U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from _______ to _______
Commission File Number: 0-22076
DTVN Holdings, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
76-0404904
(I.R.S. Employer Identification No.)
1801 Gateway Blvd, Suite 101
Richardson, Texas 75080
(Address of Principal Executive Offices)
(972) 783-0284
(Issuer's Telephone Number, Including Area Code)
_______________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 12, 2001 there were 59,414,609 shares of DTVN Holdings, Inc.
Common Stock, $.001 par value, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
---
FORM 10-QSB
TABLE OF CONTENTS
Page
Number
------
PART I Financial Information
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) ............................... 3
Condensed Consolidated Statements of Operations (Unaudited) ..................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) ..................... 5
Notes to Condensed Consolidated Financial Statements ............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ...................................................................... 9
PART II Other Information
Item 1. Legal Proceedings ............................................................... 16
Item 2. Changes in Securities and Use of Proceeds ....................................... 16
Item 6. Exhibits and Reports on Form 8-K ................................................ 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
DTVN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
Assets 2001 2000
----------------- ----------------
Current assets:
Cash and cash equivalents $ 2,244,950 $ 2,895,402
Certificates of deposit 100,529 100,000
Accounts receivable 1,833,077 278,059
Vendor deposit 64,000 64,000
Deferred tax asset (note 10) -- 902,339
Prepaid expenses 417,692 --
Other current assets 10,435 121,674
----------------- ----------------
Total current assets 4,670,683 4,361,474
----------------- ----------------
Property and equipment, net 2,749,691 1,136,806
Goodwill, net 4,039,000 23,562,199
Investments 50,000 182,061
Other assets 310,359 --
Purchased technology -- 635,508
----------------- ----------------
$ 11,819,733 $ 29,878,048
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Note payable to related parties (note 5) $ 122,750 $ 249,090
Current portion of notes payable (note 5) 1,116,946 211,035
Accounts payable 2,729,758 1,314,688
Unearned revenue 168,773 697,758
Accrued liabilities and other (note 7) 3,767,047 994,609
Current installments of obligations under capital leases 365,158 11,971
----------------- ----------------
Total current liabilities 8,270,432 3,479,151
----------------- ----------------
Deferred income taxes -- 39,101
Notes payable less current portion (note 5) 241,375 343,411
Obligations under capital leases, excluding current installments 298,191 12,139
----------------- ----------------
Total liabilities 8,809,996 3,873,802
----------------- ----------------
Stockholders' equity:
Common stock, $.001 par value, 150,000,000 shares 58,977 49,966
authorized, and 58,977,124 issued and outstanding
at September 30, 2001 and 49,965,951 issued and outstanding
at December 31, 2000
Additional paid in capital 36,388,475 29,959,014
Accumulated Deficit (33,437,717) (4,057,027)
Accumulated other comprehensive income -- 52,293
----------------- ----------------
Contingencies (note 10)
Total stockholders' equity 3,009,735 26,004,246
$ 11,819,733 $ 29,878,048
================= ================
See accompanying notes to condensed consolidated financial statements.
3
DTVN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
-------------------------------- -------------------------------
Revenues:
Net service revenue $ 3,638,481 3,087,466 $ 12,629,454 8,372,795
Other revenue 13,437 56,669 154,717 82,669
------------- ----------- --------------- ------------
Total revenues 3,651,918 3,144,135 12,784,171 8,455,464
Operating expenses:
Cost of services 4,031,053 2,000,405 10,822,326 4,808,771
Selling and marketing 76,458 30,532 286,848 68,398
General and administrative (note 6) 1,824,409 1,286,082 3,959,280 3,335,225
Litigation judgment (note 7) 2,110,011 -- 2,110,011 --
Amortization of goodwill 1,554,443 1,328,890 4,406,586 1,649,280
Loss on disposal of assets (note 8) 19,394,416 -- 19,394,416 --
Depreciation, depletion and amortization 135,164 56,607 363,547 110,010
------------- ----------- --------------- ------------
Total operating expenses 29,125,954 4,702,516 41,343,014 9,971,684
------------- ----------- --------------- ------------
Operating loss (25,474,036) (1,558,381) (28,558,843) (1,516,220)
Interest income 15,525 31,020 58,437 59,064
Gain on sale of investments -- -- 59,232 --
Interest expense 29,035 8,687 62,033 24,843
------------- ----------- --------------- ------------
Loss before income taxes (25,487,546) (1,539,059) (28,503,207) (1,485,010)
Income tax expense (benefit) 927,405 (77,762) 877,483 (739,529)
------------- ----------- --------------- ------------
Net loss $ (26,414,951) (1,461,297) $ (29,380,690) (745,481)
============= =========== =============== ============
Net loss per common share:
Basic and diluted $ (0.46) (0.03) $ (0.55) (0.02)
============= =========== =============== ============
Weighted average common shares outstanding:
Basic 57,953,608 49,965,951 53,508,231 44,024,522
============= =========== =============== ============
Diluted 67,573,016 49,965,951 60,167,896 44,024,522
============= =========== =============== ============
Pro forma data:
Income tax expense $ 66,491
------------
Net loss $ (1,551,501)
============
Net loss per common share:
Basic and diluted $ (0.04)
============
Weighted average common shares outstanding:
Basic and diluted 44,024,522
============
See accompanying notes to condensed consolidated financial statements.
