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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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: 0-22076
ZYDECO ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
76-0404904
(I.R.S. Employer Identification No.)
635 WEST CAMPBELL ROAD, SUITE 130
RICHARDSON, TEXAS
(Address of principal executive offices)
75080
(Zip Code)
(972)783-0284
(Registrant's telephone number, including area code)
(Former address of Registrant's principal executive offices,
if changed from 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 [_]
As of August 9, 2000 there were 42,775,951 shares of Zydeco Energy, Inc.
Common Stock, $.001 par value, issued and outstanding.
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FORM 10-QSB
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets............................ 3
Consolidated Statements of Operations.................. 4
Consolidated Statements of Cash Flows.................. 5
Notes to Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 10
Part II. Other Information
Item 1. Legal Proceedings...................................... 14
Item 2. Changes in Securities and Use of Proceeds.............. 14
Item 6. Exhibits and Reports on Form 8-K....................... 14
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ZYDECO ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 2000 1999
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,269,402 394,740
Certificates of deposit 96,290 --
Accounts receivable 520,759 621,535
Vendor deposit 35,209 360,000
Deferred tax asset 415,904 16,947
Prepaid expenses 74,611 --
Other 1,658 29,889
--------------- ---------------
Total current assets 3,413,833 1,423,111
Certificates of deposit -- 96,290
Investment in Wavefield Imaging Technology 668,093 --
Property and equipment, net 954,736 147,845
Deferred tax asset 425,757 --
Goodwill, net (note 1) 26,257,417 --
Other assets 129,766 --
--------------- ---------------
$ 31,849,602 1,667,246
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Note payable to related party (note 4) $ 250,000 --
Note payable for equipment (note 4) 430,898 --
Accounts payable 935,923 305,375
Unearned revenue 587,484 493,882
Accrued liabilities and other 449,581 326,108
Customer deposit -- 360,000
Current installments of obligations under capital
leases 23,489 22,432
--------------- ---------------
Total current liabilities 2,677,375 1,507,797
Obligations under capital leases, excluding current
installments 51,051 61,049
--------------- ---------------
Total liabilities 2,728,426 1,568,846
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares authorized and
7,190 shares issued and outstanding in 2000 7 --
Common stock, $.001 par value; 50,000,000 shares authorized,
42,775,951 and 32,623,855 issued and outstanding in 2000
and 1999, respectively 42,776 1,000
Additional paid in capital 29,434,488 --
Retained earnings (accumulated deficit) (356,095) 97,400
--------------- ---------------
Total stockholders' equity 29,121,176 98,400
Contingency (note 5)
--------------- ---------------
$ 31,849,602 1,667,246
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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ZYDECO ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Net service revenue $ 2,782,127 1,780,550 5,285,329 3,436,641
Other revenue 26,000 -- 26,000 --
-------------- -------------- -------------- -------------
Total revenues 2,808,127 1,780,550 5,311,329 3,436,641
Operating expenses:
Cost of services 1,563,676 1,173,094 2,808,366 2,309,247
Selling and marketing 30,235 147,563 37,866 414,022
General and administrative 512,752 116,908 857,436 210,898
Amortization of unearned stock compensation 824,841 -- 1,191,707 --
Amortization of goodwill 320,390 -- 320,390 --
Depreciation and amortization 39,043 4,018 53,403 8,036
-------------- -------------- -------------- -------------
Total operating expenses 3,290,937 1,441,583 5,269,168 2,942,203
-------------- -------------- -------------- -------------
Operating income (loss) (482,810) 338,967 42,161 494,438
Interest income 19,172 1,367 28,044 1,367
Interest expense 8,353 118 16,156 219
-------------- -------------- -------------- -------------
Income (loss) before income taxes (471,991) 340,216 54,049 495,586
Income tax expense (benefit) (685,512) 15,334 (661,767) 22,339
-------------- -------------- -------------- -------------
Net income $ 213,521 324,882 715,816 473,247
============== ============== ============== =============
Net income per common share:
Basic and diluted $ 0.01 0.01 0.02 0.01
============== ============== ============== =============
Weighted average common shares outstanding:
Basic 42,295,478 39,813,855 41,054,667 39,813,855
============== ============== ============== =============
Diluted 42,417,352 39,813,855 41,115,604 39,813,855
============== ============== ============== =============
Pro forma data (note 1):
Income tax expense (benefit) $ (55,385) 125,975 144,253 183,521
