UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 19, 2000 (June 9, 2000)
ZYDECO ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-22076 76-0404904
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
635 West Campbell Road, Suite 130
Richardson, Texas 75080
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (972) 783-0284
2170 Plaza of the Americas, North Tower
700 North Pearl Street
Dallas, Texas 75201
(Former Address)
Item 1. Changes in Control of Registrant
General
On June 9, 2000, Zydeco Energy, Inc. ("Zydeco"), and its wholly owned
subsidiary, DVN Acquisition Corporation ("DVN Acquisition") and DataVoN Inc., a
Texas corporation ("DataVoN"), completed the transactions contemplated by the
Agreement and Plan of Merger (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 Zydeco. DataVoN is a
privately-held wholesale provider of internet protocol ("IP") telephony. As a
result of the merger, the stockholders of DataVoN now own approximately 80% of
the voting stock of Zydeco, which plans to change its name to DataVoN Inc. after
a stockholders meeting. The merger did not require the approval of stockholders
of Zydeco.
Under the Merger Agreement, the current sole member of the board of
directors of Zydeco, Sam B. Myers, Jr., resigned as a director and as chief
executive officer, and Hugh Simpson was appointed as the new sole director and
chief executive officer of Zydeco. Pursuant to the Merger Agreement, the board
of directors of Zydeco Exploration, Inc., a wholly-owned subsidiary of Zydeco
("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.
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 Zydeco 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 Zydeco common stock; and
. 7,190 shares of Zydeco Series A Convertible Senior 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 preferred
stock).
The Zydeco preferred stock, which was issued entirely to Mr. Simpson in
the merger, will vote together with the Zydeco common stock. Each of the 7,190
shares of Zydeco preferred stock issued in the merger will be entitled to 1,000
votes on all matters, except as required by law, with the Zydeco common stock.
The Zydeco 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 June 12, 2000, Zydeco had outstanding 42,775,951 shares
of common stock and had reserved an additional 4,368,784 shares of its common
stock for issuance from its authorized but unissued shares upon exercise of its
outstanding options and warrants. An additional 2,522,459 shares of Zydeco
common stock will be reserved for issuance upon exercise of DataVoN
2
stock options assumed by Zydeco in the merger. Accordingly, the Zydeco preferred
stock was issued because of the limitations on the number of issued and reserved
shares of Zydeco common stock.
It is expected that the Certificate of Incorporation of Zydeco will be
proposed to Zydeco stockholders for amendment to increase the number of shares
of common stock that Zydeco is authorized to issue. If the Certificate of
Incorporation is so amended, all outstanding shares of the Zydeco preferred
stock issued in the merger will be automatically converted into Zydeco common
stock by their terms. Currently, Mr. Simpson, in his positions as sole director
and majority stockholder of Zydeco after the merger, would have the power to
cause such an amendment to be adopted and approved at a special meeting of
Zydeco stockholders.
Upon closing of the merger, Zydeco issued to two individuals for broker
services warrants to purchase an aggregate of 523,756 shares of Zydeco common
stock at $0.08 per share.
The merger will be accounted for as a reverse acquisition of Zydeco by
DataVoN under the purchase method. Accordingly, the historical financial
statements of DataVoN prior to the merger will become the financial statements
of the registrant, and the results of operations of Zydeco will be combined with
DataVoN effective with the merger.
Certain Covenants in 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, stockholders 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 stockholders an amount equal to any liability for taxes owed by the
DataVoN stockholders 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). To the extent not previously paid, Zydeco
shall issue Hugh Simpson a non-interest bearing note payable on demand for the
estimated liability for taxes owed by the DataVoN stockholders (as described
above), no later than July 15, 2000.
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,
3
business, operations, debts or liabilities of Exploration, whether arising prior
to, concurrent with or after the merger.
Item 2. Acquisition or Disposition of Assets
See discussion under Item 1 above. For more information concerning the
merger, please see (i) the Agreement and Plan of Merger which has been filed as
an exhibit, and (ii) the information set forth in the Information Statement,
dated May 24, 2000 and filed with the Securities and Exchange Commission on May
25, 2000, pursuant to Section 14(f) of the Securities Exchange Act of 1934 and
SEC Rule 14f-1.
