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 March 31, 2003 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _______________________ Commission file number: 000-27582 SPEEDUS CORP. (Exact name of registrant as specified in its charter) Delaware 13-3853788 (State or other jurisdiction of (I.R.S. Employer 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) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of outstanding shares of the registrant's common stock, par value $.01 per share, as of May 9, 2003 was 16,805,189. SPEEDUS CORP. INDEX TO FORM 10-Q Page ---- PART I -- FINANCIAL INFORMATION ITEM 1 -- Financial Statements Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002 ................................................................................. 3 Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2003 and 2002 ............................................................ 4 Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2003 and 2002 ............................................................ 5 Notes to Consolidated Financial Statements (unaudited) ................................................ 6-9 ITEM 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................................. 10-13 ITEM 3 -- Quantitative and Qualitative Disclosures About Market Risk ............................................. 13 ITEM 4 -- Controls and Procedures ................................................................................ 14 PART II -- OTHER INFORMATION ITEM 1 -- Legal Proceedings ...................................................................................... 15 ITEM 2 -- Changes in Securities .................................................................................. 15 ITEM 3 -- Defaults Upon Senior Securities ........................................................................ 15 ITEM 4 -- Submission of Matters to a Vote of Security Holders .................................................... 15 ITEM 5 -- Other Information ...................................................................................... 15 ITEM 6 -- Exhibits and Reports on Form 8-K ....................................................................... 15 Signature Page ................................................................................................... 16 Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes -Oxley Act Of 2002 .............. 17 Certification of Chief Financial Officer Pursuant to Sect ion 302 of The Sarbanes-Oxley Act Of 2002 .............. 18 Exhibit 99.1: Certification of Chief Executive Officer Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002 .......................................... 19 Exhibit 99.2: Certification of Chief Financial Officer Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002 .......................................... 20 2 SPEEDUS CORP. CONSOLIDATED BALANCE SHEETS March 31, December 31, 2003 2002 ------------ ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 31,312,072 $ 33,052,815 Marketable securities 403,018 879,194 Due from broker 8,316,926 11,728,880 Accounts and other receivables 42,500 40,099 Prepaid expenses and other 121,485 17,488 ------------ ------------ Total current assets 40,196,001 45,718,476 Property and equipment, net of accumulated depreciation of $1,863,007 and $2,015,662 741,821 819,714 Other intangible assets, net of accumulated amortization of $522,121 and $418,929 1,547,879 1,651,071 Goodwill 1,371,365 1,760,106 Other assets 284,654 297,544 ------------ ------------ Total assets $ 44,141,720 $ 50,246,911 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 297,969 $ 228,144 Accrued liabilities 1,459,887 1,734,252 Securities sold and not purchased 10,465,594 14,212,566 Other current liabilities 66,352 62,336 ------------ ------------ Total current liabilities 12,289,802 16,237,298 Minority interest 955,700 1,591,557 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; 4,559,449 and 4,418,577 shares) (4,478,953) (4,371,778) Accumulated deficit (55,128,109) (53,713,446) ------------ ------------ Stockholders' equity 30,896,218 32,418,056 ------------ ------------ Total liabilities and stockholders' equity $ 44,141,720 $ 50,246,911 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 3 SPEEDUS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three months ended March 31, ---------------------------- 2003 2002 ------------ ------------ Revenues $ 169,807 $ 234,564 ------------ ------------ Expenses: Selling, general and administrative 1,006,462 1,053,104 Research and development 255,065 216,361 Depreciation and amortization 215,368 659,783 Cost of sales 48,300 205,272 ------------ ------------ Total operating expenses 1,525,195 2,134,520 ------------ ------------ Operating loss (1,355,388) (1,899,956) Investment income/(loss) (47,530) 514 Equity in loss of associated company (92,996) (81,928) Minority interest 81,251 -- ------------ ------------ Net loss $ (1,414,663) $ (1,981,370) ============ ============ Per share: Basic loss per common share $ (0.08) $ (0.10) ============ ============ Weighted average common shares outstanding 16,883,034 18,910,607 ============ ============ Diluted loss per common share $ (0.08) $ (0.10) ============ ============ Weighted average common shares outstanding 16,883,034 18,910,607 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 4 SPEEDUS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three months ended March 31, ---------------------------- 2003 2002 ------------ ------------ Cash flows from