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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy [_] Confidential, For Use of the
Statement Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Under Rule 14a-12
ZYDECO ENERGY, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
--------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
--------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------
(5) Total fee paid:
--------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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ZYDECO ENERGY, INC.
635 West Campbell Road, Suite 130
Richardson, Texas 75080
November 29, 2000
Dear Zydeco Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Zydeco Energy, Inc. to be held at 10:00 a.m. local time, on December 21, 2000,
at Richardson Civic Center, 411 W. Arapaho, Richardson, Texas 75080. I hope
that you will be present or represented by proxy at this important meeting.
Details of the business to be conducted at the special meeting are given in
the attached Notice of Special Meeting and Proxy Statement.
Whether or not you plan to attend the special meeting, it is important that
your shares be represented and voted at the special meeting. Therefore, I urge
you to sign and date the enclosed proxy card and promptly return it in the
enclosed envelope so that your shares will be represented at the special
meeting. Please refer to the enclosed proxy card for detailed instructions. If
you so desire, you may withdraw your proxy and vote in person at the special
meeting.
We look forward to meeting those of you who will be able to attend the
special meeting.
Sincerely,
/s/ Hugh D. Simpson
-----------------------------------
Hugh D. Simpson
President and Chief Executive
Officer
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ZYDECO ENERGY, INC.
635 West Campbell Road, Suite 130
Richardson, Texas 75080
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Stockholders of Zydeco Energy, Inc.:
A Special Meeting of Stockholders of Zydeco Energy, Inc., a Delaware
corporation, will be held at Richardson Civic Center, 411 W. Arapaho,
Richardson, Texas 75080, at 10:00 a.m. local time on December 21, 2000, for
the following purposes:
1. To amend Zydeco's Certificate of Incorporation to increase the number of
authorized shares of Zydeco's common stock, par value $.001 per share,
from 50,000,000 to 150,000,000.
2. To amend Zydeco's Certificate of Incorporation to change the name of the
company from "Zydeco Energy, Inc." to "DTVN Holdings, Inc."
3. To approve the 2000 Stock Option and Restricted Stock Plan.
4. To transact such other business as may properly come before the meeting
or any adjournments or postponements thereof.
Only holders of record of Zydeco's common stock and Series A convertible
preferred stock at the close of business on November 22, 2000 are entitled to
notice of and to vote at the special meeting or any adjournments or
postponements thereof. All stockholders are cordially invited to attend the
special meeting.
By Order of the Board of Directors
/s/ James D. Nickell
------------------------------------
James D. Nickell
Secretary
Richardson, Texas
November 29, 2000
Your vote is important.
Whether or not you expect to attend the special meeting, you are urged to
sign, date and complete the enclosed proxy card and mail it promptly in the
enclosed return envelope. No postage need be affixed if the proxy card is
mailed in the United States. Any stockholder attending the special meeting may
vote in person even if that stockholder has returned a proxy.
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Zydeco Energy, Inc.
635 West Campbell Road, Suite 130
Richardson, Texas 75080
----------------
Proxy Statement
For the Special Meeting of Stockholders
to be held on December 21, 2000
----------------
Information Concerning Solicitation and Voting
The enclosed proxy is solicited on behalf of the Board of Directors of
Zydeco Energy, Inc., a Delaware corporation, with its principal executive
offices at 635 West Campbell Road, Suite 130, Richardson, Texas 75080, for use
at Zydeco's Special Meeting of Stockholders to be held at 10:00 a.m. on
December 21, 2000 at Richardson Civic Center, 411 W. Arapaho, Richardson, Texas
75080.
This proxy statement contains important information regarding Zydeco's
Special Meeting of Stockholders, the proposals on which you are being asked to
vote, information you may find useful in determining how to vote, and voting
procedures.
A number of abbreviations are used in this proxy statement. We refer to
Zydeco Energy, Inc. as "the Company" or "Zydeco." The Company's Special Meeting
of Stockholders is simply referred to as "the special meeting." The Company's
board of directors is referred to as the "Board of Directors" or the "Board."
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Information Concerning Solicitation and Voting............................ 1
Proposal 1 Approval of Amendment to Certificate of Incorporation to
increase the number of authorized shares of Zydeco's common stock, par
value $.001 per share, from 50,000,000 to 150,000,000.................... 4
Proposal 2 Approval of Amendment to Certificate of Incorporation to change
the name of the company from Zydeco Energy, Inc. to DTVN Holdings, Inc... 6
Proposal 3 Approval of 2000 Stock Option and Restricted Stock Plan........ 7
Summary of the Merger..................................................... 11
Comparative Per Share Data................................................ 12
The Merger................................................................ 13
Merger Agreement.......................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 25
Security Ownership of Certain Beneficial Owners and Management............ 30
Management................................................................ 31
Executive Compensation.................................................... 33
Compliance with Section 16(a) of the Exchange Act......................... 34
Certain Relationships and Related Transactions............................ 34
Price Range of Zydeco Common Stock........................................ 35
Dividend Policy........................................................... 35
Description of the Company's Securities................................... 36
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 37
Experts................................................................... 38
Forward-Looking Statements................................................ 38
Where You Can Find More Information....................................... 39
Other Matters............................................................. 40
Proposals of Stockholders for 2001 Annual Meeting......................... 40
</TABLE>
<TABLE>
<C> <S> <C>
Annex I 2000 Stock Option and Restricted Stock Plan................... I-1
Exhibit A DataVoN Audited Financial Statements as of and for the years
ended December 31, 1999 and 1998.............................. A-1
Exhibit B Zydeco Unaudited Consolidated Financial Statements as of
September 30, 2000 and for the periods ended September 30,
2000 and 1999................................................. B-1
Exhibit C Zydeco Unaudited Pro Forma Statements of Operations........... C-1
Exhibit D Zydeco Audited Consolidated Financial Statements as of and for
the years ended December 31, 1999 and 1998.................... D-1
</TABLE>
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Record Date and Outstanding Shares
The Board of Directors of the Company is sending this proxy statement on or
about November 29, 2000 to all holders of record of the Company's common stock
and the Company's Series A convertible preferred stock as of the record date,
November 22, 2000. Holders of the Company's common stock and the Company's
Series A convertible preferred stock at the close of business on November 22,
2000 are entitled to attend and vote at the special meeting. On the record
date, there were 42,775,951 shares of the Company's common stock issued and
outstanding and 7,190 shares of the Company's Series A convertible preferred
stock issued and outstanding.
Voting Procedures
As a stockholder of the Company, you have a right to vote on certain
business matters affecting the Company. The proposals that will be presented
at the special meeting and upon which you are being asked to vote are
discussed below. Each share of the Company's common stock you own entitles you
to one vote. Except as required by law, each share of the Company's Series A
convertible preferred stock you own entitles you to 1,000 votes and will vote
with the Company's common stock. You may vote by mail or in person at the
special meeting.
Methods of Voting
Voting by Mail. By signing and returning the proxy card in the enclosed
prepaid and addressed envelope, you are enabling the individuals named on the
proxy card (known as "proxies") to vote your shares at the special meeting in
the manner you indicate. We encourage you to sign and return the proxy card
even if you plan to attend the special meeting. In this way, your shares will
be voted even if you are unable to attend the special meeting.
Your shares will be voted in accordance with the instructions you indicate
on the proxy card. If you return the proxy card but do not indicate your
voting instructions, your shares will be voted as follows:
. FOR approval of the amendment to the Certificate of Incorporation to
increase the number of authorized shares of the Company's common stock,
par value $.001 per share, from 50,000,000 to 150,000,000;
. FOR approval of the amendment to the Certificate of Incorporation to
change the name of the company from "Zydeco Energy, Inc." to "DTVN
Holdings, Inc."; and
. FOR approval of the 2000 Stock Option and Restricted Stock Plan.
If you received more than one proxy card, it is an indication that your
shares are held in multiple accounts. Please sign and return all proxy cards
to ensure that all of your shares are voted.
Voting in Person at the Meeting. If you plan to attend the special meeting
and vote in person, we will provide you with a ballot at the special meeting.
If your shares are registered directly in your name, you are considered the
stockholder of record and you have the right to vote in person at the special
meeting.
If your shares are held in the name of your broker or other nominee, you
are considered the beneficial owner of shares held in street name. If you wish
to vote at the special meeting, you will need to bring with you to the special
meeting a legal proxy from your broker or other nominee authorizing you to
vote such shares.
Revoking Your Proxy
You may revoke your proxy at any time before it is voted at the special
meeting. In order to do this, you may either:
. sign and deliver to the Company another proxy dated a later date;
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. provide written notice of the revocation to the Company's Secretary; or
. attend the special meeting and vote in person.
Quorum Requirement
A quorum, which is a majority of the voting power of the outstanding shares
entitled to vote as of the record date, November 22, 2000, must be present in
order to hold the special meeting and to conduct business. Shares are counted
as being present at the special meeting if you appear in person at the special
meeting or if you vote your shares by submitting a properly executed proxy
card.
Votes Required for Each Proposal
The vote required and method of calculation for the proposals to be
considered at the special meeting are as follows:
Proposal 1 -- Amendment to the Certificate of Incorporation to increase the
number of authorized shares of the Company's common stock. Approval of this
amendment to the Certificate of Incorporation requires the affirmative vote of:
(i) a majority of shares of common stock outstanding (excluding the preferred
shares), and (ii) a majority of the voting power of the shares of common stock
and Series A convertible preferred stock outstanding.
Proposal 2 -- Amendment to the Certificate of Incorporation to change the
name from "Zydeco Energy, Inc." to "DTVN Holdings, Inc." Approval of this
amendment to the Certificate of Incorporation requires the affirmative vote of
a majority of the voting power of the shares of common stock and Series A
convertible preferred stock outstanding.
Proposal 3 -- 2000 Stock Option and Restricted Stock Plan. Approval of the
2000 Stock Option and Restricted Stock Plan requires the affirmative vote of a
majority of the voting power of the shares of common stock and Series A
convertible preferred stock present at the special meeting, in person or by
proxy.
You may vote "for," "against," or "abstain" from the proposals to approve
(a) the amendments to the Certificate of Incorporation and (b) the 2000 Stock
Option and Restricted Stock Plan.
Abstentions and Broker Non-Votes
If you return a proxy card that indicates an abstention from voting in all
or some matters, the shares represented will be counted as present for the
purpose of determining a quorum. If you abstain from voting on the proposal to
approve (a) the amendments to the Certificate of Incorporation, or (b) the 2000
Stock Option and Restricted Stock Plan, your abstention has the same effect as
a vote against the proposal.
Brokers may not have the discretionary authority to vote shares of the
Company's common stock held in "street name" if they have not received
instructions from the beneficial owners. Broker non-votes will have the same
effect as votes cast against Proposals 1 and 2--amendments to the Certificate
of Incorporation. Broker non-votes will not be counted as votes in favor of
Proposal 3--approving the 2000 Stock Option and Restricted Stock Plan--and will
also not be counted as votes cast or shares voting on Proposal 3.
Voting Confidentiality
Proxies, ballots and voting tabulations are handled on a confidential basis
to protect your voting privacy. Information will not be disclosed except as
required by law.
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Voting Results
Final voting results will be announced at the special meeting and will be
published in the Company's Form 10-KSB for the year ended December 31, 2000. We
file this annual report with the Securities and Exchange Commission. After the
report is filed, you may obtain a copy by visiting the SEC's website at
www.sec.gov. See "Where You Can Find More Information."
Proxy Solicitation Costs
Solicitations of proxies may be made by personal interview, mail, telephone
or telegram by directors, officers and regular employees of the Company. The
Company may also request banking institutions, brokerage firms, custodians,
trustees, nominees and fiduciaries to forward solicitation material to the
beneficial owners of the Company's common stock and Series A convertible
preferred stock held of record by such persons and may reimburse such
forwarding expenses. All costs of preparing, printing, assembling and mailing
the form of proxy and the material used in the solicitation thereof and all
clerical and other expenses of solicitation will be borne by the Company.
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Proposal 1
Approval of Amendment to Certificate of Incorporation
to increase the number of authorized shares of Zydeco's common stock,
par value $.001 per share,
from 50,000,000 to 150,000,000
Proposed Amendment to Certificate of Incorporation
The Board of Directors has adopted resolutions setting forth the proposed
amendment to the first paragraph of Article Fourth of the Certificate of
Incorporation (the "Amendment to Increase Authorized"), the advisability of the
Amendment to Increase Authorized, and a call for submission of the Amendment to
Increase Authorized for approval by the Company's stockholders at the special
meeting. The following is the text of the first paragraph of Article Fourth of
the Certificate of Incorporation, as proposed to be amended:
"FOURTH: The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is 151,000,000 of which
150,000,000 shares shall be Common Stock of the par value of $.001 per
share and 1,000,000 shares shall be Preferred Stock of the par value of
$.001 per share."
Purpose and Effect of Proposed Amendment
On June 9, 2000, the Company, and its wholly owned subsidiary, DVN
Acquisition Corporation ("DVN Acquisition"), and DataVoN Inc., a Texas
corporation ("DataVoN"), completed the transactions contemplated by the merger
agreement pursuant to which DVN Acquisition merged with and into DataVoN, with
DataVoN continuing as the surviving corporation and wholly-owned subsidiary of
the Company. DataVoN was a privately-held wholesale provider of internet
protocol telephony. As a result of the merger, the former shareholders of
DataVoN own approximately 80% of the voting power of the Company's outstanding
capital stock. The merger did not require the approval of stockholders of the
Company. For more information on the merger, see "The Merger" and "The Merger
Agreement."
Because of the change in ownership of voting stock and the composition of
the Board after the merger, there was a change in control of the Company upon
completion of the merger.
Upon completion of the merger, all of the outstanding shares of common stock
of DataVoN were converted into:
. 32,623,855 shares of the Company's common stock; and
. 7,190 shares of the Company's Series A convertible preferred stock,
$.001 par value, convertible into 7,190,000 shares of the Company's
common stock or 1,000 shares of common stock for each share of Series A
convertible preferred stock.
The Company's Series A convertible preferred stock was issued entirely to
Mr. Simpson in the merger. Each of the 7,190 shares of the Company's Series A
convertible preferred stock issued in the merger is entitled to 1,000 votes on
all matters and votes with the Company's common stock, except as required by
law. If Proposal 1 is approved by the Company's stockholders, all outstanding
shares of the Company's Series A convertible preferred stock will be
automatically converted into the Company's common stock by their terms.
The Series A convertible preferred stock was issued in the merger because
the Certificate of Incorporation of Zydeco currently authorizes Zydeco to issue
50,000,000 shares of common stock and 1,000,000 shares of preferred stock, the
latter with such powers and preferences as the Board of Directors of Zydeco
shall determine. As of November 22, 2000, Zydeco had outstanding 42,775,951
shares of common stock and had reserved an additional 6,891,243 shares of its
common stock for issuance from its authorized but unissued shares upon exercise
of its outstanding options and warrants. Accordingly, the Series A convertible
preferred stock was issued because of the limitations on the number of shares
of Zydeco common stock that could be issued in the merger.
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The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Certificate of Incorporation to increase the number
of shares of the Company's common stock the Company is authorized to issue from
50,000,000 shares to 150,000,000 shares. The additional common stock to be
authorized for issuance upon the adoption of such amendment would possess
rights identical to the currently authorized common stock of the Company. If
the Company's stockholders do not approve the Amendment to Increase Authorized,
the Series A convertible preferred stock will continue to remain outstanding
and be entitled to 1,000 votes on all matters and will vote with the Company's
common stock, except as required by law.
In addition to the Company's need to increase the number of authorized
shares of common stock to provide for a sufficient number of shares available
for issuance upon the conversion of the Company's Series A convertible
preferred stock, an increase in the number of authorized shares of the
Company's common stock will also enable the Company to take advantage of
various potential business opportunities through the issuance of the Company's
securities, including, without limitation, providing equity incentives to
employees, officers or directors (including under the 2000 Stock Option and
Restricted Stock Plan), establishing certain strategic relationships with other
companies and expanding the Company's business lines through possible future
acquisitions of other businesses.
The issuance of additional shares of the Company's common stock would have a
dilutive effect for a person who does not acquire additional shares of common
stock to maintain his or her pro rata interest, on a stockholder's percentage
voting power in the Company. In addition, depending upon the nature and terms
thereof, such issuances could enable the Board to render more difficult or
discourage an attempt to obtain a controlling interest in the Company or the
removal of the incumbent Board and may discourage unsolicited takeover attempts
which might be desirable to stockholders. For example, the issuance of shares
of the Company's common stock in a public or private sale, merger or similar
transaction would increase the number of the Company's outstanding shares,
thereby diluting the interest of a party seeking to take over the Company.
Furthermore, many companies have issued warrants or other rights to acquire
additional shares to the holders of such companies' common stock to discourage
or defeat unsolicited stock accumulation programs or acquisition proposals. If
this amendment is adopted, more common stock of the Company would be available
for such purposes than is currently available.
The Board of Directors believes that the approval of the foregoing proposal
is in the best interests of the Company and its stockholders and therefore
recommends that the stockholders vote "FOR" this proposal.
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Proposal 2
Approval of Amendment to Certificate of Incorporation
to change the name of the company from
Zydeco Energy, Inc. to DTVN Holdings, Inc.
Proposed Amendment to Certificate of Incorporation
The Board of Directors has adopted resolutions setting forth the proposed
amendment to Article First of the Certificate of Incorporation (the "Amendment
to Change Name"), the advisability of the Amendment to Change Name, and a call
for submission of the Amendment to Change Name for approval by the Company's
stockholders at the special meeting. The following is the text of Article First
of the Certificate of Incorporation, as proposed to be amended:
"First: The name of the Corporation is DTVN Holdings, Inc."
Purpose and Effect of the Proposed Amendment
As a result of the Company's merger with DataVoN, DataVoN became a wholly-
owned subsidiary of the Company. Management of the Company intends to expand
the Company's involvement in the internet telephony services industry.
Consistent with this plan, the Company has decided to change the name of the
Company to DTVN Holdings, Inc. Accordingly, the Board of Directors unanimously
adopted a resolution, subject to stockholder approval, authorizing the
amendment to the Company's Certificate of Incorporation to change the name of
the Company to DTVN Holdings, Inc.
The Board of Directors believes that the approval of the foregoing proposal
is in the best interests of the Company and its stockholders and therefore
recommends that the stockholders vote "FOR" this proposal.
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Proposal 3
Approval of 2000 Stock Option and Restricted Stock Plan
The Company's Board of Directors adopted, subject to stockholder approval,
the 2000 Stock Option and Restricted Stock Plan (the "2000 Plan"). The 2000
Plan is to become effective upon receiving stockholder approval. The purpose of
the 2000 Plan is to:
. offer selected directors, officers, employees and consultants an equity
interest in the financial success of the Company;
. provide the Company an opportunity to attract and retain the best
available personnel for positions of substantial responsibility; and
. encourage equity participation in the Company.
Summary of the 2000 Plan
While we have summarized certain provisions of the 2000 Plan below, attached
as Annex I to this proxy statement is a full copy of the 2000 Plan, and our
summary is qualified by reference to the 2000 Plan. We encourage you to read
the 2000 Plan.
Number of Shares
Up to 7.0 million shares of common stock may be issued under the 2000 Plan.
The Committee will adjust this number for stock dividends, stock splits, or any
other increase or decrease in the number of shares of the Company's common
stock issued without receipt of consideration by the Company. Shares to be
issued under the 2000 Plan may be drawn from either authorized but previously
unissued shares of the Company's common stock or from treasury shares.
Administration
The Board of Directors or a committee of the Board of Directors--as the
Board of Directors in its sole discretion shall determine--will administer the
2000 Plan. For purposes of the 2000 Plan and this section, the Board of
Directors acting in this capacity or the committee of the Board of Directors
will be referred to as the "Committee." The Company intends that any committee
established by the Board to administer the 2000 Plan will consist of at least
two persons, each of whom meet the definition of "non-employee director" under
Section 16 of the Exchange Act and the definition of "Outside Director" under
Section 162(m) of the Internal Revenue Code of 1986 and the rules and
regulations promulgated thereunder, as amended (the "Code"). The members of the
Committee will be appointed by the Board of Directors. The Board may from time
to time remove members from, or add members to, the Committee.
Eligibility, Options and Restricted Stock
The Committee has the authority under the 2000 Plan to grant stock options
or shares of restricted stock to directors, officers, employees or consultants
of the Company. As of October 31, 2000, the Company had 22 full-time employees.
Options granted under the 2000 Plan may include incentive stock options
intended to qualify under Section 422 of the Code as well as non-statutory
options. Incentive stock options will only be granted to persons who are
employed by the Company at the time of the grant. Subject to the limits of the
2000 Plan, the Committee may determine the number of shares to be issued upon
exercise, the exercise price, vesting period and other terms of the stock
options. However, incentive stock options will not be granted with an exercise
price below the fair market value of the common stock on the date of the grant
(or less than 110% of the fair market value in the case of an incentive stock
option granted to a 10% or greater stockholder of the Company) and in no event
can any incentive stock option be exercisable after the expiration of ten years
after the date of grant (or five years in the case of an incentive stock option
granted to a 10% or greater stockholder
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of the Company). The closing price of the common stock as reported by the OTC
bulletin board for November 22, 2000 was $0.97. The Committee may also
determine the number of shares, terms, conditions and restrictions of the
restricted stock. However, each grant of restricted stock will require that the
recipient remain an employee or otherwise provide services to the Company for
at least six months after the date of grant. Subject to adjustment, the
Committee will not grant stock options for shares of common stock or make
grants of restricted stock under the 2000 Plan to any "covered employee" as
defined in Section 162(m) in excess of twenty-five percent (25%) of the shares
issuable under the 2000 Plan.
IRS Limits on Deductibility of Compensation
Section 162(m) of the Code limits the tax deductibility of compensation in
excess of $1 million paid to certain executive officers, unless the payments
are made under plans that satisfy the technical requirements of the Code and
qualify as performance-based pay. The Committee believes that performance-based
pay over $1 million is sometimes required to attract and retain executives in a
competitive marketplace. Stock options granted under the 2000 Plan are designed
so that the compensation paid can be tax deductible by the Company. In this
proxy statement, stockholders are being asked to approve the 2000 Plan to
maximize our ability to deduct future incentive compensation paid to the
officers covered by Section 162(m). A vote in favor of the 2000 Plan will
constitute approval under Section 162(m) of each of the material terms of the
2000 Plan, including the performance objectives described below, for purposes
of making plan awards to covered employees.
Background-Section 162(m) Exemption
We are asking our stockholders to vote on the 2000 Plan in order to satisfy
the requirements of Section 162(m) of the Code. Section 162(m) limits our
ability to deduct compensation that we pay to certain of our executive
employees when determining our federal tax liability. These limitations apply
to compensation in excess of $1 million per year that we pay to our chief
executive officer and each of our four other highest paid executive officers.
Certain types of compensation are excluded from the calculation of the $1
million limit in Section 162(m). These include compensation under plans that
are "performance based" and are approved by our stockholders. "Performance
based" compensation under Section 162(m) is compensation based on the
attainment of one or more objective performance goals, the material terms of
which are approved by stockholders. In order to maximize our ability to deduct
compensation (covered awards) paid to our employees covered by Section 162(m)
(covered employees), our Board requests that the stockholders approve the 2000
Plan as it relates to payment of certain awards to covered employees.
Determination of Restricted Stock Awards, Performance Objectives
A covered award payable to a covered employee will be based on performance
objectives established by the Committee at the beginning of the year. The
Committee will establish performance objectives for covered awards payable to
covered employees from one or more of the following measures: specified
increases in earnings, share price, market share, revenue, net profits, and
operating profit margins. Performance objectives may be described in terms of
company, subsidiary, major business segment, division or departmental
performance. Because covered awards under the 2000 Plan are subject to the
discretion of the Committee and subject to the attainment of the performance
objectives, the benefits or amounts that will be allocated under the 2000 Plan
are not determinable at this time.
Stock Option Grants, Fair Market Value
Under Section 162(m) of the Code, if the exercise price of options granted
under a plan equals the fair market value of the stock as of the grant date and
the plan has been established and operated in accordance with Section 162(m) of
the Code, then the option grant satisfies the exemption from compensation that
is subject to the $1 million deductibility limit for covered employees. The
Company currently intends that all option grants to any covered employee will
be made at the fair market value of the Company's common stock.
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Payment of Restricted Stock
Covered awards of restricted stock will be paid to employees in shares of
stock as soon as practicable following the date the restrictions terminate.
Covered employees will be given the option to defer the receipt of the shares
to a future year. The amount of stock to be distributed will equal the number
of shares of the Company's common stock that would have been paid if the award
of restricted stock had been paid on the grant date, as adjusted for dividends,
stock splits and any other increase or decrease in the number of issued shares
effected without the receipt of consideration by the Company.
Non-Employee Director Options
Each non-employee director of the Company shall, subject to the terms of the
2000 Plan, be granted on his or her appointment to the Board of Directors or on
the approval of this 2000 Plan by the stockholders of the Company, whichever
occurs later, options to purchase 100,000 shares of the Company's common stock.
Unless otherwise provided in the applicable stock option agreement, each option
shall become exercisable as to one-twelfth of the shares of the Company's
common stock subject to such option at the end of each full calendar quarter
following the grant date of the option, beginning with the end of the first
full calendar quarter following the grant date of the option, and would have an
exercise price per share equal to the fair market value of the Company's common
stock on the date of grant; provided, however, that such non-employee director
must be serving as a non-employee director of the Company on the last day of
such quarter for such option to vest.
