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| SPDE > SEC Filings for SPDE > Form 10-Q on 14-May-2004 | All Recent SEC Filings |
14-May-2004
Quarterly Report
The following discussion and analysis of financial condition and resultsof operations should be read in conjunction with the corresponding discussionand analysis included in the Company's Report on Form 10-K for the year endedDecember 31, 2003.
Cautionary Statement Regarding Forward-Looking Information
This Management's Discussion and Analysis of Financial Condition andResults of Operations and other sections of this Form 10-Q contain"forward-looking statements" within the meaning of Section 27A of the SecuritiesAct 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-Qand include statements regarding the intent, belief or current expectations ofthe Company or its officers with respect to, among other things, the ability ofthe 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 factorsthat may effect the Company's financial condition or results of operations.Forward-looking statements may include, but are not limited to, projections ofrevenues, income or losses, capital expenditures, plans for future operations,financing needs or plans, compliance with covenants in loan agreements, plansfor liquidation or sale of assets or businesses, plans relating to products orservices of the Company, assessments of materiality, predictions of futureevents, and the ability to obtain additional financing, including the Company'sability to meet obligations as they become due, and other pending and possiblelitigation, as well as assumptions relating to the foregoing. All statements inthis Form 10-Q regarding industry prospects and the Company's financial positionare forward-looking statements. Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof. Although the Company believes that the expectations reflected in suchforward-looking statements are reasonable, it can give no assurance that suchexpectations will prove to have been correct. The Company undertakes noobligation to publicly release the result of any revisions to theseforward-looking statements that may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unanticipated events.
Business Activities
Speedus Corp. is a holding company that owns significant equity interestsin diverse businesses. We seek business opportunities across all industries forpotential transactions and relationships in which we can apply our currentresources and management strengths. The companies that we target, either publicor privately held, will be seeking growth or restructuring capital to pursuenear term business objectives in demonstrated markets. We will continue topursue opportunities involving our expertise in the medical device and wirelessmarkets as well as those areas involving our broadband assets as attractiveopportunities present themselves.
We have co-invested with Siemens Corporate Research, Inc., a subsidiary ofSiemens Corporation, in Zargis Medical Corp. to develop medical diagnosticsupport service solutions that automatically analyze acoustical data from apatient to determine physiological significant features useful in medicaldiagnosis. The first Zargis clinical device, the Zargis Acoustic Cardioscan(ZAC) will initially be targeted toward primary care physicians, to be used aspart of general medical examinations and physicals to detect murmurs which couldbe a sign of valvular and congenital heart disease. We own 80% of F&B GudtfoodHolding Corp., the creator and operator of the original Eurocentric "chic andquick" cafe, which is operating its first store in Manhattan and is currentlyplanning expansion to other locations. We own a portfolio of patents that allowfor high-speed wireless communications. We also own fixed wireless spectrum inthe New York City metropolitan area that we may commercialize in the future tosupport high-speed, or broadband, Internet access service.
Zargis Medical Corp. In January 2001, we co-invested with SiemensCorporate Research, Inc., a subsidiary of Siemens Corporation, in Zargis MedicalCorp. to develop non-invasive, medical diagnostic support solutions thatautomatically analyze acoustical data from a patient to determinephysiologically significant features useful in medical diagnosis. Thedevelopment of Zargis' patented technology is a pioneering effort in medicinewhich uses advanced signal processing algorithms deployed on standard computerplatforms. The first Zargis device, the Zargis Acoustic Cardioscan (ZAC), willinitially be targeted toward primary care physicians to be used as part ofgeneral medical examinations and physicals to detect murmurs which could be asign of valvular and congenital heart disease. General medical examinations,according to the National Center for Health Statistics, totaled 64 million in2000 for the US alone. Zargis is currently researching, and conducting trialson, additional noninvasive diagnostic support tools that process acoustical datafrom the body in order to provide an accurate and intelligible assessment of apatient's health. These assessments may be used by physicians and otherhealthcare providers to assist in the early identification or monitoring ofheart, lung, vascular and other conditions and to provide better patienttreatment.
We have signed an exclusive contract with Zargis to provide transactionprocessing to support Zargis' medical products. Some of the major next stepsremaining for Zargis include continuing clinical trials for new applications ofthe Zargis technology, FDA approval, and the formation of strategic partnershipsfor industry and market acceptance.