4
DTVN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2001 2000
---- ----
Cash flows from operating activities:
Net loss $(29,380,690) $ (745,481)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation, depletion and amortization 4,770,133 1,759,290
Non-cash general & administrative expenses 593,680 1,652,042
Loss on disposal of asset 19,394,416 3,011
Deferred tax (benefit) expense 877,483 (975,353)
Gain on sale of investments (59,232) --
Changes in assets and liabilities:
Accounts receivable (1,490,972) 535,388
Customer deposit -- (360,000)
Accounts payable and accrued liabilities 4,006,907 589,155
Unearned revenue (528,985) 177,626
Vendor deposit -- 324,791
Prepaid expenses (262,669) (43,634)
Other current assets (52,826) 29,253
------------ ------------
Net cash provided by (used in) operating activities (2,132,755) 2,946,088
------------ ------------
Cash flows from investing activities:
Capital expenditures (966,031) (155,414)
Payment of deposits (310,358) --
Purchase of certificates of deposit (100,529) --
Proceeds from maturity of certificates of deposit 100,000 --
Sale of investments 138,721 --
Sale of assets 740,000 --
Payment of cash for acquisitions, net of cash acquired (410,793) 432,414
------------ ------------
Net cash provided by (used in) investing activities (808,990) 277,000
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable to related parties 122,750 250,000
Principal payments on notes to related parties (249,090) --
Principal payments on obligations (237,834) (232,286)
Proceeds from notes payable 1,023,267 --
Payment of dividends -- (847,446)
Proceeds sale of common stock 1,500,000 --
Proceeds exercise stock options 132,200 --
------------ ------------
Net cash provided by (used in) financing activities 2,291,293 (829,732)
------------ ------------
Net (decrease) increase in cash and cash equivalents (650,452) 2,393,356
Cash and cash equivalents at beginning of period 2,895,402 394,740
------------ ------------
Cash and cash equivalents at end of period $ 2,244,950 $ 2,788,096
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 52,865 $ 2,164
============ ============
Cash paid during the year for income taxes $ 27,327 $ 27,180
============ ============
Supplemental disclosure of noncash investing and financing activities:
Purchase of equipment in exchange for note payable $ -- $ 709,473
============ ============
Disposal of capitalized lease asset $ -- $ 51,745
============ ============
Reverse acquisition of Zydeco by DataVoN $ -- $ 27,962,700
============ ============
Acquisition of Video Intelligence by DTVN $ 4,678,086 $ --
============ ============
Acquisition of equipment under capital lease $ 751,835 $ --
============ ============
See accompanying notes to condensed consolidated financial statements.
5
DTVN HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2001 and 2000
(Unaudited)
(1) Merger and Basis of Financial Reporting
On June 9, 2000, DataVoN, Inc. ("DataVoN") merged (the "Merger") with DTVN
Holdings, Inc. ("DTVN"), formerly Zydeco Energy, Inc., and DataVoN became a
subsidiary of DTVN. Shareholders of DataVoN received shares of DTVN equal to a
majority of the shares of DTVN outstanding after the transaction. Accordingly,
the business combination has been accounted for as a reverse acquisition of DTVN
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 DTVN 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 DTVN subsequent to the Merger. The purchase price totaled
approximately $28 million, which was comprised of the traded market value of
DTVN's outstanding common stock and the fair value of DTVN'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 was being amortized to expense over a five-year period. As a
result of a disposition of substantially all the tangible assets acquired in the
June 2000 Zydeco Energy, Inc. merger during the three month period ended
September 30, 2001 all of the remaining goodwill was written off.
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 DTVN. The preferred
shares were automatically converted into 7,190,000 common shares when sufficient
additional common shares of DTVN were authorized by its stockholders.
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 June 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 is based upon the
Company's historical income statements and give effect to pro forma income taxes
as if the Company was a C corporation for the entire duration of both periods.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America 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 accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, the accompanying unaudited consolidated 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 consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the year ended December 31, 2000 included in the Form 10-KSB filed by the
Company with the Securities and Exchange Commission on March 26, 2001, as
amended.
(2) Acquisitions
On April 13, 2001, the Company completed a merger with Video Intelligence, Inc.,
a Pennsylvania corporation ("Video Intelligence"). Pursuant to the merger, the
Company issued 6,749,775 shares of the common stock, par value $0.001 per share,
of the Company (the "Common Stock") and agreed to pay a total of $493,225 in
cash to the holders of all of the issued and outstanding shares of capital stock
of Video Intelligence. An aggregate of 2,530,251 shares of Common Stock issued
in connection with the merger are subject to a certain Relinquishment Agreement,
dated April 12, 2001 among the Company, Video Intelligence and certain
stockholders. Pursuant to the Relinquishment Agreement, in the event that
financial or other performance criteria set forth in
6
the Relinquishment Agreement are not achieved during the first year after the
closing of the merger, all or a portion of the Common Stock will be relinquished
and transferred to the Company, without further consideration, as a refund of
consideration previously paid in connection with the merger. Under the terms of
the merger, all of the options to purchase shares of common stock of Video
Intelligence that were issued and outstanding at the time of the merger were
assumed by the Company and converted into options to purchase 1,141,804 shares
of Common Stock at $0.25 per share. The assumed options were exercisable for a
period of ninety (90) days following the closing of the merger. As of the final
exercise date, 948,948 of the options had been exercised and 192,856 were
abandoned. The total exercise price paid for these options was $153,830 and
333,629 shares exchanged in cashless option exercises. A portion of the option
shares issued is subject to the Relinquishment Agreement discussed above.