Forward-Looking Statements
The information in this Form 8-K 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. DataVoN 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 DataVoN makes. The forward-looking
statements in this Form 8-K reflect DataVoN'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, significant competition and those other risks and
uncertainties discussed herein that could cause DataVoN's actual results to
differ materially from its historical results or those that DataVoN hopes to
achieve. In this Form 8-K, 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 8-K. DataVoN undertakes no
obligation to announce publicly revisions DataVoN makes to these forward-looking
statements to reflect the effect of events or circumstances that may arise after
the date of this Form 8-K. All written and oral forward-looking statements made
subsequent to the date of this Form 8-K and attributable to DataVoN or persons
acting on its behalf are expressly qualified in their entirety by this section.
DataVoN
Company Overview
- ----------------
DataVoN 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 DataVoN's connected
cities. DataVoN 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 June 1, 2000, DataVoN was providing services to several of the
high volume United States carriers. DataVoN currently owns and operates a
diverse network that includes "points of presence" ("POP") in fourteen U.S.
markets. DataVoN plans to increase its network to approximately forty-five POP's
by the end of 2000. During the quarter ended December 31, 1999,
4
DataVoN transported in excess of 400 million minutes of traffic, a volume that
had been growing in excess of 50% on average every quarter.
Through the DataVoN Network, DataVoN transports a large volume of "toll
quality" voice and data services. The entrance point for communications traffic
over the DataVoN Network is referred to as a point of presence. 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. DataVoN's customers can
interconnect with DataVoN's network by connecting dedicated voice circuits from
their facilities to one of DataVoN's POP, which are currently located in Texas,
Colorado, Georgia, California, Florida, Maryland and Washington, D.C.
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, DataVoN uses the IP transport gateway in conjunction with the
managed IP network to deliver voice and data traffic. By using the VoPIN,
DataVoN avoids having to build a private, dedicated network of fiber and cable
connections, which would delay DataVoN's time-to-market in many locations and
would be more costly to deploy. DataVoN also uses data transmission over private
leased lines or traditional circuit-based voice networks where the managed IP
network is unavailable.
DataVoN had revenues of $8.27 million and an operating income of
$831,000 in 1999. Earnings before taxes, interest income, interest expense,
depreciation and amortization ("EBITDA") for that period was $848,000. Total
assets were $1.67 million at December 31, 1999.
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. DataVoN'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.
5
Benefits of Using DataVoN
- -------------------------
DataVoN 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).
DataVoN believes its services provide the following key benefits to its
customers:
. Low Price. DataVoN believes its services are often the low-price
option for carriers because packet switching is more efficient than traditional
circuit switching. In addition, DataVoN leverages the packet network to deliver
traffic, which results in lower costs than transmission alternatives that deploy
dedicated connections.
. Engineering Expertise. DataVoN believes it has positioned itself with
quality IP technology vendors, as well as a high quality engineering team with
extensive telecommunications network expertise. DataVoN 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 DataVoN's staff of network errors.
. Redundant Network Structure. DataVoN has constructed a network
infrastructure able to handle substantial minutes of traffic with dynamic,
alternative routing for calls. DataVoN's network architecture is scalable,
allowing it to support customers' future growth. DataVoN 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 DataVoN, the customer can deploy
financial resources in areas other than network infrastructure. DataVoN's
customers can gain a competitive advantage or maintain competitive parity with
its 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
- ---------------
DataVoN 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, DataVoN believes the following
opportunities are available:
. increasing the breadth of its current business lines, both in
existing and ancillary categories. DataVoN plans to acquire additional bandwidth
and facility POP's in several markets;
6
. expanding its customer base through strategic marketing relationships
and wholesale contracts. DataVoN 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. DataVoN plans to expand into
second tier markets.
Services
- --------
DataVoN's current services include voice and data services over IP. In
the future, DataVoN 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"). DataVoN 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
- ---------
DataVoN does not sell its services directly to subscribers. DataVoN'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.
DataVoN currently has a customer base that traffics over 100 million
minutes per month and is operating in the following cities:
Atlanta Denver Miami
Austin Fort Worth San Antonio
Baltimore Houston Washington, D.C.
Dallas Los Angeles
Currently, two of DataVoN's customers account for approximately 90% of
DataVoN's revenues, and DataVoN's largest customer accounts for approximately
50% of DataVoN's revenues.
