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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 September 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 November 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.................. 4
Consolidated Statements of Operations........ 5
Consolidated Statements of Cash Flows........ 6
Notes to Consolidated Financial Statements... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 11
Part II. Other Information
Item 1. Legal Proceedings............................ 16
Item 6. Exhibits and Reports on Form 8-K............. 16
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
3
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ZYDECO ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,788,096 394,740
Certificates of deposit 100,000 --
Accounts receivable 194,873 621,535
Vendor deposit 35,209 360,000
Deferred tax asset 392,600 16,947
Prepaid expenses 43,634 --
Other 1,424 29,889
----------- ---------
Total current assets 3,555,836 1,423,111
Certificates of deposit -- 96,290
Investment in Wavefield Imaging Technology 651,801 --
Property and equipment, net 1,179,180 147,845
Deferred tax asset 599,700 --
Goodwill, net (note 1) 24,928,527 --
Other assets 138,385 --
----------- ---------
$31,053,429 1,667,246
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to related party (note 4) $ 250,000 --
Note payable for equipment (note 4) 298,869 --
Line of credit (note 4) 190,555 --
Accounts payable 861,115 305,375
Unearned revenue 671,508 493,882
Accrued liabilities and other 625,722 326,108
Customer deposit -- 360,000
Current installments of obligations
under capital leases 11,879 22,432
----------- ---------
Total current liabilities 2,909,648 1,507,797
Obligations under capital leases,
excluding current installments 14,943 61,049
----------- ---------
Total liabilities 2,924,591 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 29,894,823 --
Retained earnings (accumulated deficit) (1,817,392) 97,400
Accumulated Other Comprehensive Income 8,624 --
----------- ---------
Total stockholders' equity 28,128,838 98,400
----------- ---------
Contingency (note 5)
$31,053,429 1,667,246
=========== =========
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net service revenue $ 3,087,466 2,151,005 8,372,795 5,587,646
Other revenue 56,669 -- 82,669 --
----------- ---------- ---------- ----------
Total revenues 3,144,135 2,151,005 8,455,464 5,587,646
Operating expenses:
Cost of services 2,000,405 1,555,902 4,808,771 3,865,149
Selling and marketing 30,532 200,955 68,398 614,977
General and administrative 825,747 183,278 1,683,183 394,176
Amortization of unearned stock compensation 460,335 -- 1,652,042 --
Amortization of goodwill 1,328,890 -- 1,649,280 --
Depreciation and amortization 56,607 4,018 110,010 12,054
----------- ---------- ---------- ----------
Total operating expenses 4,702,516 1,944,153 9,971,684 4,886,356
----------- ---------- ---------- ----------
Operating income (loss) (1,558,381) 206,852 (1,516,220) 701,290
Loss on disposal of fixed asset 3,011 -- 3,011 --
Interest income 31,020 2,342 59,064 3,709
Interest expense 8,687 10 24,843 229
----------- ---------- ---------- ----------
Income (loss) before income taxes (1,539,059) 209,184 (1,485,010) 704,770
Income tax expense (benefit) (77,762) 9,413 (739,529) 31,715
----------- ---------- ---------- ----------
Net income (loss) $(1,461,297) 199,771 (745,481) 673,055
=========== ========== ========== ==========
Net income (loss) per common share:
Basic and diluted $ (0.03) 0.01 (0.02) 0.02
=========== ========== ========== ==========
Weighted average common shares outstanding:
Basic 49,965,951 39,813,855 44,024,522 39,813,855
=========== ========== ========== ==========
Diluted 49,965,951 39,813,855 44,024,522 39,813,855
=========== ========== ========== ==========
Pro forma data (note 1):
Income tax expense (benefit) 77,398 66,491 260,919
---------- ---------- ----------
Net income (loss) 131,786 (1,551,501) 443,851
========== ========== ==========
Net income (loss) per common share:
Basic and diluted 0.00 (0.04) 0.01
========== ========== ==========
Weighted average common shares outstanding:
Basic and diluted 39,813,855 44,024,522 39,813,855
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
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ZYDECO ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
--------- -------
Cash flows from operating activities:
Net income (loss) $ (745,481) 673,055
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 1,759,290 12,054
Loss on disposal of asset 3,011