operating activities: Net loss $ (1,414,663) $ (1,981,370) Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: Depreciation and amortization 215,368 659,783 Unrealized (gains)/losses 461,887 727,880 Equity in loss of associated company 92,996 81,928 Minority interest (81,251) -- Changes in operating assets and liabilities: Marketable securities 434,790 (8,226) Due from broker 3,411,954 (319,495) Accounts and other receivables (2,401) 101,003 Prepaid expenses and other (103,997) 205,272 Other assets (172,490) 13,200 Accounts payable (46,852) 209,607 Accrued liabilities (287,750) (177,751) Securities sold and not purchased (4,167,473) 455,392 Other current liabilities 4,016 (203,359) ------------ ------------ Net cash provided by/(used in) operating activities (1,654,866) (236,136) ------------ ------------ Cash flows from investing activities: Loans and other receivables, net of repayments 2,500 (146,563) Proceeds from sale of assets -- 553,122 Acquisition of business, net of cash acquired 18,798 -- ------------ ------------ Net cash provided by/(used in) investing activities 21,298 406,559 ------------ ------------ Cash flows from financing activities: Repurchase of stock (107,175) (489,935) ------------ ------------ Net cash provided by/(used in) financing activities (107,175) (489,935) ------------ ------------ Net increase/(decrease) in cash and cash equivalents (1,740,743) (319,512) Cash and cash equivalents, beginning of period 33,052,815 39,933,881 ------------ ------------ Cash and cash equivalents, end of period $ 31,312,072 $ 39,614,369 ============ ============ Supplemental information of business acquired: Fair value of assets acquired: Cash $ 18,798 $ -- Non current assets 34,283 -- Goodwill 481,009 -- Less-liabilities assumed: Current liabilities (218,946) -- Minority interest (315,144) -- ------------ ------------ Cash paid -- -- less-cash acquired 18,798 -- ------------ ------------ Acquisition of business, net of cash acquired $ (18,798) $ -- ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 5 SPEEDUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The unaudited consolidated financial statements of Speedus Corp. have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements do not include all information and notes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the Company's 2002 audited consolidated financial statements and notes thereto on Form 10-K. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. Financial statements and principles of consolidation The consolidated financial statements include the accounts of Speedus and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Companies in which Speedus directly or indirectly owns more than 50% of the outstanding voting securities or that Speedus has effective control over are accounted for under the consolidation method of accounting. Under this method, those companies' balance sheets and results of operations, from the date Speedus acquired control, are included in Speedus' consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. Other shareholders' interest in the net assets and operations of these companies is reflected in the caption 'Minority interest' in Speedus' consolidated balance sheet and statements of operations. The Company's share of earnings or losses of associated companies, that are 20% to 50% owned, is included in the consolidated operating results using the equity method of accounting. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of operating revenues and expenses during the reporting periods. Actual results could differ from those estimates and the difference could be material. Marketable Securities All marketable securities are defined as trading securities under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." At March 31, 2003 and December 31, 2002, marketable securities consisted of publicly traded equity securities and were recorded at fair market value. Their original cost was $1,080,000 and $1,479,000, unrealized losses were $677,000 and $600,000 and the carrying value was $403,000 and $879,000, respectively. For the three months ended March 31, 2003 and 2002, unrealized gains/(losses) were $(41,000) and $7,000, respectively. 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 March 31, 2003 and December 31, 2002, the Company had sold securities it had not purchased. The aggregate proceeds were $9,404,000 and $12,001,000, unrealized (losses) were $(1,062,000) and $(2,212,000) and the market value of the securities was $10,466,000 and $14,213,000, respectively. For the three months ended March 31, 2003 and 2002, unrealized (losses) were $(421,000) and $(735,000), respectively. 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 March 31, 2003 and December 31, 2002, restricted cash balances in the amounts of $8,317,000 and $11,729,000, respectively, were held by brokerage firms. Concentrations of Credit Risk Financial instruments that potentially could subject the Company to concentrations of credit risk consist largely of cash equivalents and marketable securities. These instruments are potentially subject to concentrations of credit risk but the Company believes that this risk is limited due to diversification and investments being made in investment grade securities. 