-------------- -------------- -------------- -------------
Net income (loss) $ (416,606) 214,241 (90,204) 312,065
============== ============== ============== =============
Net income (loss) per common share:
Basic and diluted $ (0.01) 0.01 -- 0.01
============== ============== ============== =============
Weighted average common shares outstanding:
Basic and diluted 42,295,478 39,813,855 41,054,667 39,813,855
============== ============== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
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ZYDECO ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
-------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 715,816 473,247
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 373,793 8,036
Amortization of unearned stock compensation 1,191,707 --
Deferred tax (benefit) expense (824,714) 22,339
Changes in operating assets and liabilities net of
effect of acquisition:
Accounts receivable 209,502 (98,495)
Customer deposit (360,000) --
Accounts payable and accrued liabilities 499,946 201,610
Unearned revenue 93,602 (73,976)
Vendor deposit 324,791 --
Prepaid expenses (74,611) --
Other current assets 28,231 (17,358)
-------------- -----------
Net cash provided by operating activities 2,178,063 515,403
-------------- -----------
Cash flows from investing activities:
Cash acquired in the merger, net of direct costs (note 1) 432,414 -
Capital expenditures (41,408) (9,510)
-------------- -----------
Net cash provided by (used in) investing activities 391,006 (9,510)
-------------- -----------
Cash flows from financing activities:
Proceeds from notes payable to related parties 250,000 --
Principal payments on notes to related parties -- (18,103)
Principal payments on obligations (96,961) --
Payments of dividends (847,446) (244,912)
-------------- -----------
Net cash used in financing activities (694,407) (263,015)
-------------- -----------
Net increase in cash and cash equivalents 1,874,662 242,878
Cash and cash equivalents at beginning of period 394,740 159,996
-------------- -----------
Cash and cash equivalents at end of period $ 2,269,402 402,874
============== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 31,034 219
============== ===========
Cash paid during the period for income taxes $ 27,180 7,259
============== ===========
Supplemental disclosure of noncash investing and financing activities:
Purchase of equipment in exchange for note payable (note 4) $ 518,918 --
============== ===========
Reverse acquisition of Zydeco by DataVoN (note 1) $ 27,962,700 --
============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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Zydeco Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(1) Merger and Basis of Financial Reporting
On June 9, 2000, DataVoN, Inc. (DataVoN) merged (the Merger) with Zydeco
Energy, Inc. (Zydeco) and DataVoN became a subsidiary of Zydeco.
Shareholders of DataVoN received shares of Zydeco equal to a majority of the
shares of Zydeco outstanding after the transaction. Accordingly, the
business combination has been accounted for as a reverse acquisition of
Zydeco by DataVoN using the purchase method of accounting. Accordingly, the
historical financial statements of DataVoN prior to the Merger have become
the financial statements of the registrant, and the results of operations of
Zydeco have been combined with DataVoN beginning on June 9, 2000. References
to the "Company" refer to operations of DataVoN prior to the Merger and the
combined operations of DataVoN and Zydeco subsequent to the Merger. The
purchase price totals approximately $28 million, which is comprised of the
traded market value of Zydeco's outstanding common stock and the fair value
of Zydeco's outstanding options and warrants at the date the Merger was
agreed and announced, and direct acquisition costs. A substantial portion of
the purchase price was allocated to goodwill that is being amortized to
expense over a five-year period. This goodwill is subject to an impairment
test. As a result, an impairment of goodwill may be required in the near
term, and if so required, could be material to the results of operations and
financial position.
The purchase price allocation is based on preliminary estimates. The final
allocation of the purchase price may differ from that reflected in the
accompanying consolidated financial statements as of and for the six months
ended June 30, 2000 upon completion of the analysis of the fair values of
the assets acquired and liabilities assumed. Specifically, Zydeco had a net
operating loss carryforward for tax purposes of approximately $18.4 million
as of December 31, 1999. The Company is assessing the impact the Merger had
on any limitations to the ultimate use of this net operating loss
carryforward by the Company in periods subsequent to the Merger and no
conclusion has been reached. To the extent that a deferred tax asset can
ultimately be recognized in the final purchase price allocation, there will
be a reduction to goodwill.