Sales and Marketing
- -------------------
DataVoN plans to sell its networking products through the following
distinct channels:
7
. Executive Sales. DataVoN intends to present its products to top
corporate managers and leaders of certain industry associations.
. Direct Sales. Direct sales by DataVoN employees will include
attendance at trade shows.
. Direct Response Mail. DataVoN will initially direct its mailing
efforts at its existing customer base and their referrals.
Competition
- -----------
DataVoN 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.
DataVoN 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 DataVoN'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.
DataVoN 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 DataVoN, 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 DataVoN faces increasing competition in this
market space, DataVoN believes these companies may represent potential future
customers and strategic partners.
Government Regulation
- ---------------------
DataVoN believes that under United States law, based on specific
regulatory classifications and recent regulatory decisions, the IP
communications services that DataVoN provides constitutes information services,
as opposed to regulated telecommunications services. As such, the FCC's current
position is that 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 DataVoN's operations may
be subject to state or federal regulation, including regulation governing
8
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 DataVoN's
business, financial condition and results of operation.
DataVoN 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, DataVoN 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
DataVoN'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.
DataVoN Founder
- ---------------
Hugh Simpson, age 42, founded DataVoN in 1997 and has served as its
sole officer and majority shareholder. 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. Mr. Simpson's United States
Marine Corp Reserve Unit was activated for duty in Operation
9
Desert Shield and Storm in 1990. 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. Simpson served as a board member of Total Communication, a
private communications concern based in Cedar Rapids, Iowa until September 1999.
Mr. Simpson received a Bachelor Degree from Sam Houston State University in
1979.
Employees
- ---------
DataVoN presently has 16 employees, which are comprised of seven
technical, five telecom-experienced veterans, and four administrative positions.
Facilities
- ----------
DataVoN'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.
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 agent, certain commissions pursuant to a contract drafted by the
former agent. DataVoN has countersued the former agent for amounts allegedly
owed by the former agent to DataVoN. The litigation is in its early stages and
no determination of the outcome is possible at this stage. The former agent
alleges maximum economic damages in the amount of $4,222,970.54. Management of
DataVoN can make no assurances as to the outcome of such litigation nor what
effect it will have on the business of DataVoN or its financial condition. The
defendants are defending the action vigorously.
Risk Factors
Risks Related to DataVoN's Operations
- -------------------------------------
DataVoN has a limited operating history upon which to base an
investment decision, and you may inaccurately assess its prospects for success.
DataVoN was incorporated in November 1997 and first began to offer commercial
services in January 1998. Due to DataVoN's limited operating history, it is
difficult for DataVoN to predict future results of operations. Moreover, DataVoN
cannot be sure that it has accurately identified all of the risks to its
business, especially since DataVoN uses new, and in many cases, unproven
technologies and provides new services. As a result, its past results and rates
of growth may not be a meaningful indicator of its future results of operations.
Also, your assessment of the prospects for DataVoN's success may prove
inaccurate.
10
DataVoN's revenue would decline significantly if it lost one or more of
its most significant customers. DataVoN generates much of its revenue from a
limited number of customers. Customers may discontinue their use of DataVoN's
services at any time, and without notice. Therefore, in any given quarter,
DataVoN would lose a significant amount of revenue if it lost one or more major
customers.
Failure to obtain necessary additional capital in the future on
acceptable terms would prevent DataVoN from executing its business plan. DataVoN
needs additional capital to finance investments in equipment and corporate
infrastructure, expand its network, increase the range of services it offers and
respond to competitive pressures and perceived opportunities. Cash flow from
operations and cash on hand may not be sufficient to cover DataVoN's operating
expenses and capital investment needs. DataVoN cannot assure you that additional
financing will be available on terms acceptable to it, if at all. Failure to
obtain additional funding would prevent DataVoN from making expenditures that
will allow it to grow or maintain its operations.
If DataVoN raises additional funds by selling equity securities, the
relative equity ownership of its existing investors could be diluted or new
investors could obtain terms more favorable than previous investors. If DataVoN
raises additional funds through debt financing, it could incur significant
borrowing costs. The failure to obtain additional financing when required could
result in DataVoN being unable to grow as required to attain profitable
operations.
DataVoN may not be able to generate sufficient revenue to maintain
profitability if telecommunications carriers and other communications service
providers are reluctant to use its services or do not use its services in
sufficient volume. If the market for IP telephony and new services does not
develop as DataVoN expects, or develops more slowly than expected, its business,
financial condition and results of operations will be materially adversely
affected.