In February 2003, we acquired a controlling interest in Zargis Medical foran additional investment of $1,250,000. In July 2003, we increased our ownershipin Zargis Medical to 68.9% by investing an additional $2,000,000. As of December31, 2003 and February 1, 2004, our ownership increased to 70.5% and 71.2%,respectively, as a result of certain milestones not having been met.
F&B Gudtfood. We own 80% of F&B Gudtfood, the creator and operator of theoriginal Eurocentric "chic and quick" cafe, which is operating its first storein Manhattan. The acquisition price was $3,500,000 in May 2002. In February2003, we reduced our cash investment in F&B Gudtfood and received $1,775,000while maintaining our original 51% interest. In December 2003, as a result ofrenegotiation, our interest increased to 80% without an additional investmentand, under certain circumstances, could increase to 90%. We expect that F&BGudtfood will open its second location in Manhattan and begin selling F&BGudtfood franchises through its wholly owned subsidiary, F&B Gudtfood FranchiseCorp., in the second quarter of 2004. We have also entered into a managementservices contract with F&B Gudtfood.
Broadband Patents. Through our wholly owned subsidiaries, BroadbandPatents, LLC and CellularVision Technology & Telecommunications, L.P., we haveaccumulated a portfolio of patents that allow for high-speed wirelesscommunication systems with greater information content, reliability, clarity, ormore efficient use of licensed spectrum as compared to prior systems. We havesix domestic patents with expiration dates ranging from 2007 through 2017, withapproximately 60 international counterparts in 42 countries. Certain wirelesscommunications systems may employ a number of different combinations of ourpatented technology to maximize operational and spectrum efficiency. While webelieve that it would be difficult for such a wireless communications system tobe constructed without using one or more of our patented technologies, it is alengthy and expensive process to pursue licensing/patent infringement cases. Weare evaluating a strategy for the utilization of these patents in the future,which may include pursuit of licensing or development of other strategicopportunities with users of the underlying technology. However, due to thecurrent depressed economic state of the telecommunications industry, licensingactivity for the patent portfolio is not actively being pursued at this time. Wehave licensed technology in the past, both domestically and internationally, butare not currently receiving any license fees.
Local Multipoint Distribution Service (LMDS) license. We have an FCCcommercial operating license, awarded to us in recognition of our efforts indeveloping and deploying LMDS technology and for spearheading its regulatoryapproval 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 ofspectrum until the first Ka band satellite is launched, an event which is notcurrently determinable. The license provides that the spectrum may be used for awide variety of fixed wireless purposes, including wireless local looptelephony, high-speed Internet access and two-way teleconferencing.
We will not commence a full marketing effort using our LMDS technologyuntil new LMDS equipment becomes commercially available with cost andperformance that allow implementation of an economically viable business model.We cannot determine when this will occur and this equipment may never beavailable to us on this basis.
Other. We have invested a portion of our assets in a portfolio ofmarketable securities consisting of publicly traded equity securities. We havealso sold publicly traded equity securities we do not own in anticipation ofdeclines in the fair market values of these securities.
We have generated operating losses and negative operating cash flows sinceour 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 ofoperations are based upon our consolidated financial statements. The preparationof those financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the dates of the financial statements and the reportedamounts of operating revenues and expenses during the reporting periods. Actualresults could differ from those estimates. For a description of all of ouraccounting policies, see Note 1 to our consolidated financial statementsincluded in this Form 10-Q and Note 2 to our consolidated financial statementsincluded in our 2003 Form 10-K. However, we believe the following criticalaccounting policies affect the more significant judgments and estimates used inthe preparation of our consolidated financial statements.
Financial instruments. Our financial instruments consist primarily of cashequivalents, marketable securities and securities sold and not purchased. Thecarrying value of cash equivalents approximates market value since these highlyliquid, interest earning investments are invested in money market funds.Marketable securities consist of publicly traded equity securities classified astrading securities and are recorded at fair market value, i.e., closing pricesquoted on established securities markets. Securities sold and not repurchasedare also carried at the fair market value of the securities. Significant changesin the market value of securities that we invest in could have a material impacton our financial position and results of operations.