Under the terms of the Merger, DataVoN's shareholders received 32,623,855
shares of common stock and 7,190 shares of preferred stock of Zydeco. The
preferred shares will automatically convert into 7,190,000 common shares
when sufficient additional common shares of Zydeco are authorized by its
stockholders, and vote with the Zydeco common shares on an as if converted
basis on all matters, except as required by law. Zydeco intends to issue a
proxy statement in the near term to obtain stockholder approval to increase
its authorized common shares. Stockholders' equity has been converted from
DataVoN's capital structure to Zydeco's capital structure to reflect the
exchange of shares pursuant to the Merger. Accordingly, all share and per
share information has been revised to reflect the exchange ratio on a
retroactive basis.
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The preferred shares are included in weighted average common shares
outstanding during the periods presented for both basic and diluted earnings
per share on an as if converted basis since the former DataVoN shareholders
currently have the ability to authorize sufficient additional common shares
of Zydeco and the authorization is essentially a formality.
In connection with the Merger, DataVoN converted from an S corporation into
a C corporation. Accordingly, the Company eliminated DataVoN's retained
earnings and established deferred federal income taxes at the date of the
Merger. The corresponding deferred tax benefit of $643,969 was recognized in
the statement of operations for the six months ended June 30, 2000. The
unaudited pro forma statement of operations data presented on the face of
the statements of operations for the three months and six months ended June
30, 2000 and 1999 are based upon the Company's historical income statements
and give effect to pro forma income taxes as if the Company was a C
corporation for the entire duration of both periods.
Unaudited pro forma results, as if the Merger had occurred at the beginning
of the period presented and including pro forma income taxes as if DataVoN
was a C corporation for the entire duration of both periods, are as follows.
These unaudited pro forma results do not purport to be indicative of results
which would actually have occurred if the Merger had been consummated at the
beginning of the period presented.
For the six months ended
June 30,
--------------------------
2000 1999
----------- -----------
Pro forma revenues $ 5,368,274 $ 3,637,196
=========== ===========
Goodwill amortization $ 2,657,781 $ 2,657,781
=========== ===========
Pro forma net loss $(3,164,850) $(3,699,769)
=========== ===========
Pro forma diluted
loss per share $ (0.06) $ (0.07)
=========== ===========
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the accompanying unaudited financial statements contain all adjustments
(consisting solely of normal recurring
7
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adjustments) considered necessary to present fairly the financial position,
results of operations and cash flows of the Company. Interim period results
are not necessarily indicative of the results to be achieved for an entire
year. These interim unaudited financial statements should be read in
conjunction with the audited financial statements of the Company for the
year ended December 31, 1999 included in the Form 8-K filed by Zydeco with
the Securities and Exchange Commission on June 19, 2000. These interim
unaudited financial statements should also be read in conjunction with the
audited financial statements of Zydeco for the year ended December 31, 1999
included in the Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 30, 2000.
(2) Stock Compensation
In March 2000, the Company adopted a stock option plan. Under the plan, the
Company may grant to officers, directors, consultants and employees options
to purchase shares of the Company's common stock. In March 2000, the Company
granted options to purchase 2,522,459 shares of its common stock for an
exercise price of $0.49 per share. These options have a 10 year life and
vest over a three-year period, subject to certain exceptions. Stock
compensation totaling approximately $5.2 million is being recognized over
the vesting period.
(3) Segment Information
As a result of the Merger, the Company is now organized along two lines of
business, DataVoN and Zydeco. DataVoN provides Internet protocol bandwidth
capacity to a number of major domestic and international carriers and IP
providers desiring to employ the benefits of Voice over Internet Protocol
(VoIP) technology and networking. Zydeco is an independent energy company
that has been engaged in the exploration for oil and gas utilizing advanced
three-dimensional seismic and computer-aided exploration techniques. Because
of market conditions, Zydeco's operations were curtailed prior to the Merger
and it had focused its efforts on (1) conserving cash resources; (2)
concentrating on marketing salable assets; and (3) seeking alternate
sources of capital for possible drilling participation and general working
capital, including potential business combinations outside of the oil and
gas industry. The Company is considering its alternatives with respect to
the operations of Zydeco. Zydeco's revenues and net loss for the period from
the Merger date to June 30, 2000 are insignificant.