DataVoN's customers may be reluctant to use its services for a number
of reasons, including:
. perceptions that the quality of voice transmitted over the packet
switched data network is low;
. perceptions that IP telephony is unreliable; and
. traffic may not be able to be delivered with significant cost
advantages.
The growth of its business depends on carriers and other communications
service providers generating an increased volume of voice and data traffic, and
selecting its network to carry at least some of this traffic. If the volume of
voice and data traffic fails to increase, or decreases, and these third-parties
do not employ DataVoN's network, DataVoN's ability to generate sufficient
revenues to maintain profitability will be materially adversely affected.
DataVoN can not assure you that end-users will continue to purchase services
from its customers or that its customers will maintain a demand for its
services.
11
DataVoN depends on its key personnel and may have difficulty attracting and
retaining the skilled employees it needs to execute its growth plans.
DataVoN depends heavily on its key management. DataVoN's future success
will depend, in large part, on the continued service of its key management and
technical personnel, including Hugh Simpson, its President and Chief Executive
Officer. If any of these individuals is unable or unwilling to continue in their
present positions, DataVoN's business, financial condition and results of
operations would suffer.
DataVoN will need to attract skilled personnel to execute its growth
plans. DataVoN's future success will depend, in large part, on its ability to
attract, retain and motivate highly skilled employees, particularly engineering
and technical personnel. Competition for such employees in DataVoN's industry is
intense. DataVoN has from time to time in the past experienced, and it expects
to continue to experience in the future, difficulty in hiring and retaining
employees with appropriate qualifications. DataVoN may not be able to retain its
employees or attract, assimilate or retain other highly qualified employees in
the future. If DataVoN does not succeed in attracting and retaining skilled
personnel, it may not be able to grow at a sufficient rate to maintain
profitable operations.
DataVoN may face quality and capacity problems over its network upon
failures by third parties.
Vendors. DataVoN relies upon third-party vendors to provide it with the
equipment and software that DataVoN uses to transfer and translate calls from
traditional voice networks to the packet switched network, and vice versa.
DataVoN cannot assure you that it will be able to continue purchasing such
equipment and software on acceptable terms, if at all. If DataVoN becomes unable
to purchase the equipment needed to maintain and expand its network as currently
configured, DataVoN may not be able to maintain or expand its network to
accommodate growth and DataVoN may consequently be unable to grow revenues
sufficiently to maintain projections.
Parties that Maintain Phone and Data Lines. DataVoN's business model
depends on the availability of the managed IP network bandwidth to transmit
voice and data calls, and to provide other value-added services. Third-parties
maintain, and in many cases own, the traditional voice networks as well as data
networks. Some of these third-parties are national telephone companies. They may
increase their charges for using these lines at any time and decrease DataVoN's
profitability. They may also fail to properly maintain their lines and disrupt
DataVoN's ability to provide service to its customers. Any failure by these
third-parties to maintain these lines and networks that leads to a material
disruption of DataVoN's ability to provide services and could discourage its
customers from using DataVoN's network, which could have the effect of
preventing DataVoN's ability to maintain projections.
Strategic Relationships. DataVoN depends in part on its strategic
relationships to expand its distribution channels and develop and market its
services. DataVoN's strategic relationship
12
partners may choose not to renew existing arrangements on commercially
acceptable terms, if at all. In general, if DataVoN loses certain key strategic
relationships, or if DataVoN fails to develop new relationships in the future,
its ability to expand the scope and capacity of its network, and to maintain
state-of-the-art technology, would be materially adversely affected.
DataVoN may not be able to succeed in the intensely competitive market
for its services. The market for VoPIN, data and other value-added services is
extremely competitive and will likely become more competitive. Internet protocol
and IP telephony service providers, such as GRIC Communications, iBasis and ITXC
Corp., route traffic to destinations worldwide and compete directly with
DataVoN. Also, IP telephony service providers, such as Net2Phone, that presently
focus on retail customers may in the future enter DataVoN's market and compete
with DataVoN. In addition, major telecommunications carriers, such as AT&T,
Deutsche Telekom, MCI WorldCom and Qwest Communications, have all entered or
announced plans to enter the IP telephony market. All of these companies are
larger than DataVoN and have substantially greater managerial and financial
resources than DataVoN. Intense competition in DataVoN's markets can be expected
to continue to put downward pressure on prices and adversely affect its
profitability. DataVoN cannot assure you that it will be able to compete
successfully against its competitors and DataVoN may lose customers or fail to
grow its business as a result of this competition.
