10QSB 1 0001.txt FORM 10-QSB FOR QUARTER ENDED SEPTEMBER 30, 2000 U.S SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER: 0-22076 ZYDECO ENERGY, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 76-0404904 (I.R.S. Employer Identification No.) 635 WEST CAMPBELL ROAD, SUITE 130 RICHARDSON, TEXAS (Address of principal executive offices) 75080 (Zip Code) (972) 783-0284 (Registrant's telephone number, including area code) (Former address of Registrant's principal executive offices, if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of November 9, 2000 there were 42,775,951 shares of Zydeco Energy, Inc. Common Stock, $.001 par value, issued and outstanding. 1 FORM 10-QSB TABLE OF CONTENTS Page Number ------ Part I. Financial Information Item 1. Consolidated Financial Statements Consolidated Balance Sheets.................. 4 Consolidated Statements of Operations........ 5 Consolidated Statements of Cash Flows........ 6 Notes to Consolidated Financial Statements... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 11 Part II. Other Information Item 1. Legal Proceedings............................ 16 Item 6. Exhibits and Reports on Form 8-K............. 16 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. 3 ZYDECO ENERGY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 2,788,096 394,740 Certificates of deposit 100,000 -- Accounts receivable 194,873 621,535 Vendor deposit 35,209 360,000 Deferred tax asset 392,600 16,947 Prepaid expenses 43,634 -- Other 1,424 29,889 ----------- --------- Total current assets 3,555,836 1,423,111 Certificates of deposit -- 96,290 Investment in Wavefield Imaging Technology 651,801 -- Property and equipment, net 1,179,180 147,845 Deferred tax asset 599,700 -- Goodwill, net (note 1) 24,928,527 -- Other assets 138,385 -- ----------- --------- $31,053,429 1,667,246 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to related party (note 4) $ 250,000 -- Note payable for equipment (note 4) 298,869 -- Line of credit (note 4) 190,555 -- Accounts payable 861,115 305,375 Unearned revenue 671,508 493,882 Accrued liabilities and other 625,722 326,108 Customer deposit -- 360,000 Current installments of obligations under capital leases 11,879 22,432 ----------- --------- Total current liabilities 2,909,648 1,507,797 Obligations under capital leases, excluding current installments 14,943 61,049 ----------- --------- Total liabilities 2,924,591 1,568,846 Stockholders' equity: Preferred stock, $.001 par value; 1,000,000 shares authorized and 7,190 shares issued and outstanding in 2000 7 -- Common stock, $.001 par value; 50,000,000 shares authorized, 42,775,951 and 32,623,855 issued and outstanding in 2000 and 1999, respectively 42,776 1,000 Additional paid in capital 29,894,823 -- Retained earnings (accumulated deficit) (1,817,392) 97,400 Accumulated Other Comprehensive Income 8,624 -- ----------- --------- Total stockholders' equity 28,128,838 98,400 ----------- --------- Contingency (note 5) $31,053,429 1,667,246 =========== ========= See accompanying notes to consolidated financial statements. 4 ZYDECO ENERGY, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999 -------- ---------- ---------- --------- Revenues: Net service revenue $ 3,087,466 2,151,005 8,372,795 5,587,646 Other revenue 56,669 -- 82,669 -- ----------- ---------- ---------- ---------- Total revenues 3,144,135 2,151,005 8,455,464 5,587,646 Operating expenses: Cost of services 2,000,405 1,555,902 4,808,771 3,865,149 Selling and marketing 30,532 200,955 68,398 614,977 General and administrative 825,747 183,278 1,683,183 394,176 Amortization of unearned stock compensation 460,335 -- 1,652,042 -- Amortization of goodwill 1,328,890 -- 1,649,280 -- Depreciation and amortization 56,607 4,018 110,010 12,054 ----------- ---------- ---------- ---------- Total operating expenses 4,702,516 1,944,153 9,971,684 4,886,356 ----------- ---------- ---------- ---------- Operating income (loss) (1,558,381) 206,852 (1,516,220) 701,290 Loss on disposal of fixed asset 3,011 -- 3,011 -- Interest income 31,020 2,342 59,064 3,709 Interest expense 8,687 10 24,843 229 ----------- ---------- ---------- ---------- Income (loss) before income taxes (1,539,059) 209,184 (1,485,010) 704,770 Income tax expense (benefit) (77,762) 9,413 (739,529) 31,715 ----------- ---------- ---------- ---------- Net income (loss) $(1,461,297) 199,771 (745,481) 673,055 =========== ========== ========== ========== Net income (loss) per common share: Basic and diluted $ (0.03) 0.01 (0.02) 0.02 =========== ========== ========== ========== Weighted average common shares outstanding: Basic 49,965,951 39,813,855 44,024,522 39,813,855 =========== ========== ========== ========== Diluted 49,965,951 39,813,855 44,024,522 39,813,855 =========== ========== ========== ========== Pro forma data (note 1): Income tax expense (benefit) 77,398 66,491 260,919 ---------- ---------- ---------- Net income (loss) 131,786 (1,551,501) 443,851 ========== ========== ========== Net income (loss) per common share: Basic and diluted 0.00 (0.04) 0.01 ========== ========== ========== Weighted average common shares outstanding: Basic and diluted 39,813,855 44,024,522 39,813,855 ========== ========== ========== See accompanying notes to consolidated financial statements.