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 6 Company's potential for loss on these transactions is unlimited since the value of the underlying security can keep increasing which could have a material adverse effect on the Company's consolidated financial statements. Long-lived Assets The Company periodically evaluates the net realizable value of long-lived assets, including fixed and intangible assets, relying on anticipated future cash flows. The Company's evaluation of anticipated future cash flows considers operating results, business plans and economic projections, as well as, non-financial data such as market trends, product and development cycles, and changes in management's market emphasis. An impairment in the carrying value of an asset is recognized when the expected future operating cash flows derived from the asset are less than its carrying value. Goodwill and Other Intangible Assets The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" which requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under the nonamortization approach, goodwill is not being amortized into results of operations, but instead is reviewed for impairment annually. Goodwill, with a balance of $1,760,000 at December 31, 2002, increased $481,000 as a result of the acquisition of a controlling interest in Zargis Medical and decreased $870,000 as a result of the reduction in the Company's investment in F&B Gudtfood, resulting in a balance of $1,371,000 recorded by the Company as goodwill at March 31, 2003. Other intangible assets consist of the cost of a patent which, through the year ended December 31, 2002, was amortized over its life of fourteen years at the time of acquisition. During the three months ended March 31, 2003, the Company reviewed the estimated useful life of this patent in light of the continuing depressed economic state of the telecommunications industry. As a result, effective January 1, 2003, the Company considers the remaining useful life to be four years and has accounted for this determination as a change in an estimate. This change increased net loss for the three months ended March 31, 2003 by $66,000. There was no effect on basic loss per common share. Revenue Recognition Revenues from F&B Gudtfood's operations are recorded on a cash basis. 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 March 31, 2003, the amount recorded for these deferred revenues was not material. During the three months ended March 31, 2002, the Company recorded revenues in the amount of $231,000 in connection with the sale and activation of wireless phones. 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 three months ended March 31, 2003 and 2002, outstanding stock options and warrants in the amounts of 1,939,780 and 2,268,236, 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 and is presenting pro forma disclosures of earnings and earnings per share as if the fair value method of accounting was applied. 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 three months ended March 31, 2003 and 2002 is summarized as follows: 7 Three months ended March 31, ---------------------------- (unaudited) 2003 2002 ------------ ------------ Net loss as reported $ (1,414,663) $ (1,981,370) After tax effect of pro forma compensation (122,194) (224,927) ------------ ------------ Pro forma net loss $ (1,536,857) $ (2,206,297) ============ ============ Loss per share: Basic - as reported $ (0.08) $ (0.10) ============ ============ Basic - pro forma $ (0.09) $ (0.12) ============ ============ Diluted - as reported $ (0.08) $ (0.10) ============ ============ Diluted - pro forma $ (0.09) $ (0.12) ------------ ------------ 2. Related Party Transactions a. The Company has signed an exclusive contract with Zargis Medical to design and develop the wireless applications, as well as provide transaction processing to support the commercial rollout of Zargis Medical's cardiac diagnostic products. b. The Company also entered into a management services contract with F&B Gudtfood. In connection with the F&B Gudtfood acquisition, in May 2002 the Company extended loans to two employees of F&B Gudtfood, who are also minority shareholders of F&B Gudtfood aggregating $120,000. The loans, which can be increased by $40,000 each under certain conditions, will be forgiven if certain milestones are achieved. 3. Acquisitions a. On February 28, 2003, the Company increased its investment in Zargis Medical to 57.7% with an additional investment of $1,250,000 in newly issued shares. Prior to February 28, 2003, the Company held a 46.4% interest in Zargis and accounted for its investment under the equity method of accounting. 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 allocation of the excess of the purchase price over the fair value of the net assets acquired of $481,000 is preliminary. The Company expects to finalize its purchase price allocation during 2003 and this final allocation could change the current allocation to goodwill. To the extent that the allocation changes from goodwill, increased amortization or a write-off of up to $481,000 could result. Unaudited pro forma operating results of the Company as though the acquisition of Zargis Medical had occurred on January 1, 2002, are as follows: Three months ended March 31, ---------------------------- (unaudited) 2003 2002 ----------- ----------- Revenues $ 169,807 $ 234,564 Operating loss $(1,555,811) $(2,068,790) Net loss $(1,437,311) $(1,997,722) Basic and diluted loss per share $ (0.09) $ (0.11) b. On May 6, 2002, the Company acquired a 51% interest in F&B Gudtfood, the creator and operator of the original Eurocentric "chic and quick" cafe, which is operating its first store in Manhattan and is currently planning expansion to other locations. The acquisition price was $3,500,000, which funds will be applied principally for its expansion. On February 8, 2003, we reduced our investment in F&B Gudtfood and received $1,775,000 while maintaining our 51% interest. 