,209,181 $ 53,892,106 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 308,352 $ 206,871 Accrued liabilities 1,333,793 1,461,460 Securities sold and not purchased 7,210,320 6,277,837 Other current liabilities 66,840 464,217 ------------ ------------ Total current liabilities 8,919,305 8,410,385 Minority interest 1,653,778 -- Commitments and Contingencies -- -- Stockholders' equity: Common stock ($.01 par value; 50,000,000 shares authorized; 21,384,838 shares issued 213,848 213,848 Preferred stock ($.01 par value; 20,000,000 shares authorized): Series A Junior Participating ($.01 par value; 4,000 shares authorized; no shares issued and outstanding) -- -- Additional paid-in-capital 90,289,432 90,289,432 Treasury stock (at cost; 3,632,732 and 2,277,532 shares) (3,777,375) (2,416,089) Accumulated deficit (49,089,807) (42,605,470) ------------ ------------ Stockholders' equity 37,636,098 45,481,721 ------------ ------------ Total liabilities and stockholders' equity $ 48,209,181 $ 53,892,106 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 3 SPEEDUS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended June 30, Six Months Ended June 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenues $ 325,610 $ 21,877 $ 560,174 $ 46,381 ------------ ------------ ------------ ------------ Expenses: Selling, general and administrative 990,140 1,463,600 2,043,244 3,001,174 Research and development 266,823 443,117 483,184 928,205 Depreciation and amortization 4,264,746 1,400,069 4,924,529 2,784,294 Cost of sales 213,089 -- 418,361 -- ------------ ------------ ------------ ------------ Total operating expenses 5,734,798 3,306,786 7,869,318 6,713,673 ------------ ------------ ------------ ------------ Operating loss (5,409,188) (3,284,909) (7,309,144) (6,667,292) Investment income/(loss) 1,019,358 (240,348) 1,019,872 5,638,311 Equity in loss of associated company (135,921) (20,590) (217,849) (40,602) Minority interest 22,784 -- 22,784 -- ------------ ------------ ------------ ------------ Net loss $ (4,502,967) $ (3,545,847) $ (6,484,337) $ (1,069,583) ============ ============ ============ ============ Per share: Basic loss per common share $ (0.25) $ (0.18) $ (0.35) $ (0.05) ============ ============ ============ ============ Weighted average common shares outstanding 18,076,408 20,179,102 18,491,203 20,251,034 ============ ============ ============ ============ Diluted loss per common share $ (0.25) $ (0.18) $ (0.35) $ (0.05) ============ ============ ============ ============ Weighted average common shares outstanding 18,076,408 20,179,102 18,491,203 20,251,034 ============ ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 4 SPEEDUS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six months ending June ---------------------------- 2002 2001 ------------ ------------ Cash flows from operating activities: Net earnings/(loss) $ (6,484,337) $ (1,069,583) Adjustments to reconcile net earnings/(loss) to net cash used in operating activities: Depreciation and amortization 4,924,529 2,784,294 Stock based compensation -- 653,000 Equity in loss of associated company 217,849 40,602 Minority interest (22,784) -- Changes in operating assets and liabilities: Marketable securities (1,456,416) 25,158 Due from broker 444,688 (2,734,922) Accounts and other receivables 80,841 85,800 Prepaid expenses and other 367,804 60,089 Other assets (69,053) 850 Accounts payable (21,519) 45,730 Accrued liabilities (145,523) (347,853) Securities sold and not purchased 932,483 6,654,813 Other current liabilities (397,377) (86) ------------ ------------ Net cash provided by/(used in) operating activities (1,628,815) 6,197,892 ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets 553,122 -- Loans and other receivables, net of repayments (130,608) -- Loans to related parties (120,000) -- Investment in associated company -- (200,000) Acquisitions of business, net of cash acquired 6,000 -- Property and equipment additions -- (200,763) ------------ ------------ Net cash provided by/(used in) investing activities 308,514 (400,763) ------------ ------------ Cash flows from financing activities: Repurchase of stock (1,361,286) (1,190,739) Proceeds from exercise of stock options or warrants -- 500 ------------ ------------ Net cash provided by/(used in) financing activities (1,361,286) (1,190,239) ------------ ------------ Net increase/(decrease) in cash and cash equivalents (2,681,587) 4,606,890 Cash and cash equivalents, beginning of period 39,933,881 38,594,815 ------------ ------------ Cash and cash equivalents, end of period $ 37,252,294 $ 43,201,705 ============ ============ Supplemental information of business acquired: Fair value of assets acquired: $ 6,000 $ -- Cash 13,000 -- Other current assets 196,166 -- Non-current assets 1,755,006 -- Goodwill Less - liabilities assumed: (140,856) -- Current liabilities (152,754) -- Acquisition costs (1,676,562) -- Minoirty interest -- -- ------------ ------------ Cash paid less - cash acquired (6,000) -- ------------ ------------ Acquisition of business, net of cas h acquired $ 6,000 $ -- ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 5 SPEEDUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The unaudited consolidated financial statements of Speedus Corp., formerly SPEEDUS.COM, Inc., have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements do not include all information and notes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the Company's 2001 audited consolidated financial statements and notes thereto on Form 10-K. Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Principles of Consolidation The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Companies in which Speedus directly or indirectly owns more than 50% of the outstanding voting securities or that Speedus has effective control over are accounted for under the consolidation method of accounting. Under this method, those companies' balance sheets and results of operations, from the date Speedus acquired control, are included in Speedus' consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The interest in the net assets and operations of these companies' other stockholders is reflected in the caption `Minority interest' in Speedus' consolidated balance sheet and statements of operations. The Company's share of earnings or losses of associated companies, that are 20% to 50% owned, is included in the consolidated operating results using the equity method of accounting. Marketable Securities All marketable securities are defined as trading securities under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." At June 30, 2002, marketable securities consisted of publicly traded equity securities and were recorded at fair market value. Their original cost was $2,277,000, unrealized losses were $789,000 and the carrying value was $1,488,000. Securities Sold But Not Purchased The Company may sell publicly traded equity securities it does not own in anticipation of declines in the fair market values of the securities. When the Company effects such transactions, it must borrow the securities it sold in order to deliver them and settle the trades. The amounts shown on the balance sheet as `Securities sold and not purchased' represent the value of these securities at fair market value. At June 30, 2002, the Company had sold securities it had not purchased. The aggregate proceeds were $7,817,000, unrealized gains were $531,000 and the market value of the securities was $7,210,000. During the six months ended June 30, 2002 and 2001, realized losses and gains, respectively, in the amounts of $200,000 and $6,483,000, respectively, were recorded and included in Investment Income in the accompanying Consolidated Statements of Operations. Due From Broker In connection with selling publicly traded securities that it does not own, the Company is obligated to maintain balances with brokerage firms as security for these transactions. At June 30, 2002 and December 31, 2001, restricted cash balances in the amounts of $4,476,000 and $4,921,000, respectively, were held by brokerage firms. Long-lived Assets The Company periodically evaluates the net realizable value of long-lived assets, including fixed assets and equity method investments, relying on anticipated future cash flows. The Company's evaluation of anticipated future cash flows considers operating results, business plans and economic projections, as well as, non-financial data such as market trends, product and development cycles, and changes in management's market emphasis. An impairment in the carrying value of an asset is recognized when the expected future operating cash flows derived from the asset are less than its carrying value. In August 2001, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", was issued. SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and changes the criteria that would have to be met to classify an asset as held-for-sale. SFAS No. 144 retains the requirement of Accounting Principles Board Opinion No. 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 is effective January 1, 2002 for the Company. During the three and six months ended June 30, 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. 6 Other Intangible Assets Other intangible assets consist of the cost of a patent which is being amortized over its remaining life of fourteen years at the time of acquisition. In July 2001, Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" was issued. FAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and charged against results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. This accounting standard had no material effect on our results of operations. Revenue Recognition The Company earns fees from a licensee for the sale and activation of wireless phones. In accordance with the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", these revenues and associated costs are deferred until the expiration of cancellation privileges and chargeback periods from carriers. At June 30, 2002, the amount recorded for these deferred revenues was not material. Revenues from F&B Gudtfood's operations are recorded as services are rendered. Earnings Per Share Basic and diluted earnings/(loss) per common share are determined in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". For the quarters and six months ended June 30, 2002 and 2001, basic and diluted net earnings/(loss) available for common shareholders was equal to net earnings/(loss). For the six months ended June 30, 2002 and 2001 weighted average common shares for the assumed exercise or conversion of stock options in the amounts of 40,113 and 29,310, respectively, and warrants in the amounts of 12,854 and 66,639, respectively, have been excluded from the diluted loss per share since their effect would be antidilutive. 2. Acquisition and Investment in Associated Company On May 6, 2002, the Company acquired a 51% interest in F&B Gudtfood, the creator and operator of the original Eurocentric "chic and quick" cafe, which is operating its first store in Manhattan and is currently planning expansion to other locations. The acquisition price was $3,500,000, which funds will be applied principally for its expansion. This acquisition was accounted for using the purchase method of accounting. The results of operations of F&B Gudtfood have been included in the consolidated statements of operations from the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was approximately $1.8 million and has been recorded as goodwill. In connection with this acquisition, the Company extended loans to two minority shareholders of F&B Gudtfood aggregating $120,000. The loans, which can be increased by $40,000 each under certain conditions, will be forgiven if certain milestones are achieved. 