Change in Control
Upon a change in control, as defined in the 2000 Plan, all outstanding
options under the 2000 Plan will become immediately exercisable and all
restrictions on any shares of restricted stock granted under the 2000 Plan will
lapse and such stock will immediately vest in the holder notwithstanding that
such options were not fully exercisable or that such restricted stock had not
fully vested. In the event of a reorganization, lawful and fair provision shall
be made whereby the option holder shall thereafter have the right to purchase
and receive, in lieu of the shares of common stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented thereby, such shares of stock, securities, or assets as may be
issued or payable with respect to or in exchange for the number of outstanding
shares of such common stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented by such options, had such reorganization not taken place.
Amendment and Termination
The Board may amend or terminate the 2000 Plan at any time, but may not do
so without stockholder approval if the amendment changes the aggregate number
of shares that may be issued under the Plan, other than in connection with
certain adjustments or a reorganization of the Company as discussed above. The
Board may not, without the participant's consent, adversely affect the rights
of a participant under any option or restricted stock that has been granted.
Unless our Board later extends the 2000 Plan, it will automatically terminate
ten years following its effective date except as to awards outstanding at that
date.
Federal Income Tax Consequences
Incentive Stock Options
Some of the options granted under the 2000 Plan may be incentive stock
options as described in Section 422 of the Code ("ISOs"). An optionee does not
realize taxable income upon the grant or exercise of an ISO. Although the
optionee will not realize ordinary income at the time an ISO is exercised, the
excess of the fair market value of the shares acquired at the time of exercise
over the option price may constitute an item of adjustment used to compute
alternative minimum taxable income under Section 56 of the Code, and may,
therefore, result in the imposition of the alternative minimum tax under
Section 55 of the Code on the optionee. If the optionee does not dispose of the
shares received upon exercise of an ISO within one year from the ISO's
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<PAGE>
date of exercise and within two years of the date that the ISO was granted, any
gain or loss realized from the subsequent sale or disposition of such shares
will be treated as long-term capital gain or loss to the optionee and no
deduction will be available to the Company. If the optionee disposes of the
shares before the end of the holding periods described above, the optionee has
made a disqualifying disposition and will recognize ordinary income equal to
the lesser of (i) the excess of the fair market value of the shares on the date
of exercise over the option price or (ii) the actual gain realized upon such
disposition. Any additional gain upon such disposition will be taxed as capital
gain. In the event of a disqualifying disposition, the Company receives a tax
deduction, subject to Section 162(m) of the Code, in an amount equal to the
ordinary income recognized by the optionee. In the event there is not a
disqualifying disposition, the Company will not receive a tax deduction in
connection with the option or the exercise thereof.
Non-Statutory Options
An optionee will not recognize any taxable income upon the grant of a non-
statutory stock option. However, on the date of exercise of a non-statutory
stock option, the optionee recognizes ordinary income in an amount equal to the
difference between the exercise price and the fair market value of the shares
on the date of exercise, and the Company receives a tax deduction for the same
amount, subject to Section 162(m) of the Code. The gain, if any, realized upon
a subsequent disposition of the shares will constitute short-term or long-term
capital gain, depending on the optionee's holding period.
Restricted Stock
A recipient of restricted stock generally will not recognize income upon the
grant of restricted stock. However, at the time the restrictions lapse, the
recipient recognizes ordinary income equal to the fair market value of the
shares at the time, and the Company receives a tax deduction for the same
amount, subject to the provisions of Section 162(m) of the Code. Upon
disposition of the shares acquired, an optionee will generally recognize the
appreciation or depreciation on the shares after the date the restrictions
lapse as either short-term or long-term capital gain or loss depending on the
recipient's holding period.
Deduction Limits
A deduction otherwise available to the Company for any year with respect to
compensation payable to an executive officer may be denied under Section 162(m)
of the Code to the extent the amount exceeds $1,000,000. It is anticipated that
grants of options and restricted stock will qualify for an exemption to that
limitation for eligible performance-based compensation.
A vote in favor of the 2000 Plan will constitute approval for purposes of
the exemption from Section 162(m), of each of the material terms of the 2000
Plan, including the performance objectives described above, and will authorize
the Committee to issue designated, "performance-based" awards under the 2000
Plan to covered employees.
The Board recommends you vote "FOR" this proposal.
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Summary of the Merger
This summary highlights selected information about the merger between Zydeco
and DataVoN which was completed on June 9, 2000. To understand the merger more
fully and for a more complete description of the merger, we urge you to read
the entire proxy statement. See "The Merger" and "The Merger Agreement."
What DataVoN Shareholders Received in the Merger
Upon completion of the merger on June 9, 2000, all of the outstanding shares
of DataVoN were converted into:
. 32,623,855 shares of Zydeco common stock; and
. 7,190 shares of Zydeco Series A convertible preferred stock, $.001 par
value, convertible into 7,190,000 shares of Zydeco common stock, or
1,000 shares of common stock for each share of Series A convertible
preferred stock.
Ownership of Zydeco After the Merger
As a result of the merger, the former shareholders of DataVoN now own
approximately 80% of the voting power of Zydeco outstanding capital stock. See
"Security Ownership of Certain Beneficial Owners and Management."
Stockholder Vote Required to Approve the Merger
The merger did not require the approval of stockholders of Zydeco. The
shareholders of DataVoN unanimously approved the merger.
Federal Income Tax Consequences
We structured the merger so that DataVoN shareholders did not recognize gain
or loss as a consequence of the merger. Zydeco and DataVoN received an opinion
from tax advisors that, based on certain assumptions and certifications, the
merger was a tax-free reorganization for federal income tax purposes.
Management and Operations after the Merger
As a result of the merger, Hugh Simpson was appointed as a director and
chief executive officer of Zydeco. Zydeco plans to primarily focus its business
on the internet telephony market.
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Comparative Per Share Data
The following table presents comparative per share information for Zydeco
and DataVoN on a historical basis and on a pro forma basis assuming that the
merger had occurred at January 1, 1999 for earnings per common share purposes
and as of March 31, 2000 for book value per common share purposes. The table
should be read in conjunction with the historical financial statements and
related notes and unaudited pro forma financial statements and related notes
included elsewhere or incorporated by reference in this proxy statement. We are
providing this information for 1999 and the three months ended March 31, 2000
as they represent the year and interim period immediately prior to the
consummation of the merger on June 9, 2000.
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
------------ ------------
<S> <C> <C>
Zydeco (per share):
Net loss--diluted................................... $(0.28) $(0.01)
Book value N/A $ 0.21
DataVoN (per share):
Net income--diluted (1)............................. $ 0.53 $ 0.50
Book value N/A $ 0.52
Dividends paid...................................... $ 0.61 $ 0.45
Pro Forma Combined (per share):
Net loss--diluted................................... $(0.16) $(0.02)
Book value N/A $ 0.58
Equivalent Pro Forma Combined (per share)(2):
Net loss--diluted................................... $(6.37) $(0.80)
Book value N/A $23.09
</TABLE>
The above data do not include the effects of dividends on shares of common
stock of Zydeco because Zydeco has not paid any dividends on its shares since
its incorporation. The dividends per common share for DataVoN represent
dividends paid as a result of its status as an S corporation prior to the
merger. No pro forma dividends per common share are provided because such
dividends would not have been made on a pro forma basis reflecting the merger
and the conversion of DataVoN from an S corporation to a C corporation. We do
not anticipate paying any dividends on shares of common stock in the
foreseeable future because we intend to retain any earnings to finance the
expansion of our business, to repay indebtedness and for general corporate
purposes. Any payment of future dividends will be at the discretion of the
Board of Directors and will depend upon, among other things, our earnings,
financial condition, capital requirements, level of indebtedness and other
relevant factors.
--------
(1) In connection with the merger, DataVoN converted from an S corporation to a
C corporation for federal income tax purposes. The net income per share
amounts for DataVoN give effect to pro forma income taxes as if DataVoN was
a C corporation for all of the periods presented.
(2) The equivalent pro forma combined per share amounts have been calculated by
multiplying the pro forma combined per share amounts by 39.81385. The
39.81385 represents the number of shares of Zydeco common stock that a
holder of shares of DataVoN common stock received for each share of their
DataVoN common stock.
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The Merger
This section of the proxy statement describes material aspects of the
merger. The following description does not purport to be complete and is
qualified by reference to the merger agreement, which has been publicly filed
with the Securities and Exchange Commission. See "Where You Can Find More
Information." Please note that the merger between Zydeco and DataVoN has
already been completed, that the merger did not require the approval of the
stockholders of Zydeco, and the solicitation of votes by Zydeco of its
stockholders for the proposals in this proxy statement will not affect the
merger.
Background of the Merger
Beginning in April 1999, market conditions for selling interests in oil and
gas prospects significantly deteriorated. Because of this change in market
conditions, Zydeco altered its business plan to focus its efforts on, among
other things, seeking a merger partner to utilize its cash resources and
"public company" status. Zydeco did not have a preference as to whether the
merger partner operated in the oil and gas business.
In January, 2000, J.D. McGraw, an investment banker with Cornerstone
Ventures, met with Sam B. Myers, Jr., the then sole director and officer of
Zydeco, to discuss seeking a merger partner to facilitate Zydeco's new business
plan. Through Mr. McGraw's business relationship with Scott Posell, Mr. McGraw
met Hugh Simpson, owner of DataVoN, during his search for a merger partner for
Zydeco.
In February, 2000, Mr. McGraw continued discussions with Mr. Simpson
regarding a possible merger between DataVoN and Zydeco. Mr. McGraw also
discussed with Mr. Simpson the outstanding options and warrants of Zydeco.
Later that month, Mr. McGraw introduced Mr. Simpson to Mr. Myers to discuss the
possibility of a merger between DataVoN and Zydeco in greater detail. Initial
discussions revolved around (1) what percentage of Zydeco would be owned by
DataVoN shareholders after a merger, and (2) how to handle the oil and gas
operations of Zydeco after a merger.
In February, 2000, DataVoN and Zydeco agreed to begin a legal and financial
due diligence review of the other company. It was also agreed that Mr. Myers
would resign as the sole officer and director of Zydeco, and Mr. Simpson would
be appointed to those positions upon any completion of the merger.
On March 10, 2000, a telephonic meeting was held among DataVoN, Mr. Myers
and Mr. McGraw to discuss structure issues and terms. The parties to the
telephonic meeting discussed, among other things, the various alternatives of
what could be done with the oil and gas business of Zydeco Exploration, Inc., a
wholly owned subsidiary of Zydeco ("Exploration"). The alternatives discussed
included: (1) spinning-off Exploration to the stockholders of Zydeco existing
as of the time immediately prior to a merger, (2) selling Exploration prior to
the merger, and (3) keeping Exploration and its assets intact under Zydeco. The
parties discussed how the percentage of Zydeco that would be owned by DataVoN
shareholders after a merger was partially dependent on which of the above
alternatives was pursued. Tax issues were also discussed, including whether the
merger would qualify as a tax-free reorganization under the Code.
On March 13, 2000, DataVoN met with Mr. Myers and Mr. McGraw. The parties to
the meeting discussed, among other things, issues relating to the issuance of
Zydeco preferred stock to Mr. Simpson, including its implications on the status
of the tax-free reorganization. Since Zydeco would likely not have enough
authorized common stock to issue the appropriate number of shares to DataVoN
shareholders to create the agreed upon split of ownership of Zydeco, the
parties agreed that preferred stock--convertible into common stock upon
stockholder approval of an increase in authorized common shares of Zydeco--
could be issued to make up the deficiency in authorized common stock.
Later that month, the first draft of the merger agreement and certain
ancillary documents were distributed. Between this date and April 10, the
parties reviewed the merger agreement, and variations to the terms of the
merger were discussed among the parties to the proposed transaction.
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<PAGE>
On April 10, 2000, Mr. Simpson and Mr. Myers discussed the terms of the
merger over the telephone. Mr. Simpson and Mr. Myers tentatively agreed to an
80% DataVoN/20% Zydeco split--DataVoN shareholders to own 80% of Zydeco after
the merger--with the oil and gas assets of Zydeco being retained by Zydeco with
no obligation or requirement to transfer the value of these assets to the
current stockholders of Zydeco.
On April 28, 2000, a revised draft of the merger agreement was distributed
to the parties to the proposed transaction.
In May, 2000, Zydeco retained Swartwood Hesse, Inc., an investment banking
firm, to evaluate the fairness, from a financial point of view, of the proposed
merger consideration to the existing stockholders of Zydeco.
On May 17, 2000, the parties discussed the merger agreement during a
telephonic meeting. The parties also discussed the concept of moving the oil
and gas operations and certain cash balances of Zydeco down to Exploration. As
a result of these discussions, a revised draft of the merger agreement was
distributed on May 19, 2000.
On May 22, 2000, both parties tentatively agreed to the following:
. Each share of DataVoN common stock, except for such DataVoN common stock
held by Mr. Simpson, would be converted into 39.81385 shares of Zydeco
common stock--for a total of 1,074,978 shares of Zydeco common stock.
. Shares of DataVoN common stock held by Mr. Simpson would be converted
into: (1) 31,548,877 shares of Zydeco common stock, and (2) 7,190 shares
of Zydeco preferred stock, which would be convertible into 7,190,000
shares of Zydeco common stock.
A revised draft of the merger agreement, reflecting the agreed upon exchange
ratio and other issues resolved during the telephonic meeting, was distributed
to all parties later that day.
On May 23, 2000, Swartwood Hesse delivered to Zydeco an opinion stating that
the merger consideration is fair, from a financial point of view, to the
stockholders of Zydeco. In conducting its analysis and arriving at its opinion,
Swartwood Hesse reviewed, among other things:
. the merger agreement;
. audited financial information for Zydeco for the fiscal years ended
December 31, 1998 and 1999;
. certain documents and reports filed by Zydeco with the Securities and
Exchange Commission, including a Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2000;
. audited financial information for DataVoN for the fiscal years ended
December 31, 1998 and 1999;
. unaudited financial information for DataVoN for the three months ended
March 31, 2000 and for the month of April 2000;
. certain internal information and documents relating to Zydeco and
DataVoN provided by their respective managements, including unaudited
financial information and financial forecasts;
. the reported prices and trading activity of Zydeco's common stock;
. the financial and business prospects for the merged entity and the
industry in which it will compete;
. certain publicly available information concerning certain other
companies engaged in businesses which Swartwood Hesse believed to be
reasonably comparable to the merged entity and the trading markets for
such other companies' securities; and
. information concerning such other business transactions that Swartwood
Hesse believed to be reasonably comparable to the merger.
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<PAGE>
Swartwood Hesse also discussed with certain officers and employees of Zydeco
and DataVoN their respective businesses and operations, assets, contingencies,
present condition and future prospects.
Mr. Simpson, as the sole director of DataVoN, executed a unanimous written
consent of the Board of Directors of DataVoN, approving the merger agreement
and the merger on May 23, 2000. On the same day, the shareholders of DataVoN
executed a unanimous written consent adopting the merger agreement and the
merger. On May 23, 2000, Mr. Myers, as the sole director of Zydeco, executed a
unanimous written consent of the Board of Directors of Zydeco, approving the
merger agreement and the merger. The merger agreement and the merger did not
require adoption by the Zydeco stockholders.
On May 23, 2000, the merger agreement was executed and delivered by the
parties thereto. An information statement was distributed to the record holders
of Zydeco common stock later that week. After the satisfaction of the closing
conditions contained in the merger agreement, the parties to the merger
agreement completed the merger on June 9, 2000.
Zydeco's Reasons for the Merger
On May 23, 2000, Mr. Myers, the then sole director of Zydeco, by unanimous
written consent of the Board of Directors, determined that the merger and the
merger agreement was advisable, fair to and in the best interests of Zydeco and
its stockholders and approved the merger agreement. The merger did not require
adoption by the stockholders of Zydeco.
In reaching its conclusions that Zydeco should enter into the merger
agreement, the Zydeco Board considered a number of factors, including the
following factors, each of which supported the Zydeco Board's decision:
. changes in Zydeco's historical and projected results of operations as of
May 23, 2000 and subsequent thereto, which projected operating results,
in Zydeco Board's view, would make it more difficult for Zydeco to
secure access to capital to fund operations;
. the financial condition and results of operations of DataVoN and Zydeco
before and after giving effect to the merger;
. the strategic alternatives available to Zydeco, including remaining an
independent company;
. the absence of any other firm proposal to engage in a business
combination involving Zydeco;
. the written opinion of Swartwood Hesse, Inc. rendered on May 23, 2000,
that, as of the date of such opinion, the exchange ratio was fair, from
a financial point of view, to the holders of Zydeco common stock;
. DataVoN's and Zydeco's respective businesses, management and competitive
positions; and
. the terms of the merger agreement, including the parties' mutual
representations, warranties and covenants and the conditions of their
respective obligations.
This discussion of the information and factors considered by the Zydeco
Board is not intended to be exhaustive. Although all of the above factors
support the Zydeco Board's determination, because of the wide variety of
factors to be considered, the Zydeco Board did not assign relative weights to
the factors discussed above or determine that any factor was of particular
importance. Rather, the Zydeco Board viewed its positions and recommendation as
being based upon all of the information presented.
DataVoN's Reasons for the Merger
On May 23, 2000, Mr. Simpson, the then sole director of DataVoN, by
unanimous written consent of the DataVoN Board of Directors, determined that
the terms of the merger agreement and the merger, were advisable, fair to and
in the best interests of DataVoN and its shareholders and approved the merger
agreement and the merger. The shareholders of DataVoN adopted the merger
agreement and the merger by unanimous written consent on May 23, 2000.
15
<PAGE>
The DataVoN Board based its decision that the merger agreement is advisable
to its shareholders, and its decision to approve the merger agreement and the
merger, upon a number of factors. The DataVoN Board considered the following
factors that supported its decision to approve the merger:
. the opportunity to become part of a public company with greater ability
to access larger pools of funds that might be used to grow its business;
. the opportunity for DataVoN shareholders to share in the potential for
long-term gains from their investment in DataVoN through the ownership
of Zydeco common stock;
. the fact that DataVoN shareholders would receive Zydeco common stock in
exchange for their DataVoN common stock, which the DataVoN Board
believed would provide some flexibility to the DataVoN shareholders by
allowing them to choose whether to retain their Zydeco common stock
after the merger or to liquidate their investments, insofar as the
DataVoN Board believed that a liquid market existed for Zydeco common
stock;
. the fact that the merger would afford DataVoN shareholders the
opportunity to receive shares of Zydeco common stock in a tax-free
transaction;
. DataVoN's and Zydeco's respective businesses and management;
. current industry, economic and market conditions and trends, including
trading information with respect to Zydeco common stock; and
. the terms of the merger agreement, including the parties' mutual
representations, warranties and covenants and conditions to their
respective obligations.
After analyzing the above factors, the DataVoN Board determined that a
merger with Zydeco would be consistent with its strategy of becoming a public
company and that DataVoN's shareholders would benefit from such a business
combination. The DataVoN Board also concluded that the terms of the merger
agreement were fair to DataVoN and its shareholders. Because of these favorable
factors, each of which supported its determination, the DataVoN Board concluded
that the merger was advisable, fair to and in the best interests of DataVoN and
its shareholders.
This discussion of the information and factors considered by the DataVoN
Board is not intended to be exhaustive. Because of the wide variety of factors
to be considered, the DataVoN Board did not assign relative weights to the
factors discussed above or determine that any factor was of particular
importance. Rather, the DataVoN Board viewed its positions and recommendation
as being based upon all of the information presented.
Accounting Treatment
The merger was accounted for as a reverse acquisition of Zydeco by DataVoN
under the purchase method of accounting, in accordance with generally accepted
accounting principles. Accordingly, the historical financial statements of
DataVoN prior to the merger became the financial statements of Zydeco, and the
results of operations of Zydeco were combined with DataVoN effective with the
merger.
Federal Income Tax Consequences
The following discussion is a description of the material U.S. federal
income tax consequences of the merger, and does not purport to be a complete
analysis or description of all potential tax effects of the merger.
No information is provided herein with respect to the tax consequences, if
any, of the merger under applicable foreign, state, local and other tax laws.
Zydeco and DataVoN received an opinion from Hein + Associates LLP in form
and substance satisfactory to Zydeco and DataVoN that, on the basis of certain
representations and assumptions: the merger will be treated for U.S. federal
income tax purposes as a reorganization qualifying under the provisions of
Section 368(a) of
16
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the Code; Zydeco, Zydeco's acquisition subsidiary and DataVoN will each be a
party to that reorganization within the meaning of Section 368(b) of the Code;
and neither the shareholders of DataVoN nor DataVoN shall recognize any gain or
loss for U.S. federal income tax purposes as a result of the merger. In
addition, the opinion describes certain specific U.S. federal income tax
consequences to DataVoN shareholders as set forth in the following paragraph.
A DataVoN shareholder who received Zydeco common stock and/or Zydeco Series
A convertible preferred stock in exchange for DataVoN common stock did not
recognize gain or loss upon such exchange. Accordingly, the aggregate tax basis
of the Zydeco common stock and/or Zydeco Series A convertible preferred stock
received by a DataVoN shareholder was the same as the aggregate tax basis of
the DataVoN common stock surrendered in exchange therefor pursuant to the
merger, adjusted to take account of fractional interests, and the holding
period of the Zydeco common stock and/or Zydeco Series A convertible preferred
stock includes the holding period of the DataVoN common stock surrendered in
exchange therefor pursuant to the merger.
The tax opinion is not binding on the Internal Revenue Service or any court
and does not preclude the Internal Revenue Service or a court from reaching a
contrary conclusion. Moreover, no rulings were or will be sought from the
Internal Revenue Service concerning the tax consequences of the merger. If the
merger was not treated as a reorganization under Section 368 of the Code, a
DataVoN shareholder would have recognized gain or loss equal to the difference
between the aggregate fair market value of the Zydeco common stock and/or
Zydeco Series A convertible preferred stock received and the aggregate tax
basis of the DataVoN common stock surrendered in exchange therefor.
The foregoing summary of federal income tax consequences is for general
information only and does not address all potential tax consequences that may
be relevant to particular DataVoN shareholders or to DataVoN shareholders
subject to special treatment under the Code, including, without limitation,
foreign persons or entities, insurance companies, financial institutions,
dealers in securities, tax-exempt organizations, persons who hold shares of
stock as part of a "straddle" or a "conversion transaction" for U.S. federal
income tax purposes, and individuals who received shares of common stock
pursuant to the exercise of employee stock options or otherwise as
compensation. All shareholders should consult their own tax advisors for a
determination as to specific tax consequences applicable to them.
Regulatory Matters
The merger did not require any compliance with any federal or state
regulatory requirements. In addition, no federal or state regulatory approval
needed to be obtained in connection with the merger.
Appraisal Rights
DataVoN shareholders did not exercise their dissenters' rights of appraisal
with respect to the merger.
Federal Securities Laws Consequences
All shares of Zydeco common stock issued pursuant to the merger were not
registered under the Securities Act of 1933, as amended, and as a result, are
not freely transferable. These Zydeco stockholders may resell their shares only
in transactions permitted under Rule 144 under the Securities Act, under an
effective registration statement, or as otherwise permitted under the
Securities Act.
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Merger Agreement
The following is a description of material terms of the merger agreement but
does not purport to describe all the terms of the merger agreement. The full
text of the merger agreement has been publicly filed with the Securities and
Exchange Commission and is incorporated herein by reference. See "Where You Can
Find More Information." Zydeco stockholders are urged to read the merger
agreement in its entirety.
The Merger
On June 9, 2000, Zydeco and its wholly owned merger subsidiary and DataVoN
completed the transactions contemplated by the merger agreement pursuant to
which Zydeco's merger subsidiary merged with and into DataVoN, with DataVoN
continuing as the surviving corporation and wholly-owned subsidiary of Zydeco.
Directors and Officers
Under the merger agreement, the sole member of the board of directors of
Zydeco, Mr. Myers, resigned as a director and as chief executive officer, and
Mr. Simpson was appointed as the new director and chief executive officer of
Zydeco. Pursuant to the merger agreement, the board of directors of Exploration
consists of the following individuals: Hugh Simpson--Chairman of the Board, Sam
B. Myers, Jr., and Phillip A. Tuttle. Mr. Simpson is the sole officer of
Exploration.
Conversion of DataVoN Common Stock in the Merger
The merger agreement provided that each share of DataVoN common stock and
each option to purchase shares of DataVoN common stock would be treated as
follows:
. Each share of DataVoN common stock, except for such DataVoN common stock
held by Mr. Simpson, would be exchanged for 39.81385 shares of Zydeco's
common stock.
. Shares of DataVoN common stock held by Mr. Simpson would be exchanged
for: (1) 31,548,877 shares of Zydeco's common stock and (2) 7,190 shares
of Zydeco's Series A convertible preferred stock.
. Each outstanding option to purchase shares of DataVoN common stock
issued pursuant to DataVoN's stock option plan would be assumed by
Zydeco and would constitute solely an option to acquire, on the same
terms and conditions as were applicable under such assumed option,
subject to appropriate adjustments to the applicable exercise price,
that number of shares of Zydeco's common stock as the holder of such
option would be entitled to pursuant to the merger had the holder
exercised such option.
Thus, upon completion of the merger, all of the outstanding shares of common
stock of DataVoN were converted into:
. 32,623,855 shares of Zydeco's common stock; and
. 7,190 shares of Zydeco's Series A Convertible Senior Preferred Stock,
$.001 par value, convertible into 7,190,000 shares of Zydeco's common
stock, or 1,000 shares of common stock for each share of Series A
convertible preferred stock.
Zydeco's Series A convertible preferred stock, which was issued entirely to
Mr. Simpson in the merger, will vote together with Zydeco's common stock,
except as required by law. Each of the 7,190 shares of Zydeco's Series A
convertible preferred stock issued in the merger will be entitled to 1,000
votes on all matters and will vote with the Company's common stock, except as
required by law.