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, as reduced, over the fair value of the net assets acquired was approximately $0.9 million and has been recorded as goodwill. The Company does not have sufficient information to present pro forma information for the quarter ended March 31, 2002 without undue burden and expense. 4. Legal Proceedings The Company is subject to various claims and proceedings that occur in the ordinary course of business. The Company believes it has substantial defenses to a material portion of these claims and is prepared to pursue litigation if a reasonable and structured settlement cannot be reached with the parties. Based on information currently available, the Company believes it is remote 8 that the ultimate resolution of these current claims or proceedings, either individually or in the aggregate, will have a material effect on its business. 5. Business Segment Information The following table sets forth the Company's financial performance by reportable operating segment for the quarter ended March 31, 2003. 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. As a result, there is no segment information presented for the quarter ended March 31, 2002. During the quarter ended March 31, 2002, substantially all of the Company's revenues were from the sale and activation of wireless phones through the Company's online cell phone store, 007phones. The Company now licenses the cell phone store to a third party and license fees are less than revenues from sale and activation. No revenues were recognized in connection with 007 phones during the three months ended March 31, 2003. Corporate F&B Zargis and other Totals --- ------ --------- ------ Revenues from external customers $ 168,451 $ -- $ 1,356 $ 169,807 Depreciation and amortization 6,200 756 208,412 215,368 Operating loss (84,091) (138,343) (1,132,954) (1,355,388) Investment income/(loss) 7,699 0 (55,229) (47,530) Goodwill and other intangible assets 890,356 481,009 1,547,879 2,919,244 Fixed assets 113,854 33,526 594,441 741,821 Total assets 1,386,421 778,932 41,976,367 44,141,720 The Company has no foreign operations. During the quarter ended March 31, 2003, the Company did not have sales to any individual customer greater than 10% of total Company revenues. The Company's accounting policies for segments are the same as those described in Note 1. 6. Stockholders' Equity Treasury Stock In March 2003, the Company's Board of Directors approved an extension of the Company's stock repurchase program for up to an additional $1 million of the Company's common stock for an aggregate authorization of $5.5 million. Through May 15, 2003, the Company has repurchased 4,583,749 shares of its Common Stock. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with the corresponding discussion and analysis included in the Company's Report on Form 10-K for the year ended December 31, 2002. Cautionary Statement Regarding Forward-Looking Information This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of the Company or its officers with respect to, among other things, the ability of the Company to make capital expenditures, the ability to incur additional debt, as necessary, to service and repay such debt, if any, as well as other factors that may effect the Company's financial condition or results of operations. Forward-looking statements may include, but are not limited to, projections of revenues, income or losses, capital expenditures, plans for future operations, financing needs or plans, compliance with covenants in loan agreements, plans for liquidation or sale of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, and the ability to obtain additional financing, including the Company's ability to meet obligations as they become due, and other pending and possible litigation, as well as assumptions relating to the foregoing. All statements in this Form 10-Q regarding industry prospects and the Company's financial position are forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Business Activities Speedus Corp. is a holding company that owns significant equity interests in diverse businesses. We seek business opportunities across all industries for potential transactions and relationships in which we can apply our current resources and management strengths. We are particularly focused on companies with sound business plans and existing revenue bases that require growth capital. We will continue to pursue opportunities involving our wireless expertise and broadband assets as attractive opportunities present themselves. The companies that we target, either public or privately held and regardless of industry, will be seeking growth or restructuring capital to pursue near term business objectives in demonstrated markets. We have co-invested with Siemens Corporate Research, Inc., a subsidiary of Siemens Corporation, in Zargis Medical Corp. to develop a service solution, initially targeted toward primary care physicians, that would be used as part of general medical examinations for the early screening and detection of valvular and congenital heart disease. We have acquired a 51% interest in F&B Gudtfood, the creator and operator of the original Eurocentric "chic and quick" cafe, which is operating its first store in Manhattan and is currently planning expansion to other locations. We own a portfolio of patents