DataVoN is subject to downward pricing pressures which could prevent
DataVoN from maintaining profitability. As a result of numerous factors,
including increased competition, prices for long distance calls have been
decreasing. This downward trend of prices to end-users has caused DataVoN to
lower the prices it charges communications service providers for call completion
on its network. If this downward pricing pressure continues, DataVoN cannot
assure you that it will be able to offer IP telephony services at costs lower
than, or competitive with, the traditional voice network services with which it
competes. The continued downward pressure on prices would have a material
adverse effect on DataVoN's ability to operate its network and business
profitability.
If DataVoN is not able to keep up with rapid technological change in a
cost effective way, the relative quality of its services could suffer. The
technology upon which DataVoN's services depend is changing rapidly. Significant
technological changes could render the equipment which DataVoN uses obsolete,
and competitors may begin to offer new services that it is unable to offer.
DataVoN must adapt to its rapidly changing market by continually improving the
responsiveness, reliability, services and features of its network and by
developing new features and applications to meet customer needs. If DataVoN is
unable to successfully respond to these developments or does not respond in a
cost-effective way, it may not be able to offer competitive services.
DataVoN may not be able to expand and upgrade its network adequately to
accommodate any future growth. DataVoN's business requires that it handle a
large number of calls simultaneously. As DataVoN expands its operations, DataVoN
expects to handle significantly more calls. DataVoN will need to expand and
upgrade its hardware and software to
13
accommodate such increased traffic. If DataVoN does not expand and upgrade
quickly enough, it will not have sufficient capacity to handle the traffic and
its operating performance would suffer. Consequently, DataVoN could develop a
negative reputation with its customers and lose business.
If DataVoN fails to manage its growth, DataVoN could lose customers.
DataVoN has grown rapidly to date and expects to continue to grow rapidly. In
order to increase the number of its customers and the size of its operations,
DataVoN will need to improve its administrative, accounting, operating systems
and controls. DataVoN may need to redesign several internal systems. DataVoN's
attention to these matters may distract it from other aspects of its business.
Moreover, failure to implement new systems and controls may hamper DataVoN's
ability to provide services to customers and may impair the quality of its
services which could result in the loss of customers.
Fluctuations in DataVoN's quarterly results of operations that result
from various factors inherent in its business may cause the market price of its
common stock to fall. DataVoN's revenue and results of operations have
fluctuated and may continue to fluctuate significantly from quarter to quarter
in the future due to a number of factors, many of which are not in its control,
including, but not limited to:
. the amount of traffic DataVoN is able to sell to its customers, and
their decisions on whether to route traffic over DataVoN's network;
. the percentage of traffic that DataVoN is able to carry over the
managed IP network, rather than over the more costly traditional
public-switched telephone network;
. DataVoN's ability to negotiate changes in the termination fees
charged by its local providers when its margins deteriorate;
. capital expenditures required to expand or upgrade its network;
. technical difficulties or failures of its network systems or
third-party delays in expansion or provisioning system problems; and
. DataVoN's ability to offer value-added services that are appealing
to the market.
Because of these factors, you should not rely on quarter-to-quarter
comparisons of DataVoN's results of operations as an indication of its future
performance. It is possible that, in future periods, DataVoN's results of
operations will be significantly lower than the estimates of public market
analysts and investors. Such a discrepancy could cause the price of its common
stock to decline significantly.
If DataVoN is unable to protect its intellectual property, its
competitive position would be adversely affected. DataVoN relies on trademark
and copyright law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, partners and others to protect its
intellectual property. Despite its precautions, however, unauthorized
third-parties may copy its services or reverse engineer or obtain and use
information that DataVoN regards as proprietary. End-user license provisions
protecting against unauthorized
14
use, copying, transfer and disclosure of any licensed program may be
unenforceable. While DataVoN does not have any patents pending, DataVoN may seek
to patent certain software or equipment in the future. DataVoN does not know if
any of its future patent applications will be issued with the scope of the
claims its seeks, if at all. DataVoN's means of protecting its proprietary
rights in the United States may not be adequate and third-parties may infringe
or misappropriate its copyrights, trademarks and similar proprietary rights. If
DataVoN fails to protect its intellectual property and proprietary rights, its
business, financial condition and results of operations would suffer.