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The following is a summary of total assets by reportable segment:
June 30, December 31,
2000 1999
----------- ------------
DataVoN $ 3,800,847 1,667,246
Zydeco 1,791,338 --
Goodwill from the Merger 26,257,417 --
----------- ------------
Total assets $31,849,602 1,667,246
=========== ============
(4) Notes Payable
In March 2000, the Company entered into a note payable arrangement with a
vendor for the purchase of network equipment. The note bears interest at 9%
and requires monthly payments of $44,010, until the final balance is due on
April 1, 2001.
On May 1, 2000, the Company entered into a Security Agreement and Note
Payable with a related party for $250,000. The note bears interest at 9% per
annum. The note is due on demand but no later than July 15, 2000. The note
is secured by substantially all assets of the Company. The note has been
renewed and extended to January 15, 2001.
On June 21, 2000, the Company entered into a Loan and Security Agreement
with Bank of Texas that provides access to a $500,000 revolving credit
facility. The line of credit is secured by a lien on all trade receivables.
Interest accrues daily on the unpaid principal of the facility at an annual
rate equal to the prime rate, as defined in the Loan and Security Agreement,
plus .5%. As of June 30, 2000, no borrowings had been made under the Loan
and Security Agreement.
(5) Contingency
The Company is currently involved in litigation with a former sales agent in
regards to commissions allegedly owed to the former commissioned agent by
the Company. The Company has countersued the former agent for $230,000 owed
by the former agent to the Company. The litigation is in its early stages
and no determination of the outcome is possible at this time. The former
agent alleges maximum economic damages of approximately $4 million.
Management of the Company is vigorously defending against this claim. No
reserve for the claim, or receivable for the counterclaim, has been
established for this litigation as of June 30, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the Company's financial condition and
results of operations for the three months and six months ended June 30, 2000
should be read in conjunction with the consolidated financial statements and
footnotes for the three months and six months ended June 30, 2000 included
herein.
OVERVIEW
We are a wholesale provider of voice and data services using Internet Protocol
(IP). As of August 1, 2000, we were providing services to several domestic
carriers and are currently operating in 14 markets.
Through our network, we transport a large volume of "toll quality" voice and
data services. The entrance point for communications traffic over our network
is referred to as a points of presence (POP). Our customers interconnect with
our network by connecting dedicated voice circuits from their facilities to
gateways located in one of our POP's.
We were incorporated in 1993. We conducted oil & gas seismic exploration
operations beginning in 1993. On June 9, 2000, we merged with DataVoN Inc.
("DataVoN"). As a result of this merger, the shareholders of DataVoN now own
approximately 80% of the voting power of our stock. The merger was accounted for
as a reverse acquisition of us by DataVoN under the purchase method of
accounting. Accordingly, the historical financial statements of DataVoN prior to
the merger have become our financial statements, and our results of operations
will be combined with those of DataVoN from and after the date of the merger.
As the oil and gas seismic exploration operations are not currently material to
our combined results of operations, we do not discuss them below.
Our primary source of revenue is the fees that we receive from customers for
transporting and completing calls over our network. This revenue is dependent on
the volume of voice and data traffic carried over the network, which is measured
in minutes. We charge our customers fees based upon a per minute or flat rate
charge prior to the service being offered and recognize this revenue in the
period in which the call is completed.
Our most significant costs and expenses are data communications and
telecommunications expenses which are comprised primarily of collocation
facility fees, transport fees, termination fees, and equipment expenses.
Collocation facility fees are paid for lease of rack space, power and associated
services to "host" the equipment. Transport fees are paid to a "backbone
provider" to carry traffic between POP's where the equipment is located.
Termination fees are paid to local service providers to terminate calls.