5 ZYDECO ENERGY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 --------- ------- Cash flows from operating activities: Net income (loss) $ (745,481) 673,055 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,759,290 12,054 Loss on disposal of asset 3,011 Amortization of unearned stock compensation 1,652,042 -- Deferred tax (benefit) expense (975,353) -- Changes in assets and liabilities: Accounts receivable 535,388 136,749 Customer deposit (360,000) -- Accounts payable and accrued liabilities 589,155 351,144 Unearned revenue 177,626 (255,576) Vendor deposit 324,791 -- Prepaid expenses (43,634) -- Other 29,253 (45,234) ----------- -------- Net cash provided by operating activities 2,946,088 935,622 ----------- -------- Cash flows from investing activities: Purchase of certificates of deposit -- (95,000) Cash acquired in the merger, net of direct costs (note 1) 432,414 -- Capital expenditures (155,414) (30,136) ----------- -------- Net cash provided by (used in) investing activities 277,000 (125,136) ----------- -------- Cash flows from financing activities: Proceeds from notes payable to related parties 250,000 -- Principal payments on notes to related parties -- (27,103) Principal payments on obligations (232,286) -- Payments of dividends (847,446) (316,927) ----------- -------- Net cash used in financing activities (829,732) (344,030) ----------- -------- Net increase in cash and cash equivalents 2,393,356 466,456 Cash and cash equivalents at beginning of period 394,740 159,996 ----------- -------- Cash and cash equivalents at end of period $ 2,788,096 626,452 =========== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 2,164 229 =========== ======== Cash paid during the period for income taxes $ 27,180 7,259 =========== ======== Supplemental disclosure of noncash investing and financing activities: Disposal of captialized lease asset $ 51,745 -- =========== ======== Purchase of equipment in exchange for note payable (note 4) $ 709,473 -- =========== ======== Reverse acquisition of Zydeco by DataVoN (note 1) $27,962,700 -- =========== ======== See accompanying notes to consolidated financial statements. 6 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 7 ability to authorize sufficient additional common shares of Zydeco and the authorization is essentially a formality. In connection with the Merger, DataVoN converted from an S corporation into a C corporation. Accordingly, the Company eliminated DataVoN's retained earnings and established deferred federal income taxes at the date of the Merger. The corresponding deferred tax benefit of $643,969 was recognized in the statement of operations for the nine months ended September 30, 2000. The unaudited pro forma statement of operations data presented on the face of the statements of operations for the nine months ended September 30, 2000 and the three months and nine months ended September 30, 1999 are based upon the Company's historical statements of operations and give effect to pro forma income taxes as if the Company was a C corporation for the entire duration of these periods. Unaudited pro forma results, as if the Merger had occurred at the beginning of the period presented and including pro forma income taxes as if DataVoN was a C corporation for the entire duration of both periods, are as follows. These unaudited pro forma results do not purport to be indicative of results which would actually have occurred if the Merger had been consummated at the beginning of the period presented. For the nine months ended September 30, 2000 1999 ----------- ----------- Pro forma revenues $ 8,512,409 $ 5,788,201 =========== =========== Goodwill amortization $ 3,986,671 $ 3,986,671 =========== =========== Pro forma net loss $(4,626,147) $(4,896,873) =========== =========== Pro forma diluted loss per share $ (0.09) $ (0.09) =========== =========== The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting solely of normal adjustments) considered necessary to present fairly the financial position, results of operations and cash flows of the Company. Interim period results are not necessarily indicative of the results to be achieved for an entire year. These interim unaudited financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 1999 included in the Form 8-K filed by Zydeco with the Securities and Exchange Commission on June 19, 2000. These interim unaudited financial statements should also be read in conjunction with the audited financial statements of Zydeco for the year ended December 31, 1999 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2000. (2) Stock Compensation In March 2000, the Company adopted a stock option plan. Under the plan, the Company may grant to officers, directors, consultants and employees