DataVoN believes that it does not infringe upon the proprietary rights
of any third party, and no third party has asserted a patent infringement claim
against DataVoN. If is possible, however, that such a claim might be asserted
successfully against DataVoN in the future. DataVoN's ability to provide its
services depends on its freedom to operate. That is, DataVoN must ensure that it
does not infringe upon the proprietary rights of others or have licensed all
such rights. DataVoN has not requested or obtained an opinion from counsel as to
whether its services infringe upon the intellectual property rights of any third
parties. A party making an infringement claim could secure a substantial
monetary award or obtain injunctive relief which could effectively block its
ability to provide services in the United States.
If any of these risks materialize, DataVoN could be forced to suspend
operations, to pay significant amounts to defend its rights, and a substantial
amount of attention of its management may be diverted from its ongoing business,
each of which could materially adversely affect its ability to maintain
profitability.
DataVoN relies on a variety of technologies, primarily software, that
it licenses from third parties. Continued use of this technology by DataVoN may
require that it purchase new or additional licenses from third parties. There
can be no assurances that DataVoN can obtain those third party licenses needed
for its business or that the third party technology licenses that it does have
will continue to be available to it on commercially reasonable terms or at all.
The loss or inability to maintain or obtain upgrades to any of these technology
licenses could result in delays or breakdowns in DataVoN's ability to continue
developing and providing its services or to enhance and upgrade its services.
DataVoN may undertake strategic acquisitions in the future and any
difficulties from integrating such acquisitions could damage its ability to
attain or maintain profitability. DataVoN may acquire businesses and
technologies that complement or augment its existing businesses, services and
technologies. Integrating any newly acquired businesses or technologies could be
expensive and time-consuming. DataVoN may not be able to integrate any acquired
business successfully. Moreover, DataVoN may need to raise additional funds
through public or private debt or equity financing to acquire any businesses,
which may result in dilution for stockholders and the incurrence of
indebtedness. DataVoN may not be able to operate acquired businesses profitably
or otherwise implement its growth strategy successfully.
15
Risks Related to the Internet and IP Telephony Industry
- -------------------------------------------------------
If the Internet does not continue to grow as a medium for voice and fax
communications, DataVoN's business may suffer. The technology that allows voice
and data communications over the Internet and the delivery of other value-added
services, is still in its early stages of development. Historically, the sound
quality of calls placed over the Internet was poor. As the IP telephony industry
has grown, sound quality has improved, but the technology requires further
refinement. Additionally, as a result of the Internet's capacity constraints,
callers could experience delays, errors in transmissions or other interruptions
in service. Transmitting telephone calls over the Internet must also be accepted
as an alternative to traditional voice and data service by communications
service providers. Because the IP telephony market is new and evolving,
predicting the size of this market and its growth rate is difficult. If
DataVoN's market fails to develop, then it will be unable to grow its customer
base and its results of operations will be adversely affected.
If the Internet infrastructure is not adequately maintained, DataVoN
may be unable to maintain the quality of its services and provide them in a
timely and consistent manner. DataVoN's future success will depend upon the
maintenance of the Internet infrastructure, including a reliable network
backbone with the necessary speed, data capacity and security for providing
reliability and timely Internet access and services. To the extent that the
Internet continues to experience increased numbers of users, frequency of use or
bandwidth requirements, the Internet may become congested and be unable to
support the demands placed on it and its performance or reliability may decline
thereby impairing DataVoN's ability to complete calls using the Internet at
consistently high quality. The Internet has experienced a variety of outages and
other delays as a result of failures of portions of its infrastructure or
otherwise. Any future outages or delays could adversely affect DataVoN's ability
to complete calls. Moreover, critical issues concerning the commercial use of
the Internet, including security, cost, ease of use and access, intellectual
property ownership and other legal liability issues, remain unresolved and could
materially and adversely affect both the growth of Internet usage generally and
DataVoN's business in particular.