Equipment costs are capitalized and depreciated over their estimated useful
lives and minor items are expensed directly. Other expenses include charges for
connections between our POP's and our vendors for termination services and
software support and management systems required in maintaining our network.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1999
NET SERVICE REVENUE. Our net service revenue increased by $1 million to $2.8
million for the three months ended June 30, 2000, from $1.8 million for the
three months ended June 30, 1999. The increase in net revenue resulted from an
increase in the amount of traffic carried over our network to approximately 410
million minutes for the three months ended June 30, 2000, from approximately 235
million minutes for the three months ended June 30, 1999.
COST OF SERVICES. Cost of services increased by approximately $0.4 million to
$1.6 million for the three months ended June 30, 2000, from $1.2 million for the
three months ended June 30, 1999. The increase in expense was driven by the
increase in traffic described above. Telecommunications fees increased to $1.5
million for the three months ended June 30, 2000 from $1.2 million for the three
months ended June 30, 1999. Collocation facility fees increased to $24,076 for
the three months ended June 30, 2000, from $2,134 for the three months ended
June 30, 1999. As a percentage of net service revenue, cost of services expense
decreased to approximately 56% for the three months ended June 30, 2000, from
approximately 66% for the three months ended June 30, 1999 due to higher margins
on certain customers.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses include expenses
relating to the salaries, payroll taxes, benefits and commissions that we pay
for sales personnel and the expenses associated with the development and
implementation of our promotion and marketing campaigns, including expenses
relating to our outside public relations firm and industry analysts. Selling and
marketing expenses decreased by $117,328 to $30,235 for the three months ended
June 30, 2000 from $147,563 for the three months ended June 30, 1999. This
decrease is attributable to our no longer using commissioned sales agents in
our business. We now have sales personnel on our payroll to perform the
functions previously carried out by the commissioned sales agents.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses include
salary, payroll tax and benefit expenses and related costs for general corporate
functions, including executive management, administration, office facilities,
information technology and human resources. General and administrative expenses
increased by $395,844 to $512,752 for the three months ended June 30, 2000, from
$116,908 for the three months ended June 30, 1999. General and administrative
expenses increased primarily due to an increase in the number of personnel and
an increase in consulting and professional fees. As a percentage of net revenue,
general and administrative expenses increased to approximately 14% for the three
months ended June 30, 2000, from approximately 7% for the three months ended
June 30, 1999 due to the factors described above.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased by $35,025 to $39,043 for the three months ended June 30, 2000, from
$4,018 for the three months ended June 30, 1999. This increase primarily
resulted from additional purchases of capital equipment and software that were
needed to support our expanding network.
AMORTIZATION OF UNEARNED STOCK COMPENSATION. This expense totaled $824,841 and
represents amortization of stock compensation related to options we issued in
March 2000. The stock compensation is being amortized over the vesting period of
the options, which equals the estimated period of benefit.
AMORTIZATION OF GOODWILL. This expense totaled $320,390 and represents
amortization of goodwill recognized in the reverse acquisition of Zydeco by
DataVoN beginning from June 9, 2000. We are amortizing the goodwill balance over
a five year life, which will result in annual noncash amortization expense of
approximately $5.3 million. This goodwill is subject to an impairment test, and
as a result, we may be required to recognize a noncash impairment charge in the
near term, and if so required, could be material to our results of operations
and financial condition.
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INTEREST INCOME AND INTEREST EXPENSE. Interest expense is primarily comprised of
interest on our notes payable, and various capital leases. Interest income is
primarily composed of income earned on our cash and cash equivalents and
certificates of deposit.
INCOME TAX EXPENSE (BENEFIT). For the three months ended June 30, 2000, we
recognized a deferred tax benefit of $643,969 as a result of DataVoN becoming a
C corporation in connection with the merger transaction.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1999
NET SERVICE REVENUE. Our net service revenue increased by approximately $1.9
million to $5.3 million for the six months ended June 30, 2000, from $3.4
million for the six months ended June 30, 1999. The increase in net revenue
resulted from an increase in the amount of traffic carried over our network to
approximately 773 million minutes for the six months ended June 30, 2000, from
approximately 462 million minutes for the six months ended June 30, 1999.