3. Legal Proceedings The Company is subject to various claims and proceedings that occur in the ordinary course of business. The Company believes it has substantial defenses to a material portion of these claims and is prepared to pursue litigation if a reasonable and structured settlement cannot be reached with the parties. Based on information currently available, the Company believes that none of these current claims or proceedings, either individually or in the aggregate, will have a material effect on its business. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with the corresponding discussion and analysis included in the Company's Report on Form 10-K for the year ended December 31, 2001. Cautionary Statement Regarding Forward-Looking Information This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of the Company or its officers with respect to, among other things, the ability of the Company to make capital expenditures, the ability to incur additional debt, as necessary, to service and repay such debt, if any, as well as other factors that may effect the Company's financial condition or results of operations. Forward-looking statements may include, but are not limited to, projections of revenues, income or losses, capital expenditures, plans for future operations, financing needs or plans, compliance with covenants in loan agreements, plans for liquidation or sale of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, and the ability to obtain additional financing, including the Company's ability to meet obligations as they become due, and other pending and possible litigation, as well as assumptions relating to the foregoing. All statements in this Form 10-Q regarding industry prospects and the Company's financial position are forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Operations We have co-invested with Siemens Corporate Research, Inc., a subsidiary of Siemens Corporation, in Zargis Medical Corp. to develop a service solution, initially targeted toward primary care physicians that would be used as part of general medical examinations for the early screening and detection of valvular and congenital heart disease. We have acquired a 51% interest in F&B Gudtfood, the creator and operator of the original Eurocentric "chic and quick" cafe, which is operating its first store in Manhattan and is currently planning expansion to other locations. We own a portfolio of patents that allow for high-speed wireless communications. We also developed and launched an online cell phone store, 007Phones, which we now license to a third-party. We also own fixed wireless spectrum in the New York City metropolitan area that we may commercialize in the future to support high-speed, or broadband, Internet access service. We seek business opportunities across all industries for potential transactions and relationships in which we can apply our current resources and management strengths. We are particularly focused on companies with sound business plans and existing revenue bases that require growth capital. We will continue to pursue opportunities involving our wireless expertise and broadband assets as attractive opportunities present themselves. The companies that we target, either public or privately held and regardless of industry, will be seeking growth or restructuring capital to pursue near term business objectives in demonstrated markets. We changed our business focus in November 1998, terminating our subscription television service. Since changing our focus, we have yet to generate any material revenue from our wireless data products and services business. Revenues from 1999 to 2001, generally subscriber fees from our pilot program for high-speed Internet service and co-hosting revenues from the use of our Data Center, have not been material and future revenues from this and our mobile wireless business are uncertain. We have also generated operating losses and negative operating cash flows since our inception and expect to continue to do so in the near future. In 2002, we recognized revenues from the sale and activation of wireless phones. However, these amounts are expected to decrease in the future. The Company now licenses the cell phone store to a third party and license fees are less than revenues from sale and activation. In 2002, we also recognized revenues from the operations of F&B Gudtfood from the date of acquisition. We have invested a portion of our assets in a portfolio of marketable securities consisting of publicly traded equity securities. We have also sold publicly traded equity securities we do not own in anticipation of declines in the fair market values of these securities. During the six months ended June 30, 2002, we recognized realized losses on these transactions in the amount of $200,000. In January 2001, we co-invested with Siemens Corporate Research, Inc., a subsidiary of Siemens Corporation, in a new company, Zargis Medical Corp. Zargis Medical is building a service solution, initially targeted toward primary care physicians that would be used as part of general medical examinations for the early screening and detection of valvular and congenital heart disease. General medical examinations, according to the National Center for Health Statistics, totaled 46 million in 1999 for the US alone. We have signed an exclusive contract with Zargis Medical to design and develop the wireless applications, as well as provide transaction processing to support the commercial rollout of Zargis Medical's cardiac diagnostic products. Under this contract, using