(3) Stock Compensation
In 2000, the Company adopted two stock option plans. Under the plans, the
Company may grant to officers, directors, consultants and employees options to
purchase shares of the Company's Common Stock. In March of 2000, under the
DataVoN, Inc. Stock Option Plan, effective as of March 17, 2000 (the "March 2000
Plan") the Company granted options to purchase 2,522,459 shares of its common
stock at an exercise price of $.49 per share. As of September 30, 2001, a total
of 1,187,652 of the options granted under the March 2000 Plan were forfeited. An
adjusted stock compensation charge related to those options of $2.9 million is
being recognized over the vesting period. Through September 30, 2001, the
Company had granted options to purchase a total of 5,345,800 shares of its
common stock under the DTVN Holdings, Inc. 2000 Stock Option and Restricted
Stock Plan effective as of December 21, 2000 (the "December 2000 Plan"), at
exercise prices generally equal to the common stock's fair market value as of
the date of such grants. During the third quarter of 2001, options on 150,000
shares were forfeited when Directors left the Company. As of September 30, 2001,
a total of 850,000 of the options granted under the December 2000 Plan had been
forfeited. As of September 30, 2001, with respect to the December 2000 Plan,
$313,750 is being recognized as a stock compensation charge over the vesting
period. All option grants occurring after March 2000, have been made under the
December 2000 Plan. With some exceptions, all options have a 10-year life and a
3-year vesting period.
(4) Segment Information
As a result of the Merger and the acquisition of Video Intelligence, DataVoN
combined with Video Intelligence provides Internet protocol services to a number
of major domestic and international carriers and IP users desiring to employ the
benefits of Voice over Internet Protocol ("VoIP") technology and networking and
enhanced video services. Zydeco Exploration, Inc., a wholly owned subsidiary,
that was engaged in the exploration for oil and gas utilizing advanced
three-dimensional seismic and computer-aided exploration techniques sold a
substantial portion of its assets in the third quarter for $740,000, which
resulted in a write off of the remaining goodwill related to the Merger from
June 2000. (See Note 8)
(5) Notes Payable
In March 2000, the Company entered into a note payable arrangement with a vendor
for the purchase of network equipment. In October 2000, the Company refinanced
the equipment with a master revolving note with a bank to include future
purchases of equipment. The interest is payable monthly at an interest rate of
the bank's prime rate plus .5%, with the outstanding principal converting into
an installment loan on May 22, 2001. On October 19, 2001, the remaining balance
was refinanced with a Promissory Note to another bank. The note bears interest
at the bank's base rate plus 1% per annum. The note is due October 2004.
On May 1, 2000, the Company entered into a Security Agreement and Note Payable
with a related party for $300,000. Until the final balance of $100,000 was paid
on April 16, 2001 the note bore interest at 9% per annum. The note was secured
by substantially all of the Company's assets.
On February 23, 2001, the Company entered into a Variable Rate Installment
Agreement with a bank for $23,000. The note bears interest at the prime rate
plus 1% per annum. The note is due December 23, 2004. On October 19, 2001, the
remaining balance was refinanced with a Promissory Note to another bank. The
note bears interest at the bank's base rate plus 1% per annum. The note is due
October 2004.
7
On June 1, 2001, Video Intelligence entered into a Security Agreement and Note
Payable with a related party for $100,000 and on July 29, 2001 an additional
$22,000. Until the final balance is paid on June 1, 2002 and July 29, 2002 the
note bears interest at 9% per annum. The note is unsecured.
On September 24, 2001, the Company entered into a Promissory Note with an
individual for up to $2,000,000. This note evidences a line of credit under
which the Company can request a maximum of two advances. Interest shall accrue
on the unpaid balance of the principal at 10% per annum.
The advances are due 180 days after drawn. As of October 23, 2001, $1,000,000
had been advanced on the note. The note is secured by a lien on all of the
Company's accounts receivable and is due on March 23, 2002.
(6) General and Administrative Non-Cash Expenses
The Company incurred non-cash general and administrative expenses during the
three and nine month periods ended September 30, 2001 and September 30, 2000.
These non-cash expenses relate to the stock compensation charge resulting from
the issuance of options. The non-cash expense for the three months ended
September 30, 2001 and 2000 was $244,185 and $460,335, respectively. The
non-cash expense for the nine months ended September 30, 2001 and 2000 was
$579,642 and $1,652,042, respectively.
(7) Litigation Judgment
DataVoN is currently involved in litigation with a former sales agent with
regard to commissions allegedly owed to the former commissioned agent by
DataVoN. The trial stage of the litigation concluded on August 17, 2001 and
resulted in responses to a jury charge against DataVoN in the approximate amount
of $2.1 million, which included attorneys' fees, court costs and interest.