options to 8 purchase shares of the Company's common stock. In March 2000, the Company granted options to purchase 2,522,459 shares of its common stock for an exercise price of $0.49 per share. These options have a 10 year life and vest over a three-year period, subject to certain exceptions. Stock compensation totaling approximately $5.2 million is being recognized over the vesting period. During the third quarter 500,000 options were forfeited when an employee left the Company and the corresponding compensation expense previously recognized was reversed. (3) Segment Information As a result of the Merger, the Company is now organized along two lines of business, DataVoN and Zydeco. DataVoN provides Internet protocol bandwidth capacity to a number of major domestic and international carriers and IP providers desiring to employ the benefits of Voice over Internet Protocol (VoIP) technology and networking. Zydeco is an independent energy company that has been engaged in the exploration for oil and gas utilizing advanced three-dimensional seismic and computer-aided exploration techniques. Because of market conditions, Zydeco's operations were curtailed prior to the Merger and it had focused its efforts on (1) conserving cash resources; (2) concentrating on marketing salable assets; and (3) seeking alternate sources of capital for possible drilling participation and general working capital, including potential business combinations outside of the oil and gas industry. The Company is considering its alternatives with respect to the operations of Zydeco. Zydeco's revenues and net loss for the period from the Merger date to September 30, 2000 are insignificant. The following is a summary of total assets by reportable segment: September 30, December 31, 2000 1999 ------------- ------------ DataVoN $ 4,413,564 1,667,246 Zydeco 1,711,338 -- Goodwill from the Merger 24,928,527 -- ----------- --------- Total assets $31,053,429 1,667,246 =========== ========= (4) Notes Payable In March 2000, the Company entered into a note payable arrangement with a vendor for the purchase of network equipment. The note bears interest at 9% and requires monthly payments of $44,010, until the final balance is due on April 1, 2001. On May 1, 2000, the Company entered into a Security Agreement and Note Payable with a related party for $250,000. The note bears interest at 9% per annum. The note is due on demand but no later than January 15, 2001. The note is secured by substantially all assets of the Company. On June 21, 2000, the Company entered into a Loan and Security Agreement with Bank of Texas that provides access to a $500,000 revolving credit facility. The line of credit is secured by a lien on all trade receivables. Interest accrues daily on the unpaid principal of the facility at an annual rate equal to the prime rate, as defined in the Loan and Security Agreement, plus .5%. As of 9 September 30, 2000, no borrowings had been made under the Loan and Security Agreement. On September 28, 2000, the Company entered into an equipment line of credit with Comerica that provides access to a $275,000 line of credit. This line of credit is secured by a lien on equipment. Interest accrues daily on the unpaid principal at an annual rate equal to the prime rate, as defined in the agreement, plus 1%. As of September 30, 2000, $190,555 had been drawn down to purchase equipment. (5) Contingency The Company is currently involved in litigation with a former sales agent in regards to commissions allegedly owed to the former commissioned agent by the Company. The Company has countersued the former agent for $230,000 owed by the former agent to the Company. The litigation is in its early stages and no determination of the outcome is possible at this time. The former agent alleges maximum economic damages of approximately $4 million. Management of the Company is vigorously defending against this claim. No reserve for the claim, or receivable for the counterclaim, has been established for this litigation as of September 30, 2000. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of the Company's financial condition and results of operations for the three months and nine months ended September 30, 2000 should be read in conjunction with the consolidated financial statements and footnotes for the three months and nine months ended September 30, 2000 included herein. The Company believes that all necessary adjustments (consisting of normal recurring adjustments) have been included in the amounts stated below to present fairly the following quarterly information. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results for interim periods are not necessarily indicative of results for the year. OVERVIEW The Company is a wholesale provider of voice and data services over a next generation packet switched network. As of October 31, 2000, the Company was providing services to several domestic carriers and is currently operating in 14 markets with points of presence ("POP's") in 25 cities. Through its network, the Company transports a large volume of "toll quality" voice and data services. The entrance point for communications traffic over its network is referred to as a POP (point of presence). The Company's customers interconnect with its network by connecting dedicated voice circuits from their facilities to gateways located in one of its POP's. The Company was incorporated in 1993. The Company conducted oil & gas seismic exploration operations beginning in 1993. On June 9, 2000, the Company merged with DataVoN Inc. ("DataVoN"). As a result of this merger, the former shareholders of DataVoN now own approximately 80% of the voting power of the Company's common stock. The merger was accounted for as a reverse acquisition of the Company by DataVoN under the purchase method of accounting. Accordingly, the historical financial statements of DataVoN prior to the merger have become the Company's financial statements, and the Company's results of operations will be combined with those of DataVoN from and after the date of the merger. As the oil and gas seismic exploration operations are not currently material to the Company's combined results of operations, the Company does not discuss them below. The Company's primary source of revenue is the fees that it receives from customers for transporting and completing calls over its network. This revenue is dependent on the volume of voice and data traffic carried over the network, which is measured in minutes. The Company charges its customers fees based upon a per minute or flat rate charge prior to the service being offered and recognizes this revenue in the period in which the call is completed. The Company's most significant costs and expenses are data communications and 11 telecommunications expenses which are comprised primarily of collocation facility fees, transport fees, termination fees, and equipment expenses. Collocation facility fees are paid for lease of rack space, power and associated services to "host" the equipment. Transport fees are paid to a "backbone provider" to carry traffic between POP's where the equipment is located. Termination fees are paid to local service providers to terminate calls. Equipment costs are capitalized and depreciated over their useful lives and minor items are expensed directly. Other expenses include charges for connections between the Company's POP's and its vendors for termination services and software support and management systems required in maintaining its network. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 NET SERVICE REVENUE. The Company's net service revenue increased by $0.9 million to $3.1 million for the three months ended September 30, 2000, from $2.2 million for the three months ended September 30, 1999. The increase in net revenue resulted from an increase in the amount of traffic carried over the Company's network to approximately 460.5 million minutes for the three months ended September 30, 2000, from approximately 286.0 million minutes for the three months ended September 30, 1999. COST OF SERVICES. Cost of services increased by approximately $0.4 million to $2.0 million for the three months ended September 30, 2000, from $1.6 million for the three months ended September 30, 1999. The increase in expense was driven by the increase in traffic described above. Collocation facility fees increased to $67,800 for the three months ended September 30, 2000, from $9,300 for the three months ended September 30, 1999. Telecommunications fees increased to $1.8 million for the three months ended September 30, 2000 from $1.5 million for the three months ended September 30, 1999. As a percentage of net service revenue, cost of services expense decreased to approximately 65% for the three months ended September 30, 2000, from approximately 72% for the three months ended September 30, 1999. SELLING AND MARKETING EXPENSES. Selling and marketing expenses include expenses relating to the salaries, payroll taxes, benefits and commissions that the Company pays for sales personnel and the expenses associated with the development and implementation of its promotion and marketing campaigns, including expenses relating to its outside public relations firm and industry analysts. Selling and marketing expenses decreased by $168,066 to $30,532 for the three months ended September 30, 2000 from $200,955 for the three months ended September 30, 1999. This decrease is attributable to the Company replacing commissioned sales agents with employees. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses include salary, payroll tax and benefit expenses and related costs for general corporate functions, including executive management, administration, office facilities, information technology and human resources. General and administrative expenses increased by $0.6 million to $0.8 million for the three months ended September 30, 2000, from $0.2 million for the three months ended September 30, 1999. General and administrative expenses increased primarily due to an increase in the number of personnel and an increase in consulting and 12 professional fees. As a percentage of net revenue, general and administrative expenses increased to approximately 26% for the three months ended September 30, 2000, from 9% for the three months ended September 30, 1999 due to the factors described above. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense increased by $1.4 million for the three months ended September 30, 2000, from $4,018 for the three months ended September 30, 1999. This increase primarily resulted from amortization of goodwill associated with the merger. AMORTIZATION OF UNEARNED STOCK COMPENSATION. This expense totaled $460,335 and represents amortization of stock compensation related to options the Company issued in March 2000. The stock compensation is being amortized over the vesting period of the options, which equals the estimated period of benefit. INTEREST INCOME AND INTEREST EXPENSE. Interest expense is primarily comprised of interest on the Company's notes payable, and various capital leases. Interest income is primarily composed of income earned on the Company's cash and cash equivalents and certificates of deposit. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 NET SERVICE REVENUE. The Company's net service revenue increased by $2.8 million to $8.4 million for the nine months ended September 30, 2000, from $5.6 million for the nine months ended September 30, 1999. The increase in net revenue resulted from an increase in the amount of traffic carried over the Company's network to approximately 1.2 billion minutes for the nine months ended September 30, 2000, from approximately 0.7 billion minutes for the nine months ended September 30, 1999. COST OF SERVICES. Cost of services expense increased by $0.9 million to $4.8 million for the nine months ended September 30, 2000, from $3.9 million for the nine months ended September 30, 1999. The increase in expense was driven by the increase in traffic described above. Collocation facility fees increased to $106,303 for the nine months ended September 30, 2000, from $13,624 for the nine months ended September 30, 1999. Telecommunications fees increased to $4.5 million for the nine months ended September 30, 2000, from $3.9 million for the nine months ended September 30, 1999. As a percentage of net revenue, cost of services expense decreased to approximately 57% for the nine months ended September 30, 2000, from approximately 69% for the nine months ended September 30, 1999. SELLING AND MARKETING EXPENSES. Selling and marketing expenses include expenses relating to the salaries, payroll taxes, benefits and commissions that the Company pays for sales personnel and the expenses associated with the development and implementation of its promotion and marketing campaigns, including expenses relating to its outside public relations firm and industry analysts. Selling and marketing expenses decreased by $0.5 million to $68,398 for the nine months ended September 30, 2000 from $0.6 million for the nine months ended September 30, 1999. This decrease is attributable to the Company replacing commissioned sales agents with employees. As a percentage of net revenue, selling and marketing expenses decreased to approximately 1% for the nine months ended September 30, 2000, from approximately 11% for the nine months ended September 30, 1999. 13 GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses include salary, payroll tax and benefit expenses and related costs for general corporate functions, including executive management, administration, office facilities, information technology and human resources. General and administrative expenses increased by $1.3 million to $1.7 million for the nine months ended September 30, 2000, from $0.4 million for the nine months ended September 30, 1999. General and administrative expenses increased primarily due to an increase in the number of personnel and an increase in consulting and professional fees. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expense increased by $1.8 million for the nine months ended September 30, 2000, from $12,054 for the nine months ended September 30, 1999. This increase primarily resulted from amortization of goodwill associated with the merger. AMORTIZATION OF UNEARNED STOCK COMPENSATION. This expense totaled $1,652,042 and represents amortization of stock compensation related to options the Company issued in March 2000. The stock compensation is being amortized over the vesting period of the options, which equals the estimated period of benefit. INTEREST INCOME AND INTEREST EXPENSE. Interest expense is primarily comprised of interest on the Company's notes payable, and various capital leases. Interest income is primarily composed of income earned on the Company's cash and cash equivalents and certificate of deposit. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital and liquidity needs historically and currently have related to the development of its network infrastructure, its sales and marketing activities, and general capital needs. The Company's capital needs have been met, in large part, from cash flow generated from operations. As the Company has placed greater emphasis on expanding its network infrastructure, the Company also plans to meet an increasing portion of its capital needs through vendor capital leases and other equipment financing. The Company has also established a $500,000 line of credit with a bank. Net cash provided by operating activities was $2.9 million for the nine months ended September 30, 2000, as compared to $0.9 million for the nine months ended September 30, 1999. The increase was primarily attributable to increased revenue from voice and data services over IP. Net cash provided by investing activities was $0.3 million for the nine months ended September 30, 2000, as compared to $0.1 million used by investing activities for the nine months ended September 30, 1999. Net cash used in financing activities was $0.8 million for the nine months ended September 30, 2000, as compared to net cash used in financing activities of $0.3 million for the nine months ended September 30, 1999. In March 2000, the Company entered into a notes payable arrangement with a vendor for the purchase of network equipment. The notes bears interest at 9% and requires monthly payments of $44,010, until the final balance is paid on April 1, 2001. The balance outstanding at September 30, 2000 was $298,869. 14 On May 1, 2000, the Company entered into a Security Agreement and Note Payable with a related party for $250,000. The note bears interest at 9% per annum from the date of the note until paid. The note is due on demand but no later than January 15, 2001. The note is secured by substantially all of the Company's assets. On June 21, 2000, the Company entered into a Loan and Security Agreement with Bank of Texas that provides it with access to a $500,000 revolving credit facility. The line of credit is secured by a lien on all of the Company's trade receivables. Interest accrues daily on the unpaid principal of the facility at an annual rate equal to the prime rate, as defined in the Loan and Security Agreement, plus .5%. As of September 30, 2000, the Company had made no borrowings under the Loan and Security Agreement. On September 28, 2000, the Company entered into an equipment line of credit with Comerica that provides access to a $275,000 line of credit. This line of credit is secured by a lien on equipment. Interest accrues daily on the unpaid principal at an annual rate equal to the prime rate, as defined in the agreement, plus 1%. As of September 30, 2000, $190,555 had been drawn down to purchase equipment. Capital expenditures totaled approximately $0.9 million for the nine months ended September 30, 2000. Based on the Company's existing operations, the Company estimates total capital expenditures for 2000 to be approximately $3.0 million, mainly for equipment to expand its network infrastructure, which is expected to be funded by cash flows from operations and financing. However, there can be no assurance that the Company will be able to obtain such outside financing to fund these capital expenditures. If the Company is unable to obtain such outside financing, its planned expansion of its network infrastructure will be reduced. The Company believes that its cash on hand, cash flows from operations, borrowing availability under its revolving line of credit and other financing arrangements which it plans to pursue will be sufficient to satisfy existing commitments and plans, including those described above. However, there can be no assurance that the Company will be able to make planned borrowings, that its business will generate sufficient cash flows from operations, or that future borrowings will be available in an amount to enable the Company to make necessary capital or other expenditures. FORWARD-LOOKING STATEMENTS The information in this Form 10-QSB includes "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. The Company includes this statement for the express purpose of availing itself of the protections of these safe harbor provisions with respect to all of the forward-looking statements the Company makes. The forward- looking statements in this Form 10-QSB reflect the Company's current views with respect to possible future events and financial performance. They are subject to certain risks and uncertainties, including without limitation the absence of significant revenues, financial resources, loss of key customers and/or personnel, significant competition, regulatory changes and those other risks and uncertainties discussed herein that could cause the Company's actual results to differ materially from the Company's historical results or those that the Company hopes to achieve. In this Form 10-QSB, the words, "anticipates," "plans," "believes," "expects," "intends," "future" and similar expressions identify certain forward-looking statements. Please do not place undue reliance on the forward-looking statements contained in this Form 10-QSB. The Company undertakes no obligation to announce publicly revisions it 15 makes to these forward-looking statements to reflect the effect of events or circumstances that may arise after the date of this Form 10-QSB. All written and oral forward-looking statements made subsequent to the date of this Form 10-QSB and attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this section. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. In a complaint filed on December 9, 1999 in the District Court of Tarrant County in the State of Texas, Teton Enterprises brought suit against DataVoN and Hugh Simpson. The complaint alleges that DataVoN owes the plaintiff, a former sales person doing business under a corporate name, certain commissions pursuant to a contract entered into between the parties. DataVoN has countersued the plaintiff for amounts owed by the plaintiff to DataVoN. The litigation is set for trial in July of 2001. Extensive discovery has been exchanged by both parties and pre-trial motion practice is the anticipated next step. No determination of the outcome is possible at this stage. The plaintiff alleges maximum economic damages in the amount of $4,222,970.54, which DataVoN believes is contradictory to the disclosures made by plaintiff regarding calculation of economic damages pled. DataVoN alleges in its counterclaim, among other claims pled, that the plaintiff owes DataVoN in excess of $200,000. Management of DataVoN can make no assurances as to the outcome of such litigation nor what effect it will have on the business of DataVoN or its financial condition. The defendants will continue to defend the action vigorously. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 Certificate of Incorporation and Certificates of Amendment thereto (incorporated by reference to Zydeco's Annual Report on Form 10-K for the year ended December 31, 1995). 3.2* Amended and Restated Bylaws. 3.3 Certificate of Designations of Series A Convertible Preferred Stock of Zydeco (incorporated by reference to Form 8-K (File No. 0-22076) filed with the SEC on June 19, 2000). 10.1 Warrant Agreement between Continental Stock Transfer & Trust Company and Zydeco Energy, Inc. (incorporated by reference to Registration Statement on Form S-1 (Reg. No. 33-65286)). 10.2 Form of Warrant Agreement by and among Zydeco Energy, Inc. and Brean Murray & Co., Inc. and Gaines, Berland Inc. (incorporated by reference to Registration Statement on Form S-1 (Reg. No. 333-27679)). 16 EXHIBIT NO. DESCRIPTION ----------- ----------- 10.3 Agreement and Plan of Merger among Zydeco Energy, Inc., DVN Acquisition Corporation and DataVoN Inc. dated as of May 23, 2000 (incorporated by reference to Form 8-K (File No. 0-22076) filed with the SEC on May 24, 2000). 10.4 Zydeco Energy, Inc. 2000 Stock Option Plan (formerly known as the DataVoN Inc. 2000 Stock Option Plan) (incorporated by reference to Registration Statement on Form S-8 (Reg. No. 333-41492) filed with the SEC on July 14, 2000. 27.1* Financial Data Schedule. * Filed herewith (b) Report on Form 8-K. On August 8, 2000, the Company filed a Report on Form 8-K pursuant to Item 4 disclosing the change of its accountants. On August 16, 2000, the Company filed Amendment No. 1 to Report on Form 8-K pursuant to Item 7 disclosing certain financial statements and pro forma information regarding the consummation of its merger with DataVoN Inc. 17 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZYDECO ENERGY, INC. /s/ Marcia C. Kennedy --------------------------------------- Marcia C. Kennedy Chief Financial Officer Dated: November 14, 2000 18 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 Certificate of Incorporation and Certificates of Amendment thereto (incorporated by reference to Zydeco's Annual Report on Form 10-K for the year ended December 31, 1995). 3.2* Amended and Restated Bylaws. 3.3 Certificate of Designations of Series A Convertible Preferred Stock of Zydeco (incorporated by reference to Form 8-K (File No. 0-22076) filed with the SEC on June 19, 2000). 10.1 Warrant Agreement between Continental Stock Transfer & Trust Company and Zydeco Energy, Inc. (incorporated by reference to Registration Statement on Form S-1 (Reg. No. 33-65286)). 10.2 Form of Warrant Agreement by and among Zydeco Energy, Inc. and Brean Murray & Co., Inc. and Gaines, Berland Inc. (incorporated by reference to Registration Statement on Form S-1 (Reg. No. 333- 27679)). 10.3 Agreement and Plan of Merger among Zydeco Energy, Inc., DVN Acquisition Corporation and DataVoN Inc. dated as of May 23, 2000 (incorporated by reference to Form 8-K (File No. 0-22076) filed with the SEC on May 24, 2000). 10.4 Zydeco Energy, Inc. 2000 Stock Option Plan (formerly known as the DataVoN Inc. 2000 Stock Option Plan) (incorporated by reference to Registration Statement on Form S-8 (Reg. No. 333-41492) filed with the SEC on July 14, 2000. 27.1* Financial Data Schedule. *Filed herewith 19