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Certain Covenants in the Merger Agreement
Prior to the merger with Zydeco, DataVoN was an S corporation. Unlike a C
corporation which is a separate legal entity for tax purposes, an S corporation
is a pass-through entity for tax purposes. Thus, prior to the merger,
shareholders of DataVoN were personally obligated to pay the tax liability on
any income earned by DataVoN. As a result of the merger, DataVoN's S
corporation status has been converted to that of a C corporation.
Pursuant to the merger agreement, Zydeco is obligated to pay to the DataVoN
shareholders an amount equal to any liability for taxes owed by the DataVoN
shareholders that are attributable to income reported on DataVoN's 1999 tax
return and the short-period taxable year 2000 of DataVoN ending on the date of
the completion of the merger.
Prior to the completion of the merger, Zydeco restructured its operations by
causing all assets and liabilities used or incurred in the oil and gas business
of Zydeco, including the capital stock of Wavefield Image, Inc. and cash
balances of Zydeco, subject to certain exceptions, to be contributed to
Exploration. For a period of nine months after the closing of the merger or
such earlier date as Exploration ceases to be a subsidiary of Zydeco, Zydeco
cannot, without the unanimous consent of the board of directors of Exploration,
take any action to cause any cash to be transferred from Exploration to Zydeco
or any other subsidiary of Zydeco, other than a subsidiary of Exploration,
except for payment or reimbursement to Zydeco or such subsidiary for any
liabilities to which Zydeco and its subsidiaries may be or become subject
relating to or arising out of the assets, business, operations, debts or
liabilities of Exploration, whether arising prior to, concurrent with or after
the merger.
19
<PAGE>
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 should be read in conjunction with the financial
statements and footnotes included herein as Exhibits A-C.
Overview
The Company is a wholesale provider of voice and data services using
Internet Protocol ("IP"). As of October 31, 2000, the Company was providing
services to several domestic carriers and is currently operating in 14 markets.
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 points of presence ("POP"). 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. As a result of this merger, the former shareholders of
DataVoN now own approximately 80% of the voting power of the Company's 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 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 "back
bone 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 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.
20
<PAGE>
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
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. These options have a 10 year life and vest over a three-year period,
subject to certain exceptions.
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
21
<PAGE>
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.
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. These options have a 10 year life and vest over a three-year period,
subject to certain exceptions.
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--Year Ended December 31, 1999 Compared to Year Ended
December 31, 1998
Net Service Revenue. The Company's net service revenue increased by $6.1
million to $8.3 million for the year ended December 31, 1999, from $2.2 million
for the year ended December 31, 1998. The increase in net revenue resulted from
an increase in the amount of traffic carried over the Company's network to
approximately 1.13 billion minutes for the year ended December 31, 1999, from
approximately 404 million minutes for the year ended December 31, 1998.
Cost Of Services. Cost of services increased by approximately $5.0 million
to $6.1 million for the year ended December 31, 1999, from $1.1 million for the
year ended December 31, 1998. The increase in expense was driven by the
increase in traffic described above. As a percentage of net service revenue,
cost of services expense increased to approximately 73% for the year ended
December 31, 1999, from approximately 49% for the year ended December 31, 1998
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
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 increased by $190,859 to $692,525 for
the year ended December 31, 1999 from $501,666 for the year ended December 31,
1998. This increase is attributable to the increase in traffic carried over the
Company's network, which increased the amount paid to 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 $342,746 to $673,880 for the year ended
December 31, 1999, from $331,134 for the year ended December 31, 1998. 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 decreased to 8%
for the year ended December 31,1999, from 15% for the year ended December 31,
1998, primarily because the revenue growth rate exceeded the necessary growth
rate in general and administrative expenses.
22
<PAGE>
Depreciation And Amortization Expense. Depreciation and amortization expense
increased by $13,973 to $16,072 for the year ended December 31, 1999, from
$2,099 for the year ended December 31, 1998. This increase primarily resulted
from additional purchases of capital equipment and software that were needed to
support the Company's expanding network.
Interest Income And Interest Expense. Interest expense is primarily
comprised of interest on the Company's financed equipment, and various capital
leases. Interest income is primarily composed of income earned on the Company's
cash and cash equivalents.
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.
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 its 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 line of
credit 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 outside 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.
23
<PAGE>
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.
24
<PAGE>
Business
Overview
The Company intends to build one of the nation's first "next-generation"
packet switched IP networks to provide voice and data services. A unique,
meshed IP backbone will transport "toll quality" traffic to any of the
Company's connected cities. The Company believes that this network architecture
will drastically reduce the cost compared to traditional networks of
originating, transporting and terminating traffic while providing network
scalability for future growth.
As of October 31, 2000, the Company was providing services to several of the
high volume United States carriers. The Company currently owns and operates a
network that includes POP in fourteen U.S. markets. The Company currently has
twenty-five (25) POP's, and plans to increase its network to approximately
forty (40) POP's by the end of 2000. During the quarter ended September 30,
2000, the Company transported in excess of 460 million minutes of traffic, a
volume that had been growing every quarter.
Through the Company's network, the Company transports a large volume of
"toll quality" voice and data services. The entrance point for communications
traffic over the Company's network is referred to as a point of presence or
POP. Points of presence are composed of gateways, which digitize, compress and
packetize voice and data transmissions at both the originating and terminating
points and enable calls to be routed over a managed IP network. The Company's
customers can interconnect with the Company's network by connecting dedicated
voice circuits from their facilities to one of the Company's POP, which are
currently located in Texas, Colorado, Georgia, California, Florida, Maryland,
Washington, D.C., Arizona, Missouri, Utah, Nevada, Washington, Oregon,
Illinois, Ohio, and New York.
The managed IP network calls are routed through a local carrier's switched
network. Gateways in each POP digitize, compress and packetize voice and data
calls and then transmit them over the "voice over private internet network"
("VoPIN"). At the destination, another POP reverses the process and the call is
switched back from the VoPIN to a local carrier's circuit-switched network at
the destination.
Because of its wide-ranging coverage, rapid growth and flexible
connectivity, the Company uses the IP transport gateway in conjunction with the
managed IP network to deliver voice and data traffic. By using the VoPIN, the
Company avoids having to build a private, dedicated network of fiber and cable
connections, which would delay the Company's time-to-market in many locations
and would be more costly to deploy. The Company also uses data transmission
over private leased lines or traditional circuit-based voice networks where the
managed IP network is unavailable.
The Market
Although it has been possible to transmit voice over data networks since
1995, only recently has the technology improved such that phone-to-phone calls
can be transmitted over data networks with similar quality as that of
traditional voice networks. The market for worldwide IP telephony is projected
to grow from $0.5 billion in 1999, to $18.7 billion in 2004, according to
International Data Corporation, a market research firm. Wholesale worldwide IP
telephony, including wholesale international IP telephony, is expected to grow
to $2.0 billion by the same date. Forrester Research, Inc. projects that by
2004, IP telephony will capture $3 billion from traditional telecom services.
By 2006, ESSL Technologies predicts that 35% of all long distance calls will be
handled by IP telephony. The Company's telephony services enable
telecommunications carriers and other communications service providers to
utilize the technologies and efficiencies of the Internet to cut costs and
offer new services in order to add and retain customers.
Benefits of Using the Company
The Company enables integrated communications service providers to outsource
their voice and data services over an IP backbone network at lower costs than
over traditional networks while maintaining quality of service ("QoS").
25
<PAGE>
The Company believes its services provide the following key benefits to its
customers:
. Low Price. The Company believes its services are often the low-price
option for carriers because packet switching is more efficient than
traditional circuit switching. In addition, the Company leverages the
packet network to deliver traffic, which results in lower costs than
transmission alternatives that deploy dedicated connections.
. Engineering Expertise. The Company believes it has positioned itself
with quality IP technology vendors, as well as a high quality
engineering team with extensive telecommunications network expertise.
The Company has a Network Operations Center ("NOC"), located in
Richardson, Texas, that currently employs a staff of six people. There
are two groups that work within the NOC: (a) the network engineering
group and (b) the network support group. Both groups have twenty-four
hours a day, seven days a week coverage to quickly respond to any
problems. The network engineering group monitors network issues, repairs
outages and solves security problems. The support group oversees a
nationwide real-time network analysis map, which notifies the Company's
staff of network errors.
. Redundant Network Structure. The Company has constructed a network
infrastructure able to handle substantial minutes of traffic with
dynamic, alternative routing for calls. The Company's network
architecture is scalable, allowing it to support customers' future
growth. The Company also plans to pursue strategic relationships to
reduce network costs and increase network utilization.
. Improve Capital Allocation of Customers. By purchasing origination
transport and termination VoPIN services from the Company, the customer
can deploy financial resources in areas other than network
infrastructure. The Company's customers can gain a competitive advantage
or maintain competitive parity with their competitors by expanding their
end user offerings (i.e., marketing, customer service) without incurring
the substantial capital investments and operating costs that would
otherwise be required to build and deploy their own VoPIN-based
multiple-service network.
Growth Strategy
The Company plans to leverage its customer relationships, operational
expertise, regulatory insight, and state-of-the-art network as a platform from
which to drive future growth. Specifically, the Company believes the following
opportunities are available:
. increasing the breadth of its current business lines, both in existing
and ancillary categories. The Company plans to acquire additional
bandwidth and facility POP's in several markets;
. expanding its customer base through strategic marketing relationships
and wholesale contracts. The Company plans to enter into new sales
contracts with regional emerging carriers; and
. developing additional telecommunications services to complement the
current product line in new geographic areas. The Company plans to
expand into second tier markets.
Services
The Company's current services include voice and data services over IP. In
the future, the Company plans to provide Internet Service Provider ("ISP")
dial-up services, POTS--plain old telephone service also known as voice-grade
switched telephone service, ISDN--integrated services digital network, and
"digital subscriber line" ("DSL"). The Company offers voice and data transport
and call completion services. This provides its customers with a toll quality,
low-cost alternative for voice and data transport of phone-to-phone, PC to
phone, phone to PC, and PC to PC calls placed by its business and residential
customers.
Customers
The Company does not sell its services directly to subscribers. The
Company's target audience is service providers--specifically, tier one and two
telecommunications companies, competitive local exchange carriers, ISP's and
emerging global carriers. Tier one carriers generally have annual revenues in
excess of $2 billion. Second tier carriers have revenues generally in the $750
million to $2 billion range, but have fewer direct operating agreements with
other carriers and fewer international facilities.
26
<PAGE>
The Company currently has a customer base that traffics approximately 155
million minutes per month and is operating in the following cities:
<TABLE>
<S> <C> <C>
Atlanta Denver Phoenix
Austin Fort Worth San Antonio
Baltimore Houston San Diego
Dallas Los Angeles San Francisco
Miami Washington, D.C.
</TABLE>
Currently, two of the Company's customers account for approximately 90% of
the Company's revenues, and the Company's largest customer accounts for
approximately 65% of the Company's revenues. Most of the Company's customers
initially enter into an annual contract with the Company, with the contracts
being subject to automatic annual renewals absent written notice not to renew.
Sales and Marketing
The Company plans to sell its networking products through the following
distinct channels:
. Executive Sales. The Company intends to present its products to top
corporate managers and leaders of certain industry associations.
. Direct Sales. Direct sales by the Company's employees will include
attendance at trade shows.
. Direct Response Mail. The Company will initially direct its mailing
efforts at its existing customer base and their referrals.
Competition
The Company competes in both the market for enhanced IP communications
services and the market for carrier transmission services. Each of these
markets on a stand-alone basis is highly competitive and has numerous service
providers. The Company faces competition from a variety of sources, including
large communications service providers with more resources, longer operating
histories and more established positions in telecommunications marketplace,
some of whom have begun to develop IP telephony capabilities. Most of the
Company's competitors are larger companies.
Large carriers around the world carry a substantial majority of the traffic.
These carriers, such as British Telecom and Deutsche Telecom, have started to
deploy packet-switched networks for voice and data traffic. These carriers have
substantial resources and have large budgets available for research and
development. In addition, several companies, many with significant resources,
such as Level 3 and Qwest Communications, are building fiber optic networks,
primarily in the United States, for IP telephony traffic. These networks can be
expected to carry voice and data.
The Company also competes with companies who have focused primarily on IP
telephony. AT&T Clearinghouse, GRIC Communications, iBasis, and ITXC, which are
larger and have substantially greater financial, marketing and network
resources than the Company, sell international voice and data over the
Internet. Other IP telephony companies, including Net2Phone and Delta Three.com
are currently focusing on the retail market and personal computer-based IP
telephony.
Competition for gateway access, call management, and enhanced services is
becoming intense. Even though the Company faces increasing competition in this
market space, the Company believes these companies may represent potential
future customers and strategic partners.
Government Regulation
The Company believes that under United States law, based on specific
regulatory classifications and recent regulatory decisions, the IP
communications services that the Company provides constitutes information
services, as opposed to regulated telecommunications services. As such, the
FCC's current position is that
27
<PAGE>
information service providers, including IP telephony providers, are not
telecommunications carriers, and thus not currently subject to FCC regulations
or any regulations by state agencies charged with regulating telecommunications
carriers. Nevertheless, aspects of the Company's operations may be subject to
state or federal regulation, including regulation governing universal service
funding, disclosure of confidential communications, copyright and excise tax
issues.
On April 10, 1998, the FCC issued a report to Congress discussing its
implementation of certain universal service provisions contained in the 1996
amendments to the Communications Act of 1934. In its report, the FCC stated
that it would undertake an examination of whether phone-to-phone IP telephony
should be considered an information service or a telecommunications service.
The FCC noted that certain forms of phone-to-phone IP telephony appeared to
lack the characteristics of an information service and to have the same
functionality as non-Internet protocol telecommunications services.
In addition, the FCC is currently considering whether to impose surcharges
or other common carrier regulations upon certain providers of Internet and IP
telephony, primarily those which provide Internet and IP telephony services to
end users located in the United States. Although the FCC decided that
information service providers, including Internet and IP telephony providers,
are not telecommunications carriers, various companies have challenged that
decision. Congressional dissatisfaction with the FCC's conclusions could result
in requirements that the FCC impose greater or lesser regulations. It is also
possible that the FCC will adopt a regulatory framework for IP telephony
providers different than that applied to traditional common carriers. Several
efforts have been made in the United States to enact federal legislation that
would either regulate or exempt from regulation communications services
provided over the Internet. Any change in the existing regulation of IP
telephony by the FCC or Congress could materially adversely affect the
Company's business, financial condition and results of operation.
The Company cannot give any assurances that IP telephony will continue to be
lightly regulated by the FCC and state regulatory agencies. Although the FCC
has determined that, at present, information service providers, including IP
telephony providers, are not telecommunications carriers, the Company cannot be
certain that this position will continue.
In the future, the FCC may require providers of Internet and IP telephony
services to be subject to traditional common carrier regulation, make universal
service contributions, and/or pay access charges. Increased regulation of the
Internet may slow its growth. Such regulation may negatively impact the cost of
doing business over the Internet and materially adversely affect the Company's
business, operating results, financial condition and future prospects.
In addition to the FCC and Congress, state regulatory authorities and
legislators may assert jurisdiction over the provision of intrastate IP
telephony services. Some states already have initiated proceedings to examine
the regulation of such services.
Employees
As of October 31, 2000, the Company had 22 employees, which are comprised of
seven (7) technical, four (4) telecom-experienced veterans, and eleven (11)
administrative positions.
Facilities
The Company's executive office is located at 635 West Campbell Road, Suite
130 in Richardson, Texas, a suburb of Dallas, where it leases approximately
4,000 square feet of commercial space pursuant to a term lease that expires in
the year 2003.
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<PAGE>
Litigation
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 the
Company 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 are defending the action
vigorously.
29
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Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of November 22, 2000,
regarding beneficial ownership of Zydeco common stock and Series A convertible
preferred stock by (i) each person known by the Company to be the beneficial
owner of more than 5% of the outstanding shares of its common stock and Series
A convertible preferred stock, (ii) each current director, nominee and
executive officer of the Company, and (iii) all current officers and directors
as a group. The information is determined in accordance with Rule 13d-3
promulgated under the Exchange Act based upon information furnished by the
persons listed or contained in filings made by them with the SEC. Except as
indicated below, the stockholders listed possess sole voting and investment
power with respect to their shares. Except as otherwise indicated in the table
below, the business address of each of the persons listed is c/o Zydeco Energy,
Inc., 635 West Campbell Road, Suite 130, Richardson, Texas 75080.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership(1) of Total
------------------------------------ ------------ ----------
<S> <C> <C>
Hugh Simpson........................................ 38,738,877(1) 77.53%(1)
James S. Holden..................................... 0 --
Marcia C. Kennedy................................... 37,750(2) *
Amar Budarapu....................................... 0(3) --
Robert E. Conn...................................... 0 --
David G. Olson...................................... 0 --
Robert A. Veschi.................................... 0 --
Current directors and officers as a group........... 38,776,627(1) 77.61%(1)
</TABLE>
--------
* Less than 1%
(1) Based on 49,965,951 shares of Zydeco common stock outstanding as of
November 22, 2000, and includes 7,190,000 shares of Zydeco common stock
issuable upon conversion of the 7,190 shares of Zydeco Series A convertible
preferred stock held by Mr. Simpson upon the adoption and approval of an
amendment to Zydeco's Certificate of Incorporation to increase the
authorized number of shares of Zydeco common stock. Mr. Simpson, as the
majority stockholder of Zydeco, would have the power to cause such an
amendment to be adopted and approved at the special meeting.
(2) Includes 22,500 shares of Zydeco common stock owned by Kenneco, Inc., a
corporation whose shares are 100% owned by a trust, of which (a) Ms.
Kennedy serves as trustee, and (b) certain beneficiaries of the trust are
part of Ms. Kennedy's immediate family (as defined in Section 16 of the
Exchange Act).
(3) Does not include options to purchase 92,010 shares of Zydeco common stock
held by Mr. Budarapu, which are not exercisable within 60 days of November
22, 2000.
30
<PAGE>
Management
Directors, Officers and Key Employees
The directors, executive officers and key employees of Zydeco, and their
ages, as of October 31, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- -----------------------------------
<C> <C> <S>
Executive Officers and Directors:
Hugh Simpson.................. 42 President, Chief Executive Officer,
Chairman, and Director
James S. Holden............... 46 Chief Operating Officer
Marcia C. Kennedy............. 49 Chief Financial Officer, Director
Amar Budarapu................. 34 Director
Robert E. Conn................ 74 Director
David G. Olson................ 48 Director
Robert A. Veschi.............. 39 Director
Key Employees:
Chad Frazier.................. 34 Vice President, Network Operations
Greg Hahn..................... 48 Vice President
Steve Weigman................. 38 Vice President--Finance
</TABLE>
Mr. Simpson founded DataVoN in 1997 and has served as its Chief Executive
Officer, President and majority shareholder since June 2000. Upon consummation
of the merger, Mr. Simpson assumed the role of Chief Executive Officer,
President and a director of the Company. In 1991, Mr. Simpson founded Travel
Com 800 Inc., a communications company serving military personnel for their
calling card and wireless needs, where he worked until 1996 when Mr. Simpson
sold the communications segment to one equity partner, and the wireless
communications segment to another equity partner. Mr. Simpson's United States
Marine Corp Reserve Unit was activated for duty in Operation Desert Shield and
Storm in 1990, where he served until July 1991. Mr. Simpson was promoted to the
rank of Lieutenant Colonel before joining the inactive roles in June 1999. From
1988 to 1990, Mr. Simpson was employed by International Telecharge, Inc. as a
National Product Manager.
Mr. Holden has served as Chief Operating Officer of the Company since
September 2000. Prior to joining the Company, Mr. Holden was the Director of
Access Planning for CapRock Telecommunications, where he was responsible for
all domestic and international off-net facilities purchases, negotiating
interconnects and rates, forecasting overbuilds and monitoring entrance
facility usage. Mr. Holden was with CapRock Telecommunications from October
1999 to September 2000. From August 1979 to January 1999, Mr. Holden was with
MCI Telecommunications, serving in a broad range of management positions,
concluding his services as Senior Manager, Financial Operations, responsible
for the day-to-day business relationship between MCI WorldCom and GTE.
Ms. Kennedy has served as Chief Financial Officer of the Company since
September 2000 and a director of the Company since October 2000. Ms. Kennedy is
also Chairman and Chief Executive Officer of Kenneco, Inc., a holding company
with investments in technology companies. From 1998 to 1999, Ms. Kennedy was
the Chairman, President and Founder of Asset Growth Corporation, an acquisition
enterprise formed in 1998 to acquire Internet companies providing brand name
products and services to individual investors. The company was bought by Data
Transmission Network Corporation following the successful completion of the
company's initial acquisition. Ms. Kennedy served as Vice President for an
online division of Reuters America in 1997, and as manager of the broker unit
at Telescan, Inc. from 1993 to 1997, where she was responsible for contract
negotiations with such brokerage firms as Charles Schwab & Co., Fidelity
Investments, Quick & Reilly and AmeriTrade. From 1989 to 1991, Ms. Kennedy
served as a senior manager at Pricewaterhouse, and from 1976 to 1981, she
served as a senior manager at Arthur Andersen & Co.
31
<PAGE>
Mr. Budarapu has served as a director of the Company since October 2000.
Since August 2000, Mr. Budarapu has served as a Director, General Counsel and
Senior Vice President of CKX, Inc., a talent management company. From July 1993
to July 2000, Mr. Budarapu practiced law with Baker & McKenzie as a Partner and
member of the firm's Securities, Mergers and Acquisitions and Global Securities
Practice Groups. He also served as Managing Partner of the Houston office and
as the Chairman of the Securities Practice Group. The primary areas of Mr.
Budarapu's legal practice are securities and merger and acquisition law.
Mr. Conn has served as a director of the Company since October 2000. Mr.
Conn retired as Senior Counsel, specializing in telecommunications, mergers,
and acquisitions, from the Washington, D.C. law firm of Shaw Pittman. Prior to
joining this law firm, Mr. Conn served as Vice President, Regulatory Law, with
MCI Communications from 1982 to 1984. From 1963 to 1982, Mr. Conn served as
Chief Legal Officer of Western Union International, Inc. ("WUI") and also as
its Executive Vice President in 1982, before its acquisition in 1982 by MCI
Communications. At varying periods between 1982 and 1988, Mr. Conn served on
the Boards of Directors of: WUI; WorldCom, Inc.; Houston International
Teleport, Inc.; Satellite Transmission & Reception Specialists, Inc.; and
Pointe Communications Corporation, formerly Charter Communications, Inc. and
now Telescape International, Inc.
Mr. Olson has served as a director of the Company since October 2000. Mr.
Olson retired from Charter Communications International, Inc. (predecessor of
Pointe Communications Corporation) in 1998, where he served as a director and
held the positions of Chairman, President, Chief Executive Officer and Chief
Operating Officer during various points in his tenure with the Company,
beginning in 1994. Charter Communications International, Inc., now Telescape
Communications, is a provider of local, long distance, Internet and other
communications services primarily in the United States to Central and South
America. From 1991 to 1992, Mr. Olson served as Chief Executive Officer of
WorldCom, Inc., which was acquired by IDB Communications Group, Inc. in 1992.
Mr. Olson served as a consultant to IDB from 1993-1994. Mr. Olson was also the
founder, Chairman, Chief Executive Officer and President of Satellite
Transmission and Reception Specialists, and the founder, Chairman, Chief
Executive Officer and Chief Operating Officer of Houston International
Teleport, Inc., global providers of voice, video and data services.
Mr. Veschi has served as a director of the Company since October 2000. Mr.
Veschi is currently the President, Chief Executive Officer and director of
zeroplus.com, Inc., a global provider of Internet telephony services, where he
has served in such capacity since February 2000. Mr. Veschi founded e-Net, Inc.
(the predecessor of zeroplus.com), a provider of telecommunications products
and patented voice over internet protocol solutions, in 1995. From 1990-1994,
Mr. Veschi was Group President of I-Net, Inc.'s Advanced Technology division,
where he was responsible for the design, construction, operation and
maintenance of software and hardware management systems for their
telecommunications network.
Mr. Frazier has been Vice President of Network Operations for DataVoN since
February 2000. Prior to joining DataVoN, Mr. Frazier was the Director of
Technical Services for Revenue Communications, where he was responsible for
engineering and constructing an SS7 based platform to perform various database
query and response services. Since August 1994, Mr. Frazier has served as
President of ABCO Service Company, which specializes in various outside plant
operations throughout the Southwestern United States. From 1988 to 1994, Mr.
Frazier worked with Intellicall, Inc. as Product Manager of several of that
company's products and services.
Mr. Hahn has been with DataVoN as Vice President of Sales since early 2000.
Mr. Hahn has been in the telecommunications industry since 1977, when he
started as a sales representative for MCI. Since that time, Mr. Hahn has been
involved in several start-up ventures, including GTE Mobilnet and International
Telecharge, Inc. Mr. Hahn was a Director of Carrier Support for USLD (now known
as Qwest) from 1993 to 1995.
Mr. Weigman has served as Vice President--Finance of DataVoN since March
2000. From 1995 to 2000, Mr. Weigman had his own accounting practice in the
Dallas, Texas area, providing full accounting services to numerous companies,
including DataVoN. From 1986 to 1995, Mr. Weigman was employed by James R.
Knight P.C., a public accounting firm located in Dallas, Texas.
32
<PAGE>
Committees
The Company does not currently have standing audit, nominating or
compensation committees of its Board of Directors.
Board and Committee Meetings
During the fiscal year ended December 31, 1999, there were three meetings of
the Board of Directors, one meeting of the audit committee of the Board of
Directors, and one meeting of the compensation committee of the Board of
Directors. No incumbent director attended fewer than 75% of the total number of
meetings of the Board of Directors and its committees on which he served during
the fiscal year ended December 31, 1999. In addition, the members of the Board
of Directors and its committees acted at various times by unanimous written
consent pursuant to Delaware law.