Amortization of unearned stock
compensation 1,652,042 --
Deferred tax (benefit) expense (975,353) --
Changes in assets and liabilities:
Accounts receivable 535,388 136,749
Customer deposit (360,000) --
Accounts payable and accrued
liabilities 589,155 351,144
Unearned revenue 177,626 (255,576)
Vendor deposit 324,791 --
Prepaid expenses (43,634) --
Other 29,253 (45,234)
----------- --------
Net cash provided by operating
activities 2,946,088 935,622
----------- --------
Cash flows from investing activities:
Purchase of certificates of deposit -- (95,000)
Cash acquired in the merger, net of
direct costs (note 1) 432,414 --
Capital expenditures (155,414) (30,136)
----------- --------
Net cash provided by (used in)
investing activities 277,000 (125,136)
----------- --------
Cash flows from financing activities:
Proceeds from notes payable to
related parties 250,000 --
Principal payments on notes to related
parties -- (27,103)
Principal payments on obligations (232,286) --
Payments of dividends (847,446) (316,927)
----------- --------
Net cash used in financing activities (829,732) (344,030)
----------- --------
Net increase in cash and cash equivalents 2,393,356 466,456
Cash and cash equivalents at beginning of
period 394,740 159,996
----------- --------
Cash and cash equivalents at end of period $ 2,788,096 626,452
=========== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest $ 2,164 229
=========== ========
Cash paid during the period for income
taxes $ 27,180 7,259
=========== ========
Supplemental disclosure of noncash investing
and financing activities:
Disposal of captialized lease asset $ 51,745 --
=========== ========
Purchase of equipment in exchange for
note payable (note 4) $ 709,473 --
=========== ========
Reverse acquisition of Zydeco by DataVoN
(note 1) $27,962,700 --
=========== ========
See accompanying notes to consolidated financial statements.
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Zydeco Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 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 nine months
ended September 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.
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
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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 nine months ended September 30, 2000. The unaudited pro
forma statement of operations data presented on the face of the statements of
operations for the nine months ended September 30, 2000 and the three months and
nine months ended September 30, 1999 are based upon the Company's historical
statements of operations and give effect to pro forma income taxes as if the
Company was a C corporation for the entire duration of these 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 nine months ended
September 30,
2000 1999
----------- -----------
Pro forma revenues $ 8,512,409 $ 5,788,201
=========== ===========
Goodwill amortization $ 3,986,671 $ 3,986,671
=========== ===========
Pro forma net loss $(4,626,147) $(4,896,873)
=========== ===========
Pro forma diluted
loss per share $ (0.09) $ (0.09)
=========== ===========
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 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
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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. During
the third quarter 500,000 options were forfeited when an employee left the
Company and the corresponding compensation expense previously recognized was
reversed.
(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 September 30, 2000 are
insignificant.
The following is a summary of total assets by reportable segment:
September 30, December 31,
2000 1999
------------- ------------
DataVoN $ 4,413,564 1,667,246
Zydeco 1,711,338 --
Goodwill from the Merger 24,928,527 --
----------- ---------
Total assets $31,053,429 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 January 15, 2001. The note is secured by
substantially all assets of the Company.
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
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September 30, 2000, no borrowings had been made under the Loan and Security
Agreement.
On September 28, 2000, the Company entered into an equipment line of credit with
Comerica that provides access to a $275,000 line of credit. This line of credit
is secured by a lien on equipment. Interest accrues daily on the unpaid
principal at an annual rate equal to the prime rate, as defined in the
agreement, plus 1%. As of September 30, 2000, $190,555 had been drawn down to
purchase equipment.