COST OF SERVICES. Cost of services expense increased by $0.5 million to $2.8
million for the six months ended June 30, 2000, from $2.3 million for the six
months ended June 30, 1999. The increase in expense was driven by the increase
in traffic described above. Telecommunications fees increased to $2.7 million
for the six months ended June 30, 2000, from $2.3 million for the six months
ended June 30, 1999. Collocation facility fees increased to $38,511 for the six
months ended June 30, 2000, from $4,358 for the six months ended June 30, 1999.
As a percentage of net revenue, cost of services expense decreased to
approximately 53% for the six months ended June 30, 2000, from approximately 67%
for the six months ended June 30, 1999 due to higher margins on certain
customers.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses include expenses
relating to the salaries, payroll taxes, benefits and commissions that we pay
for sales personnel and the expenses associated with the development and
implementation of our promotion and marketing campaigns, including expenses
relating to our outside public relations firm and industry analysts. Selling and
marketing expenses decreased by $376,156 to $37,866 for the six months ended
June 30, 2000 from $414,022 for the six months ended June 30, 1999. This
decrease is attributable to our no longer using commissioned sales agents in our
business. We now have sales personnel on our payroll to perform the functions
previously carried out by the commissioned sales agents.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses include
salary, payroll tax and benefit expenses and related costs for general corporate
functions, including executive management, administration, office facilities,
information technology and human resources. General and administrative expenses
increased by $646,538 to $857,436 for the six months ended June 30, 2000, from
$210,898 for the six months ended June 30, 1999. General and administrative
expenses increased primarily due to an increase in the number of personnel and
an increase in consulting and professional fees.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expense
increased by $45,367 to $53,403 for the six months ended June 30, 2000, from
$8,036 for the six months ended June 30, 1999. This increase primarily resulted
from additional purchases of capital equipment and software that were needed to
support our expanding network.
AMORTIZATION OF UNEARNED STOCK COMPENSATION. This expense totaled $1,191,707 and
represents amortization of stock compensation related to options we issued in
March 2000. The stock compensation is being amortized over the vesting period of
the options, which equals the estimated period of benefit.
AMORTIZATION OF GOODWILL. This expense totaled $320,390 and represents
amortization of goodwill recognized in the reverse acquisition of Zydeco by
DataVoN beginning from June 9, 2000. We are amortizing the goodwill balance over
a five year life, which will result in annual noncash amortization expense of
approximately $5.3 million. This goodwill is subject to an an impairment test,
and as a result, we may be required to recognize a noncash impairment charge in
the near term, and if so required, could be material to our results of
operations and financial condition.
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INTEREST INCOME AND INTEREST EXPENSE. Interest expense is primarily comprised of
interest on our notes payable, and various capital leases. Interest income is
primarily composed of income earned on our cash and cash equivalents.
INCOME TAX EXPENSE (BENEFIT). For the six months ended June 30, 2000, we
recognized a deferred tax benefit of $643,969 as a result of DataVoN becoming a
C corporation in connection with the merger transaction.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital and liquidity needs historically and currently have
related to the development of our network infrastructure, our sales and
marketing activities, and general capital needs. Our capital needs have been
met, in large part, from cash flow and profits generated from operations. As we
have placed greater emphasis on expanding our network infrastructure, we also
plan to meet an increasing portion of our capital needs through vendor capital
leases and other equipment financing. We have also established a line of credit
with a bank.
Net cash provided by operating activities was $2,178,063 for the six months
ended June 30, 2000, as compared to $515,403 for the six months ended June 30,
1999. The increase was primarily attributable to increased revenue from voice
and data services over IP.
Net cash provided by investing activities was $391,006 for the six months ended
June 30, 2000, as compared to $9,510 used by investing activities for the six
months ended June 30, 1999. Cash provided by investing activities was primarily
related to cash acquired from Zydeco in the merger.
Net cash used in financing activities was $694,407 for the six months ended June
30, 2000, as compared to net cash used in financing activities of $263,015 for
the six months ended June 30, 1999.
In March 2000, we entered into a notes payable arrangement with a vendor for the
purchase of network equipment. The notes bears interest at 9% and requires
monthly payments of $44,010, until the final balance is paid on April 1, 2001.