Compensation of Directors
Directors who are also employees of the Company receive no compensation for
serving on the Board of Directors. With respect to Directors who are not
employees of the Company, the Company reimburses such non-employee directors
for all travel and other expenses incurred in connection with attending Board
of Directors and committee meetings. Non-employee directors are also eligible
to receive stock option grants under the 2000 Plan.
Executive Compensation
The following summary compensation table sets forth summary information as
to compensation received by the Company's Chief Executive Officer and each of
the four other most highly compensated persons who were serving as executive
officers of the Company as of October 31, 2000 (collectively, the "named
executive officers") for services rendered to the Company and its subsidiaries
for the years ended December 31, 1999, 1998, and 1997:
Annual Compensation
<TABLE>
<CAPTION>
Other Annual
Name And Position Year Salary Bonus Compensation
----------------- ---- -------- ----- ------------
<S> <C> <C> <C> <C>
Hugh D. Simpson(1)............................ 1999 $200,000 -- --
Chief Executive Officer, President 1998 $167,000 -- --
and Chairman of the Board 1997 -- -- --
James S. Holden............................... 1999 N/A N/A N/A
Chief Operating Officer 1998 N/A N/A N/A
1997 N/A N/A N/A
Marcia C. Kennedy............................. 1999 N/A N/A N/A
Chief Financial Officer 1998 N/A N/A N/A
1997 N/A N/A N/A
</TABLE>
--------
(1) Mr. Simpson was appointed as Zydeco's Chief Executive Officer, President,
Secretary, Chairman of the Board of Directors and Director, effective as of
June 9, 2000, the closing date of the merger. Mr. Sam B. Myers, Jr. served
in these capacities for Zydeco prior to the merger, and resigned from these
positions, effective as of June 9, 2000. Mr. Myers earned $150,000 in
salary from his positions with Zydeco for each of the years ended 1999,
1998 and 1997.
The compensation figures provided above for Mr. Simpson reflect compensation
earned from his positions with DataVoN for each of the years ended 1999, 1998
and 1997.
33
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and persons who beneficially own
more than 10% of the Company's common stock to file reports of their beneficial
ownership and changes in ownership--Forms 3, 4 and 5, and any amendment
thereto--with the Securities and Exchange Commission. Executive officers,
directors, and greater-than-ten percent holders are required to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms furnished to the Company and any written
representations from the executive officers and directors, the Company believes
that all Section 16(a) filing requirements applicable to its executive
officers, directors and greater-than-ten percent holders have been complied
with, except for: (i) one Form 3 filed late by James S. Holden, the Chief
Operating Officer of the Company, (ii) one Form 3 filed late by Marcia C.
Kennedy, the Chief Financial Officer and Director of the Company, (iii) one
Form 3 filed late by Robert E. Conn, a Director of the Company, (iv) one Form 3
filed late by David G. Olson, a Director of the Company, and (v) one Form 3
filed late by Robert A. Veschi, a Director of the Company. The delinquent Form
3s have all been filed.
Certain Relationships and Related Transactions
On May 1, 2000, DataVoN, a subsidiary of the Company, issued a note payable
to Mr. Simpson in the amount of $250,000, secured against accounts receivable
of DataVoN. The note bears interest at 9% per annum, and is due on demand but
no later than January 15, 2001. The note was issued to Mr. Simpson for moneys
advanced by Mr. Simpson to DataVoN for operating capital. The money advanced by
Mr. Simpson to DataVoN occurred subsequent to a cash distribution made to Mr.
Simpson in the amount of $400,000 to pay the estimated tax liability incurred
by DataVoN during its Subchapter S status during taxable year 2000 and 1999.
In 1999, the Company entered into capital leases with M.M. Simpson &
Associates, P.C. and an agent of Fidelity National Title, both of which are
related parties, for a vehicle, computers and office equipment that expire at
various dates through 2003. At December 31, 1999, the gross amount of property
and equipment and related accumulated amortization recorded under capital
leases was $81,939. The lease terms for the property under capital leases range
from 36 to 48 months.
34
<PAGE>
Price Range of Zydeco Common Stock
The Company's common stock, par value $.001, and the Company's publicly-
traded warrants ("Warrants") have traded on the OTC Bulletin Board since May
25, 1999, The Nasdaq National Market from August 19, 1997 to May 24, 1999, and
on the Nasdaq SmallCap Market from December 23, 1995 to August 19, 1997 under
the symbols "ZNRG" and "ZNRGW". Prior to December 23, 1995, they were quoted on
the OTC Bulletin Board under the symbols "TNER" and "TNERW", respectively. The
high and low sales prices of the Company's common stock and the Warrants during
each quarter are presented in the table below. The quotes represent "inter-
dealer" prices without retail markups, markdown, or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common
Stock Warrants
----------- -----------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
Three Months Ended
March 31, 1998........................................ 3.250 1.938 1.188 0.688
June 30, 1998......................................... 2.875 1.500 1.000 0.250
September 30, 1998.................................... 2.750 0.750 0.969 0.125
December 31, 1998..................................... 1.297 0.500 0.391 0.047
Three Months Ended
March 31, 1999........................................ 1.313 0.282 0.438 0.063
June 30, 1999......................................... 0.250 0.125 0.125 0.010
September 30, 1999.................................... 0.188 0.130 0.105 0.015
December 31, 1999..................................... 0.160 0.063 0.030 0.001
Three Months Ended
March 31, 2000........................................ 3.000 0.078 0.562 0.020
June 30, 2000......................................... 3.063 0.875 0.437 0.093
September 30, 2000.................................... 2.031 0.719 0.187 0.011
</TABLE>
The Company purchased 318,000 shares of treasury stock during the period
November 1999 to January 2000 in the open market.
Dividend Policy
The Company has never paid a cash dividend on its preferred stock or its
common stock. The Company currently intends to retain its existing working
capital and potential future earnings to finance the growth and development of
its business and does not anticipate paying any cash dividends on its common
stock in the foreseeable future. Any future change in the Company's dividend
policy will be made at the discretion of the Board of Directors in light of the
financial condition, capital requirements, earnings, and prospects of the
Company and any restrictions under any credit agreements, as well as other
factors the Board of Directors may deem relevant.
35
<PAGE>
Description of the Company's Securities
General
The Company is authorized to issue 50,000,000 shares of its common stock,
par value $.001 per share, and 1,000,000 shares of its preferred stock, par
value $.001 per share. As of November 22, 2000, there were 42,775,951 shares of
the Company's common stock outstanding held by approximately 80 holders of
record. The Company believes there are approximately 535 beneficial owners of
the Company's common stock. As of November 22, 2000, there were 7,190 shares of
the Company's Series A convertible preferred stock outstanding held by 1
holder.
Common Stock
The holders of shares of the Company's common stock are entitled to one vote
for each share held of record on all matters to be voted on by stockholders.
There is no cumulative voting with respect to the election of directors, with
the result that the holders of more than 50% of the shares voting for the
election of directors can elect all of the directors then being elected. The
holders of shares of the Company's common stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of shares of the Company's common stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the shares of the Company's
common stock. Holders of shares of the Company's common stock, as such, have no
conversion, redemption, preemptive or other subscription rights. All of the
outstanding shares of the Company's common stock are fully paid and
nonassessable.
Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
1,000,000 shares of its preferred stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue shares of the Company's preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting
power or other rights of the holders of shares of the Company's common stock.
In addition, the shares of the Company's preferred stock could be utilized,
under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. There are 7,190 shares of the
Company's Series A convertible preferred stock currently outstanding. Each of
the 7,190 shares of the Company's Series A convertible preferred stock will be
entitled to 1,000 votes on all matters and will vote with the Company's common
stock, except as required by law.
Redeemable Common Stock Purchase Warrants
Each Redeemable Common Stock Purchase Warrant (a "Redeemable Warrant")
entitles the registered holder to purchase one share of the Company's common
stock for $5.50, subject to adjustment in certain circumstances. The Redeemable
Warrants expire on December 13, 2000. The Company may call the Redeemable
Warrants for redemption, in whole and not in part, at a price of $.01 per
Redeemable Warrant at any time if the last sale price of the shares of the
Company's common stock has been at least $10.00 per share for the 20
consecutive trading days ending on the third day prior to the date on which the
notice of redemption is given. The notice of redemption must be given at least
30 days in advance of the redemption date. The holders of Redeemable Warrants
have exercise rights until the close of business on the redemption date.
The exercise price, number of shares of the Company's common stock issuable
on exercise of the Redeemable Warrants and redemption price are subject to
adjustment in certain circumstances including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
However, the Redeemable Warrants are not subject to adjustment for issuances of
shares of the Company's common stock at a price below their exercise price.
36
<PAGE>
The Company has the right, in its sole discretion, to extend the expiration
date of the Redeemable Warrants.
The Redeemable Warrants are quoted on the OTC Bulletin Board. As of the date
of this proxy statement, there are 3,300,000 Redeemable Warrants outstanding.
1995 Bridge Warrants
The Company issued a total of 225,028 warrants (the "1995 Bridge Warrants")
to certain persons. The terms and conditions of the 1995 Bridge Warrants are
substantially the same as the terms and conditions of the Redeemable Warrants
except as described in this paragraph. The exercise price for the 1995 Bridge
Warrants is $5.33 per share, and they include a "cashless" exercise right
pursuant to which the 1995 Bridge Warrants may be surrendered in order to pay
the exercise price on other 1995 Bridge Warrants. In addition, the 1995 Bridge
Warrants may not be redeemed by the Company. The 1995 Bridge Warrants were not
registered with the Securities and Exchange Commission.
1997 Underwriter Warrants
The Company issued warrants entitling the holders thereof to purchase
320,000 shares of common stock on August 26, 1997 (the "Underwriter Warrants").
Each Underwriter Warrant entitles the registered holder to purchase one share
of common stock of the Company for $5.10, subject to adjustment in certain
circumstances. The Underwriter Warrants expire on August 26, 2002.
The exercise price and number of shares of Company common stock issuable on
exercise of the Underwriter Warrants are subject to adjustment in certain
circumstances including in the event of a stock dividend, reclassification,
merger or consolidation of the Company. The exercise price for the Underwriter
Warrants includes a "cashless" exercise right pursuant to which the Underwriter
Warrants may be surrendered in order to pay the exercise price on other
Underwriter Warrants. The Underwriter Warrants were not registered with the
Securities and Exchange Commission.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
In December, 1999, the Company decided to replace Arthur Andersen LLP
("Andersen") as its independent accountants to audit its financial statements
for economic reasons. Andersen's reports on the Company's financial statements
for the two most recent fiscal years did not contain any adverse opinion or
disclaimer of opinion; however, the report included in the 1998 Form 10-K was
modified to disclose uncertainties regarding the Company's ability to continue
as a going concern. The decision to change accountants was approved by the
Company's Board of Directors on December 31, 1999. During the Company's two
most recent fiscal years and any subsequent interim period preceding the change
in accountants, there were no disagreements with Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. The decision to change accountants was based on the
comparative cost of the audit services provided by Andersen and its
replacement, the firm of Hein + Associates LLP ("Hein"). The Company requested
that Andersen furnish it with a letter addressed to the U.S. Securities and
Exchange Commission stating whether it agrees with the above statements. A copy
of that letter was filed with the Commission.
The Company engaged Hein to serve as the Company's independent accountants
as of January 21, 2000. At the time of its engagement, Hein had not been
consulted during the two most recent fiscal years or any subsequent interim
period on any matters relating to accounting principles or a specific
transaction, either completed or proposed.
Effective August 4, 2000, the Company dismissed Hein as the Company's
independent accountant. None of the reports of Hein on the financial statements
during the past fiscal year contained an adverse opinion or disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principles. During the Company's engagement of Hein, there were no
disagreements with Hein on any matter of
37
<PAGE>
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to Hein's satisfaction
would have caused Hein to make reference to the subject matter of the
disagreement in connection with its report. The Company requested that Hein
furnish it with a letter addressed to the U.S. Securities and Exchange
Commission stating whether it agrees with the above statements. A copy of that
letter was filed with the Commission.
On August 4, 2000, the Company engaged KPMG LLP ("KPMG"), to serve as the
Company's independent accountant and auditor for future periods. Prior to
August 4, 2000, KPMG had served as the independent auditor for DataVoN. Except
for consultation with matters relating to DataVoN, during the Company's two
most recent fiscal years and the subsequent interim period preceding this
engagement of KPMG, neither the Company nor anyone on its behalf has consulted
with KPMG regarding the application of accounting principles to a specific or
contemplated transaction, or the type of audit opinion that might be rendered
on the Company's financial statements, and no written or oral advice was
provided to the Company that was a factor considered by the Company in reaching
a decision as to any accounting, auditing or financial reporting issue.
The Company's dismissal of Hein and engagement of KPMG was approved and
ratified by the Company's Board of Directors. The Company does not have an
audit committee of the Board of Directors.
A representative of KPMG is expected to be present at the special meeting to
be available to respond to appropriate questions from stockholders and to make
a statement if he or she desires to do so.
Experts
The financial statements of DataVoN as of December 31, 1999 and 1998, and
for each of the years then ended, have been included herein in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
Hein + Associates LLP, independent auditors, have audited the financial
statements of Zydeco as of December 31, 1999 and for the year ended December
31, 1999. These financial statements are included herein in reliance on their
report, given on their authority as experts in accounting and auditing.
Arthur Andersen LLP, independent auditors, have audited the financial
statements of Zydeco as of December 31, 1998 and for the year ended December
31, 1998. These financial statements are included herein in reliance on their
report, given on their authority as experts in accounting and auditing.
Forward-Looking Statements
The information in this proxy statement includes "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933,
Section 21E of the Securities and 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 proxy statement 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 other risks and uncertainties that could cause the
Company's actual results to differ materially from its historical results or
those that the Company hopes to achieve. In this proxy statement, 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 proxy
statement. The Company undertakes no obligation to announce publicly revisions
the Company makes to these forward-looking statements to reflect the effect of
events or circumstances that may arise after the date of this proxy statement.
All written and oral forward-looking statements made subsequent to the date of
this proxy statement and attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this section.
38
<PAGE>
Where You Can Find More Information
The Company files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information we file at the SEC's
public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, as
well as at the Securities and Exchange Commission's regional offices at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our
SEC filings are also available to the public from commercial document retrieval
services and at the Internet world wide web site maintained by the SEC at
www.sec.gov.
The SEC allows the Company to "incorporate by reference" information into
this proxy statement, which means that the Company can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
proxy statement, except for any information superseded by information contained
directly in this proxy statement. This proxy statement incorporates by
reference the documents set forth below that the Company has previously filed
with the SEC. These documents contain information about the Company and its
financial condition.
1. Annual Report on Form 10-KSB for the year ended December 31, 1999.
2. Current Report on Form 8-K filed on February 2, 2000.
3. Quarterly Report on Form 10-QSB for the quarter ended March 31, 2000.
4. Current Report on Form 8-K filed on May 24, 2000.
5. Current Report on Form 8-K filed on June 19, 2000.
6. Current Report on Form 8-K filed on August 8, 2000.
7. Current Report on Form 8-K/A-1 filed on August 16, 2000.
8. Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000.
9. Current Report on Form 8-K filed on October 10, 2000.
10. Quarterly Report on Form 10-QSB for the quarter ended September 30,
2000.
If you are a stockholder, the Company may already have sent you some of the
documents incorporated by reference, but you can obtain any of them through the
Company, the SEC or the SEC's Internet world wide web site as described above.
Documents incorporated by reference are available from the Company without
charge, excluding all exhibits unless we have specifically incorporated by
reference an exhibit in this proxy statement. Please direct requests to:
DataVoN Inc.
635 West Campbell Road, Suite 130
Richardson, Texas 75080
Tel: (972) 783-0284
Attn: Investor Relations
If you would like to request documents from the Company, please do so by
December 11, 2000 to receive them before the special meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement to vote on the transactions. The Company has
not authorized anyone to provide you with information that is different from
what is contained in this proxy statement. This proxy statement is dated
November 29, 2000. You should not assume that the information contained in this
proxy statement is accurate as of any date other than that date, and the
mailing of this proxy statement to stockholders shall not create any
implication to the contrary.
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Other Matters
The Company's management is not aware of other matters which may come before
the special meeting. The persons named in the accompanying form of proxy will
vote said proxy in accordance with their judgment if any other matter does
properly come before the special meeting. A majority of those votes present at
the special meeting cast in favor of any such matter will result in the passage
of such matter.
Proposals of Stockholders for 2001 Annual Meeting
Any proposal that a stockholder of the Company wishes to be considered for
inclusion in the Company's proxy statement and proxy card for the Company's
2001 Annual Meeting of Stockholders (the "2001 Annual Meeting") must be
submitted to the Secretary of the Company at its offices, 635 West Campbell
Road, Suite 130, Richardson, Texas 75080, no later than December 15, 2000. In
addition, such proposals must comply with the requirements of Rule 14a-8 under
the Securities Exchange Act of 1934, as amended.
If a stockholder of the Company wishes to present a proposal before the 2001
Annual Meeting, but does not wish to have the proposal considered for inclusion
in the Company's proxy statement and proxy card, such stockholder must also
give written notice to the Secretary of the Company at the address noted above.
The Secretary must receive such notice no later than December 15, 2000. If a
stockholder fails to provide timely notice of a proposal to be presented at the
2001 Annual Meeting, the proxies designated by the Board of Directors of the
Company will have discretionary authority to vote on any such proposal.
By the Order of the Board of
Directors,
/s/ James D. Nickell
---------------------------------
James D. Nickell, Secretary
Richardson, Texas
November 29, 2000
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ANNEX I
DTVN HOLDINGS, INC.
2000 STOCK OPTION AND RESTRICTED STOCK PLAN
Effective , 2000
SECTION 1
ESTABLISHMENT AND PURPOSE
This Plan is established to (i) offer selected, directors, officers,
Employees and Consultants of the Company or its Subsidiaries an equity
ownership interest in the financial success of the Company, (ii) provide the
Company an opportunity to attract, retain and motivate the best available
personnel for positions of substantial responsibility and (iii) to encourage
equity participation in the Company by eligible Participants. This Plan
provides for the grant by the Company of (i) Options to purchase Shares, and
(ii) shares of Restricted Stock. Options granted under this Plan may include
Nonstatutory Options as well as ISOs intended to qualify under Section 422 of
the Code.
SECTION 2
DEFINITIONS
"Board of Directors" shall mean the board of directors of the Company, as
duly elected from time to time.
"Change in Control" shall mean such time as either (i) any "person", as
such term is used in Section 14(d) of the Exchange Act (other than the
Company, a wholly-owned subsidiary of the Company, any employee benefit plan
of the Company or its Subsidiaries or Mr. Hugh Simpson together with his
affiliates (as such term is defined in Rule 12b-2 of the Exchange Act)) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act (or any successor rule), directly or indirectly, of fifty percent (50%) or
more of the combined voting power of the Company's common stock or (ii)
individuals who constitute the Board of the Directors on the effective date of
this Plan (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent to
the date hereof whose election or nomination for election by the Company's
shareholders was approved by a vote of at least three quarters of the
directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named
as a nominee for the director without objection to such nomination) shall be,
for purposes of this clause (ii) considered as though such person was a member
of the Incumbent Board.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and as
interpreted by the regulations thereunder.
"Committee" shall mean the Stock Option Committee of the Company, or such
other Committee as may be appointed by the Board of Directors from time to
time.
"Company" shall mean DTVN Holdings, Inc., a Delaware corporation.
"Consultant" shall mean any individual that is expressly designated as a
consultant of the Company or its Subsidiaries by the Committee in its sole
discretion.
"Covered Employee" shall mean an individual who, on the last day of the
taxable year, is the chief executive officer of the Company or any one of the
four most highly compensated officers of the Company other than the chief
executive, as described in Section 162(m)(e) of the Code.
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"Date of Grant" shall mean the date on which the Committee resolves to
grant an Option to an Optionee or grant Restricted Stock to a Participant, as
the case may be.
"Disinterested Director" shall mean a member of the Board of Directors who
is both (i) a Non-Employee Director, within the meaning of Rule 16b-3
promulgated under the Exchange Act, as amended from time to time and (ii) an
Outside Director, within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder, as amended from time to time.
"Employee" shall include every individual performing Services to the
Company or its Subsidiaries other than as a Consultant and only if the
relationship between such individual and the Company or its Subsidiaries is
the legal relationship of employer and employee. This definition of "Employee"
is qualified in its entirety and is subject to the definition set forth in
Section 3401(c) of the Code and the regulations thereunder.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and as interpreted by the rules and regulations promulgated thereunder.
"Exercise Price" shall mean the amount for which one Share may be purchased
upon exercise of an Option, as specified by the Committee in the applicable
Stock Option Agreement, but in no event less than the par value per Share.
"Fair Market Value" shall mean the closing price of the shares on the
national securities exchange on which the Shares are listed (if the shares are
so listed) as reported in the Wall Street Journal on the applicable date (or,
if not so reported, as otherwise reported by the National Association of
Securities Dealers Automated Quotation System) or on the NASDAQ National
Market System (if the Shares are regularly quoted thereon), or, if not so
listed or regularly quoted, the mean of the closing bid and asked prices of
the securities in the over-the-counter market, on the applicable date or, if
such bid and asked prices shall not be available, as reported by any
nationally recognized quotation service selected by the Company, or as
determined by the Committee in a manner consistent with the provisions of the
Code.
"ISO" shall mean a stock option which is granted to an individual and which
meets the requirements of Section 422 of the Code.
"Nonstatutory Option" shall mean any Option granted by the Committee that
is not an ISO.
"Option" shall mean either an ISO or Nonstatutory Option, as the context
requires, granted under this Plan.
"Optionee" shall mean a Participant who holds an Option.
"Participants" shall mean those individuals described in Section 1 of this
Plan selected by the Committee who are eligible under Section 4 of this Plan
for grants of either Options or Restricted Stock under this Plan.
"Performance Goals" shall have that meaning set forth in Section 3(c)(xii)
of the Plan.
"Permanent and Total Disability" shall mean that an individual is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period
of more than twelve (12) months. An individual shall not be considered to
suffer from Permanent and Total Disability unless such individual furnishes
proof of the existence thereof in such form and manner, and at such times, as
the Committee may reasonably require. The scope of this definition shall
automatically be reduced or expanded to the extent that Section 22(e)(3) of
the Code is amended to reduce or expand the scope of the definition of
Permanent and Total Disability thereunder.
"Plan" shall mean this DTVN Holdings, Inc. 2000 Stock Option and Restricted
Stock Plan, as amended from time to time.
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"Plan Award" shall mean the grant of either an Option or Restricted Stock,
as the context requires.
"Plan Maximum" shall have that meaning set forth in Section 5(a) of this
Plan.
"Restricted Stock" shall have that meaning set forth in Section 7(a) of
this Plan.
"Restricted Stock Account" shall have that meaning set forth in Section
7(a)(ii) of this Plan.
"Restricted Stock Criteria" shall have that meaning in Section 7(a)(iv) of
this Plan.
"Restriction Period" shall have that meaning in Section 7(a)(iii) of this
Plan.
"Services" shall mean services rendered to the Company or any of its
Subsidiaries by a Participant.
"Share" shall mean one share of Stock, as adjusted in accordance with
Section 9 of this Plan (if applicable).
"Stock" shall mean the Common Stock of the Company, par value $.001 per
share.
"Stock Option Agreement" shall mean the agreement executed between the
Company and an Optionee that contains the terms, conditions and restrictions
pertaining to the granting of an Option.
"Subsidiary" shall mean any corporation as to which more than fifty (50%)
percent of the outstanding voting stock or shares shall now or hereafter be
owned or controlled, directly by a person, any Subsidiary of such person, or
any Subsidiary of such Subsidiary.
"Ten-Percent Shareholder" shall mean a person that owns more than ten
percent (10%) of the total combined voting power of all classes of outstanding
stock of the Company or any Subsidiary, taking into account the attribution
rules set forth in Section 424 of the Code, as amended. For purposes of this
definition of "Ten Percent Shareholder" the term "outstanding stock" shall
include all stock actually issued and outstanding immediately after the grant
of an Option to an Optionee. "Outstanding stock" shall not include reacquired
shares or shares authorized for issuance under outstanding Options held by the
Optionee or by any other person.
"Vest Date" shall have that meaning in Section 7(a)(v) of this Plan.
SECTION 3
ADMINISTRATION
(a) General Administration. This Plan shall be administered by the Board of
Directors or the Committee (as the Board of Directors in its sole
discretion shall determine); provided, if the Plan is to be administered
by the Committee, then the Committee shall consist of at least two
persons, each of whom shall be Disinterested Directors. For purposes of
the Plan, the Board of Directors acting in this capacity or the Committee
shall be referred to as the "Committee." The members of the Committee
shall be appointed by the Board of Directors for such terms as the Board
of Directors may determine. The Board of Directors may from time to time
remove members from, or add members to, the Committee. Vacancies on the
Committee, however caused, may be filled by the Board of Directors.
(b) Committee Procedures. The Board of Directors shall designate one of the
members of the Committee as chairman. The Committee may hold meetings at
such times and places as it shall determine. The acts of a majority of the
Committee members present at meetings at which a quorum exists, or acts
reduced to or approved in writing by a majority of all Committee members,
shall be valid acts of the Committee. A majority of the Committee shall
constitute a quorum.
(c) Authority of Committee. This Plan shall be administered by, or under the
direction of, the Committee constituted in such a manner as to comply at
all times with Rule 16b-3 (or any successor rule) under the Exchange Act.