DataVoN recognized an expense of approximately $2.1 million and accrued the
corresponding liability in the three month period ended September 30, 2001.
DataVoN currently has a motion for new trial pending based on factual
insufficiency of the evidence supporting the verdict, as well as newly
discovered evidence of violation of the contractor agreement. The new trial
motion is scheduled to be heard on November 26, 2001. If the Court denies the
new trial motion, DataVoN intends to appeal the judgment and has within 30 days
of the denial of the to post a bond to cover the post judgment collection
efforts and file the notice of appeal. DataVoN does not expect to commit any
significant cash resources to the fulfillment of any bond requirements as the
amount of the bond is subject reduction and/or negotiation.
(8) Loss on Disposal of Assets
As a result of selling substantially all the assets obtained from the June 2000
merger with Zydeco Energy, Inc. during the three month period ended September
30, 2001, a loss on disposal was recognized in the amount of $19,394,416.
(9) Comprehensive Income (Loss)
Net income (loss) equals comprehensive income (loss) at September 30, 2001 and
2000.
(10) Income Taxes
Management assessed the likelihood the Company would utilize the deferred tax
assets, and decided it is more likely than not, the deferred tax assets will not
be realized, therefore, a full valuation allowance has been established.
(11) Contingencies
The Company is party from time to time to ordinary litigation incidental to its
business, none of which is expected to have a material adverse effect on the
results of operations, financial position or liquidity of the Company.
8
(12) Subsequent Event
DataVoN, Inc. and PointOne Telecommunications, Inc. have executed a letter of
intent pursuant to which DataVoN has been approved as the primary bidder for the
purchase of substantially all of PointOne's assets. PointOne is currently a
Chapter 11 debtor in a bankruptcy proceeding in Austin, Texas. Any transaction
between DataVoN and Point One would be subject to Bankruptcy Court approval.
On or about November 6, 2001, pursuant to the terms of a Stock Purchase
Agreement dated August 13, 2001, between the Company and Dynegy Technology
Capital Corp., the Company issued 437,485 shares of its common stock, part value
$0.001 per share, to Dynegy in exchange for $.5 million. The Company believes
that the issuance of such securities is exempt from registration in reliance on
Section 4(2) of the Securities Act of 1933 as a transaction not involving a
public offering. The issuance was made without general solicitation or
advertising, and the purchaser represented that it was acquiring the shares
without a view to distribute and that they were afforded the opportunity to
review all publicly filed documents and to ask questions, and receive answers
from, officers of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the financial condition and results of
operations of DTVN Holdings, Inc. (the "Company") for the three months and nine
months ended September 30, 2001 should be read in conjunction with the
accompanying consolidated financial statements and footnotes for the three
months and nine months ended September 30, 2001 included herein and in
conjunction with the consolidated audited financial statements and related notes
thereto contained in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000. 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. Quarterly operating results have varied
significantly in the past and can be expected to vary in the future. The results
for interim periods are not necessarily indicative of results for the year.
Unless the context otherwise requires, references in this report on Form 10-QSB
to the "Company" "we", "us", or "our" refer to DTVN Holdings, Inc. and its
direct and indirect subsidiaries.
FORWARD-LOOKING INFORMATION
All statements other than statements of historical fact contained in this
report, including without limitation statements containing the words "believes,"
"may," "will," "estimate," "continue," "anticipates," "intends," "expects"
"project," "potential, " and words of similar import, constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results, events
or developments to be materially different from any future results, events or
developments expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both nationally and in the regions in which the Company operates;
technology changes; competition; changes in business strategy or development
plans; the ability to attract and retain qualified personnel; liability and
other claims asserted against the Company; and other factors referenced in the
Company's filings with the Securities and Exchange Commission. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future results, events or
developments. All forward-looking statements included herein are expressly
qualified in their entirety by the cautionary statements in this paragraph.
OVERVIEW
The Company is a provider of voice, video and data services over a next
generation packet switched, internet protocol ("IP") network. As of October 31,
2001, the Company was providing services to several domestic carriers and
operating in 16 metropolitan markets. Through its network, the Company
transports a large volume of toll-quality voice, video and data services. The
Company's customers interconnect with the Company's network by connecting
dedicated voice circuits from the customers' facilities to the Company's
network.
9
Zydeco Energy, Inc. ("Zydeco") was incorporated in 1993 and engaged in acquiring
leases, drilling, and producing oil and gas reserves utilizing focused
geological concepts. Zydeco merged with DataVoN, Inc. ("DataVoN") in June 2000.
As a result of the DataVoN merger, the former shareholders of DataVoN owned
approximately 80% of the voting power of the Zydeco's common stock. The DataVoN
merger was accounted for as a reverse acquisition of Zydeco by DataVoN under the
purchase method of accounting. Accordingly, the historical financial statements
of DataVoN prior to the DataVoN merger have become Zydeco's financial
statements, and the Company's results of operations have been combined with
those of DataVoN from and after the date of the DataVoN merger. As the oil and
gas seismic exploration operations were not currently material to the Company's
combined results of operations prior to the disposition of substantially of its
assets during the three month period ended September 30, 2001, the Company does
not discuss them below.