The balance outstanding at June 30, 2000 is $430,898.
On May 1, 2000, we entered into a Security Agreement and Note Payable with a
related party for $250,000. The note bears interest at 9% per annum from the
date of the note until paid. The note is due on demand but no later than January
15, 2001. The note is secured by substantially all of our assets.
On June 21, 2000, we entered into a Loan and Security Agreement with Bank of
Texas that provides us with access to a $500,000 revolving credit facility. The
line of credit is secured by a lien on all of our trade receivables. Interest
accrues daily on the unpaid principal of the facility at an annual rate equal to
the prime rate, as defined in the Loan and Security Agreement, plus .5%. As of
June 30, 2000, we had made no borrowings under the Loan and Security Agreement.
Capital expenditures totaled approximately $0.6 million for the six months ended
June 30, 2000. Based on our existing operations, we estimate total capital
expenditures for 2000 to be approximately $10 million, mainly for equipment to
expand our network infrastructure, which is expected to be funded by cash flows
from operations and outside financing. However, there can be no assurance that
we will be able to obtain such outside financing to fund these capital
expenditures. If we are unable to obtain such outside financing, our planned
expansion of our network infrastructure will be slowed.
We believe that our cash on hand, cash flows from operations, borrowing
availability under our revolving line of credit and other financing arrangements
which we plan to pursue will be sufficient to satisfy existing commitments and
plans, including those described above. However, there can be no assurance that
we will be able to make planned borrowings, that our business will generate
sufficient cash flows from operations, or that future borrowings will be
available in an amount to enable us to make necessary capital or other
expenditures.
FORWARD-LOOKING STATEMENTS
The information in this Form 10-QSB includes "forward-looking" statements within
the meaning of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934, and the Private Securities Litigation Reform
Act of 1995. We include this statement for the express purpose of availing
ourselves of the protections of these safe harbor provisions with respect to all
of the forward-looking statements we make. The forward-looking statements in
this Form 10-QSB reflect our current views with respect to possible future
events and financial performance. They are subject to certain risks and
uncertainties, including without limitation the absence of significant revenues,
financial resources, significant competition and those other risks and
uncertainties discussed herein that could cause our actual results to differ
materially from our historical results or those that we hope to achieve. In this
Form 10-QSB, the words, "anticipates," "plans," "believes," "expects,"
"intends," "future" and similar expressions identify certain forward-looking
statements. Please do not place undue reliance on the forward-looking statements
contained in this Form 10-QSB. We undertake no obligation to announce publicly
revisions we make to these forward-looking statements to reflect the effect of
events or circumstances that may arise after the date of this Form 10-QSB. All
written and oral forward-looking statements made subsequent to the date of this
Form 10-QSB and attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this section.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
In a complaint filed on December 9, 1999 in the District Court of
Tarrant County in the State of Texas, Teton Enterprises brought suit against
DataVoN and Hugh Simpson. The complaint alleges that DataVoN owes the plaintiff,
a former sales agent, certain commissions pursuant to a contract drafted by the
former agent. DataVoN has countersued the former agent for amounts allegedly
owed by the former agent to DataVoN. The litigation is in its early stages and
no determination of the outcome is possible at this stage. The former agent
alleges maximum economic damages in the amount of $4,222,970.54. Management of
DataVoN can make no assurances as to the outcome of such litigation nor what
effect it will have on the business of DataVoN or its financial condition. The
defendants are defending the action vigorously.
Item 2. Changes in Securities and Use of Proceeds.
(c) On June 9, 2000, Zydeco issued 32,623,855 shares of its common stock and
7,190 shares of its preferred stock in connection with its merger with DataVoN.
Each of the 7,190 shares of preferred stock issued in the merger is entitled to
1,000 votes on all matters, except as required by law, with Zydeco's common
stock. The 7,190 shares of preferred stock are convertible into 7,190,000 shares
of Zydeco's common stock (or 1,000 shares of common stock for each share of
preferred stock). All outstanding shares of Zydeco's preferred stock issued in
the merger will be automatically converted into Zydeco's common stock by their
terms upon approval by Zydeco's stockholders of an amendment to its Certificate
of Incorporation to increase the number of shares of common stock that Zydeco is
authorized to issue.