The Committee shall administer this Plan so as to comply at all times with
the Exchange Act and the Code and shall have absolute and final authority,
subject to the provisions of the Plan, to interpret this Plan and to make
all determinations specified in or permitted by this Plan or deemed
necessary
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or desirable for its administration or for the conduct of the Committee's
business including without limitation the authority to take the following
actions:
(i) To interpret this Plan and to apply its provisions;
(ii) To adopt, amend or rescind rules, procedures and forms relating to
this Plan;
(iii) To authorize any person to execute, on behalf of the Company, any
instrument required to carry out the purposes of this Plan;
(iv) To determine when Plan Awards are to be granted under this Plan;
(v) To select the Optionees and Participants;
(vi) To determine the number of Shares to be made subject to each Plan
Award;
(vii) To prescribe the terms, conditions and restrictions of each Plan
Award, including without limitation, the Exercise Price, the vesting
schedule and the determination whether an Option is to be classified as an
ISO or a Nonstatutory Option;
(viii) To amend or cancel any outstanding Stock Option Agreement (other
than the Exercise Price) or the terms, conditions and restrictions of a
grant of Restricted Stock, subject to applicable legal restrictions and the
consent of the Optionee or Participant, as the case may be, who entered
into such agreement, or accelerate the vesting of any Plan Award;
(ix) To establish procedures so that an Optionee may obtain a loan
through a registered broker-dealer under the rules and regulations of the
Federal Reserve Board, for the purpose of exercising an Option;
(x) To establish procedures for an Optionee (1) to have withheld from
the total number of Shares to be acquired upon the exercise of an Option
that number of Shares having a Fair Market Value, which, together with such
cash as shall be paid in respect of fractional shares, shall equal the
Exercise Price, and (2) to exercise a portion of an Option by delivering
that number of Shares already owned by an Optionee having a Fair Market
Value which shall equal the partial Exercise Price and to deliver the
Shares thus acquired by such Optionee in payment of Shares to be received
pursuant to the exercise of additional portions of the Option, the effect
of which shall be that an Optionee can in sequence utilize such newly
acquired shares in payment of the Exercise Price of the entire Option,
together with such cash as shall be paid in respect of fractional shares;
(xi) To establish procedures whereby a number of Shares may be withheld
from the total number of Shares to be issued upon exercise of an Option, to
meet the obligation of withholding for federal and state income and other
taxes, if any, incurred by the Optionee upon such exercise;
(xii) To establish performance goals ("Performance Goals") in connection
with any grant of Restricted Stock, which Performance Goals may be based on
earnings, market share, revenue, net profits, stock price, return on
capital, operating margins, general and administrative expenses, or
refinements of these measures; provided that in any case, the Performance
Goals may be based on either a single period or cumulative results,
aggregate or per share data or results computed independently or with
respect to a peer group; and
(xiii) To take any other actions deemed necessary or advisable for the
administration of this Plan.
All interpretations and determinations of the Committee made with respect
to the administration and interpretation of the Plan and the granting of Plan
Awards shall be final, conclusive, and binding on all interested parties. The
Committee may make grants of Plan Awards on an individual or group basis. The
provisions and conditions of the Plan Awards need not be the same with respect
to each Optionee or Participant or with respect to each Plan Award. No member
of the Committee shall be liable for any action that is taken or is omitted to
be taken if such action or omission is taken in good faith with respect to
this Plan or grant of any Plan Award.
(d) Holding Period. The Committee may in its sole discretion require as a
condition to the granting of any Plan Award, that a Participant hold the Plan
Awards for a period of six months following the date of such
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acquisition. This condition shall be satisfied with respect to an Option if at
least six months elapse from the date of acquisition of the Option to the date
of disposition of the Option (other than upon exercise or conversion) or its
underlying equity security.
(e) Compliance with Section 162(m) of the Code. It is intended that the
granting of the Plan Award that affects a Covered Employee will qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code and the regulations promulgated thereunder.
SECTION 4
ELIGIBILITY
(a) General Rule. Subject to the limitations set forth in subsection b
below or elsewhere in this Plan, Participants shall be eligible to participate
in this Plan.
(b) Non-Employee Ineligible for ISOs. In no event shall an ISO be granted
to any individual who is not an Employee on the Date of Grant.
SECTION 5
SHARES SUBJECT TO PLAN
(a) Basic Limitation. Shares offered under this Plan may be authorized but
unissued Shares or Shares that have been reacquired by the Company. The
aggregate number of Shares that are available for issuance under this Plan
shall not exceed 7.0 million (7,000,000) Shares, subject to adjustment
pursuant to Section 9 of this Plan (the "Plan Maximum"). The Committee shall
not issue more Shares than are available for issuance under this Plan. The
number of Shares that are subject to unexercised Options at any time under
this Plan shall not exceed the number of Shares that remain available for
issuance under this Plan. The Company, during the term of this Plan, shall at
all times reserve and keep available sufficient Shares to satisfy the
requirements of this Plan.
(b) Additional Shares. In the event any outstanding Option for any reason
expires, is canceled or otherwise terminates, the Shares allocable to the
unexercised portion of such Option shall again be available for issuance under
this Plan. In the event that Shares issued under this Plan revert to the
Company prior to the Vest Date under a grant of Restricted Stock, such Shares
shall again be available for issuance under this Plan.
SECTION 6
TERMS AND CONDITIONS OF OPTIONS
(a) Term of Option. The term of each Option shall be ten (10) years from
the Date of Grant or such shorter term as may be determined by the Committee;
provided, however, in the case of an ISO granted to a Ten-Percent Shareholder,
the term of such ISO shall be five (5) years from the Date of Grant or such
shorter time as may be determined by the Committee.
(b) Exercise Price and Method of Payment.
(i) Exercise Price. The Exercise Price shall be such price as is
determined by the Committee in its sole discretion and set forth in the
Stock Option Agreement; provided, however, in the case of an ISO granted to
any Optionee and a Nonstatutory Option to an Optionee who is also a Covered
Employee, the Exercise Price shall not be less than 100% of the Fair Market
Value of the Shares subject to such Option on the Date of Grant (or 110% in
the case of an ISO granted to a Participant who is a Ten-Percent
Shareholder on the Date of Grant).
(ii) Payment of Shares. Payment for the Shares upon exercise of an
Option shall be made in cash, by certified check, or if authorized by the
Committee, by delivery of other Shares having a Fair Market Value on the
date of delivery equal to the aggregate exercise price of the Shares as to
which said Option is being exercised, or by any combination of such methods
of payment or by any other method of payment as may
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be permitted under applicable law and this Plan and authorized by the
Committee under Section 3(c) of this Plan.
(c) Exercise of Option.
(i) Procedure for Exercise; Rights of Shareholder. Any Option granted
hereunder shall be exercisable at such times under such conditions as shall
be determined by the Committee including, without limitation performance
criteria with respect to the Company and/or the Optionee and in accordance
with the terms of this Plan. To the extent that Options granted hereunder
are ISOs, the Committee shall designate such Options as ISOs in the written
instrument evidencing such Option. If the written instrument does not
designate the Options as ISOs, then the Option shall be a Nonstatutory
Option.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Stock Option Agreement by the Optionee entitled to exercise the Option and
full payment for the Shares with respect to which the Option is exercised has
been received by the Company. Full payment may, as authorized by the
Committee, consist of any form of consideration and method of payment
allowable under Section 6(b)(ii) of this Plan. Upon the receipt of notice of
exercise and full payment for the Shares, the Shares shall be deemed to have
been issued and the Optionee shall be entitled to receive such Shares and
shall be a shareholder with respect to such Shares, and the Shares shall be
considered fully paid and nonassessable. No adjustment will be made for a
dividend or other right for which the record date is prior to the date on
which the stock certificate is issued, except as provided in Section 9 of this
Plan.
Each exercise of an Option shall reduce, by an equal number, the total
number of Shares that may thereafter be purchased under such Option.
(ii) Termination of Status as an Employee or Consultant. Except as
provided in Subsections 6(c)(iii) and 6(c)(iv) below, an Optionee holding
an Option who ceases to be an Employee, a Consultant or a director of the
Company may, but only until the earlier of the date (x) the Option held by
the Optionee expires, or (y) thirty (30) days after the date such Optionee
ceases to be an Employee, a Consultant or a director, exercise the Option
to the extent that the Optionee was entitled to exercise it on such date;
provided, however, that in the event the Optionee is an Employee and is
terminated without cause (as determined in the sole discretion of the
Committee) then the thirty (30) day period described in this sentence shall
be automatically extended to ninety (90) days (and in the case of a
Nonstatutory Option, such period shall be automatically extended to six (6)
months), unless the Committee further extends such period in its sole
discretion. To the extent that the Optionee was not entitled to exercise an
Option on such date, or if the Optionee does not exercise it within the
time specified herein, such Option shall terminate. The Committee shall
have the authority to determine the date an Optionee ceases to be an
Employee, a Consultant or a director.
(iii) Permanent and Total Disability. Notwithstanding the provisions of
Section 6(c)(ii) above, in the event an Optionee is unable to continue to
perform Services for the Company or any of its Subsidiaries as a result of
such Optionee's Permanent and Total Disability (and, for ISOs, at the time
such Permanent and Total Disability begins, the Optionee was an Employee
and had been an Employee since the Date of Grant), such Optionee may
exercise an Option in whole or in part notwithstanding that such Option may
not be fully exercisable, but only until the earlier of the date (x) the
Option held by the Optionee expires, or (y) twelve (12) months from the
date of termination of Services due to such Permanent and Total Disability.
To the extent the Optionee is not entitled to exercise an Option on such
date or if the Optionee does not exercise it within the time specified
herein, such Option shall terminate.
(iv) Death of an Optionee. Upon the death of an Optionee, any Option
held by an Optionee shall terminate and be of no further effect; provided,
however, notwithstanding the provisions of Section 6(c)(ii) above, in the
event an Optionee's death occurs during the term of an Option held by such
Optionee and, at
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the time of death, the Optionee was an Employee, Consultant or, director
(and, for ISOs, the Optionee had been an Employee since the Date of Grant),
the Option may be exercised in whole or in part notwithstanding that such
Option may not have been fully exercisable on the date of the Optionee's
death, but only until the earlier of the date (x) the Option held by the
Optionee expires, or (y) twelve (12) months from the date of the Optionee's
death, by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance. To the extent the Option is
not entitled to be exercised on such date or if the Option is not exercised
within the time specified herein, such Option shall terminate.
(d) Non-Transferability of Options. Except as may be permitted by the
Committee in its sole discretion, any Option granted under this Plan may not
be sold, pledged, assigned, hypothecated, transferred or disposed of in any
manner other than by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or
Title I of the Employee Retirement Income Security Act, or the rules
thereunder, and is not assignable by operation of law or subject to execution,
attachment or similar process. During the Optionee's lifetime, any Option
granted under this Plan can only be exercised by such Optionee. Any attempted
sale, pledge, assignment, hypothecation or other transfer of the Option
contrary to the provisions hereof and the levy of any execution, attachment or
similar process upon the Option shall be null and void and without force or
effect. No transfer of the Option by will or by the laws of descent and
distribution shall be effective to bind the Company unless the Company shall
have been furnished written notice thereof and an authenticated copy of the
will and/or such other evidence as the Committee may deem necessary to
establish the validity of the transfer and the acceptance by the transferee or
transferees of the terms and conditions of the Option. The terms of any Option
transferred by will or by the laws of descent and distribution shall be
binding upon the executors, administrators, heirs and successors of Optionee.
(e) Time of Granting Options. Any Option granted hereunder shall be deemed
to be granted on the Date of Grant. Written notice of the Committee's
determination to grant an Option to a Participant, evidenced by a Stock Option
Agreement, dated as of the Date of Grant, shall be given to such Participant
within a reasonable time after the Date of Grant.
(f) Modification, Extension and Renewal of Options. Within the limitations
of this Plan, the Committee may modify, extend or renew outstanding Options or
may accept the cancellation of outstanding Options (to the extent not
previously exercised) for the granting of new Options in substitution
therefor. The foregoing notwithstanding, no modification of an Option shall,
without the consent of the Optionee, alter or impair the Optionee's rights or
obligations under such Option; provided that the Committee may, in its sole
discretion, and without the consent of the Optionee or any other person,
reduce the exercise price of all or any part of any Option or accelerate the
vesting of all or part of any Option.
(g) Restrictions on Transfer of Shares. Any Shares issued upon exercise of
an Option shall be subject to such rights of repurchase and other transfer
restrictions as the Committee may determine in its sole discretion. Such
restrictions shall be set forth in the applicable Stock Option Agreement.
(h) Special Limitation on ISOs. To the extent that the aggregate Fair
Market Value (determined on the Date of Grant) of the Shares with respect to
which ISOs are exercisable for the first time by an individual during any
calendar year under this Plan, and under all other plans maintained by the
Company, exceeds $100,000, such Options shall be treated as Nonstatutory
Options.
(i) Leaves of Absence. Leaves of absence approved by the Committee which
conform to the policies of the Company shall not be considered termination of
employment until the employer-employee relationship, as defined under the Code
or the regulations promulgated thereunder, ends or, if earlier, the leave of
absence period expires and the individual fails to return to active employment
with the Company.
(j) Limitation on Grants of Plan Awards to Covered Employees. The total
number of Shares for which Options may be granted and which may be awarded as
Restricted Stock to any Covered Employee during any calendar year period shall
not exceed twenty-five percent (25%) of the Plan Maximum in the aggregate.
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(k) Disqualifying Dispositions. The Stock Option Agreement evidencing any
ISO granted under this Plan shall provide that if the Optionee makes a
disposition, within the meaning of Section 425(c) of the Code and the
regulations promulgated thereunder, of any share or shares issued to him
pursuant to the exercise of the ISO within the two-year period commencing on
the day after the Date of Grant of such Option or within a one-year period
commencing on the day after the date of transfer of the share or shares to him
pursuant to the exercise of such Option, he shall, within ten days of such
disposition, notify the Company thereof and immediately deliver to the Company
any amount of federal income tax withholding required by law.
(l) Withholding Taxes. The Committee shall require an Optionee to pay to
the Company at the time of exercise of an Option the amount that the Company
deems necessary to satisfy its obligation to withhold federal, state or local
income or other taxes incurred by reason of the exercise. Upon the exercise of
an Option requiring tax withholding, an Optionee may either pay such taxes in
cash or make a written election to have Shares withheld by the Company from
the shares otherwise to be received by the Optionee. The acceptance of any
such election by an Optionee shall be at the sole discretion of the Committee.
In addition, the Committee may require the Company to withhold Shares from the
Shares otherwise to be received by an Optionee upon exercise of an option. The
number of Shares withheld pursuant to this paragraph shall have an aggregate
Fair Market Value on the date of exercise sufficient to satisfy the applicable
withholding taxes.
(m) Return of Proceeds.
(i) The Committee, in its discretion, may include as a term of any
Optionee's stock option agreement a provision that, if within one year
after ceasing to be an Employee or Consultant (whether voluntarily or
involuntarily), an Optionee shall, directly or indirectly, engage in an
activity that competes with the business of the Company or a Subsidiary as
conducted at the time the Optionee ceased to be an Employee or Consultant
(as determined by the Board of Directors in its sole discretion and good
faith) and such Optionee had exercised Options within six months before or
after the date the Optionee ceased to be an Employee or Consultant, the
Optionee shall be required to remit to the Company in good funds within 5
business days of receipt of written demand therefore an amount equal to the
excess of (A) the Fair Market Value per share of Stock on the date of
exercise of such Option(s) multiplied by the number of shares with respect
to which the Options were exercised over (B) the aggregate option exercise
price for such number of shares of Stock (the "Proceeds").
(ii) The Committee, in its discretion, may include as a term of any
Optionee's stock option agreement a provision requiring the remittance by
an Optionee to the Company in good funds within 5 business days of receipt
of written demand therefore of Proceeds by an Optionee that has exercised
Options within six months before or after the date the Optionee ceased to
be an Employee or Consultant (whether voluntarily or involuntarily). The
Committee shall have the authority in its discretion to include such other
conditions and/or terms in an Optionee's stock option agreement that it
deems appropriate or desirable in furtherance of the foregoing provisions.
(n) Grants of Options to Non-Employee Directors. Subject to the terms and
conditions of this Section 6(n), each Non-Employee Director of the Company
shall, subject to the terms of the Plan, be granted on his or her appointment
to the Board of Directors or on the approval of this Plan by the stockholders
of the Company, whichever occurs later, a grant of Options to purchase 100,000
Shares. Unless otherwise provided in the applicable Stock Option Agreement,
each Option granted pursuant to this Section 6(n) shall become exercisable as
to one-twelfth of the Shares subject to Options at the end of each full
calendar quarter following the date of grant of the Options, beginning with
the end of the first full calendar quarter following the date of grant of the
Option, and would have an exercise price per share equal to the Fair Market
Value of the Stock on the date of grant; provided, however, that such Non-
Employee Director must be serving as a Non-Employee Director of the Company on
the last day of such quarter for such option to vest.
I-8
<PAGE>
SECTION 7
RESTRICTED STOCK
(a) Authority to Grant Restricted Stock. The Committee shall have the
authority to grant to Participants Shares that are subject to certain terms,
conditions and restrictions (the "Restricted Stock"). The Restricted Stock may
be granted by the Committee either separately or in combination with Options.
The terms, conditions and restrictions of the Restricted Stock shall be
determined from time to time by the Committee without limitation, except as
otherwise provided in this Plan; provided, however, that each grant of
Restricted Stock shall require the Participant to remain an Employee of (or
otherwise provide Services to) the Company or any of its Subsidiaries for at
least six (6) months from the Date of Grant. The granting, vesting and issuing
of the Restricted Stock shall also be subject to the following provisions:
(i) Nature of Grant. Restricted Stock shall be granted to Participants
for Services rendered and at no additional cost to Participant; provided,
however, that the value of the Services performed must, in the opinion of
the Committee, equal or exceed the par value of the Restricted Stock to be
granted to the Participant.
(ii) Restricted Stock Account. The Company shall establish a restricted
stock account (the "Restricted Stock Account") for each Participant to whom
Restricted Stock is granted, and such Restricted Stock shall be credited to
such account. No certificates will be issued to the Participant with
respect to the Restricted Stock until the Vest Date as provided herein.
Every credit of Restricted Stock under this Plan to a Restricted Stock
Account shall be considered "contingent" and unfunded until the Vest Date.
Such contingent credits shall be considered bookkeeping entries only,
notwithstanding the "crediting" of "dividends" as provided herein. Such
accounts shall be subject to the general claims of the Company's creditors.
The Participant's rights to the Restricted Stock Account shall be no
greater than that of a general creditor of the Company. Nothing contained
herein shall be construed as creating a trust or fiduciary relationship
between the Participants and the Company, the Board of Directors or the
Committee.
(iii) Restrictions. The terms, conditions and restrictions of the
Restricted Stock shall be determined by the Committee on the Date of Grant.
The Restricted Stock may not be sold, assigned, transferred, redeemed,
pledged or otherwise encumbered during the period in which the terms,
conditions and restrictions apply (the "Restriction Period"). More than one
grant of Restricted Stock may be outstanding at any one time, and the
Restriction Periods may be of different lengths. Receipt of the Restricted
Stock is conditioned upon satisfactory compliance with the terms,
conditions and restrictions of this Plan and those imposed by the
Committee, which may include the achievement of any Performance Goals
established by the Committee.
(iv) Restricted Stock Criteria. At the time of each grant of Restricted
Stock, the Committee in its sole discretion may establish certain criteria
to determine the times at which restrictions placed on Restricted Stock
shall lapse (i.e., the termination of the Restriction Period), which
criteria may include without limitation performance measures and targets
(which may include any Performance Goals established by the Committee)
and/or holding period requirements (the "Restricted Stock Criteria"). The
Committee may establish a corresponding relationship between the Restricted
Stock Criteria and (x) the number of Shares of Restricted Stock that may be
earned, and (y) the extent to which the terms, conditions and restrictions
on the Restricted Stock shall lapse. Restricted Stock Criteria may vary
among grants of Restricted Stock; provided, however, that once the
Restricted Stock Criteria are established for a grant of Restricted Stock,
the Restricted Stock Criteria shall not be modified with respect to such
grant.
(v) Vesting. On the date the Restriction Period terminates, the
Restricted Stock shall vest in the Participant (the "Vest Date"), who may
then require the Company to issue certificates evidencing the Restricted
Stock credited to the Restricted Stock Account of such Participant.
(vi) Dividends. The Committee may provide from time to time that amounts
equivalent to dividends shall be payable with respect to the Restricted
Stock held in the Restricted Stock Account of a Participant. Such amounts
shall be credited to the Restricted Stock Account and shall be payable to
the Participant on the Vest Date.
I-9
<PAGE>
(vii) Termination of Services. If a Participant (x) with the consent of
the Committee, ceases to be an Employee of, or otherwise ceases to provide
Services to, the Company or any of its Subsidiaries, or (y) dies or suffers
from Permanent and Total Disability, the vesting or forfeiture (including
without limitation the terms, conditions and restrictions) of any grant
under this Section 7 shall be determined by the Committee in its sole
discretion, subject to any limitations or terms of this Plan. If the
Participant ceases to be an Employee of, or otherwise ceases to provide
Services to, the Company or any of its Subsidiaries for any other reason,
all grants of Restricted Stock under this Plan shall be forfeited (subject
to the terms of this Plan).
(viii) Certificates. The Committee may legend the certificates
representing the Restricted Stock to give appropriate notice of the
applicable terms, conditions and restrictions thereof, as well as any
applicable restrictions under applicable Federal or state securities laws,
and may deposit such certificates with the Secretary of the Company pending
vesting of the Restricted Stock.
(b) Deferral of Payments.
The Committee may establish procedures by which a Participant may elect to
defer the transfer of Restricted Stock to the Participant. The Committee shall
determine the terms and conditions of such deferral in its sole discretion.
SECTION 8
ISSUANCE OF SHARES
As a condition to the transfer of any Shares issued under this Plan, the
Company may require an opinion of counsel, satisfactory to the Company, to the
effect that such transfer will not be in violation of the Securities Act of
1933, as amended (the "Securities Act"), or any other applicable securities
laws, rules or regulations, or that such transfer has been registered under
federal and all applicable state securities laws. The Company may refrain from
delivering or transferring Shares issued under this Plan until: (1) the
Committee has determined that the Participant has tendered to the Company any
and all applicable federal, state or local tax owed by the Participant as the
result of the receipt of a Plan Award, the exercise of an Option or the
disposition of any Shares issued under this Plan, in the event that the
Company reasonably determines that it might have a legal liability to satisfy
such tax, (2) the Company has determined that all applicable listing
requirements of any stock exchange or quotation system on which the Shares are
listed have been satisfied, and (3) the Company has determined that any other
applicable provision of state or federal law, including without limitation
applicable state securities laws, has been satisfied. The Company shall not be
liable to any person or entity for damages due to any delay in the delivery or
issuance of any stock certificate evidencing any Shares for any reason
whatsoever.
SECTION 9
CAPITALIZATION ADJUSTMENTS; MERGER; CHANGE IN CONTROL
(a) Adjustments Upon Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of Shares covered by
each outstanding Option, the aggregate number of Shares that have been
authorized for issuance under this Plan and the number of Shares of Restricted
Stock credited to any Restricted Stock Account of a Participant (as well as
the Exercise Price covered by any outstanding Option), shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a stock split, payment of a stock dividend with respect
to the Stock or any other increase or decrease in the number of issued Shares
effected without receipt of consideration by the Company. Such adjustment
shall be made by the Committee in its sole discretion, which adjustment shall
be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of Shares subject to an Option.
I-10
<PAGE>
(b) Dissolution, Liquidation, Sale of Assets or Merger. In the event of the
dissolution or liquidation of the Company, other than pursuant to a
Reorganization (hereinafter defined), any Option granted under the Plan shall
terminate as of a date to be fixed by the Committee, provided that not less
than 30 days written notice of the date so fixed shall be given to each
Optionee and each such Optionee shall have the right during such period to
exercise his Options as to all or any part of the Shares covered thereby
including Shares as to which such Options would not otherwise be exercisable
by reason of an insufficient lapse of time.
In the event of a Reorganization, then, as a condition of such
Reorganization, lawful and fair provision shall be made whereby the Option
holders shall thereafter have the right to purchase and receive, upon the
basis and upon the terms and conditions specified in the Plan and the stock
option agreements and in lieu of the shares of Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented thereby, such shares of stock, securities, or assets as may
be issued or payable with respect to or in exchange for the number of
outstanding shares of such Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented by such Options, had such Reorganization not taken place,
and in such event appropriate provision shall be made with respect to the
rights and interests of the Option holders to the end that the provisions
hereof (including, without limitation, provisions for adjustments of the
exercise price and of the number of shares purchasable upon the exercise of
such Options) shall thereafter be applicable, as nearly as may be in relation
to any share of stock, securities, or assets thereafter deliverable upon the
exercise hereof.
The term "Reorganization" as used in this Subsection 9(b) shall mean any
merger, consolidation, sale of all or substantially all of the assets of the
Company, sale, pursuant to an agreement with the Company, of securities of the
Company pursuant to which the Company is or becomes a wholly-owned subsidiary
of another company after the effective date of the Reorganization, or other
similar event.