Long-lived assets. Long-lived assets, including fixed assets, goodwill andother intangibles, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of any such asset may not berecoverable through estimated future cash flows from that asset. The estimate ofcash flow is based upon, among other things, certain assumptions about expectedfuture operating performance. Specifically, we own a broadband patent, includedin intangible assets, which had a carrying value of $1.2 million and $1.1million at December 31, 2003 and March 31, 2004, respectively, and currently donot generate significant revenues or cash flows. However, as of December 31,2003, we estimated that, based upon our review of recent transactions and otherfactors, the fair value of our remaining FCC license and certain patents thathave no carrying value on our books would
generate sufficient cash to fully realize this asset as of December 31, 2003.This estimate evaluated the recovery of this broadband asset compared to thefair value of our remaining FCC license and certain patents as a group since itrepresents the lowest level for which identifiable cash flows are largelyindependent of the cash flows of other groups of assets and liabilities. Theseestimates may differ from actual results due to, among other things,technological changes, economic conditions, changes to our business model orchanges in our operating performance. As of December 31, 2003, we also reviewedthe carrying value of goodwill in the amount of $0.6 million at that time, andestimated based upon our review, taking into account such factors as projectedoperations 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 Statementof Financial Accounting Standards No. 5, "Accounting for Contingencies". SFASNo. 5 requires that we record an estimated loss when information available priorto issuance of our financial statements indicates that it is probable that anasset has been impaired or a liability has been incurred at the date of thefinancial statements and the amount of the loss can be reasonably estimated.Accounting for contingencies such as environmental, legal and income tax mattersrequires us to use our judgment. While we believe that our accruals for thesematters are adequate, if the actual loss is significantly different than theestimated loss, our results of operations will be affected in the period thatthe difference is known.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Revenues decreased $19,000 from $170,000 for the three months ended March31, 2003 to $151,000 for the three months ended March 31, 2004. This decrease isprimarily attributable to unfavorable weather conditions during the 2004 period.
Selling, general and administrative expenses increased $66,000 from$927,000 for the three months ended March 31, 2003 to $993,000 for the threemonths ended March 31, 2004. This increase is primarily a result of an increasein selling, general and administrative expenses of Zargis Medical. ZargisMedical is included in the consolidated financial statements of the Companysince February 28, 2003, the date of acquisition of a majority interest.
During the three months ended March 31, 2004, the Company incurred$2,929,000 in expenses in connection with a technology settlement in the amountof $15,000,000. No such expenses were recognized during the three months endedMarch 31, 2003. In connection with the settlement and as provided under theterms of his 2002 employment agreement, Shant S. Hovnanian, Chairman of theBoard and Chief Executive Officer of the Company, received a contingentparticipation in the proceeds of the settlement in the amount of approximately$2.8 million during the three months ended March 31, 2004.
Research and development expenses increased $36,000 from $335,000 for thethree months ended March 31, 2003 to $371,000 for the three months ended March31, 2004. This increase is primarily a result of an increase in research anddevelopment expenses of Zargis Medical. Zargis Medical is included in theconsolidated financial statements of the Company since February 28, 2003, thedate of acquisition of a majority interest.
Depreciation and amortization increased $70,000 from $215,000 for thethree months ended March 31, 2003 to $285,000 for the three months ended March31, 2004. This increase is primarily a result of the amortization of medicaltechnology during the three months ended March 31, 2004 resulting from theZargis Medical acquisition.
Cost of sales decreased $3,000 from $48,000 for the three months endedMarch 31, 2003 to $45,000 for the three months ended March 31, 2004. Thisdecrease is primarily a result of a lower level of revenues during the threemonths ended March 31, 2004.
During the three months ended March 31, 2004, the Company recorded a gainfrom technology settlement in the amount of $15,000,000. No such gain wasrecognized during the three months ended March 31, 2003.