(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
September 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 nine months ended September
30, 2000 should be read in conjunction with the consolidated financial
statements and footnotes for the three months and nine months ended September
30, 2000 included herein. The Company believes that all necessary adjustments
(consisting of normal recurring adjustments) have been included in the amounts
stated below to present fairly the following quarterly information. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year end. The results for interim periods are not necessarily indicative
of results for the year.
OVERVIEW
The Company is a wholesale provider of voice and data services over a next
generation packet switched network. As of October 31, 2000, the Company was
providing services to several domestic carriers and is currently operating in 14
markets with points of presence ("POP's") in 25 cities.
Through its network, the Company transports a large volume of "toll
quality" voice and data services. The entrance point for communications traffic
over its network is referred to as a POP (point of presence). The Company's
customers interconnect with its network by connecting dedicated voice circuits
from their facilities to gateways located in one of its POP's.
The Company was incorporated in 1993. The Company conducted oil & gas
seismic exploration operations beginning in 1993. On June 9, 2000, the Company
merged with DataVoN Inc. ("DataVoN"). As a result of this merger, the former
shareholders of DataVoN now own approximately 80% of the voting power of the
Company's common stock. The merger was accounted for as a reverse acquisition of
the Company by DataVoN under the purchase method of accounting. Accordingly, the
historical financial statements of DataVoN prior to the merger have become the
Company's financial statements, and the Company's 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 the
Company's combined results of operations, the Company does not discuss them
below.
The Company's primary source of revenue is the fees that it receives from
customers for transporting and completing calls over its network. This revenue
is dependent on the volume of voice and data traffic carried over the network,
which is measured in minutes. The Company charges its customers fees based upon
a per minute or flat rate charge prior to the service being offered and
recognizes this revenue in the period in which the call is completed.
The Company's most significant costs and expenses are data communications
and
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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 useful lives and
minor items are expensed directly. Other expenses include charges for
connections between the Company's POP's and its vendors for termination services
and software support and management systems required in maintaining its network.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1999
NET SERVICE REVENUE. The Company's net service revenue increased by $0.9
million to $3.1 million for the three months ended September 30, 2000, from $2.2
million for the three months ended September 30, 1999. The increase in net
revenue resulted from an increase in the amount of traffic carried over the
Company's network to approximately 460.5 million minutes for the three months
ended September 30, 2000, from approximately 286.0 million minutes for the three
months ended September 30, 1999.
COST OF SERVICES. Cost of services increased by approximately $0.4 million to
$2.0 million for the three months ended September 30, 2000, from $1.6 million
for the three months ended September 30, 1999. The increase in expense was
driven by the increase in traffic described above. Collocation facility fees
increased to $67,800 for the three months ended September 30, 2000, from $9,300
for the three months ended September 30, 1999. Telecommunications fees
increased to $1.8 million for the three months ended September 30, 2000 from
$1.5 million for the three months ended September 30, 1999. As a percentage of
net service revenue, cost of services expense decreased to approximately 65% for
the three months ended September 30, 2000, from approximately 72% for the three
months ended September 30, 1999.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses include expenses
relating to the salaries, payroll taxes, benefits and commissions that the
Company pays for sales personnel and the expenses associated with the
development and implementation of its promotion and marketing campaigns,
including expenses relating to its outside public relations firm and industry
analysts. Selling and marketing expenses decreased by $168,066 to $30,532 for
the three months ended September 30, 2000 from $200,955 for the three months
ended September 30, 1999. This decrease is attributable to the Company replacing
commissioned sales agents with employees.
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 $0.6 million to $0.8 million for the three months ended September
30, 2000, from $0.2 million for the three months ended September 30, 1999.
General and administrative expenses increased primarily due to an increase in
the number of personnel and an increase in consulting and
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professional fees. As a percentage of net revenue, general and administrative
expenses increased to approximately 26% for the three months ended September 30,
2000, from 9% for the three months ended September 30, 1999 due to the factors
described above.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased by $1.4 million for the three months ended September 30, 2000, from
$4,018 for the three months ended September 30, 1999. This increase primarily
resulted from amortization of goodwill associated with the merger.