(c) Limitation on Rights of Optionee. Except as expressly provided in this
Section 9, no Optionee shall have any rights by reason of any payment of any
stock dividend, stock split or reverse stock split or any other increase or
decrease in the number of shares of stock of any class, or by reason of any
reorganization, consolidation, dissolution, liquidation, merger, exchange,
split-up or reverse split-up, or spin-off of assets or stock of another
corporation. Any issuance by the Company of Shares, Options or securities
convertible into Shares or Options shall not affect, and no adjustment by
reason thereof shall be made with respect to, the number or Exercise Price of
the Shares for which an Option is exercisable. Notwithstanding the foregoing,
if the Company shall enter into a transaction affecting the Company's capital
stock or distributions to the holders of its capital stock for which a
revision in the terms of each Option is not required pursuant to this Section
9, the Committee shall revise the terms of each Option in a manner the
Committee deems fair and reasonable in its sole discretion given the
transaction involved. If necessary or appropriate in connection with such
transaction, the Committee may declare that any Option shall terminate as of a
date fixed by the Committee and give each Optionee the right to exercise his
or her Option in whole or in part, including exercise as to shares of Stock to
which the Option would not otherwise be exercisable.
(d) Change in Control. Subject to Section 9(b), in the event there occurs a
Change of Control, (i) the Optionees shall have the right to exercise from and
after the date of the Change in Control the Option held by such Optionee in
whole or in part notwithstanding that such Option may not be fully
exercisable, and (ii) any and all restrictions on any Restricted Stock
credited to a Restricted Stock Account shall lapse and such stock shall
immediately vest in the Participants notwithstanding that the Restricted Stock
held in such account was unvested.
(e) Stock Dividend; Distribution of Assets. In the event of a stock
dividend or other distribution of assets by the Company to the holders of the
Stock which is not covered by any provision of this Section 9, the Option
holders shall be entitled thereafter to receive upon exercise of the Option
the kind and amount of such distribution, whether cash, shares of stock or
other securities or assets, which the Option holder would have been entitled
to receive after the occurrence of such event had this Option been exercised
immediately prior to such event.
I-11
<PAGE>
(f) No Restriction on Rights of Company. The grant of an Option shall not
affect or restrict in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations, or changes of its capital or
business structure, or to merge or consolidate, or to dissolve, liquidate,
sell, or transfer all or any part of its business or assets.
SECTION 10
NO EMPLOYMENT RIGHTS
No provision of this Plan, under any Stock Option Agreement or under any
grant of Restricted Stock shall be construed to give any Participant any right
to remain an Employee of, or provide Services to, the Company or any of its
Subsidiaries or to affect the right of the Company to terminate any
Participant's service at any time, with or without cause.
SECTION 11
TERM OF PLAN; EFFECT OF AMENDMENT OR TERMINATION
(a) Effective Date; Term of Plan. This Plan shall become effective as
determined by the Board of Directors, but no Options granted under this Plan
shall be exercised and no grants of Restricted Stock shall have their
restrictions lapse unless and until this Plan has been approved by the
stockholders of the Company, which approval shall be within twelve (12) months
before or after the date this Plan is adopted by the Board of Directors. This
Plan shall continue in effect for a term of ten (10) years unless sooner
terminated under this Section 11.
(b) Amendment and Termination. The Board of Directors in its sole
discretion may terminate this Plan at any time. The Board of Directors may
amend this Plan at any time in such respects as the Board of Directors may
deem advisable; provided, that any change in the aggregate number of Shares
that may be issued under this Plan, other than in connection with an
adjustment under Section 9 of this Plan, shall require approval of the holders
of a majority of the outstanding Shares entitled to vote.
(c) Effect of Termination. In the event this Plan is terminated, no Shares
shall be issued under this Plan, except upon exercise of an Option granted
prior to such termination or issuance of Shares of Restricted Stock previously
credited to a Restricted Stock Account. The termination of this Plan, or any
amendment thereof, shall not affect any Shares previously issued to a
Participant, any Option previously granted under this Plan or any Restricted
Stock previously credited to a Restricted Stock Account.
SECTION 12
GOVERNING LAW
THIS PLAN AND ANY AND ALL STOCK OPTION AGREEMENTS AND AGREEMENTS RELATING
TO THE GRANT OF RESTRICTED STOCK EXECUTED IN CONNECTION WITH THIS PLAN SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
SECTION 13
OTHER
(a) Rights of a Stockholder. The recipient of any award under the Plan,
unless otherwise provided by the Plan, shall have no rights as a stockholder
with respect thereto unless and until shares of Stock are issued to him.
I-12
<PAGE>
(b) Indemnification. No member of the Board of Directors or the Committee,
nor any officer or employee of the Company or a Subsidiary acting on behalf of
the Board of Directors or the Committee, shall be personally liable for any
action, determination or interpretation taken or made in good faith with
respect to the Plan, and all members of the Board of Directors or the
Committee and each and any officer or employee of the Company or any
Subsidiary acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such action,
determination or interpretation.
(c) Nonuniform Determinations. The Committee's determinations under the
Plan (including without limitation determinations of the persons to receive
awards, the form, amount and timing of such awards, the terms and provisions
of such awards and the agreements evidencing same, and the establishment of
values and performance targets) need not be uniform and may be made by it
selectively among persons who receive, or are eligible to receive, awards
under the Plan, whether or not such persons are similarly situated.
(d) Severability. If any of the terms or provisions of this Plan, or awards
made under this Plan, conflict with the requirements of Section 162(m) or
Section 422 of the Code with respect to awards subject to or governed by
Section 162(m) or Section 422 of the Code, then such terms or provisions shall
be deemed inoperative to the extent they so conflict with the requirements of
Section 162(m) or Section 422 of the Code. With respect to an Incentive Stock
Option, if this Plan does not contain any provisions required to be included
herein under Section 422 of the Code (as the same shall be amended from time
to time), such provision shall be deemed to be incorporated herein with the
same force and effect as if such provision had been set out herein.
(e) Effect on Other Plans. Participation in this Plan shall not affect an
employee's eligibility to participate in any other benefit or incentive plan
of the Company or any Subsidiary and any awards made pursuant to this Plan
shall not be used in determining the benefits provided under any other plan of
the Company or any Subsidiary unless specifically provided.
(f) Gender and Number. Words denoting the masculine gender shall include
the feminine gender, and words denoting the feminine gender shall include the
masculine gender. Words in the plural shall include the singular, and the
singular shall include the plural.
(g) Acceleration of Exercisability and Vesting. The Committee shall have
the power to accelerate the time at which an award may first be exercised or
the time during which an award or any part thereof will vest in accordance
with the Plan, notwithstanding the provisions in the award stating the time at
which it may first be exercised or the time during which it will vest.
(h) No Strict Construction. No rule of strict construction shall be applied
against the Company, the Committee, or any other person in the interpretation
of any of the terms of the Plan, any agreement executed in connection with the
Plan, any award granted under the Plan, or any rule, regulation or procedure
established by the Committee.
(i) Successors. This Plan is binding on and will inure to the benefit of
any successor to the Company, whether by way of merger, consolidation,
purchase, or otherwise.
(j) Plan Provisions Control. The terms of the Plan govern all awards
granted under the Plan, and in no event will the Committee have the power to
grant any award under the Plan which is contrary to any of the provisions of
the Plan. In the event any provision of any award granted under the Plan shall
conflict with any term in the Plan, the term in the Plan shall control.
(k) Headings. The headings used in the Plan are for convenience only, do
not constitute a part of the Plan, and shall not be deemed to limit,
characterize, or affect in any way any provisions of the Plan, and all
provisions of the Plan shall be construed as if no captions had been used in
the Plan.
I-13
<PAGE>
EXHIBIT A
Independent Auditors' Report
The Board of Directors
DataVoN, Inc.:
We have audited the accompanying balance sheets of DataVoN, Inc. (formerly
HR Partners, Inc.) as of December 31, 1999 and 1998, and the related
statements of income, stockholder's equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DataVoN, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Dallas, Texas
May 4, 2000
A-1
<PAGE>
DATAVON, INC.
(Formerly HR Partners, Inc.)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 394,740 $159,996
Accounts receivable..................................... 621,535 302,949
Vendor deposit (note 4)................................. 360,000 360,000
Deferred tax asset...................................... 16,947 8,725
Other................................................... 29,889 9,203
---------- --------
Total current assets.................................. 1,423,111 840,873
Certificates of deposit................................... 96,290 --
Property and equipment, net (note 2)...................... 147,845 17,244
---------- --------
$1,667,246 $858,117
========== ========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable........................................ $ 305,375 $ 54,262
Unearned revenue........................................ 493,882 255,576
Accrued liabilities and other........................... 326,108 232,650
Customer deposit (note 4)............................... 360,000 360,000
Notes payable to related parties (note 6)............... -- 51,828
Current installments of obligations under capital leases
(note 5)............................................... 22,432 --
---------- --------
Total current liabilities............................. 1,507,797 954,316
Obligations under capital leases, excluding current
installments (note 5).................................... 61,049 --
---------- --------
Total liabilities..................................... 1,568,846 954,316
Stockholder's equity (deficit):
Common stock, no par value; 1,000,000 shares authorized,
issued and outstanding in 1999 and 1998................ 1,000 1,000
Retained earnings (accumulated deficit)................. 97,400 (97,199)
---------- --------
Total stockholder's equity (deficit).................. 98,400 (96,199)
---------- --------
Commitments and contingencies (notes 2, 5 and 9).......... $1,667,246 $858,117
========== ========
</TABLE>
See accompanying notes to financial statements.
A-2
<PAGE>
DATAVON, INC.
(Formerly HR Partners, Inc.)
Statements of Income
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net service revenue..................................... $8,273,472 $2,226,703
Costs and expenses:
Cost of services...................................... 6,059,472 1,093,756
Selling and marketing................................. 692,525 501,666
General and administrative............................ 673,880 331,134
Depreciation and amortization......................... 16,072 2,099
---------- ----------
Total costs and expenses............................ 7,441,949 1,928,655
---------- ----------
Operating income.................................... 831,523 298,048
Interest income......................................... 33,509 6,792
Interest expense........................................ 21,729 6,295
---------- ----------
Income before state income tax...................... 843,303 298,545
State income tax (note 7)............................... 37,356 13,558
---------- ----------
Net income.......................................... $ 805,947 $ 284,987
========== ==========
Net income per common share--basic and diluted.......... $ 0.81 $ 0.28
========== ==========
Weighted average common shares outstanding--basic and
diluted................................................ 1,000,000 1,000,000
========== ==========
Pro forma data (unaudited) (note 11):
Income taxes.......................................... $ 310,395 $ 111,382
Net income............................................ $ 532,908 $ 187,163
========== ==========
Net income per common share--basic and diluted........ $ 0.01 --
========== ==========
Weighted average common shares outstanding--basic and
diluted................................................ 39,813,855 39,813,855
========== ==========
</TABLE>
See accompanying notes to financial statements.
A-3
<PAGE>
DATAVON, INC.
(Formerly HR Partners, Inc.)
Statements of Stockholder's Equity (Deficit)
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Total
Common stock Retained stockholder's
----------------- earnings equity
Shares Amount (deficit) (deficit)
--------- ------- --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997........ 1,000,000 $ 1,000 $ -- $ 1,000
Net income.......................... -- -- 284,987 284,987
Dividend payments................... -- -- (382,186) (382,186)
--------- ------- --------- ---------
Balance at December 31, 1998........ 1,000,000 1,000 (97,199) (96,199)
Net income.......................... -- -- 805,947 805,947
Dividend payments................... -- -- (611,348) (611,348)
--------- ------- --------- ---------
Balance at December 31, 1999........ 1,000,000 $ 1,000 $ 97,400 $ 98,400
========= ======= ========= =========
</TABLE>
See accompanying notes to financial statements.
A-4
<PAGE>
DATAVON, INC.
(Formerly HR Partners, Inc.)
Statements of Cash Flows
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 805,947 $ 284,987
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 16,072 2,099
Changes in assets and liabilities:
Accounts receivable............................... (318,586) (302,949)
Customer deposit.................................. -- 360,000
Accounts payable and accrued liabilities.......... 344,571 286,912
Unearned revenue.................................. 238,306 255,576
Vendor deposit.................................... -- (360,000)
Deferred tax assets............................... (8,222) (8,725)
Other current assets.............................. (20,686) (9,203)
---------- ---------
Net cash provided by operating activities....... 1,057,402 508,697
---------- ---------
Cash flows from investing activities:
Purchase of certificates of deposit................... (96,290) --
Capital expenditures.................................. (54,367) (19,343)
---------- ---------
Net cash used in investing activities........... (150,657) (19,343)
---------- ---------
Cash flows from financing activities:
Proceeds from notes payable to related parties........ -- 61,728
Payments on notes payable to related parties.......... (51,828) (9,900)
Borrowings on line of credit.......................... 174,250 --
Payments on line of credit............................ (174,250) --
Principal payments on obligations under capital
leases............................................... (8,825) --
Payment of common stock subscription.................. -- 1,000
Payments of dividends................................. (611,348) (382,186)
---------- ---------
Net cash used in financing activities........... (672,001) (329,358)
---------- ---------
Net increase in cash and cash equivalents............... 234,744 159,996
Cash and cash equivalents at beginning of year.......... 159,996 --
---------- ---------
Cash and cash equivalents at end of year................ $ 394,740 $ 159,996
========== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................ $ 4,045 $ 400
========== =========
Cash paid during the year for income taxes............ $ 7,259 $ --
========== =========
Non-cash investing activity--capital leases for property
and equipment.......................................... $ 92,306 $ --
========== =========
</TABLE>
See accompanying notes to financial statements.
A-5
<PAGE>
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(1) Summary of Significant Accounting Policies
(a) Formation, Organization and Description of Business
DataVoN, Inc., a Subchapter S corporation, (the Company) was formed in
November 1997 for the purpose of becoming a provider of high-quality
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. The Company
began operations in January 1998. The Company changed its name from HR
Partners, Inc. to DataVoN, Inc. in January 2000.
The Company currently has its headquarters in Richardson, Texas, and
operates Internet Protocol Terminations in Texas, Colorado, Georgia,
California and Florida.
(b) Cash Equivalents and Certificates of Deposit
For purposes of the statement of cash flows, the Company considers all
demand deposits, time deposits and other highly liquid investments with an
initial maturity of less than ninety days to be cash equivalents.
Certificates of deposit are classified as available-for-sale and are
carried at fair value, which approximates cost.
(c) Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs are
charged against income as incurred, while renewals and major replacements
are capitalized. The cost and related accumulated depreciation of assets
sold or retired are removed from the accounts, and any resulting gain or
loss is reflected in operations. Property and equipment under capital
leases are stated at the present value of minimum lease payments.
The Company provides depreciation on fixed assets using the straight-
line method over the estimated useful lives of the respective assets.
Property and equipment held under capital leases are amortized straight
line over the shorter of the lease term or estimated useful life of the
asset.
(d) Income Taxes
As a Subchapter S corporation, the federal income tax liability incurred
as a result of the Company's earnings are the responsibility of its
stockholder. Therefore, no federal income taxes are provided in the
Company's financial statements. The Company makes distributions to its
stockholder to pay federal income taxes owed by the stockholder related to
the Company's taxable income.
State income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
A-6
<PAGE>
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements--(Continued)
December 31, 1999 and 1998
(e) Revenue Recognition
The Company generally bills for its services based on capacity made
available to its customers, rather than actual usage. Service based on
capacity is generally billed monthly in advance. Revenue from service
billed in advance is deferred and recognized as revenue when earned.
Service based on actual usage is recognized as revenue when earned and is
billed monthly in arrears.
The Company may incur incremental costs to establish new connections
with customers. In these situations, the Company will charge its customers
a set up fee for the new connections. The Company defers these set up fees,
net of incremental set-up costs, and recognizes them ratably as revenue
over the initial service commitment period for the new connection, which is
generally one year.
(f) Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(g) Use of Estimates
Management of the Company has made a number of estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(h) Net Income per Share
Basic and diluted net income per common share was determined by dividing
net income by the weighted average common shares outstanding during the
period. The Company had no potential common shares outstanding during 1999
and 1998.
(i) Fair Value of Financial Instruments
Financial instruments consist principally of cash equivalents,
certificates of deposit, accounts receivable, accounts payable and short-
term notes payable. The estimated fair value of these instruments
(excluding short-term notes payable) approximates their carrying value. The
estimated fair value of short-term notes payable (see note 6) cannot be
determined without incurring excessive costs due to the related party
nature of the instruments.
(j) Concentrations of Credit Risk
The Company's customers are primarily well-established long distance
carriers throughout the United States. Two non-affiliated customers
comprised 70% and 24% of revenues during 1998, and comprised 71% and 20% of
accounts receivable at December 31, 1998. Two non-affiliated customers
comprised 68% and 23% of revenues during 1999, and 36% and 57% of accounts
receivable at December 31, 1999.
A-7
<PAGE>
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements--(Continued)
December 31, 1999 and 1998
(2) Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated
useful
life 1999 1998
--------- --------- ------
<S> <C> <C> <C>
Computer equipment.............................. 3 years $ 23,084 --
Vehicle......................................... 4 years 51,745 --
Office equipment and furniture.................. 5 years 34,683 --
Telecommunications equipment.................... 5 years 56,504 19,343
--------- ------
Total property and equipment................ 166,016 19,343
Less accumulated depreciation................... (18,171) (2,099)
--------- ------
$ 147,845 17,244
========= ======
</TABLE>
On December 29, 1999, the Company entered into an agreement with third
parties for the purchase, installation and maintenance of telecommunications
equipment during 2000 for a total of $614,118 to be paid in installments
beginning February 1, 2000 through February 1, 2001. The Company will record
the telecommunications equipment and related services in its financial
statements as it takes possession of the equipment and the services are
provided.
(3) Related Party Transactions
In 1999 and 1998, the Company entered into a number of transactions with
related parties. These transactions include operating and capital leases with
related parties (see note 5), notes payable to related parties (see note 6)
and services provided by related parties.
The Company paid a related party, M.M. Simpson & Associates, P.C. (M.M.
Simpson), $7,589 and $9,981 in 1999 and 1998, respectively, for legal services
provided to the Company.
The Company also paid M.M. Simpson $29,683 and $8,937 in 1999 and 1998,
respectively, for payroll costs of shared employees.
(4) Deposits
During 1998, a vendor required the Company to pay a $360,000 deposit to the
vendor prior to providing new bandwidth capacity. The Company obtained
deposits for an equivalent amount from its customers prior to establishing new
service using the new bandwidth capacity. The vendor returned the deposit to
the Company in February 2000, and the Company returned the equivalent amount
to its customers.
(5) Leases
(a) Operating Leases
The Company leases office space from M.M. Simpson and an airplane from
EDVon, Inc. The Company also leases an airplane hangar from McKinney
Executive Air. Total rental expense was $36,715 in 1999 and $8,487 in 1998.
Of the total rental expense, $35,515 was paid to related parties in 1999
and $8,487 was paid to related parties in 1998. All leases were entered
into in the normal course of business.
A-8
<PAGE>
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements--(Continued)
December 31, 1999 and 1998
Future minimum lease payments under non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
December 31, 1999 are: 2000--$51,600; 2001--$48,000; 2002--$48,000; 2003--
$48,000 and 2004--$32,000. All but $3,600 of these future minimum lease
payments are due to EDVon.
(b) Capital Leases
In 1999, the Company entered into capital leases with M.M. Simpson and
an agent of Fidelity National Title, both of which are related parties, for
a vehicle, computers and office equipment that expire at various dates
through 2003. At December 31, 1999, the gross amount of property and
equipment and related accumulated amortization recorded under capital
leases were as follows:
<TABLE>
<S> <C>
Vehicle.......................................................... $51,745
Computer equipment............................................... 20,292
Office equipment................................................. 20,269
-------
92,306
Less accumulated amortization.................................... 10,367
-------
$81,939
=======
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
The lease terms for the property under capital leases range from 36 to
48 months. Future minimum lease payments, of which all is due to related
parties, under capital leases as of December 31, 1999 are:
<TABLE>
<S> <C>
2000..................................................... $29,511
2001..................................................... 29,511
2002..................................................... 26,911
2003..................................................... 13,228
-------
Total minimum lease payments................................. 99,161
Less amounts representing interest (at approximately 9.5%)....... 15,680
-------
Present value of minimum capital lease payments.............. 83,481
Less current installments of obligations under capital leases.... 22,432
-------
Obligations under capital leases,
excluding current installments.............................. $61,049
=======
</TABLE>
(6) Line of Credit and Notes Payable
In 1999, the Company entered into a line of credit agreement with a bank.
Interest is payable monthly, with outstanding principal due February 2001. The
total amount available under the line of credit is $100,000, of which none was
borrowed as of December 31, 1999. The interest rate is the bank's prime rate
plus one percent (9.5 percent at December 31, 1999). This line of credit is
guaranteed by the stockholder of the Company and by the stockholder's spouse.
The Company borrowed $15,000 from a related party in February 1998 for a
term of three years. The agreement called for $600 of interest for the first
24 months and four percent interest beginning after 24 months.
A-9
<PAGE>
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements--(Continued)
December 31, 1999 and 1998
At December 31, 1998, $5,100 of the principal amount was outstanding. In 1999,
the Company paid the balance on the note in full.
In 1998, the Company also entered in a note payable agreement with the
stockholder and stockholder's spouse that provides for maximum borrowings of
$60,000 through September, 2000. The agreement calls for no interest if
principal is repaid within twelve months and four percent interest thereafter.
At December 31, 1998, the Company had borrowed $46,728 under this agreement.
All amounts under the agreement were repaid in full during 1999. As of
December 31, 1999, the Company still has the ability to draw funds under this
agreement.
Total interest expense incurred to related parties under notes payable and
capital leases amounted to $3,757 and $400 in 1999 and 1998, respectively.
(7) State Income Tax
Texas franchise tax is equal to the greater of (1) 0.25% of the Company's
net taxable capital and (2) 4.5% of the Company's net taxable earned surplus.
Net taxable earned surplus is based on federal taxable income, subject to
certain adjustments. The total computed Texas franchise tax is an income tax
to the extent that the tax exceeds the capital-based tax in a given year.
State income tax expense differed from the amounts computed by applying the
Texas income tax rate of 4.5% to income before state income tax as a result of
the following:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Computed "expected" state income tax expense........... $ 37,622 $13,435
Increase (reduction) in income taxes resulting from:
Franchise tax based on net taxable capital........... (425) --
Other................................................ 159 123
-------- -------
$ 37,356 $13,558
======== =======
</TABLE>
The temporary difference that gave rise to substantially all of the
deferred tax asset at December 31, 1999 and 1998 results from the use of cash
basis accounting for income tax purposes and accrual basis accounting for
financial reporting purposes.
In assessing the realizability of the deferred tax asset, management
considers whether it is more likely than not that some portion or all of the
deferred tax asset will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences at December
31, 1999. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income are
reduced.
(8) Segment Information
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. Operating
A-10
<PAGE>
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements--(Continued)
December 31, 1999 and 1998
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision maker, or decision-making group, in deciding how to
allocate resources and assess performance.
The Company's chief operating decision-maker, as defined under SFAS No.
131, is the chief executive officer. To date, the Company has conducted its
operations and managed its business as one segment, telecommunications
services. As a result, the financial information disclosed herein represents
all of the material financial information related to the Company's principal
operating segment.
(9) Contingencies
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 December 31, 1999.
(10) Subsequent Event
In March 2000, the Company adopted a stock option plan. Under the plan, the
Company may grant to officers, directors, consultants and key employees
options to purchase shares of the Company's common stock for an exercise price
of not less than 85% of the fair value of the common stock at the date of
grant. In March 2000, the Company increased its authorized common stock to
1,100,000 shares, and granted options to purchase 63,356 shares of the
Company's common stock for an exercise price of $19.50 per share.
(11) Events Subsequent to Date of Auditors' Report (Unaudited)
On June 9, 2000, the Company merged (the Merger) with Zydeco Energy, Inc.
(Zydeco). Shareholders of the Company received shares of Zydeco equal to a
majority of the shares of Zydeco outstanding after the transaction.
Accordingly, the business combination will be accounted for as a reverse
acquisition of Zydeco by the Company using the purchase method. Accordingly,
the historical financial statements of the Company prior to the Merger will
become the financial statements of the registrant, and the results of
operations of Zydeco will be combined with the Company concurrent with the
Merger. The purchase price is approximately $28 million, a substantial portion
of which is goodwill that will be amortized to expense over a five year
period.
In connection with the Merger, the Company merged into a C corporation. The
unaudited pro forma income statement data for the years ended December 31,
1999 and 1998 are based upon the 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. In connection with the Merger, the Company's
stockholders 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.
Pro forma weighted average common shares outstanding during the periods
presented have been adjusted based on the share conversion ratio used in the
Merger. The preferred shares are included in proforma weighted average common
shares outstanding during the periods presented for both basic and diluted net
income per share on an as if converted basis since the Company's shareholders
currently have the ability to authorize sufficient additional common shares of
Zydeco and the shareholder authorization is essentially a formality.
A-11
<PAGE>
EXHIBIT B
ZYDECO ENERGY, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................ B-2
Consolidated Statements of Operations.................................. B-3
Consolidated Statements of Cash Flows.................................. B-4
Notes to Consolidated Financial Statements............................. B-5
</TABLE>
B-1
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
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....... 42,766 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
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
B-2
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 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
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
B-3
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
2000 1999
----------- ---------
<S> <C> <C>
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 capitalized 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 --
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-4
<PAGE>
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 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.
B-5
<PAGE>
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.
<TABLE>
<CAPTION>
For the
nine months ended
September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Pro forma revenues................................ $ 8,512,409 $ 5,788,201
=========== ===========
Goodwill amortization............................. $ 3,986,671 $ 3,986,671
=========== ===========
Pro forma net loss................................ $(4,521,091) $(4,896,873)
=========== ===========
Pro forma diluted loss per share.................. $ (0.09) $ (0.09)
=========== ===========
</TABLE>
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
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.
B-6
<PAGE>
The following is a summary of total assets by reportable segment:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
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
=========== =========
</TABLE>
(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 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 line of
credit 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.