that allow for high-speed wireless communications. We also developed and launched an online cell phone store, 007Phones, which we now license to a third-party. We also own fixed wireless spectrum in the New York City metropolitan area that we may commercialize in the future to support high-speed, or broadband, Internet access service. Zargis Medical Corp. In January 2001, we co-invested with Siemens Corporate Research, Inc., a subsidiary of Siemens Corporation, in a new company, Zargis Medical Corp. Zargis Medical is building a service solution, initially targeted toward primary care physicians that would be used as part of general medical examinations for the early screening and detection of valvular and congenital heart disease. General medical examinations, according to the National Center for Health Statistics, totaled 46 million in 1999 for the US alone. We have signed an exclusive contract with Zargis Medical to design and develop the wireless applications, as well as provide transaction processing to support the commercial rollout of Zargis Medical's cardiac diagnostic products. Under this contract, using a combination of wireless and wired technology, Speedia Wireless, our wholly owned subsidiary, has demonstrated the ability to transfer the heart sound file from a physician's office to the Speedus Data Center which will enable Zargis Medical to pursue a business model based on a fee per usage basis. Some of the major next steps remaining for Zargis Medical include clinical trials, FDA approval, marketing and roll-out, along with the formation of strategic partnerships. In February 2003, we acquired a controlling interest in Zargis Medical. The additional investment of $1,250,000 was represented by amounts outstanding to the Company by Zargis Medical at December 31, 2002 in the amount of $250,000 and an additional cash investment of $1,000,000. F&B Gudtfood. In May 2002, we acquired a 51% interest in F&B Gudtfood, the creator and operator of the original Eurocentric "chic and quick" cafe, which is operating its first store in Manhattan and is currently planning expansion to other locations. The acquisition price was $3,500,000, which funds will be applied principally for its expansion. We also entered into a management services contract with F&B Gudtfood. 10 On February 8, 2003, we reduced our investment in F&B Gudtfood and received $1,775,000 while maintaining our 51% interest. Broadband Patents. Through our wholly owned subsidiaries, Broadband Patents, LLC and CellularVision Technology & Telecommunications, L.P., we have accumulated a portfolio of patents that allow for high-speed wireless communication systems with greater information content, reliability, clarity, or more efficient use of licensed spectrum as compared to prior systems. We have five domestic patents with expiration dates ranging from 2007 through 2017, with numerous international counterparts. Any particular wireless communications system may employ a number of different combinations of our patented technology to maximize operational and spectrum efficiency. While we believe that it would be difficult for any wireless communications company to construct a system without using one or more of our patented technologies, it is a lengthy and expensive process to pursue licensing/patent infringement cases. We are evaluating a strategy for the utilization of these patents in the future, which may include pursuit of licensing or development of other strategic opportunities with users of the underlying technology. However, due to the current depressed economic state of the telecommunications industry, licensing activity for the patent portfolio is not actively being pursued at this time. We have licensed technology in the past, both domestically and internationally, but are not currently receiving any license fees. Currently, we have instituted litigation in the New York courts against an international licensee in Canada. 007Phones. In August 2001, we launched 007Phones.com, an e-commerce portal designed to provide consumers and businesses with an easy-to-use, online method of researching and purchasing wireless phones and carrier services. We now license 007Phones.com to a third-party. Local Multipoint Distribution Service license. We have an FCC commercial operating license, awarded to us in recognition of our efforts in developing and deploying LMDS technology and for spearheading its regulatory approval at the FCC, which covers 150 MHz of spectrum in the New York City area. The license has been renewed as a standard LMDS license through February 1, 2006. Under FCC authorization, the license includes an additional 150 MHz of spectrum until the first Ka band satellite is launched, an event which is not currently determinable. The license provides that the spectrum may be used for a wide variety of fixed wireless purposes, including wireless local loop telephony, high-speed Internet access and two-way teleconferencing. We are conducting a limited pilot program of our SPEED(SM) broadband super high-speed Internet service. A full marketing effort will not commence until new LMDS equipment becomes commercially available with cost and performance that allow implementation of SPEED(SM) service on an economically attractive basis. We cannot determine when this will occur and this equipment may never be available to us on this basis. During 2002, we recorded an impairment charge in the amount of $3,650,000 for property and equipment taken out of service, generally related to the pilot program. Other. We have invested a portion of our assets in a portfolio of marketable securities consisting of publicly traded equity securities. We have also sold publicly traded equity securities we do not own in anticipation of declines in the fair market values of these securities. We have generated operating losses and negative operating cash flows since our inception and expect to continue to do so in the near future. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The preparation of those financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of operating revenues and expenses during the reporting periods. Actual results could differ from those estimates. For a description of all of our accounting policies, see Note 1 to our consolidated financial statements included in this Form 10-Q and Note 2 to our consolidated financial statements included in our 2002 Form 10-K. However, we believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Financial instruments. Our financial instruments consist primarily of cash equivalents, marketable securities and securities sold and not purchased. The carrying value of cash equivalents approximates market value since these highly liquid, interest earning investments are invested in money market funds. Marketable securities consist of publicly traded equity securities classified as trading securities and are recorded at fair market value, i.e., closing prices quoted on established securities markets. Securities sold and not repurchased are also carried at the fair market value of the securities. Significant changes in the market value of securities that we invest in could have a material impact on our financial position and results of operations. Long-lived assets. Long-lived assets, including fixed assets, goodwill, 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 $1.8 million and $1.5 million at December 31, 2002 and March 31, 2003, respectively, and currently do not generate significant revenues or cash flows. However, as of December 31, 2002, we estimated that, based upon our review of recent transactions and other factors, the fair value of our remaining FCC license and certain patents that have no carrying 11 value on our books would generate sufficient cash to fully realize our assets described above as of December 31, 2002. This estimate evaluated the recovery of these broadband assets compared to the fair value of our remaining FCC license and certain patents as a group since it represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. These estimates may differ from actual results due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance. As of December 31, 2002, we also reviewed the carrying value of goodwill in the amount of $1.8 million at that time, and estimated based upon our review, taking into account such factors as projected operations and Company's redemption rights in connection with the investment, that there had been no impairment to this carrying value. Contingencies. We account for contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies". SFAS No. 5 requires that we record an estimated loss when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as environmental, legal and income tax matters requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss is significantly different than the estimated loss, our results of operations may be misstated. Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Revenues decreased $65,000 from $235,000 for the three months ended March 31, 2002 to $170,000 for the three months ended March 31, 2003. $231,000 of this net decrease is a result of revenues recognized from the sale and activation of wireless phones through the Company's online cell phone store, 007phones, during the three months ended March 31, 2002. The Company now licenses the cell phone store to a third party and license fees are less than revenues from sale and activation. No revenues were recognized in connection with 007 phones during the three months ended March 31, 2003. The decrease in revenues is net of an increase in the amount of $168,000 as a result of revenues recognized by F&B Gudtfood during the three months ended March 31, 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 $47,000 from $1,053,000 for the three months ended March 31, 2002 to $1,006,000 for the three months ended March 31, 2003. The decrease is primarily attributable to decreases in compensation and employee related expenses as a result of staff reductions. This decrease is net of increases as a result of selling, general and administrative expenses of F&B Gudtfood and Zargis Medical in the amounts of $168,000 and $138,000, respectively, during the three months ended March 31, 2003. 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. Research and development expenses increased $39,000 from $216,000 for the three months ended March 31, 2002 to $255,000 for the three months ended March 31, 2003. This increase is primarily attributable to increases in compensation and employee related expenses. Depreciation and amortization decreased $445,000 from $660,000 for the three months ended March 31, 2002 to $215,000 for the three months ended March 31, 2003. This decrease 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 during 2002. Cost of sales decreased $157,000 from $205,000 for the three months ended March 31, 2002 to $48,000 for the three months ended March 31, 2003. $205,000 of this net decrease is a result of the direct cost and expenses related to the sale and activation of wireless phones through the