The Company's primary sources of revenue are fees received from customers for
transporting the IP component of voice traffic over its network and from the
sale of enhanced voice, video and data IP based services. Much of this revenue
is dependent on the volume of voice, video and data traffic carried over the
network. For IP transport traffic, the Company charges its customers fees based
upon a per minute, per megabyte or flat rate charge and recognizes this revenue
in the period in which the transport is completed. For other enhanced services,
the revenue is recognized upon issuance of an invoice for services.
The Company's most significant costs and expenses are data communications and
telecommunications expenses, which are comprised primarily of collocation
facility fees, transport fees, termination fees, and equipment expenses.
Collocation facility fees are paid for lease of rack space, power and associated
services to "host" the equipment. Transport fees are paid to a "backbone
provider" to carry traffic between markets. 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 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, 2001 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2000
Net Service Revenue. The Company's net service revenue increased by
approximately $.55 million to approximately $3.64 million for the three months
ended September 30, 2001, from approximately $3.09 million for the three months
ended September 30, 2000. The increase in net revenue resulted from new
products, the planned introduction of the new, packet-switched infrastructure
and the concomitant increase in rates charged as the result of a shift from
primarily flat-rated circuit revenue to primarily minutes of use revenue. The
amount of traffic carried over the Company's network decreased by approximately
102.5 million minutes to approximately 358.0 million minutes for the three
months ended September 30, 2001, from approximately 460.5 million minutes for
the three months ended September 30, 2000. The decline in customer minutes was
also affected by the loss of a large 8xx origination and 8xx termination
customer that went out of business in the three months ended September 30, 2001.
Cost of Services. Cost of services increased by approximately $2.03 million to
approximately $4.03 million for the three months ended September 30, 2001, from
approximately $2.00 million for the three months ended September 30, 2000. The
increase in expense principally resulted from the network expansion. As a result
of this network expansion, collocation facility fees increased to approximately
$288,500 for the three months ended September 30, 2001, from approximately
$67,800 for the three months ended September 30, 2000 and telecommunications
fees increased to approximately $3.52 million for the three months ended
September 30, 2001, from approximately $1.80 million for the three months ended
September 30, 2001. As a percentage of net service revenue, cost of services
expense increased to approximately 111% for the three months ended September 30,
2001, from approximately 65% for the three months ended September 30, 2000, due
to costs associated with expanding the Company's network, adding presence in new
markets, and introducing a new product with lower gross margins.
Selling and Marketing Expenses. Selling and marketing expenses increased by
$45,926 to $76,458 for the three months ended September 30, 2001, from $30,532
for the three months ended September 30, 2000. 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. This increase is attributable to additional sales
personnel.
10
General and Administrative Expenses. General and administrative expenses
increased by approximately $.53 million to approximately $1.82 million for the
three months ended September 30, 2001, from approximately $1.29 million for the
three months ended September 30, 2000. 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, uncollectible accounts receivable, and human
resources. General and administrative expenses increased primarily due to the
recognition of a loss on uncollectible accounts receivable related to a 8xx
origination and 8xx termination customer that went out of business, increase in
the number of personnel and an increase in consulting and professional fees. As
a percentage of net revenue, general and administrative expenses increased to
approximately 50% for the three months ended September 30, 2001, from
approximately 42% for the three months ended September 30, 2000.
Litigation Judgment. Litigation judgment expenses increased by approximately
$2.1 million to approximately $2.1 million for the three months ended September
30, 2001, as compared to $0 for the three months ended September 30, 2000.
Litigation judgment expenses increased as a result of a response to a jury
charge against DataVoN.
Loss on Disposal of Assets. Loss on Disposal of Assets increased by
approximately $19.39 million to approximately $19.39 million for the three
months ended September 30, 2001, as compared to $0 for the three months ended
September 30, 2000. This increase is a result of selling a substantial portion
of the assets originally acquired in the Merger in June 2000 and the
corresponding write off of the related goodwill during the three months ended
September 30, 2001.
Depreciation, Depletion, and Amortization Expense. Depreciation, depletion, and
amortization expense increased by approximately $.21 million to approximately
$1.60 million for the three months ended September 30, 2001, from approximately
$1.39 million for the three months ended September 30, 2000. This increase
primarily resulted from the goodwill associated with the acquisition of Video
Intelligence in April of 2001 and depreciation of equipment related to the
expansion of the Company's network.
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.
Income Tax. Management assessed the likelihood the Company would utilize the
deferred tax assets, and decided it is more likely than not, the deferred tax
assets will not be realized, therefore, a full valuation allowance was
established.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2000
Net Service Revenue. The Company's net service revenue increased by
approximately $4.26 million to approximately $12.63 million for the nine months
ended September 30, 2001, from approximately $8.37 million for the nine months
ended September 30, 2000. The increase in net revenue resulted from an increase
in the amount of traffic carried over the Company's network to approximately
1,303 million minutes for the nine months ended September 30, 2001, from
approximately 1,200 million minutes for the nine months ended September 30, 2000
and higher per minute pricing for traffic derived from new products (including
8xx origination and 8xx termination).