B-7
<PAGE>
EXHIBIT C
ZYDECO ENERGY, INC. AND SUBSIDIARIES
Introduction to Unaudited Pro Forma Statements of Operations
On June 9, 2000, DataVoN merged with Zydeco. Under the terms of the merger,
each outstanding share of DataVoN common stock was converted into 39.81385
shares of Zydeco common stock. A portion of DataVoN common stock has initially
been converted into shares of Zydeco convertible preferred stock. This
preferred stock has voting rights equivalent to the number of common shares
into which it is convertible and will automatically convert into common shares
upon shareholder approval to increase the number of authorized Zydeco common
shares.
Zydeco is the surviving legal entity in the merger. However, for accounting
purposes, DataVoN is deemed to be the acquiror and, accordingly, the merger
has been accounted for as a "reverse acquisition" of Zydeco under the purchase
method of accounting. Under this method of accounting, the combined company's
historical results of operation for periods prior to the merger are DataVoN's
historical results. On the date of the merger, the assets and liabilities of
Zydeco were recorded at their estimated fair values, with the preponderance of
the purchase price allocated to goodwill. A pro forma balance sheet is not
provided as the merger is included in the historical balance sheet of the
combined company as of September 30, 2000.
The pro forma adjustments are based on preliminary estimates. The effect of
the actual allocation of the purchase price may differ from that reflected in
the unaudited pro forma statements of operations upon completion of the
analysis of the fair values of the assets acquired and liabilities assumed.
The following unaudited pro forma statements of operations give effect to
the merger of Zydeco and DataVoN as if the transaction had occurred on January
1, 1999. Such information is derived from, and should be read in conjunction
with, the separate historical financial statements of Zydeco and DataVoN
included herein. The unaudited pro forma statements of operations do not
purport to be indicative of the results of operations which actually would
have occurred if the merger had been consummated at January 1, 1999, or of the
results of operations which may be obtained in the future. The company has a
significant amount of goodwill that will be 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 results of operations.
C-1
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
Unaudited Pro Forma Statement of Operations
For the nine-month period ended September 30, 2000
<TABLE>
<CAPTION>
Consolidated Zydeco Pro forma
historical (a) adjustments Pro forma
------------ -------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net service revenue... $ 8,372,795 -- -- 8,372,795
Other revenue......... 82,669 56,945 -- 139,614
----------- -------- ---------- ----------
Total revenues.... 8,455,464 56,945 -- 8,512,409
Operating expenses:
Exploration expenses:
Geological and
geophysical........ -- (41) -- (41)
Dry hole and other
costs.............. -- 7,231 -- 7,231
Production costs...... -- 6,377 -- 6,377
Cost of services........ 4,808,771 -- -- 4,808,771
Selling and marketing... 68,398 -- -- 68,398
Research and
development............ -- 675 -- 675
General and
administrative......... 1,683,183 245,919 -- 1,929,102
Amortization of unearned
stock compensation..... 1,652,042 -- -- 1,652,042
Amortization of
goodwill............... 1,649,280 -- 2,337,390 (b) 3,986,670
Depreciation, depletion
and amortization....... 110,010 29,540 -- 139,550
Impairment of oil and
gas properties......... -- 584,754 -- 584,754
----------- -------- ---------- ----------
Total operating
expenses......... 9,971,684 874,455 2,337,390 13,183,529
----------- -------- ---------- ----------
Operating loss.......... (1,516,220) (817,510) (2,337,390) (4,671,120)
Loss on disposal of
fixed asset............ 3,011 -- -- 3,011
Interest income......... 59,064 23,259 -- 82,323
Interest expense........ 24,843 -- -- 24,843
----------- -------- ---------- ----------
Loss before income
taxes.................. (1,485,010) (794,251) (2,337,390) (4,616,651)
Income tax benefit...... (739,529) -- 643,969 (c) (95,560)
----------- -------- ---------- ----------
Net loss................ $ (745,481) (794,251) (2,981,359) (4,521,091)
=========== ======== ========== ==========
Net loss per common
share:
Basic and diluted..... $ (0.02) (0.09)
=========== ==========
Weighted average common
shares outstanding:
Basic and diluted..... 44,024,522 49,875,965 (d)
=========== ==========
</TABLE>
See accompanying note to unaudited pro forma statements of operations.
C-2
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
Unaudited Pro Forma Statement of Operations
For the year ended December 31, 1999
<TABLE>
<CAPTION>
Pro forma
DataVoN Zydeco adjustments Pro forma
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net service revenue..... $8,273,472 -- -- 8,273,472
Oil and gas sales....... -- 187,366 -- 187,366
Gain on sales of
properties............. -- 136,130 -- 136,130
Other................... -- 14,625 -- 14,625
---------- ---------- ---------- ----------
Total revenues...... 8,273,472 338,121 -- 8,611,593
Operating expenses:
Exploration expenses:
Geological and
geophysical.......... -- 170,885 -- 170,885
Impairment of unproved
properties........... -- 750,000 -- 750,000
Dry hole and other
costs................ -- 1,369,053 -- 1,369,053
Production costs........ -- 18,453 -- 18,453
Cost of services........ 6,059,472 -- -- 6,059,472
Impairment of investment
in Wavefield
Imaging Technology..... -- 200,000 -- 200,000
Selling and marketing... 692,525 -- -- 692,525
Research and
development............ -- 157,909 -- 157,909
General and
administrative......... 673,880 679,003 -- 1,352,883
Depreciation, depletion
and amortization....... 16,072 316,705 5,314,696 (b) 5,647,473
---------- ---------- ---------- ----------
Total operating
expenses........... 7,441,949 3,662,008 5,314,696 16,418,653
---------- ---------- ---------- ----------
Operating income (loss)... 831,523 (3,323,887) (5,314,696) (7,807,060)
Interest income........... 33,509 49,485 -- 82,994
Interest expense.......... 21,729 124 -- 21,853
---------- ---------- ---------- ----------
Income (loss) before
income taxes and
extraordinary item....... 843,303 (3,274,526) (5,314,696) (7,745,919)
Income taxes.............. 37,356 -- -- (c) 37,356
---------- ---------- ---------- ----------
Income (loss) before
extraordinary item....... $ 805,947 (3,274,526) (5,314,696) (7,783,275)
========== ========== ========== ==========
Income (loss) before
extraordinary item per
common share--basic and
diluted.................. $ 0.81 (0.32) (0.16)
========== ========== ==========
Weighted average common
shares outstanding--basic
and diluted.............. 1,000,000 10,345,096 50,158,951 (d)
========== ========== ==========
</TABLE>
See accompanying note to unaudited pro forma statements of operations.
C-3
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
Note to Unaudited Pro Forma Statements of Operations
The following summarizes the unaudited pro forma statements of operations
adjustments:
(a) Represents Zydeco's results of operations for the period from January
1, 2000 to the merger date.
(b) This adjustment records the effect on depreciation and amortization of
the purchase method of accounting. The goodwill is being amortized over
five years.
(c) This adjustment reverses the deferred tax benefit recognized by the
Company when the merger occurred and DataVoN converted from an S
corporation to a C corporation. No further pro forma tax effects are
included because of the book loss that results after the add-back of
nondeductible goodwill amortization.
(d) Weighted average shares outstanding on a pro forma basis are based on
the exchange ratio of 39.81385 shares of Zydeco common stock for each
share of DataVoN common stock outstanding. The shares of Zydeco
convertible preferred stock are included in both the basic and diluted
loss per share computations based on the 7,190,000 shares of Zydeco
common shares the preferred stock is automatically converted into when
sufficient additional common shares are authorized by the Company's
shareholders. The inclusion is based on the fact that the former
DataVoN shareholders currently have the ability to authorize sufficient
additional common shares of Zydeco and the stockholders' authorization
is essentially a formality.
C-4
<PAGE>
EXHIBIT D
ZYDECO ENERGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----------
<S> <C>
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS.......................... D-2 and D-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and 1998..... D-4
Consolidated Statements of Operations for the Two Years Ended
December 31, 1999............................................... D-5
Consolidated Statements of Stockholders' Equity for the Two Years
Ended December 31, 1999......................................... D-6
Consolidated Statements of Cash Flows for the Two Years Ended
December 31, 1999............................................... D-7
Notes to Consolidated Financial Statements....................... D-8
</TABLE>
D-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Zydeco Energy, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Zydeco Energy,
Inc. and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Zydeco Energy, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Hein + Associates LLP
Dallas, Texas
March 8, 2000
D-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of Zydeco Energy Inc.:
We have audited the accompanying consolidated balance sheet of Zydeco Energy,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Zydeco Energy, Inc. and
subsidiaries as of December 31, 1998 and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has substantially used most of its capital resources which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statement do not include any adjustments relating to the
recoverability or classification of asset carrying amounts or the amount or
classification of liabilities that might result should the Company be unable to
continue as a going concern.
ARTHUR ANDERSEN LLP
Houston, Texas
March 21, 1999
D-3
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents.......................... $ 500,876 $ 1,912,970
Oil and Gas Revenue Receivables.................... 26,020 47,916
Prepaid Expenses................................... 9,494 50,235
Other Current Assets............................... 75,777 141,664
----------- -----------
Total Current Assets............................. 612,167 2,152,785
Oil and Gas Properties, Using Successful Efforts
Method of Accounting
Proved Properties.................................. 334,972 334,972
Unproved Properties................................ 1,643,324 2,796,471
Equipment and Software, at Cost...................... 41,896 2,331,361
----------- -----------
2,020,192 5,462,804
Less: Accumulated Depreciation, Depletion,
Amortization and Impairment......................... (1,118,791) (2,167,489)
----------- -----------
901,401 3,295,315
Investment in Wavefield Imaging Technology, net...... 671,206 928,229
Common Stock Investment.............................. 69,244 --
Operating Bond and Other Assets...................... 300,994 313,329
----------- -----------
TOTAL ASSETS......................................... $ 2,555,012 $ 6,689,658
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable................................... $ 225,044 $ 1,181,387
Accrued Liabilities................................ 28,401 330,041
----------- -----------
Total Current Liabilities........................ 253,445 1,511,428
Commitments and Contingencies (Note 3)
Stockholders' Equity
Common Stock, Par Value $.001 Per Share; 50,000,000
Shares Authorized; 11,338,351 Shares Issued;
10,069,096 and 10,357,096 Shares Outstanding,
Respectively...................................... 11,338 11,338
Additional Paid-In Capital......................... 24,531,668 24,531,668
Unrealized Loss on Stock Investment................ (16,256) --
Accumulated Deficit................................ (21,763,842) (18,928,524)
Less Treasury Stock, at Cost; 1,269,255 and
981,255Shares, Respectively....................... (461,341) (436,252)
----------- -----------
Total Stockholders' Equity....................... 2,301,567 5,178,230
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $ 2,555,012 $ 6,689,658
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-4
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December
31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues
Oil and Gas Sales.................................. $ 187,366 $ 389,798
Gain/(Loss) on Sales of Properties................. 136,130 346,321
Other.............................................. 14,625 47,382
----------- -----------
338,121 783,501
----------- -----------
Expenses
Exploration Expenses
Geological and Geophysical....................... 170,885 3,561,184
Impairment of Unproved Properties................ 750,000 3,000,000
Dry Hole and Other Costs......................... 1,369,053 148,285
Production Costs................................... 18,453 17,170
Research and Development Costs..................... 157,909 409,240
Impairment of Investment in Wavefield Imaging
Technology........................................ 200,000 --
Depreciation, Depletion, and Amortization.......... 316,705 569,020
General and Administrative......................... 679,003 2,987,570
----------- -----------
3,662,008 10,692,469
----------- -----------
Operating Loss....................................... (3,323,887) (9,908,968)
----------- -----------
Other Income (Expense)
Interest Income.................................... 49,485 297,352
Interest Expense................................... (124) (122)
----------- -----------
49,361 297,230
----------- -----------
Loss Before Extraordinary Item....................... (3,274,526) (9,611,738)
Extraordinary Gain from Reduction of Liabilities..... 439,208 --
----------- -----------
Net Loss............................................. $(2,835,318) $(9,611,738)
=========== ===========
Per Common Share--
Weighted Average Number of Common Shares
Outstanding (Basic and Diluted)................... 10,345,096 10,365,106
=========== ===========
Net Loss Per Common Share (Basic and Diluted)--
Net Loss Before Extraordinary Item................. $ (0.32) $ (0.93)
Extraordinary Item................................. $ (0.04) $ --
Net Loss........................................... $ (0.28) $ (0.93)
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-5
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 and 1998
---------------------------------------------------------------------------------
Unrealized
Common Stock Additional Loss on Total
------------------- Paid-in Stock Accumulated Treasury Stockholders'
Shares Amount Capital Investment Deficit Stock Equity
---------- ------- ----------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 10,537,096 11,318 24,499,688 -- (9,316,786) (7,252) 15,186,968
Net Loss................ -- -- -- -- (9,611,738) -- (9,611,738)
Options Exercised for
Common Stock........... 20,000 20 31,980 -- -- -- 32,000
Acquisition of Treasury
Stock.................. (200,000) -- -- -- -- (429,000) (429,000)
---------- ------- ----------- -------- ------------ --------- ----------
Balance at December 31,
1998................... 10,357,096 $11,338 $24,531,668 -- $(18,928,524) $(436,252) $5,178,230
Net Loss................ -- -- -- -- (2,835,318) -- (2,835,318)
Unrealized Loss on
Investment............. -- -- -- (16,256) -- -- (16,256)
Acquisition of Treasury
Stock.................. (288,000) -- -- -- -- (25,089) (25,089)
---------- ------- ----------- -------- ------------ --------- ----------
Balance at December 31,
1999................... 10,069,096 $11,338 $24,531,668 $(16,256) $(21,763,842) $(461,341) $2,301,567
========== ======= =========== ======== ============ ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-6
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December
31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss............................................ $(2,835,318) $(9,611,738)
Adjustments to Reconcile Net Loss to Net Cash Used
in Operating Activities:
Depreciation, Depletion, and Amortization......... 316,705 569,020
Impairment of Unproved Leases..................... 750,000 3,000,000
Impairment of Investment in Wavefield Imaging
Technology....................................... 200,000 --
(Gain)/Loss on Sales of Properties................ (136,130) (346,321)
Exploration and Dry Hole Costs.................... 2,119,053 3,709,469
Extraordinary Gain from Reduction of Liabilities.. (439,208) --
Changes in Operating Assets and Liabilities Decrease
in Oil and Gas Revenue Receivables................. 21,896 104,041
(Increase) Decrease in Other Current Assets....... 65,888 (67,003)
Increase (Decrease) in Accounts Payable........... (365,619) 790,568
Decrease in Accrued Liabilities................... (299,482) 39,978
Other............................................. 27,440 (6,721)
----------- -----------
Net Cash Used in Operating Activities............... (574,775) (1,818,707)
----------- -----------
Cash Flows from Investing Activities:
Additions to Oil and Gas Properties............... (33,836) (5,753,010)
Exploration and Dry Hole Costs.................... (1,404,009) (2,557,121)
Proceeds from the Sale of Properties.............. 686,499 365,944
Net Change in Exploration Obligation.............. 6,597 280,741
Investment in Securities.......................... (85,500) --
Purchases of Equipment and Software............... (4,823) (418,313)
Other............................................. 25,000 12,972
----------- -----------
Net Cash Used in Investing Activities............. (810,072) (8,068,787)
----------- -----------
Cash Flows from Financing Activities:
Treasury Stock Purchase........................... (25,089) (429,000)
Other............................................. (2,158) 29,158
----------- -----------
Net Cash Used in Financing Activities............. (27,247) (399,842)
----------- -----------
Net (Decrease) in Cash and Cash Equivalents......... (1,412,094) (10,287,336)
Cash and Cash Equivalents at Beginning of Year...... 1,912,970 12,200,306
----------- -----------
Cash and Cash Equivalents at End of Year............ $ 500,876 $ 1,912,970
=========== ===========
Cash Paid/(Received) during the Year for:
Interest.......................................... $ 124 $ 122
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-7
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Organization and Summary of Significant Accounting Policies.
Organization. Zydeco Energy, Inc. was incorporated in Delaware in June
1993, as a "special purpose acquisition corporation" under the name TN
Energy Services Acquisition Corp. ("TN Energy"), for the purpose of raising
funds and acquiring an operating business engaged in the energy services
industry. Other than its efforts to acquire an energy services business, TN
Energy did not engage in any business activities prior to December 1995. On
December 20, 1995, TN Energy acquired all the outstanding common stock and
preferred stock of Zydeco Exploration, Inc. ("Zydeco") pursuant to a merger
(the "TN Acquisition") and changed its name to Zydeco Energy, Inc. As used
herein, unless the context indicates otherwise, the term "Company" refers
to Zydeco Energy, Inc., and its wholly-owned subsidiaries, Zydeco
Exploration, Inc. and Wavefield Image, Inc. Eastern Energy, Inc., a wholly-
owned subsidiary was dissolved in 1999.
The Company has been engaged in the identification of drilling prospects,
acquiring leases, drilling and producing reserves from those properties
utilizing advanced 3D seismic technology. The Company's operations have
been curtailed in 1999, as described in Note 2.
Significant Accounting Policies
Basis of Presentation. For accounting purposes, the TN Acquisition has been
treated as a recapitalization of Zydeco with Zydeco as the acquiror
(reverse acquisition). The consolidated financial statements include the
accounts of the Company, and its wholly-owned subsidiaries, Zydeco
Exploration, Inc., Wavefield Image, Inc. (since July 1, 1997) and Eastern
Energy, Inc. (since March 4, 1998). However, Eastern Energy, Inc. was
dissolved effective June 25, 1999. (see "Note 4--Acquisitions"). All
significant intercompany transactions have been eliminated in
consolidation.
In connection with the Company's exploration agreements (See "Note 3--
Exploration Agreements"), advances to the Company are treated as
exploration obligations and expenditures made by the Company pursuant
to the exploration agreement are charged against the related
exploration obligation. No costs or expenses incurred pursuant to the
exploration agreement is recognized by the Company until the Company
begins sharing in such costs.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with original maturities of three months or less to
be cash equivalents.
Oil and Gas Properties. The Company accounts for its oil and gas
exploration and production activities using the successful efforts method
of accounting. Under this method, acquisition costs for proved and unproved
properties are capitalized when incurred. Exploration costs, including
geological and geophysical costs and the costs of carrying and retaining
unproved properties, are expensed. Exploratory drilling costs are initially
capitalized, but charged to expense if and when the well is determined not
to have found proved reserves. Costs of productive wells, developmental dry
holes and productive leases are capitalized and amortized on a property-by-
property basis using the units-of-production method. The estimated costs of
future plugging, abandonment, restoration and dismantlement are considered
as a component of the calculation of depreciation, depletion, and
amortization. Unproved properties with significant acquisition costs are
assessed periodically, as conditions warrant, on a property-by-property
basis and any impairment in value is charged to expense. The Company
recorded impairment allowances in 1999 and 1998 as described in Note 2.
Equipment. Hardware and software associated with the 3D seismic technology
equipment, office furniture and equipment, and leasehold improvements are
recorded at cost, and the related depreciation and amortization is
calculated on a straight-line basis over the shorter of the estimated
useful lives of the assets, which range from 2 to 7 years, or the lease
period.
D-8
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long-Lived Assets. In accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of", management reviews its long-lived assets (i.e., oil and gas
properties and Investment in Wavefield Imaging Technology.) whenever events
or changes in circumstances indicate that the carrying amounts of such
assets may not be recoverable. If the carrying amounts of any of the
Company's long-lived assets are greater than their projected undiscounted
future cash flows, an impairment loss to adjust such assets to fair value
is recognized. The determination of future cash flows may be based on a
variety of items including, but not limited to, current proved oil and gas
reserve estimates and current oil and gas prices and costs. Management's
estimates of fair value may also reflect a discount factor on future cash
flows consistent with the rate used by the Company in other fair-value
determinations. Through December 31, 1999, an impairment allowance of
$200,000 has been recognized on the Company's investment in Wavefield
Imaging Technology.
Income Taxes. The Company follows SFAS No. 109 which requires the asset and
liability approach to accounting for income taxes. Under this approach,
deferred income taxes are determined based upon differences between the
financial statement and tax basis of the Company's assets and liabilities
and operating loss carryforwards using enacted tax rates in effect for the
years in which the differences are expected to reverse. Deferred tax assets
are recognized if it is more likely than not that the future tax benefit
will be realized.
Oil and Gas Revenues. Oil and gas revenues are recorded using the
entitlements method of accounting, whereby the Company recognizes oil and
gas revenues as its entitled share is produced. Individually and in the
aggregate, the Company has no material gas imbalances as of December 31,
1999 and 1998.
Earnings Per Share. Basic earnings per common share is based on the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share is computed based on the weighted
average shares of common stock plus the assumed issuance of common stock
for all potentially dilutive securities. The Company's common stock
options, common stock warrants, and convertible preferred stock are
potential common shares but were anti-dilutive in all periods presented.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Significant estimates with regard to these financial
statements include the estimate of proved oil and gas reserve volumes and
the related discounted future net cash flows therefrom. See "Note 11--Oil
and Gas Producing Activities".
Reclassifications. Certain reclassifications of prior period amounts have
been made to conform with current year presentation.
2.Financial Results and Liquidity
The Company has incurred net losses of $2,835,318 and $9,611,738 in 1999
and 1998, respectively. The Company is principally engaged in one industry
and geographic segment, oil and gas exploration and production, and until
recently had concentrated its exploration efforts in an area of the
Louisiana Transition Zone, known as the West Cameron Seismic Project
("Project"). From the inception of the Project in 1996 until late 1998, the
Company and Cheniere expended approximately $21.6 million pursuant to the
terms of that Project's agreement. In addition, during 1998 the Company
expended approximately $5.8 million on
D-9
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
unproved property costs, almost all of which were on prospects within the
Project. See Note 3--"Cheniere Exploration Agreement and Litigation" for a
description of that activity. The source of funding for these activities
has come from funds generated from public and private equity offerings,
cash flow from the Company's operations, and cash payments made to it under
the Cheniere Exploration Agreement. Sources of funds include approximately
$24.1 million from the sale of securities in 1993, 1994, 1995 and 1997, and
$16.4 million provided under the Cheniere Exploration Agreement.
From 1998 until early 1999, the Company believed that its near term cash
needs would be satisfied from a combination of available cash, sales of
interests in Project prospects, sale(s) of interests in the Project itself,
oil and gas production and payments by Cheniere mandated by the arbitration
panel convened to rule in the Cheniere litigation matters. However, due
mostly to potential buyers' concerns over uncertainties of ownership
interests before the arbitration ruling and market conditions thereafter,
the Company did not generate significant sales of Project prospects and,
therefore, did not produce sufficient levels of cash inflows during that
period. From the last half of 1998 and well into 1999, market conditions
for selling interests in prospects had significantly deteriorated.
Furthermore, the arbitration ruling did not mandate any immediate cash
payments from Cheniere to the Company.
Subsequent to the arbitration ruling in December 1998, the Company and
Cheniere informally agreed to the resolution of certain matters in order
that they could recommence their prospect marketing activities. However,
market conditions had considerably deteriorated to the point that a
significantly fewer number of industry participants were actively acquiring
oil and gas prospect interests. Thus, the market for selling prospects was
very difficult, and, as a result, proceeds from the sales of interests in
prospects during the 1999 first half were insufficient to sustain the
Company's previous levels of operations and provide an adequate source of
funds to finance the Company's share of oil and gas lease rentals due in
mid 1999. The Company relinquished its share of a majority of its leases
due to such non-payment of delay rentals. The Company recorded an
impairment of $3,000,000 as of December 31, 1998, expensed approximately
$722,000 due to the write off of leases in 1999 and recorded an additional
impairment amounting to $750,000 as of December 31, 1999.
Due to the adverse factors presented above, the Company has had to rely
principally on available cash to continue its operations. However, in order
to conserve its remaining cash resources, the Company instituted certain
actions, including, but not limited to, employee terminations, reductions
in vendor obligations and sales of non-essential furniture, office
equipment and computer equipment. By restructuring its operations, the
Company altered its business strategy. It more narrowly focused its
exploration activities almost entirely on the marketing of interests in the
Project itself. In addition, it sought merger partners to utilize its cash
and public market and attempted to market its Wavefield Imaging Technology.
Should the Company be successful in selling interests in its Project in the
near term, sufficient capital may need to be raised to quickly expand its
operations. In addition, the Company will continue to seek other sources of
capital including, but not limited to, merger partners and the issuance of
equity securities. There can be no assurance that the Company will be
successful in selling interests in its Project, issuing equity securities,
obtaining any other form of financing, merge the Company or market its
Wavefield Imaging Technology. However, management believes the Company has
sufficient working capital to fund the Company's routine activities through
the year 2000.
3.Cheniere Exploration Agreement and Litigation.
In April 1996, the Company executed an Exploration Agreement (the "Cheniere
Agreement") with Cheniere Energy Operating Co., Inc., a wholly owned
subsidiary of Cheniere Energy, Inc. and formerly known as FX Energy, Inc.,
(collectively "Cheniere") covering an area of land and waters in western
D-10
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cameron Parish, Louisiana ("Project"). The Cheniere Agreement, as amended,
provided for Cheniere to fund the first $13.5 million of costs plus 50% of
costs in excess of $13.5 million of the Project. The costs covered by the
Cheniere Agreement included, but were not limited to, 3D seismic
acquisition costs, including the purchase of seismic rights or lease
options on the related onshore acreage of the Project, the purchase of
other 3D seismic data, and processing of seismic data over the Project
area.