Company's online cell phone store, 007phones, during the three months ended March 31, 2002. No expenses were incurred in connection with 007 phones during the three months ended March 31, 2003. The decrease in cost of sales is net of an increase in the amount of $48,000 as a result of costs incurred by F&B Gudtfood during the three months ended March 31, 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 income/(loss) decreased $49,000 from a net gain in the amount of $1,000 for the three months ended March 31, 2002 to a net loss in the amount of $48,000 for the three months ended March 31, 2003. This decrease is primarily a result of realized and unrealized gains/(losses). Realized gains/(losses) decreased $1,814,000 from net gains of $585,000 for the three months ended March 31, 2002 to net losses of $1,229,000 for the three months ended March 31, 2003. Unrealized losses decreased $266,000 from net losses of $728,000 for the three months ended March 31, 2002 to net losses of $462,000 for the three months ended March 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 increased $11,000 from $82,000 for the three months ended March 31, 2002 to $93,000 for the three months ended March 31, 2003. These amounts reflect the Company's share in Zargis Medical's operations, accounted for under the equity method, through February 27, 2003 in the case of the 2003 amount. 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 amounted to $81,000 for the three months ended March 31, 2003. This amount represents the interest of minority stockholders in the losses of F&B Gudtfood and Zargis Medical during the three months ended March 31, 2003. 12 Related Party Transactions We have signed an exclusive contract with Zargis Medical to design and develop the wireless applications, as well as provide transaction processing to support the commercial rollout of Zargis Medical's cardiac diagnostic products. We also entered into a management services contract with F&B Gudtfood. In connection with the F&B Gudtfood acquisition, in May 2002 the Company extended loans to two employees of F&B Gudtfood, who are also minority shareholders of F&B Gudtfood aggregating $120,000. The loans, which can be increased by $40,000 each under certain conditions, will be forgiven if certain milestones are achieved. Liquidity and Capital Resources The Company has recorded operating losses and negative operating cash flows in each year of its operations since inception. Net cash used in operating activities was $1.7 million for the three months ended March 31, 2003 compared to net cash used in operating activities of $0.2 million for the three months ended March 31, 2002. Cash was used by operating activities in the three months ended March 31, 2003 to fund the net loss for the period. While the net loss decreased from the net loss for the three months ended March 31, 2002, after adjustment for non-cash charges, including depreciation and amortization and unrealized losses, the cash used was greater. Cash was also used in the 2003 period to reduce the amount of open transactions included under 'Securities sold and not purchased'. Net cash provided by investing activities was $21,000 for the three months ended March 31, 2003 compared to net cash provided by investing activities of $0.4 million for the three months ended March 31, 2002. This net decrease was substantially the result of proceeds received in 2002 from the sale of assets. Net cash used in financing activities was $0.1 million for the three months ended March 31, 2003 compared to $0.5 million for the three months ended March 31, 2002. This decrease of $0.4 million was a result of decreased repurchases of treasury stock during 2003. At March 31, 2003, the Company's future minimum lease payments due under noncancelable leases aggregated $439,000. $274,000 and $109,000 of this amount is due during the twelve months ended March 31, 2003 and 2004, respectively, and the balance is payable thereafter with no material amount due in any one year. The Company believes that it has sufficient liquidity to finance its current level of operations and expected capital requirements through the 2003 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments at March 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. 13 ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Note 4 to the accompanying consolidated financial statements is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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. Exhibit number 99.2 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. 15 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: May 15, 2003 By: /s/ Shant S. Hovnanian ---------------------- Shant S. Hovnanian Chairman of the Board, President and Chief Executive Officer Date: May 15, 2003 By: /s/ Thomas M. Finn ------------------ Thomas M. Finn Treasurer and Chief Financial Officer 16 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Shant S. Hovnanian, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Speedus Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Shant S. Hovnanian ---------------------- Name: Shant S. Hovnanian Title: Chairman of the Board, President and Chief Executive Officer Date: May 15, 2003 17 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas M. Finn, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Speedus Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Thomas M. Finn ------------------ Name: Thomas M. Finn Title: Treasurer and Chief Financial Officer Date: May 15, 2003 18