a combination of wireless and wired technology, Speedia Wireless, our wholly owned subsidiary, has demonstrated the ability to transfer the heart sound file from a physician's office to the SPEEDUS Data Center which will enable Zargis Medical to pursue a business model based on a fee per usage basis. Some of the major next steps remaining for Zargis Medical include clinical trials, FDA approval, marketing 8 and roll-out, along with the formation of strategic partnerships. In May 2002, we acquired a 51% interest in F&B Gudtfood, the creator and operator of the original Eurocentric "chic and quick" cafe, which is operating its first store in Manhattan and is currently planning expansion to other locations. The acquisition price was $3,500,000, which funds will be applied principally for its expansion. We also entered into a management services contract with this company that will result in direct revenues to us apart from those arising out of our ownership interest although these revenues will be eliminated on our consolidated financial statements. Through our wholly owned subsidiaries, Broadband Patents, LLC and CellularVision Technology & Telecommunications, L.P., we have accumulated a portfolio of patents that allow for high-speed wireless communication systems with greater information content, reliability, clarity, or more efficient use of licensed spectrum as compared to prior systems. We have five domestic patents with expiration dates ranging from 2007 through 2017, with numerous international counterparts. Any particular wireless communications system may employ a number of different combinations of our patented technology to maximize operational and spectrum efficiency. While we believe that it would be difficult for any wireless communications company to construct a system without using one or more of our patented technologies, it is a lengthy and expensive process to pursue licensing/patent infringement cases. We are evaluating a strategy for the utilization of these patents in the future, which may include pursuit of licensing or development of other strategic opportunities with users of the underlying technology. However, due to the current economic state of the telecommunications industry, licensing activity for the patent portfolio is not actively being pursued. We have licensed technology in the past, both domestically and internationally, but are not currently receiving any license fees. Currently, we have instituted litigation in the New York courts against an international licensee in Canada. In August 2001, we launched 007Phones.com, an e-commerce portal designed to provide consumers and businesses with an easy-to-use, online method of researching and purchasing wireless phones and carrier services. We now license 007Phones.com to a third-party. We have an FCC commercial operating license, awarded to us in recognition of our efforts in developing and deploying LMDS technology and for spearheading its regulatory approval at the FCC, which covers 150 MHz of spectrum in the New York City area. The license has been renewed as a standard LMDS license through February 1, 2006. Under FCC authorization, the license includes an additional 150 MHz of spectrum until the first Ka band satellite is launched, an event which is not currently determinable. The license provides that the spectrum may be used for a wide variety of fixed wireless purposes, including wireless local loop telephony, high-speed Internet access and two-way teleconferencing. Currently, we are conducting a limited pilot program of our SPEEDsm broadband super high-speed Internet service and, at June 30, 2002, had less than 100 subscribers. A full marketing effort will not commence until new LMDS equipment becomes commercially available with cost and performance that allow implementation of SPEEDsm service on an economically attractive basis. We cannot determine when this will occur and this equipment may never be available to us on this basis. Revenues from our high-speed Internet service would consist of subscriber fees, as well as the sales and installations of modems; however, the pricing structure of the service could change in response to market and other competitive conditions. Revenues to date from these sources have not been material. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The preparation of those financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of operating revenues and expenses during the reporting periods. Actual results could differ from those estimates. For a description of all of our accounting policies, see Note 2 to our consolidated financial statements included in our 2001 Form 10-K and Note 1 to our consolidated financial statements included in this Form 10-Q. However, we believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Financial instruments. Our financial instruments consist primarily of cash equivalents, marketable securities and securities sold and not purchased. The carrying value of cash equivalents approximates market value since these highly liquid, interest earning investments are invested in money market funds. Marketable securities consist of publicly traded equity securities classified as trading securities and are recorded at fair market value. Securities sold and not repurchased are carried at the fair market value of the securities. Significant changes in the market value of securities that we invest in could have a material impact on our financial position and results of operations. Long-lived assets. Long-lived assets, including fixed assets, goodwill, equity method investments and other intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable through estimated future cash flows from that asset. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. Specifically, we own broadband assets, including fixed and intangible assets, which had a carrying value of $1.9 million at June 30, 2002 and currently do not generate significant revenues or cash flows. Absent increased revenues and cash flows in the future, however, we estimate that, based upon our review of recent transactions and other factors, the fair value of our remaining FCC license and certain patents that have no carrying value on our books would generate sufficient cash to fully realize our assets described above. These estimates may differ from actual results due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance. 9 Contingencies. We account for contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies". SFAS No. 5 requires that we record an estimated loss when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as environmental, legal and income tax matters requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss is significantly different than the estimated loss, our results of operations may be misstated. Six and Three Months Ended June 30, 2002 Compared to Six and Three Months Ended June 30, 2001 Revenues increased $514,000 from $46,000 for the six months ended June 30, 2001 to $560,000 for the six months ended June 30, 2002 and increased $304,000 from $22,000 for the three months ended June 30, 2001 to $326,000 for the three months ended June 30, 2002. For the six and three months ended June 30, 2002, $428,000 and $197,000, respectively, of this increase is a result of revenues recognized from the sale and activation of wireless phones through the Company's online cell phone store, 007phones, which the Company now licenses to a third-party. In accordance with the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", these revenues and associated costs are deferred due to cancellation privileges and chargebacks from carriers. Revenues to be recognized in the future from the sale and activation of wireless phones are expected to decrease. The Company now licenses the cell phone store to a third party and license fees are less than revenues from sale and activation. For each of the six and three months ended June 30, 2002, $119,000 of this increase is a result of revenues recognized by F&B Gudtfood since the date of acquisition. Selling, general and administrative expenses decreased $958,000 from $3,001,000 for the six months ended June 30, 2001 to $2,043,000 for the six months ended June 30, 2002 and decreased $474,000 from $1,464,000 for the three months ended June 30, 2001 to $990,000 for the three months ended June 30, 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. Research and development expenses decreased $445,000 from $928,000 for the six months ended June 30, 2001 to $483,000 for the six months ended June 30, 2002 and decreased $176,000 from $443,000 for the three months ended June 30, 2001 to $267,000 for the three months ended June 30, 2002. This decrease is primarily attributable to decreases in compensation and employee related expenses as a result of staff reductions. Depreciation and amortization increased $2,141,000 from $2,784,000 for the six months ended June 30, 2001 to $4,925,000 for the six months ended June 30, 2002 and increased $2,865,000 from $1,400,000 for the three months ended June 30, 2001 to $4,265,000 for the three months ended June 30, 2002. Approximately $3,650,000 of the increase is a result of a charge during the six and three months ended June 30, 2002 for property and equipment taken out of service, net of decreases in the amounts of $1,210,000 and $605,000, respectively, for the amortization of the goodwill recorded during the six and three months ended June 30, 2001 resulting from the Speedia acquisition on June 30, 2000. This goodwill was being amortized over a period of three years. The Company recorded a charge of $3,779,000 in the fourth quarter of 2001 for the impairment of goodwill and intangible assets associated with that acquisition, eliminating the remaining balance of goodwill and those intangible assets. Cost of sales amounted to $418,000 and $213,000 for the six and three months ended June 30, 2002, respectively. $381,000 and $176,000, respectively, of these costs, which were previously deferred, represent the direct cost and expenses related to the sale and activation of wireless phones through the Company's online cell phone store, 007phones, as discussed above. For each of the six and three months ended June 30, 2002, $37,000 represents the costs of sales recorded by F&B Gudtfood since the date of acquisition. Investment income decreased $4,618,000 from $5,638,000 for the six months ended June 30, 2001 to $1,020,000 for the six months ended June 30, 2002 and increased $1,259,000 from a loss of $240,000 for the three months ended June 30, 2001 to $1,019,000 for the three months ended June 30, 2002. These changes are primarily a result of the recognition of realized and unrealized gains/(losses) during those periods. The Company's policy is to record marketable securities and securities sold and not purchased at the fair market value of the securities. The amount of these realized and unrealized gains or losses will fluctuate based upon changes in the market value of the underlying investments and are not necessarily indicative of the results that may be expected for any future periods. Realized gains/(losses) decreased $6,683,000 from net gains of $6,483,000 for the six months ended June 30, 2001 to net losses of $200,000 for the six months ended June 30, 2002. Unrealized gains/(losses) decreased $3,128,000 from net gains of $4,286,000 for the six months ended June 30, 2001 to net gains of $1,158,000 for the six months ended June 30, 2002. Equity in loss increased $177,000 from $41,000 for the six months ended