Investment loss increased $210,000 from a loss of $48,000 for the threemonths ended March 31, 2003 to a loss of $258,000 for the three months endedMarch 31, 2004. These changes are primarily a result of the recognition ofrealized and unrealized gains/(losses) during these periods. The Company recordsmarketable securities and securities sold and not purchased at the fair marketvalue of the securities. The amount of these realized and unrealized gains orlosses will fluctuate based upon changes in the market value of the underlyinginvestments and are not necessarily indicative of the results that may beexpected for any future periods. Realized losses decreased $710,000 from netlosses of $1,129,000 for the three months ended March 31, 2003 to net losses of$419,000 for the three months ended March 31, 2004. Unrealized gains decreased$1,008,000 from net gains of $1,124,000 for the three months ended March 31,2003 to net gains of $116,000 for the three months ended March 31, 2004.
Minority interest increased $60,000 from $81,000 for the three monthsended March 31, 2003 to $141,000 for the three months ended March 31, 2004. Thisamount represents the interest of minority stockholders in the losses of F&BGudtfood and Zargis Medical.
Equity in loss of associated company amounted to $93,000 for the threemonths ended March 31, 2003. This amount reflects the Company's share in ZargisMedical's operations, accounted for under the equity method, through February27, 2003. Zargis Medical is included in the consolidated financial statements ofthe Company since February 28, 2003, the date of acquisition of a majorityinterest. As a result, no amount was recorded for the three months ended March31, 2004.
Liquidity and Capital Resources
The Company has recorded operating losses and negative operating cashflows in each year of its operations since inception.
Net cash provided by operating activities was $10.6 million for the threemonths ended March 31, 2004 compared to net cash used in operating activities of$1.7 million for the three months ended March 31, 2003. This net increase incash provided was primarily the result of a gain from technology settlement inthe amount of $15 million recognized during the three months ended March 31,2004, reduced by $2.9 million in technology settlement expenses. In February2004, the Company's wholly-owned subsidiary, CellularVision Technology &Telecommunications, L.P., received $15 million from a former internationallicensee in settlement of litigation that CT&T instituted in May 2001. Inconnection with the settlement and as provided under the terms of his 2002employment agreement, Shant S. Hovnanian, Chairman of the Board and ChiefExecutive Officer of the Company, received a contingent participation in theproceeds of the settlement in the amount of approximately $2.8 million duringthe three months ended March 31, 2004.
Net cash used in investing activities was $178,000 for the three monthsended March 31, 2004 compared to net cash provided by investing activities of$21,000 for the three months ended March 31, 2003. This net increase in cashused in investing activities was primarily the result of property and equipmentadditions.
Net cash provided by financing activities was $24,000 for the three monthsended March 31, 2004 compared to net cash used in financing activities of$107,000 for the three months ended March 31, 2003. This increase in cashprovided by financing activities was primarily the result of proceeds receivedfrom the exercise of options and warrants and decreased repurchases of treasurystock.
At March 31, 2004, the Company's future minimum lease payments due undernoncancelable leases aggregated $1,903,000. $287,000, $210,000, $212,000,$216,000 and $222,000 of this amount is due during the twelve months endingMarch 31, 2005, 2006, 2007, 2008 and 2009, respectively, and the balance ispayable thereafter.
The Company believes that it has sufficient liquidity to finance itscurrent level of operations and expected capital requirements through the nexttwelve months. However, the Company does not expect to have earnings fromoperations until such time as it substantially increases its customer baseand/or forms a strategic alliance for use of its capabilities in the future. Wecannot predict when this will occur. We have no material non-cancelablecommitments and the amount of future capital funding requirements will depend ona number of factors that we cannot quantify, including the success of ourbusiness, the extent to which we expand our high-speed Internet service ifsuitable equipment becomes available and the types of services we offer, as wellas other factors that are not within our control, including competitiveconditions, government regulatory developments and capital costs. The lack ofadditional capital in the future could have a material adverse effect on theCompany's financial condition, operating results and prospects for growth.
We have invested a portion of our assets in a portfolio of marketablesecurities consisting of publicly traded equity securities. We purchase thesesecurities in anticipation of increases in the fair market values of thesecurities. We have also sold publicly traded equity securities we do not own inanticipation of declines in the fair market values of these securities. When wesell securities that we do not own, we must borrow the securities we sold inorder to deliver them and settle the trades. Thereafter, we must buy thesecurities and deliver them to the lender of the securities. Our potential forloss on these transactions is unlimited since the value of the underlyingsecurity can keep increasing.
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