The telecommunications industry is subject to domestic governmental
regulation and legal uncertainties which could prevent DataVoN from executing
its business plan. While the FCC has tentatively decided that information
service providers, including IP telephony providers, are not telecommunications
carriers for regulatory purposes, various companies have challenged that
decision. Congress is dissatisfied with the conclusions of the FCC and the FCC
could impose greater or lesser regulation on DataVoN's industry. The FCC is
currently considering, for example, whether to impose surcharges or other
regulations upon certain providers of IP telephony, primarily those which
provide IP telephony services to end-users located within the United States.
Aspects of DataVoN's operations may be, or become, subject to state or
federal regulations governing universal service funding, disclosure of
confidential communications, copyright and excise taxes. DataVoN cannot assure
you that government agencies will not
16
increasingly regulate Internet-related services. Increased regulation of the
Internet may slow its growth. Such regulation may also negatively impact the
cost of doing business over the Internet and materially adversely affect
DataVoN's ability to maintain profitability.
17
Item 7. Financial Statements and Exhibits
(a) Financial Statements
The required financial statements of DataVoN (except for the
financial statements of DataVoN for the three months ended March 31, 2000 and
1999, which Zydeco will file within 60 days of the last date on which its report
on Form 8-K is required to be filed), attached hereto as Annex A, are
incorporated herein by reference.
(b) Pro Forma Financial Statements
Zydeco will file the required pro forma financial statements
within 60 days of the last date on which its report on Form 8-K is required to
be filed.
(c) Exhibits
3.1 Certificate of Designations of Series A Convertible Preferred
Stock of Zydeco
10.1 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).
23.1 Consent of KPMG LLP.
99.1 Press Release of Zydeco Energy, Inc. dated May 23, 2000
(incorporated by reference to Form 8-K (File No. 0-22076)
filed with the SEC on May 24, 2000).
99.2 Press Release of Zydeco Energy, Inc. dated June 9, 2000.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zydeco Energy, Inc.
By: /s/ Hugh D. Simpson
--------------------------------------
Hugh D. Simpson
President and Chief Executive Officer
Date: June 19, 2000
19
ANNEX A
20
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.
KPMG LLP
Dallas, Texas
May 4, 2000
DATAVON, INC.
(Formerly HR Partners, Inc.)
Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
------------ -----------
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
============ ===========
Liabilities and Stockholder's Equity (Deficit)
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
============ ===========
See accompanying notes to financial statements.
2
DATAVON, INC.
(Formerly HR Partners, Inc.)
Statements of Income
For the years ended December 31, 1999 and 1998
1999 1998
----------- -----------
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
and diluted 39,813,851 39,813,851
=========== ===========
See accompanying notes to financial statements.
3
DATAVON, INC.
(Formerly HR Partners, Inc.)
Statements of Stockholder's Equity (Deficit)
For the years ended December 31, 1999 and 1998
Total
Common stock Retained stockholder's
------------------------ earnings equity
Shares Amount (deficit) (deficit)
---------- ---------------
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
=========== =========== ========== ==========
See accompanying notes to financial statements.
4
DATAVON, INC.
(Formerly HR Partners, Inc.)
Statements of Cash Flows
For the years ended December 31, 1999 and 1998
1999 1998
----------- -----------
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 --
=========== ===========
See accompanying notes to financial statements.
5
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.
(Continued)
6
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
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.
(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.
(Continued)
7
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements
December 31, 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.
(2) Property and Equipment
Property and equipment consisted of the following:
Estimated
useful life 1999 1998
---------------- ---------------- ----------------
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
================ ================
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.
(Continued)
8
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
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.
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:
Vehicle $ 51,745
Computer equipment 20,292
Office equipment 20,269
-----------------
92,306
Less accumulated amortization 10,367
-----------------
$ 81,939
=================
Amortization of assets held under capital leases is included with
depreciation expense.
(Continued)
9
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
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:
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
=================
(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. 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.
(Continued)
10
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(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:
1999 1998
------------------ -----------------
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
================== =================
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 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.
(Continued)
11
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
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 valuation of the Merger may result in a
significant amount of goodwill. The operations of Zydeco may not support
the carrying value of such goodwill. The Company has not completed its
analysis of the accounting for the Merger, though the Company may incur a
significant and immediate charge to operations if significant goodwill is
recognized that cannot be supported by the operations of Zydeco.
In connection with the Merger, the Company will merge 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
(Continued)
12
DATAVON, INC.
(Formerly HR Partners, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
Zydeco common shares on an as if converted basis on all matters. 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.
13