Cost of Services. Cost of services increased by approximately $6.01 million to
approximately $10.82 million for the nine months ended September 30, 2001, from
approximately $4.81 million for the nine months ended September 30, 2000. The
increase in expense generally resulted from the increase in traffic described
above and the expansion of the network. As a result of this increased traffic
and network expansion, collocation facility fees increased to approximately $.65
million for the nine months ended September 30, 2001, from approximately $.11
million for the nine months ended September 30, 2000, and telecommunications
fees increased to approximately $9.87 million for the nine months ended
September 30, 2001, from approximately $4.50 million for the nine months ended
September 30, 2001. As a percentage of net service revenue, cost of services
expense increased to approximately 86% for the nine months ended September 30,
2001, from approximately 57% for the nine months ended September 30, 2000, due
to costs associated with expanding the Company's network and introducing a new
product with lower gross margins.
11
Selling and Marketing Expenses. Selling and marketing expenses increased by
$218,450 to $286,848 for the nine months ended September 30, 2001 from $68,398
for the nine months ended September 30, 2000. 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. This increase is attributable to the increase in sales
personnel.
General and Administrative Expenses. General and administrative expenses
increased by approximately $.62 million to approximately $3.96 million for the
nine months ended September 30, 2001, from approximately $3.34 million for the
nine months ended September 30, 2000. 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 primarily due to the recognition of a loss on
uncollectible accounts receivable related to a 8xx termination and 8xx
origination customer that went out of business during the nine months ended
September 30, 2001, an increase in the number of personnel, increase in
consulting and professional fees, but the increase was partially offset by a
decrease in the unearned stock compensation charge. As a percentage of net
revenue, general and administrative expenses decreased to approximately 31% for
the nine months ended September 30, 2001, from approximately 40% for the nine
months ended September 30, 2000.
Litigation Judgment. Litigation judgment expenses increased by approximately
$2.1 million to approximately $2.1 million for the nine months ended September
30, 2001, as compared to $0 for the nine months ended September 30, 2000.
Litigation judgment expenses increased as a result of a response to a jury
charge against DataVoN.
Loss on Disposal of Assets. Loss on Disposal of Assets increased by
approximately $19.39 million to approximately $19.39 million for the nine months
ended September 30, 2001, as compared to $0 for the nine months ended September
30, 2000. This increase is a result of selling a substantial portion of the
assets originally acquired in the Merger in June 2000 and the corresponding
write off of the related goodwill during the nine months ended September 30,
2001.
Depreciation, Depletion, and Amortization Expense. Depreciation, depletion, and
amortization expense increased by approximately $3.01 million to approximately
$4.77 million for the nine months ended September 30, 2001, from approximately
$1.76 million for the nine months ended September 30, 2000. This increase
primarily resulted from amortization of the goodwill associated with the DataVoN
merger in June 2000 and the acquisition of Video Intelligence in April of 2001
and depreciation of equipment related to the expansion of the Company's network.
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.
Income Tax. Management assessed the likelihood the Company would utilize the
deferred tax assets, and decided it is more likely than not, the deferred tax
assets will not be realized, therefore, a full valuation allowance was
established.
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. Historically, the Company's
capital needs have been met, in large part, from cash flow generated from
operations. Because the Company is placing greater emphasis on expanding its
network infrastructure, the Company plans to meet an increasing portion of its
capital needs through debt or equity investments, operating or capital leases
and/or other forms of equipment financing, although no assurance can be given
that such investments, leases, or other forms of financing will be available at
all or on terms that are acceptable to the Company. If the Company is unable to
generate sufficient cash flow or obtain outside financing, capital expenses will
be cancelled or delayed until sufficient cash resources are available.
Net cash used by operating activities was approximately $2.13 million for the
nine months ended September 30, 2001, as compared to net cash provided by
operating activities of approximately $2.95 million for the nine months ended
September 30, 2000. Cash used by operating activities was primarily attributable
to network expansion and increased selling, general and administrative expenses
related to the Company's network and its expansion.
12
Net cash used in investing activities was approximately $.81 million for the
nine months ended September 30, 2001, as compared to net cash provided by
investing activities of approximately $.28 million for the nine months ended
September 30, 2000. The decrease was attributable to the payment of deposits on
leases, capital expenditures and the acquisition of Video Intelligence.
Net cash provided by financing activities was approximately $2.29 million for
the nine months ended September 30, 2001, as compared to net cash used in
financing activities of approximately $.83 million for the nine months ended
September 30, 2000. The increase resulted primarily from investments under a
Stock Purchase Agreement whereby the investor can invest up to $3 million of
which $1.5 was invested prior to September 30, 2001 and $.5 subsequently.
In March 2000, the Company entered into a note payable arrangement with a vendor
for the purchase of network equipment. In October 2000, the Company refinanced
the equipment with a master revolving note with a bank to include future
purchases of equipment. The interest is payable monthly at an interest rate of
the bank's prime rate plus .5%, with the outstanding principal converting into
an installment loan on May 22, 2001. On October 19, 2001, the remaining balance
was refinanced with a Promissory Note to another bank. The note bears interest
at the bank's base rate plus 1% per annum. The note is due October 2004.
On November 5, 2000, the Company entered into a Variable Rate Installment
Agreement with a bank for approximately $300,000. The note bears interest at the
bank's prime rate plus 1% per annum. The note is due November 5, 2003. On
October 19, 2001, the remaining balance was refinanced with a Promissory Note to
another bank. The note bears interest at the bank's base rate plus 1% per annum.