AMORTIZATION OF UNEARNED STOCK COMPENSATION. This expense totaled $460,335 and
represents amortization of stock compensation related to options the Company
issued in March 2000. The stock compensation is being amortized over the vesting
period of the options, which equals the estimated period of benefit.
INTEREST INCOME AND INTEREST EXPENSE. Interest expense is primarily comprised of
interest on the Company's notes payable, and various capital leases. Interest
income is primarily composed of income earned on the Company's cash and cash
equivalents and certificates of deposit.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999
NET SERVICE REVENUE. The Company's net service revenue increased by $2.8 million
to $8.4 million for the nine months ended September 30, 2000, from $5.6 million
for the nine months ended September 30, 1999. The increase in net revenue
resulted from an increase in the amount of traffic carried over the Company's
network to approximately 1.2 billion minutes for the nine months ended September
30, 2000, from approximately 0.7 billion minutes for the nine months ended
September 30, 1999.
COST OF SERVICES. Cost of services expense increased by $0.9 million to $4.8
million for the nine months ended September 30, 2000, from $3.9 million for the
nine months ended September 30, 1999. The increase in expense was driven by the
increase in traffic described above. Collocation facility fees increased to
$106,303 for the nine months ended September 30, 2000, from $13,624 for the nine
months ended September 30, 1999. Telecommunications fees increased to $4.5
million for the nine months ended September 30, 2000, from $3.9 million for the
nine months ended September 30, 1999. As a percentage of net revenue, cost of
services expense decreased to approximately 57% for the nine months ended
September 30, 2000, from approximately 69% for the nine months ended September
30, 1999.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses include expenses
relating to the salaries, payroll taxes, benefits and commissions that the
Company pays for sales personnel and the expenses associated with the
development and implementation of its promotion and marketing campaigns,
including expenses relating to its outside public relations firm and industry
analysts. Selling and marketing expenses decreased by $0.5 million to $68,398
for the nine months ended September 30, 2000 from $0.6 million for the nine
months ended September 30, 1999. This decrease is attributable to the Company
replacing commissioned sales agents with employees. As a percentage of net
revenue, selling and marketing expenses decreased to approximately 1% for the
nine months ended September 30, 2000, from approximately 11% for the nine months
ended September 30, 1999.
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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 $1.3 million to $1.7 million for the nine months ended September
30, 2000, from $0.4 million for the nine months ended September 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 $1.8 million for the nine months ended September 30, 2000, from
$12,054 for the nine months ended September 30, 1999. This increase primarily
resulted from amortization of goodwill associated with the merger.
AMORTIZATION OF UNEARNED STOCK COMPENSATION. This expense totaled $1,652,042 and
represents amortization of stock compensation related to options the Company
issued in March 2000. The stock compensation is being amortized over the vesting
period of the options, which equals the estimated period of benefit.
INTEREST INCOME AND INTEREST EXPENSE. Interest expense is primarily comprised of
interest on the Company's notes payable, and various capital leases. Interest
income is primarily composed of income earned on the Company's cash and cash
equivalents and certificate of deposit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital and liquidity needs historically and
currently have related to the development of its network infrastructure, its
sales and marketing activities, and general capital needs. The Company's capital
needs have been met, in large part, from cash flow generated from operations. As
the Company has placed greater emphasis on expanding its network infrastructure,
the Company also plans to meet an increasing portion of its capital needs
through vendor capital leases and other equipment financing. The Company has
also established a $500,000 line of credit with a bank.
Net cash provided by operating activities was $2.9 million for the nine
months ended September 30, 2000, as compared to $0.9 million for the nine months
ended September 30, 1999. The increase was primarily attributable to increased
revenue from voice and data services over IP.
Net cash provided by investing activities was $0.3 million for the nine
months ended September 30, 2000, as compared to $0.1 million used by investing
activities for the nine months ended September 30, 1999.