June 30, 2001 to $218,000 for the six months ended June 30, 2002 and increased $115,000 from a loss of $21,000 for the three months ended June 30, 2001 to $136,000 for the three months ended June 30, 2002. The 2001 period reflects the Company's share (48% at June 30, 2002) in Zargis Medical's operations, accounted for under the equity method. Minority interest amounted to $23,000 for the six and three months ended June 30, 2002. This amount represents the interest of minority stockholders in the operations of F&B Gudtfood since the date of acquisition. Net loss amounted to $6,484,000 for the six months ended June 30, 2002 compared to a loss of $1,070,000 for the six months ended June 30, 2001, primarily as a result of a charge during the 2002 period for property and equipment taken out of service and the gains from investments recognized by the Company during the 2001 period. The results for the six and three months ended June 30, 10 2002 are not necessarily indicative of the results that may be expected for any future periods. Liquidity and Capital Resources The Company has recorded operating losses and negative operating cash flows in each year of its operations since inception. The Company believes that consummation of spectrum assignments in November 1998 and October 1999 for net proceeds of approximately $15.5 million and $19.8 million, respectively, after the repayment and repurchase of debt (in the aggregate amount of approximately $11.2 million) and redemption of preferred stock (approximately $4.6 million) in connection with the 1998 assignment as required under those indentures and the sale of Common Stock in July 1999 for net proceeds of approximately $19.8 million have provided sufficient liquidity to finance its current level of operations and expected capital requirements through the 2002 fiscal year. However, the lack of additional capital in the future could have a material adverse effect on the Company's financial condition, operating results and prospects for growth. The Company does not expect to have earnings from operations, exclusive of non-cash charges, until such time as it substantially increases its customer base and/or forms a strategic alliance for use of its capabilities in the future. We cannot predict when this will occur. We have no material non-cancelable commitments and the amount of future capital funding requirements will depend on a number of factors that we cannot quantify, including the success of our business, the extent to which we expand our high-speed Internet service if suitable equipment becomes available and the types of services we offer, as well as other factors that are not within our control, including competitive conditions, government regulatory developments and capital costs. We have invested a portion of our assets in a portfolio of marketable securities consisting of publicly traded equity securities. We have also sold publicly traded equity securities we do not own in anticipation of declines in the fair market values of these securities. During the six months ended June 30, 2002, we recognized realized losses on these transactions in the amount of $200,000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments at June 30, 2002 consist primarily of cash equivalents, which are subject to interest rate risk, and marketable securities and securities sold and not purchased, which are subject to equity price risk. The carrying value of cash equivalents approximates market value since these highly liquid, interest earning investments are invested in money market funds. The Company's investment in marketable securities consists of publicly traded equity securities classified as trading securities and are recorded at fair market value. Securities sold and not purchased are carried at the fair market value of the securities. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Note 2 to the accompanying consolidated financial statements is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At its Annual Meeting of shareholders held on June 25, 2002, the Company submitted the following matters to a vote of its shareholders, all of which were approved: 1. Election of Directors: Name of Director Votes For Votes Withheld ---------------- --------- -------------- Shant S. Hovnanian 16,965,175 51,132 Vahak S. Hovnanian 16,973,225 43,082 William F. Leimkuhler 16,972,025 44,282 Jeffrey Najarian 16,972,025 44,282 Christopher Vizas 16,972,225 44,082 2. Appointment of PricewaterhouseCoopers LLP as independent auditors of the Company: Votes For Votes Against Abstentions --------- ------------- ----------- 16,998,572 13,585 4,150 3. Approval of an amendment to the Company's Certificate of Incorporation, as amended, to enable the Company to effect a reverse stock split of all of the issued and outstanding shares of the Company's Common Stock at a ratio not to exceed one-for-six: Votes For Votes Against Abstentions --------- ------------- ----------- 16,881,359 124,633 10,315 4. Approval of an amendment to the Company's Certificate of Incorporation, as amended, to increase the authorized number of shares of the Company's Common Stock by 10,000,000 shares to 50,000,000 shares: Votes For Votes Against Abstentions --------- ------------- ----------- 16,807,639 202,873 5,795 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: Exhibit number 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. b. Current Reports on Form 8-K: None. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Speedus Corp. Date: August 14, 2002 By: /s/ Shant S. Hovnanian ---------------------- Shant S. Hovnanian Chairman of the Board and Chief Executive Officer Date: August 14, 2002 By: /s/ Angela M. Vaccaro --------------------- Angela M. Vaccaro Controller and Chief Accounting Officer 13