Upon closing of Zydeco's merger with DataVoN, Zydeco issued to two
individuals for broker services warrants to purchase an aggregate of 523,756
shares of its common stock at $0.08 per share.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof.
The sales of securities were without the use of an underwriter, and the shares
bear a restrictive legend permitting the transfer thereof only upon registration
of the shares or an exemption under the Securities Act.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
EXHIBIT NO. Description
----------- -----------
3.1 Certificate of Incorporation and Certificates of Amendment
thereto (incorporated by reference to Zydeco's Annual Report on
Form 10-K for the year ended December 31, 1995).
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<PAGE>
EXHIBIT NO. Description
----------- -----------
3.2 Amended and Restated Bylaws (incorporated by reference to
Zydeco's Registration Statement on Form S-1 (Reg. No. 33-65286)).
3.3 Certificate of Designations of Series A Convertible Preferred
Stock of Zydeco (incorporated by reference to Form 8-K (File No.
0-22076) filed with the SEC on June 19, 2000).
10.1 Warrant Agreement between Continental Stock Transfer & Trust
Company and Zydeco Energy, Inc. (incorporated by reference to
Registration Statement on Form S-1 (Reg. No. 33-65286)).
10.2 Form of Warrant Agreement by and among Zydeco Energy, Inc. and
Brean Murray & Co., Inc. and Gaines, Berland Inc. (incorporated
by reference to Registration Statement on Form S-1
(Reg. No. 333-27679)).
10.3 Agreement and Plan of Merger among Zydeco Energy, Inc., DVN
Acquisition Corporation and DataVoN Inc. dated as of May 23, 2000
(incorporated by reference to Form 8-K (File No. 0-22076) filed
with the SEC on May 24, 2000).
10.4 Zydeco Energy, Inc. 2000 Stock Option Plan (formerly known as the
DataVoN Inc. 2000 Stock Option Plan) (incorporated by reference
to Registration Statement on Form S-8 (Reg. No. 333-41492) filed
with the SEC on July 14, 2000.
27.1 Financial Data Schedule.
(b) Report on Form 8-K.
On May 24, 2000, Zydeco filed a Report on Form 8-K pursuant to Item 5
disclosing its entry into an agreement to merge with DataVoN Inc.
On June 19, 2000, Zydeco filed a Report on Form 8-K pursuant to
Items 1 and 2 disclosing the consummation of its merger with DataVoN Inc.
15
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZYDECO ENERGY, INC.
/s/ Hugh D. Simpson
------------------------------------
Hugh D. Simpson
Chairman of the Board, President and Chief
Executive Officer
Dated: August 16, 2000
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EXHIBIT INDEX
EXHIBIT NO. Description
----------- -----------
3.2 Amended and Restated Bylaws (incorporated by reference to
Zydeco's Registration Statement on Form S-1 (Reg. No. 33-65286)).
3.3 Certificate of Designations of Series A Convertible Preferred
Stock of Zydeco (incorporated by reference to Form 8-K (File No.
0-22076) filed with the SEC on June 19, 2000).
10.1 Warrant Agreement between Continental Stock Transfer & Trust
Company and Zydeco Energy, Inc. (incorporated by reference to
Registration Statement on Form S-1 (Reg. No. 33-65286)).
10.2 Form of Warrant Agreement by and among Zydeco Energy, Inc. and
Brean Murray & Co., Inc. and Gaines, Berland Inc. (incorporated
by reference to Registration Statement on Form S-1
(Reg. No. 333-27679)).
10.3 Agreement and Plan of Merger among Zydeco Energy, Inc., DVN
Acquisition Corporation and DataVoN Inc. dated as of May 23, 2000
(incorporated by reference to Form 8-K (File No. 0-22076) filed
with the SEC on May 24, 2000).
10.4 Zydeco Energy, Inc. 2000 Stock Option Plan (formerly known as the
DataVoN Inc. 2000 Stock Option Plan) (incorporated by reference
to Registration Statement on Form S-8 (Reg. No. 333-41492) filed
with the SEC on July 14, 2000.
27.1 Financial Data Schedule.
17