On April 17, 1998, Zydeco Exploration, Inc. filed a petition with the
American Arbitration Association for arbitration in order to resolve
certain disputes that arose with Cheniere. The arbitration claim sought to
resolve differences over Cheniere's funding obligations, the parties'
ownership in various leases and prospects, the scope of pre-drilling
activities that Cheniere can conduct within the Project area, the
dissemination by Cheniere of confidential seismic data covering the Project
area, and a variety of related issues. Cheniere filed a counterclaim in the
arbitration action, and the pleadings were amended to include Zydeco
Energy, Inc. as well as Zydeco Exploration, Inc (collectively "Zydeco").
The parties sought conflicting declaratory and injunctive relief and
damages from each other. In addition, on April 22, 1998, Zydeco initiated a
civil suit in state district court in Harris County, Texas against two
individuals who are parties to confidentiality agreements with Zydeco and
who are employees of Cheniere. Through this litigation, Zydeco sought and
obtained a Temporary Restraining Order on April 22, 1998, restraining the
individuals from breaching the terms of their confidentiality agreements
with Zydeco. Cheniere intervened in the litigation on April 27, 1998. On
May 4, 1998, Zydeco, Cheniere and the two individuals agreed to the entry
of an Agreed Temporary Injunction. The agreed Temporary Injunction expired
on June 15, 1998, and the dispute, which led to the filing of the civil
suit, was included in the arbitration action by agreement of the parties.
On December 9, 1998 the three-member arbitration panel issued its decision
in the arbitration proceedings brought by Zydeco against Cheniere. In its
ruling, the panel confirmed Zydeco's position as program manager but
recognized Cheniere's independent right to identify prospects and acquire
leases in the West Cameron Seismic Project area. The arbitration panel
directed that Cheniere has the right to participate with a 50% working
interest in most of the leases acquired by Zydeco or in prospects
designated by Zydeco. Cheniere, however, must exercise its right of
participation and pay its share of such costs within a thirty-day period
following Zydeco's formal notice of prospect designation. For each
prospect, Zydeco has the sole right to undertake the management and control
of all prospect development for a reasonable period not to exceed 90 days
following such formal notice. The arbitration panel also ruled that project
seismic costs generally incurred after December 31, 1997, are not
reimbursable to Zydeco as seismic costs. The Company believed that such
costs, either in part or in whole, should be recouped from Cheniere as
prospect costs. In addition, if certain criteria are met, then sale
proceeds from certain marketing activities would be paid to Cheniere until
Cheniere recoups $13.5 million of its investment in the project. Zydeco and
Cheniere would share any such sales above that amount equally. Neither
party received any damage awards or recovery of legal costs.
As a result of the arbitration panel's decision, Zydeco and Cheniere
informally agreed to share responsibilities and ownership for certain
activities incurred in the maintenance, marketing and sale of prospects
generated and assembled by the parties. Except for the costs of one
prospect and certain other activities, neither party would seek
reimbursement from the other for seismic and prospect costs generally
incurred prior to the arbitration ruling. After considering the arbitration
panel's ruling and the two parties' tentative agreement, Cheniere's and
Zydeco's share of third party and processing costs incurred pursuant to the
terms of the Cheniere Agreement was approximately $16,423,398 and
$5,216,773, respectively, from inception to December 31, 1998. Project
seismic costs amounting to $1,146,688 that previously had been attributable
to Cheniere were charged to exploration expense in 1998. In addition, the
Company paid approximately $5,753,010 for unproved leases during 1998.
D-11
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4.Acquisitions.
On July 1, 1997, the Company acquired all of the outstanding capital stock
of Wavefield Image, Inc. ("Wavefield"), a privately held company that
develops and licenses a seismic data processing technique known as
Wavefield Imaging Technology. This technology and associated patent are the
principal asset of Wavefield. The Company is amortizing this investment
over approximately 19 years (the life of the patent). Amortization expense
for 1999 and 1998 was $46,389 in each year. In addition, the Company
recorded an impairment allowance of $200,000 to its Investment in Wavefield
Imaging Technology during 1999.
5.Income Taxes.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred Tax Liability........................... $ -- $ --
=========== ===========
Deferred Tax Assets
Carryforwards.................................. $ 6,266,427 $ 2,522,586
Book/Tax Differences in Basis of Oil and Gas
Assets........................................ 816,276 3,881,934
Less Valuation Allowance....................... (7,082,703) (6,404,520)
----------- -----------
Total Deferred Tax Assets........................ $ -- $ --
=========== ===========
Net Deferred Tax Liability....................... $ -- $ --
=========== ===========
</TABLE>
As of December 31, 1999, the Company had a net operating loss carryforward
for federal income tax purposes of approximately $18,400,000, which will be
available to reduce future taxable income. The full realization of the tax
benefit associated with the carryforward depends predominantly upon the
Company's ability to generate taxable income during the carryforward
period. Because of the current uncertainty of realizing such tax asset in
the future, a valuation allowance has been recorded equal to the amount of
the net deferred tax asset. The net operating loss carryforward, if not
utilized, will begin to expire in the year 2009. In addition, the company
has available $365,000 of statutory depletion as carryforward to apply
against future taxable income.
6.Operating Leases.
The Company incurred rental expense of $50,676 and $247,164 in 1999 and
1998, respectively, in connection with its office leases. See "Note 8--
Related-Party Transactions". At December 31, 1999, future minimum lease
payments for leases having initial or remaining noncancelable lease terms
in excess of one year were not material.
7.Common Stock, Convertible Preferred Stock, and Warrants.
Common Stock Offering. On August 26, 1997, the Company completed an
offering of 3,680,000 shares of Common Stock and warrants to purchase
320,000 shares of Common Stock (the "Offering"). Proceeds from the Offering
were $14,056,189, net of Offering expenses of $1,583,911.
In connection with the Offering, the Company sold to the Underwriters, for
nominal consideration, warrants to purchase 320,000 shares of Common Stock
from the Company ("1997 Underwriter Warrants"). The 1997 Underwriter
Warrants are exercisable, in whole or in part, at an exercise price of
$5.10 (120% of the
D-12
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Offering price) at any time during the four-year period commencing August
26, 1998. The warrant agreement pursuant to which the 1997 Underwriter
Warrants were issued contains provisions providing for adjustment of the
exercise price and the number and type of securities issuable upon exercise
of the 1997 Underwriter Warrants should any one or more of certain
specified events occur. The 1997 Underwriter Warrants grant to the holders
demand and piggy-back registration rights for the securities issuable upon
exercise of the 1997 Underwriter Warrants.
Placement Warrants. In connection with a 1994 Private Placement Zydeco
issued 72,268 Common Stock purchase warrants ("Placement Warrants") to the
participating placement agents, each of which entitled the holder to
purchase one share of Common Stock at an exercise price of $1.60 per share
at any time prior to their expiration on December 2, 1999. These warrants
were subject to a cashless exercise provision (i.e., the exercise price may
be satisfied by canceling a number of unexercised warrants valued by the
difference between the exercise price and the market value of the shares).
The initial value of such warrants issued in connection with the private
placement was immaterial. In 1997 and 1996, Placement Warrants were
exercised for 1,888 and 29,592 shares of Common Stock, respectively, net of
573 and 9,575 warrant shares, respectively, tendered in satisfaction of the
exercise price. At December 31, 1999, the remaining 30,640 unexercised
Placement Warrants expired.
Redeemable Warrants. On December 26, 1993, the Company sold 1,500,000 units
("Units") in its initial public offering ("IPO"). Each Unit consists of one
share of the Company's Common Stock, $.001 par value, and two redeemable
Common Stock Purchase Warrants ("Redeemable Warrants"). Each Redeemable
Warrant entitles the holder to purchase from the Company one share of
Common Stock at an exercise price of $5.50, during the period commencing on
the later of the consummation by the Company of a Business Combination or
one year from the effective date of the IPO, or December 20, 1995, and
ending seven years from the effective date of the IPO, or December 13,
2000. The Redeemable Warrants will be redeemable at a price of $.01 per
warrant upon 30 days' notice at any time, only in the event that the last
sale price of the Common Stock is at least $10.00 per share for 20
consecutive trading days ending on the third day prior to the date on which
notice of redemption is given.
The Company also issued promissory notes to certain accredited investors,
in connection with the IPO. These notes were repaid on the consummation of
the Public Offering. In addition, the investors were issued 300,000
Redeemable Warrants valued at a nominal amount. At December 31, 1999, no
Redeemable Warrants had been exercised and the Redeemable Warrants expired
on December 13, 1998.
Unit Purchase Options. Also in December 1993, the Company sold to the
underwriters in the IPO and their designees, for nominal consideration, the
right to purchase up to 195,652 units ("Unit Purchase Options") as adjusted
for the Offering completed on August 26, 1997. Each Unit Purchase Option
consists of one share of Common Stock and two Common Stock Purchase
Warrants. Each Common Stock Purchase Warrant entitled the holder to
purchase one share of Common Stock under terms similar to the terms of the
Redeemable Warrants except that the Common Stock Purchase Warrants are not
redeemable. The Unit Purchase Options were exercisable at $5.06 per unit
("Option Exercise Price"), as adjusted, until December 13, 1998, when they
expired. In addition, the Common Stock Purchase Warrants were exercisable
at $5.50 per warrant, and expired. The Unit Purchase Options contained
anti-dilution provisions providing for adjustment of the Option Exercise
Price upon the occurrence of certain events, including the issuance of
shares of Common Stock or other securities convertible into or exercisable
for shares of Common Stock at a price per share less than the Option
Exercise Price or the market price of the Common Stock, or in the event of
any recapitalization, reclassification, stock dividend, stock split, stock
combination, or similar transaction. No Unit Purchase Options were
exercised prior to their expiration on December 13, 1998.
D-13
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-Redeemable Bridge Warrants. In December 1995, in connection with
arranging the Bridge Financing, the Company issued to the Bridge Lenders
warrants to purchase 225,028 shares of Common Stock ("Non-Redeemable Bridge
Warrants"), at an exercise price of $5.33 per share. The terms of the Non-
Redeemable Bridge Warrants are identical to the terms of the Redeemable
Warrants, except that they are not redeemable and are subject to a cashless
exercise provision. On December 13, 2000, the Non-Redeemable Bridge
Warrants expire. None of these Warrants had been exercised as of December
31, 1999.
8.Related-Party Transactions.
On December 30, 1998, the Company sold a 6.25% working interest
participation in a prospect to a limited partnership whose general partners
are the president and a vice president of a company who are the children of
the Company's Chairman and CEO. The agreement provided that the limited
partnership pay to the Company a total consideration of $204,000 for this
interest which included the turnkey cost of drilling this prospect's first
well. Pursuant to the terms of the agreement with such limited partnership,
the basis of this partnership's participation in this prospect is on
comparable terms of participation by an unrelated party. In connection with
the informal agreement with Cheniere discussed in Note 3--"Cheniere
Exploration Agreement and Litigation", the Company and Cheniere agreed to
share all proceeds attributable to the sale of Project prospects, including
cash and promoted interests. Cheniere's estimated share of the total
consideration paid by the limited partnership amounted to approximately
$64,000. During 1999, this prospect's first well was drilled and amounts
related to the turnkey portion were earned by the Company. The Company and
the limited partnership did not participate in a completion attempt on this
well. The Company expensed approximately $563,000 as dry hole expense
during 1999, which was net of the Company's share of the turnkey
contribution. The agreement also provided that the limited partnership had
a one-time option to acquire a 6.25% working interest participation in an
adjacent prospect for $62,500 and to pay its pro-rata share of the second
prospect's drilling costs on a promoted basis. However, the leases under
the second prospect were relinquished and such option was not exercised.
In connection with the acquisition of Wavefield, the Company agreed to
assume the remaining lease obligation of Wavefield. Wavefield had used the
offices prior to its acquisition by the Company. The term of this lease
expired in October 1999. The Company expensed $50,676 and $66,367 on this
lease in 1999 and 1998, respectively.
The Company engaged the services of a law firm, including the services of a
partner in the firm who is a relative of an officer and director of the
Company that passed away in May 1999. The Company incurred costs of $48,501
and $176,505 to this firm during the years ended December 31, 1999 and
1998, respectively.
D-14
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9.Stock Option Plans.
At December 31, 1999, the Company had three stock-based compensation plans,
which are described below. Each plan calls for the granting of options
generally at not less than the per share market price on the date of grant.
The Company applies APB Opinion 25 and the related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. No grants were issued by the
Company in 1999. Had compensation cost for the Company's three stock-based
compensation plans been determined on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123
"Accounting for Stock-Based Compensation", the Company's net loss per
common share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Results
As Reported Net Loss Before Extraordinary Item... $(3,274,526) $ (9,611,738)
Extraordinary Item............................. 439,208 --
----------- ------------
Net Loss....................................... $(2,835,318) $ (9,611,738)
=========== ============
Pro Forma
Net Loss Before Extraordinary Item............. $(3,274,526) $(10,482,914)
Extraordinary Item............................. 439,208 --
----------- ------------
Net Loss....................................... $(2,835,318) $(10,482,914)
=========== ============
Net Loss Per Common Share (Basic and Diluted)
As Reported
Net Loss Before Extraordinary Item............. $ (0.32) $ (0.93)
Extraordinary Item............................. $ 0.04 $ --
Net Loss..................................... $ (0.28) $ (0.93)
Pro Forma
Net Loss Before Extraordinary Item............. $ (0.32) $ (1.01)
Extraordinary Item............................. $ 0.04 $ --
Net Loss....................................... $ (0.28) $ (1.01)
</TABLE>
For purposes of the above proforma disclosure, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used
for grants in 1998: no dividend yield for 1998, expected volatility of .43,
a risk-free interest rate of 5.9%, and expected lives of 10 years for all
options. In connection with the above assumptions, the estimated weighted
average fair value of options granted in 1998 is $1.69 per share.
In February 1995, Zydeco's Board of Directors approved the 1995 Employee
Stock Option Plan (the "Zydeco Plan") for certain employees of the Company
and any subsequently incorporated subsidiaries of the Company. Options to
purchase 1,006,256 shares of stock at a price of $1.60 per share, as
adjusted, were granted in March 1995. Such options are non-compensatory,
vest over a four-year period and terminate no later than March 2005.
345,002 options remain outstanding as of December 31, 1999. On November 10,
1999, the Company repriced an employee's options of 52,500 shares to $.125.
On January 4, 1996, the Board of Directors approved and adopted the Zydeco
Energy, Inc. 1996 Incentive Equity Plan (the "1996 Incentive Plan") and
amended such plan on March 3, 1997. The 1996 Incentive Plan authorizes the
grant of various stock and stock-related awards to key management and other
personnel on the basis of individual and corporate performance. The 1996
Incentive Plan, as amended, provides for the granting of stock options to
purchase an aggregate of 950,000 shares of Common Stock, which are
D-15
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reserved for such purpose. Options under the 1996 Incentive Plan are non-
compensatory, vest over a four-year period and terminate no later than ten
years after the date of grant unless otherwise determined by the
Compensation Committee. All but options for 2,000 shares previously granted
pursuant to this plan have expired as of December 31, 1999. The option for
2,000 shares expired on January 31, 2000.
Also on January 4, 1996, the Board of Directors adopted the 1996 Non-
employee Director Stock Option Plan (the "1996 Director Plan") and
authorized and granted an aggregate of 45,000 shares of Common Stock to
three non-employee directors. The options vest one third on April 1, 1997,
1998, and 1999, and have an exercise price of $6.69 per share. The options
terminate no later than ten years after the date of grant. As of December
31, 1999, 45,000 options remain outstanding and expire as follows: 30,000
on March 18, 2000 and 15,000 on March 26, 2000.
Information about the Company's stock option plans for each of two years in
the period ended December 31, 1999, is set forth below:
<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
Average Average
Grant Grant
Shares Price Shares Price
---------- ------- --------- -------
<S> <C> <C> <C> <C>
Outstanding at January 1............ 1,501,006 $1.70 1,768,632 $3.33
Granted........................... -- -- 221,000 2.21
Exercised......................... -- -- (20,000) 1.60
Forfeited and Expired............. (1,109,000) 2.94 (468,626) 4.73
---------- ----- --------- -----
Outstanding at December 31.......... 392,002 1.99 1,501,006 2.75
========== ===== ========= =====
Shares Exercisable at December 31... 391,002 1.98 1,218,506 2.40
========== ===== ========= =====
Shares Available for Future Grant... 948,000 464,000
========== =========
Average Fair Value of Shares Granted
During Year........................ N/A $ 1.69
========== =========
</TABLE>
<TABLE>
<CAPTION>
Shares Outstanding and
Exercisable
--------------------------
Weighted Weighted
Average Average
Remaining Grant
Range of Grant Prices Shares Life Price
--------------------- ------- --------- --------
<S> <C> <C> <C>
$ .125 to 3.00.................................... 345,002 6 years $1.38
3.00 to 5.00.................................... 1,000 7 years 4.94
5.00 to 7.00.................................... 45,000 7 years 6.69
-------
391,002 6 years 1.99
=======
</TABLE>
10.Segment Information.
In June 1997, the Financial and Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
This standard requires that companies report certain information about
operating segments in complete sets of financial statements and in
condensed financial statements of interim periods for fiscal years
beginning after December 15, 1997. The Company adopted this statement for
the fiscal year ending December 31, 1998. The Company operates principally
in one industry and geographic segment--oil and gas exploration and
production and as such the adoption of SFAS No. 131 had no impact on the
Company's financial statements.
Major Customers. The company had oil and gas sales to one customer of
$140,794 and $348,636 in 1999 and 1998, respectively, which constituted
more than 10% of consolidated revenue for such years.
D-16
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11.Oil and Gas Production Activities.
Results of Operations from Oil and Gas Producing Activities
The results of operations for oil and gas producing activities for the
years indicated are presented below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Oil and Gas Sales.............................. 187,366 $ 389,798
Production (Lifting) Costs..................... (18,453) (17,170)
Dry Hole and Other Costs....................... (1,369,053) (148,285)
Impairment of Unproved Properties.............. (750,000) (3,000,000)
Geological and Geophysical Expenses............ (170,885) (3,561,184)
Depreciation, Depletion, and
Amortization(/1/)............................. -- (424,669)
------------ ------------
Results of Operations from Oil and Gas
Producing Activities.......................... $(2,121,025) $ (6,761,510)
</TABLE>
--------
(/1/) Includes depreciation on seismic computer hardware and software. All oil
and gas related assets were fully amortized as of December 31, 1998.
Capitalized Costs Related to Oil and Gas Producing Activities
The following table presents total capitalized costs of proved and unproved
oil and gas properties and associated accumulated depreciation, depletion,
and amortization:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Proved Oil and Gas Properties, at Cost............. $ 334,972 $ 334,972
Unproved Oil and Gas Properties.................... 1,643,324 2,796,471
Equipment and Software............................. -- 1,974,028
Less--Accumulated Depreciation, Depletion,
Amortization and Impairment....................... (1,084,972) (1,969,652)
---------- ----------
Net Capitalized Costs.............................. $ 893,324 $3,135,819
</TABLE>
Costs Incurred in Oil and Gas Property Acquisition, Exploration and
Development Activities
Presented below are costs incurred in oil and gas property acquisition,
exploration and development activities:
<TABLE>
<CAPTION>
Year Ended December
31,
-------------------
1999 1998
-------- ----------
<S> <C> <C>
Unproved Property Acquisition Costs..................... $ -- $5,753,010
Exploration Costs....................................... 623,920 3,734,900
Equipment and Software Additions........................ -- 92,378
Total for Year.......................................... $623,920 $9,580,288
</TABLE>
Reserve Quantity Information (Unaudited)
The following unaudited information has been provided pursuant to SFAS No.
69, "Disclosures about Oil and Gas Producing Activities". There are
numerous uncertainties inherent in estimating quantities of proved reserves
and in projecting future rates of production, including many factors beyond
the control of the
D-17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company. The estimation of reserve quantities results from a process that
cannot be measured in an exact way and employs judgements made by the
Company's independent petroleum engineering firms. Accordingly, reserve
estimates are often different from quantities of oil and gas that are
ultimately recovered. The Company's proved oil and gas reserves were
estimated by Petroleum Professionals International, LP as of December 31,
1999 and 1998.
Proved Developed Reserve Quantities (Unaudited)
The Company's oil and gas producing activities have been conducted solely
in the United States. The Company had no proved undeveloped reserves at
December 31, 1999 and 1998. The following table sets forth the changes in
the Company's total proved reserves for the years ended December 31, 1999
and 1998:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
-------- ---------
Oil (Bbls)
<S> <C> <C>
Total Proved Reserves:
Proved Oil Reserves at the Beginning of the
Year............................................ 269 2,614
Revisions of Previous Estimates.................. 3,769 (1,158)
Production....................................... (2,778) (1,187)
-------- ---------
Proved Oil Reserves at the End of the Year....... 1,260 269
======== =========
<CAPTION>
Gas (Mcf)
<S> <C> <C>
Proved Gas Reserves at the Beginning of the
Year............................................ 105,571 104,000
Revisions of Previous Estimates.................. (36,346) 167,333
Production....................................... (59,608) (165,762)
-------- ---------
Proved Gas Reserves at the End of the Year....... 9,617 105,571
======== =========
Proved Developed Reserves:
End of Year-- Oil (Bbls)......................... 1,260 269
======== =========
Gas (Mcf)........................ 9,617 105,571
======== =========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserve Quantities (Unaudited)
The information that follows has been developed by the Company pursuant to
procedures prescribed by SFAS 69 and utilizes reserve data estimated by the
Company's independent petroleum engineering firms. In addition to the above
discussion of uncertainties in reserve quantities, the following
calculations are based on year-end prices, costs and statutory tax rates
that relate to existing proved oil and gas reserves in which the Company
has an interest and are discounted at 10%. Because future projections are
inherently imprecise, material revisions to reserve estimates may occur in
the future. Actual sales prices and costs incurred may vary from those used
in the calculations due to a number of factors including, but not limited
to, wide fluctuations in world and/or regional markets. In addition,
production of the oil and gas reserves may not occur in the periods
assumed. The standardized measure information may be useful for certain
comparative purposes but is not intended to represent the market value of
the Company's reserves or as an estimate of the Company's future cash
flows. See "Note 1--Organization and Summary of Significant Accounting
Policies".
D-18
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the standardized measure of discounted
future net cash flows from estimated future production of the Company's
proved oil and gas reserves as of December 31:
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Future Cash Inflows..................................... $61,577 $224,307
Future Production and Development Costs(/1/)............ -- --
Future Income Tax Expense............................... -- --
------- --------
Undiscounted Future Net Cash Flows...................... 61,577 224,307
Discount................................................ (3,164) (14,627)
------- --------
Standardized Measure of Discounted Future Net Cash
Flows.................................................. $58,413 $209,680
======= ========
</TABLE>
--------
(/1/) The Company maintains an overriding royalty interest in its only
property with proved reserves at December 31, 1999 and 1998.
Accordingly, there are no future costs associated with such an
overriding royalty interest.
Principal Sources of Change in the Standardized Measure of Discounted Future
Net Cash Flows (Unaudited)
The following table sets forth changes in the standardized measure of
discounted future net cash flows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Standardized Measure--Beginning of Year................ $ 209,680 $ 377,997
Sales, Net of Operating Costs.......................... (168,913) (372,628)
Net Changes in Prices and Production Costs............. 37,437 (132,609)
Revisions of Quantity Estimates........................ (46,014) 322,880
Accretion of Discount.................................. 20,968 37,800
Other.................................................. 5,255 (23,760)
--------- ---------
Standardized Measure--End of the Year.................. $ 58,413 $ 209,680
========= =========
</TABLE>
D-19
<PAGE>
ZYDECO ENERGY, INC.
635 West Campbell Road, Suite 130
Richardson, Texas 75080
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR
THE SPECIAL MEETING OF STOCKHOLDERS
The undersigned hereby appoints Hugh D. Simpson and James D. Nickell, and each
of them acting solely, proxies with full power of substitution and with all
powers the undersigned would possess if personally present, to represent and to
vote at the Special Meeting of Stockholders to be held on December 21, 2000 and
at any adjournment or postponement thereof, as designated on the reverse side
hereof and in their discretion with respect to any matters incident to the
conduct of the meeting and other matters as may properly come before such
meeting, all of the shares of common stock and/or preferred stock of Zydeco
Energy, Inc. held of record by the undersigned as of the close of business on
November 22, 2000. All proxies previously given with respect to the shares
covered hereby are hereby revoked.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE FOLLOWING PROPOSALS:
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder and at the discretion of proxyholders as to any
other matters that may properly come before the meeting. If no direction is
made, this Proxy will be voted FOR the following proposals and at the
discretion of the proxyholders as to any other matters that may properly come
before the meeting.
1. PROPOSAL TO APPROVE AND ADOPT THE AMENDMENT TO ZYDECO'S CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF ZYDECO'S COMMON
STOCK, PAR VALUE $.001 PER SHARE, FROM 50,000,000 TO 150,000,000.
FOR [_] AGAINST [_] ABSTAIN [_]
2. PROPOSAL TO APPROVE AND ADOPT THE AMENDMENT TO ZYDECO'S CERTIFICATE OF
INCORPORATION TO CHANGE THE NAME OF THE COMPANY FROM "ZYDECO ENERGY, INC." TO
"DTVN HOLDINGS, INC."
FOR [_] AGAINST [_] ABSTAIN [_]
3. PROPOSAL TO APPROVE AND ADOPT THE 2000 STOCK OPTION AND RESTRICTED STOCK
PLAN.
FOR [_] AGAINST [_] ABSTAIN [_]
Please sign and return promptly in the
enclosed envelope.
Signature(s) _____________________________
Date _____________________________________
NOTE: Please sign exactly as name
appears. When shares are held by joint
tenants, both should sign. When signing
as attorney-in-fact, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by the president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