Net cash used in financing activities was $0.8 million for the nine months
ended September 30, 2000, as compared to net cash used in financing activities
of $0.3 million for the nine months ended September 30, 1999.
In March 2000, the Company 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 September 30, 2000 was $298,869.
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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 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 the
Company's assets.
On June 21, 2000, the Company entered into a Loan and Security Agreement
with Bank of Texas that provides it with access to a $500,000 revolving credit
facility. The line of credit is secured by a lien on all of the Company's 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 September 30, 2000, the Company had made no
borrowings under the Loan and Security Agreement.
On September 28, 2000, the Company entered into an equipment line of credit
with Comerica that provides access to a $275,000 line of credit. This line of
credit is secured by a lien on equipment. Interest accrues daily on the unpaid
principal at an annual rate equal to the prime rate, as defined in the
agreement, plus 1%. As of September 30, 2000, $190,555 had been drawn down to
purchase equipment.
Capital expenditures totaled approximately $0.9 million for the nine months
ended September 30, 2000. Based on the Company's existing operations, the
Company estimates total capital expenditures for 2000 to be approximately $3.0
million, mainly for equipment to expand its network infrastructure, which is
expected to be funded by cash flows from operations and financing. However,
there can be no assurance that the Company will be able to obtain such outside
financing to fund these capital expenditures. If the Company is unable to
obtain such outside financing, its planned expansion of its network
infrastructure will be reduced.
The Company believes that its cash on hand, cash flows from operations,
borrowing availability under its revolving line of credit and other financing
arrangements which it plans to pursue will be sufficient to satisfy existing
commitments and plans, including those described above. However, there can be no
assurance that the Company will be able to make planned borrowings, that its
business will generate sufficient cash flows from operations, or that future
borrowings will be available in an amount to enable the Company 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. The Company includes this statement for the express purpose
of availing itself of the protections of these safe harbor provisions with
respect to all of the forward-looking statements the Company makes. The forward-
looking statements in this Form 10-QSB reflect the Company's 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, loss of key customers and/or
personnel, significant competition, regulatory changes and those other risks and
uncertainties discussed herein that could cause the Company's actual results to
differ materially from the Company's historical results or those that the
Company hopes 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. The Company
undertakes no obligation to announce publicly revisions it
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makes 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 the Company or persons acting on its behalf are expressly
qualified in their entirety by this section.
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 person doing business under a corporate name, certain commissions pursuant
to a contract entered into between the parties. DataVoN has countersued the
plaintiff for amounts owed by the plaintiff to DataVoN. The litigation is set
for trial in July of 2001. Extensive discovery has been exchanged by both
parties and pre-trial motion practice is the anticipated next step. No
determination of the outcome is possible at this stage. The plaintiff alleges
maximum economic damages in the amount of $4,222,970.54, which DataVoN believes
is contradictory to the disclosures made by plaintiff regarding calculation of
economic damages pled. DataVoN alleges in its counterclaim, among other claims
pled, that the plaintiff owes DataVoN in excess of $200,000. 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 will continue to defend the action vigorously.
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).
3.2* Amended and Restated Bylaws.
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)).
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EXHIBIT NO. DESCRIPTION
----------- -----------
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.
* Filed herewith
(b) Report on Form 8-K.
On August 8, 2000, the Company filed a Report on Form 8-K pursuant to
Item 4 disclosing the change of its accountants.
On August 16, 2000, the Company filed Amendment No. 1 to Report on Form 8-K
pursuant to Item 7 disclosing certain financial statements and pro forma
information regarding the consummation of its merger with DataVoN Inc.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ZYDECO ENERGY, INC.
/s/ Marcia C. Kennedy
---------------------------------------
Marcia C. Kennedy
Chief Financial Officer
Dated: November 14, 2000
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EXHIBIT INDEX
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).
3.2* Amended and Restated Bylaws.
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.
*Filed herewith
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