The note is due October 2004.
On February 23, 2001, the Company entered into a Variable Rate Installment
Agreement with a bank for $23,000. The note bears interest at the prime rate
plus 1% per annum. The note is due December 23, 2004. On October 19, 2001, the
remaining balance was refinanced with a Promissory Note to another bank. The
note bears interest at the bank's base rate plus 1% per annum. The note is due
October 2004.
On June 1, 2001, Video Intelligence entered into a Security Agreement and Note
Payable with a related party for $100,000 and on July 29, 2001 an additional
$22,000. Until the final balance is paid on June 1, 2002 and July 29, 2002 the
note bears interest at 9% per annum. The note is unsecured.
On September 24, 2001, the Company entered into a Promissory Note with an
individual for up to $2,000,000. This note evidences a line of credit under
which the Company can request a maximum of two advances. Interest shall accrue
on the unpaid balance of the principal at 10% per annum and is secured by the
Company's accounts receivable. The advances are due 180 days after drawn. As of
October 23, 2001, $1,000,000 had been advanced on the note. The note is secured
by a lien on all of the Company's accounts receivable and is due on March 23,
2002.
VIDEO INTELLIGENCE MERGER
On April 13, 2001, the Company acquired, through a merger, Video Intelligence,
Inc., a Pennsylvania corporation ("Video Intelligence"). Pursuant to the Video
Intelligence merger, the Company issued 6,749,775 shares of the common stock,
par value $0.001 per share, of the Company (the "Common Stock") and agreed to
pay a total of $493,225 in cash to the holders of all of the issued and
outstanding shares of capital stock of Video Intelligence. As reported on the
OTC Bulletin Board, the price at which the Common Stock last traded on April 12,
2001 was $0.65 per share. Of the total cash consideration to be paid by the
Company in connection with the Video Intelligence merger, $246,613 was paid on
April 13, 2001. The balance of $246,612 was paid on June 12, 2001.
An aggregate of 2,530,251 shares of Common Stock issued in connection with the
Video Intelligence merger are subject to a certain Relinquishment Agreement,
dated April 12, 2001 (the "Relinquishment Agreement"), among the Company, Video
Intelligence, and certain stockholders of the Company. Pursuant to the
Relinquishment Agreement, in the event that financial or other performance
criteria set forth in the Relinquishment Agreement are not achieved during the
first year after the closing of the Video Intelligence merger, all or a portion
of the Common Stock issued by the Company in connection with the Video
Intelligence merger will be relinquished and transferred to the Company, without
further consideration, as a refund of consideration previously paid in
connection with the Video Intelligence merger.
13
Under the terms of the Video Intelligence merger, all of the options to purchase
shares of common stock of Video Intelligence that were issued and outstanding at
the time of the Video Intelligence merger were assumed by the Company and
converted into options to purchase 1,141,804 shares of the Common Stock at an
exercise price of $0.25 per share. The assumed options were exercisable for a
period of ninety days following the closing of the Video Intelligence merger. As
of the final exercise date, 948,948 of the options had been exercised and
192,856 had been abandoned. The total exercise price paid for these options was
$153,830 and 333,629 shares exchanged in cashless options exercises. A portion
of the option shares issued is subject to the same Relinquishment Agreement
discussed above.
CAPITAL EXPENDITURES
Capital expenditures totaled approximately $6.28 million for the nine months
ended September 30, 2001, of which approximately $.97 million was from cash from
operations and approximately $5.31 million capital and operating leases. The
Company expects to continue the expansion of its network throughout 2001 and
intends to increase its capital expenditures accordingly. The Company intends to
incur approximately $.50 million in additional capital expenditures during the
remainder of 2001, which the Company expects will be funded through a
combination of operating and capital leases, cash from operations, and the
issuance of either debt or equity securities or both. The Company currently does
not have sufficient cash on hand, existing borrowing availability or any
commitments for the cash to fund all of the planned capital expenditures. The
Company intends to use cash flow from operations, issuance of obligations under
capital and operating leases, and proceeds from the sale of either debt or
equity securities or both to fund such capital expenditures. There can be no
assurance that the Company will be able to generate sufficient cash flow or
obtain such outside financing to fund the planned capital expenditures. If the
Company is unable to generate sufficient cash flow or obtain such outside
financing, the planned expansion of its network infrastructure will be reduced,
delayed or canceled and such reduction, delay or cancellation could have a
material adverse effect on the business, financial condition or results of
operations of the Company.
CONTINGENCIES
DataVoN, Inc. is currently involved in litigation with a former sales agent with
regard to commissions allegedly owed to the former commissioned agent by
DataVoN. The trial stage of the litigation concluded on August 17, 2001. . As of
September 30, 2001 a judgment was entered by the Court in the amount of $2.1
million, which included attorneys' fees, court costs and interest. DataVoN has
accrued this expense in this quarter. DataVoN currently has a motion for new
trial pending based on factual insufficiency of the evidence supporting the
verdict, as well as newly discovered evidence of violation of the contractor
agreement. The new trial motion is scheduled to be heard on November 26, 2001.
If the Court denies the new trial motion, DataVoN intends to appeal the judgment
and has within 30 days of the denial of the to post a bond to cover the post
judgment collection efforts and file the notice of appeal. DataVoN does not
expect to commit any significant cash resources to the fulfillment of any bond
requirements as the amount of the bond is subject reduction and/or negotiation.
In addition, the Company is party from time to time to ordinary litigation
incidental to its business, none of which is expected to have a material adverse
effect on the results of operations, financial position or liquidity of the
Company.
SUBSEQUENT EVENTS
DataVoN, Inc. and Point One Telecommunications, Inc. have executed a letter of
intent pursuant to which DataVoN has been approved as the primary bidder for the
purchase of substantially all of Point One's assets. Point One is currently a
Chapter 11 debtor in a bankruptcy proceeding in Austin, Texas. Any transaction
between DataVoN and Point One would be subject to Bankruptcy Court approval.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No.'s 141 and 142, "Business Combinations"
and "Goodwill and Other Intangibles." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. SFAS 142 requires that ratable amortization of goodwill be
replaced with period fair-value based tests of the goodwill's impairment and
that intangible assets other than goodwill be amortized over their useful lives.
Additionally, under
14
the provision of the new accounting standard, an acquired intangible asset
should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. SFAS 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for by
the purchase method for which the date of acquisition is after June 30, 2001.
The provisions of SFAS 142 will be effective for fiscal years beginning after
December 15, 2001, and will thus be adopted by the Company, as required, in
fiscal year 2002. Adoption of SFAS No. 141 is not expected to have a material
impact on the Company's consolidated financial statements and related
disclosures. Management believes that SFAS 142 will have a material non-cash
impact on the Company's consolidated financial statements, as it will not
require the amortization of the Company's remaining goodwill, which approximates
$1 million annually. At this time the Company has not determined how remaining
goodwill will be allocated to specific reporting units as of January 1, 2002, as
the Company is in the process of evaluating its reporting units. Accordingly,
the Company has not made a determination about whether or not an impairment
charge will be necessary upon adoption of SFAS 142.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS 143 is not expected to have a material impact on the
Company's consolidated financial statements and related disclosure.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company will adopt SFAS No. 144 in fiscal year 2002. The Company does not
expect the provision of SFAS No. 144 to have any significant impact on its
financial condition or results of operations.
15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Information pertaining to this item is incorporated herein from Part I.
Financial Information (Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Contingencies).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 13, 2001, pursuant to the terms of a Stock Purchase Agreement between
the Company and Dynegy Technology Capital Corp., the Company issued 1,312,451
shares of its common stock, par value $0.001 per share, to Dynegy in exchange
for $1.5 million.
On or about September 24, 2001, the Company issued a total of 250,000 warrants
for the purchase of common stock of the Company to various individuals in
connection with the loan of up to $2,000,000 from an individual to the Company.
The warrants are exercisable for 5 years at an exercise price of $0.60 per
share.
The Company believes that the issuance of such securities was exempt from
registration in reliance on Section 4(2) of the Securities Act of 1933 as a
transaction not involving a public offering. The issuance was made without
general solicitation or advertising, and the purchaser represented that it was
acquiring the securities without a view to distribute and that they were
afforded the opportunity to review all publicly filed documents and to ask
questions, and receive answers from, officers of the Company.
All proceeds of these capital activities have been or will be used for operating
capital.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of Stockholders of the Company was held on July 25, 2001
to consider three new matters of business. The matters brought before the
stockholders and the voting results are as follows:
1. Election of Directors.
Stockholders approved the election of the following directors:
Nominees SHARES FOR SHARES AGAINST ABSTAINING
Hugh D. Simpson 11,449,067 500 11,700
Philip N. O'Reilly 11,412,187 500 48,580
James S. Holden 11,449,067 500 11,700
Amar Budarapu 11,448,567 1000 11,700
David G. Olson 11,449,067 500 11,700
G. Edward Powell 11,449,067 500 11,700
2. Proposal to approve Amendment to Company's 2000 Stock Option and
Restricted Stock Plan.
Stockholders were requested to approve and adopt an amendment to the
Company's 2000 Stock Option and Restricted Stock Plan to increase the
number of shares of Common Stock available for issuance under such
plan from 7,000,000 to an amount equal to 15% of the shares of the
Company's common stock issued and outstanding, subject to certain
conditions. The proposal was approved by the following votes: For:
2,258,976, Against: 422,245, Abstain: 19,200
3. Proposal to ratify the Appointment of KPMG LLP.
Stockholders were requested to ratify the appointment of KPMG LLP as
independent accountants for the Company for the fiscal year ending
December 31, 2001. The proposal was approved by the following votes:
For: 11,441,442, Against: 3600, Abstain: 16,225
16
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 the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and
to Form 8-K (File No. 0-22076) filed with the SEC on
December 21, 2000).
3.2 Amended and Restated Bylaws (incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended September 30, 2000).
10.1* Promissory Note in the original principal amount of
$2,000,000 payable to J. Lee Barton by the Company.
*Filed herewith.
(b) Reports on Form 8-K
None
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DTVN Holdings, Inc.
Dated: November 19, 2001 /s/ Philip N. O'Reilly
-------------------------------
Philip N. O'Reilly
Chief Financial Officer (Duly Authorized
Officer and Principal Financial Officer)
18