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 June 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.)
635 West Campbell Road, Suite 130
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 August 14, 2001 there were 57,664,673 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........................................................................... 10
PART II Other Information
Item 1. Legal Proceedings.................................................................... 17
Item 2. Changes in Securities and Use of Proceeds............................................ 17
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)
June 30, December 31,
Assets 2001 2000
---------------- ----------------
Current assets:
Cash and cash equivalents $ 232,950 $ 2,895,402
Certificates of deposit 98,910 100,000
Accounts receivable 1,568,006 278,059
Vendor deposit 64,000 64,000
Deferred tax asset 1,002,308 902,339
Prepaid expenses 136,450 --
Other current assets 35,610 121,674
----------------- ----------------
Total current assets 3,138,234 4,361,474
----------------- ----------------
Property and equipment, net 2,180,209 1,136,806
Goodwill, net 25,131,758 23,562,199
Investments 50,000 182,061
Other assets 368,055 --
Purchased technology 602,924 635,508
----------------- ----------------
$ 31,471,180 $ 29,878,048
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Note payable to related parties (note 5) $ 100,000 $ 249,090
Current portion of notes payable (note 5) 226,760 211,035
Accounts payable 1,071,397 1,314,688
Unearned revenue 226,173 697,758
Accrued liabilities and other 1,594,971 994,609
Current installments of obligations under capital leases 246,819 11,971
----------------- ----------------
Total current liabilities 3,466,120 3,479,151
----------------- ----------------
Deferred income taxes 39,101 39,101
Notes payable less current portion (note 5) 257,456 343,411
Obligations under capital leases, excluding current installments 201,980 12,139
----------------- ----------------
Total liabilities 3,964,657 3,873,802
----------------- ----------------
Stockholders' equity:
Common stock, $.001 par value, 150,000,000 shares 56,716 49,966
authorized, and 56,715,726 issued and outstanding
at June 30, 2001 and 49,965,951 issued and outstanding
at December 31, 2000
Additional paid in capital 34,472,575 29,959,014
Accumulated Deficit (7,022,768) (4,057,027)
Accumulated other comprehensive income -- 52,293
----------------- ----------------
Contingencies (note 8)
Total stockholders' equity 27,506,523 26,004,246
$ 31,471,180 $ 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 June 30, Six Months Ended June 30,
2001 2000 2001 2000
----------------- -------------- -------------- --------------
Revenues:
Net service revenue $ 5,408,529 2,782,127 $ 8,990,973 5,285,329
Other revenue 53,504 26,000 141,279 26,000
------------- ----------- --------------- ------------
Total revenues 5,462,033 2,808,127 9,132,252 5,311,329
Operating expenses:
Cost of services 4,264,247 1,563,676 6,791,271 2,808,366
Selling and marketing 105,801 30,235 210,390 37,866
General and administrative (note 6) 1,255,012 1,337,593 2,134,871 2,049,143
Amortization of goodwill 1,521,876 320,390 2,852,145 320,390
Depreciation, depletion and amortization 130,801 39,043 228,383 53,403
------------- ----------- --------------- ------------
Total operating expenses 7,277,737 3,290,937 12,217,060 5,269,168
------------- ----------- --------------- ------------
Operating income (loss) (1,815,704) (482,810) (3,084,808) 42,161
Interest income 14,481 19,172 42,912 28,044
Gain on sale of investments 59,232 -- 59,232 --
Interest expense 9,463 8,353 32,999 16,156
------------- ----------- --------------- ------------
Income (loss) before income taxes (1,751,454) (471,991) (3,015,663) 54,049
Income tax benefit (83,498) (685,512) (49,922) (661,767)
------------- ----------- --------------- ------------
Net income (loss) $ (1,667,956) 213,521 $ (2,965,741) 715,816
============= =========== =============== ============
Net income (loss) per common share:
Basic and diluted $ (0.03) 0.01 $ (0.06) 0.02
============= =========== =============== ============
Weighted average common shares outstanding:
Basic 55,825,645 42,295,478 51,248,700 41,054,667
============= =========== =============== ============
Diluted 66,079,527 42,417,352 56,403,968 41,115,604
============= =========== =============== ============
Pro forma data:
Income tax expense (benefit) $ (55,385) $ 144,253
----------- ------------
Net loss $ (416,606) $ (90,204)
=========== ============
Net loss per common share:
Basic and diluted $ (0.01) $ (0.00)
=========== ============
Weighted average common shares outstanding:
Basic and diluted 42,295,478 41,054,667
=========== ============
See accompanying notes to condensed consolidated financial statements.
4
DTVN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
2001 2000
---- ----
Cash flows from operating activities:
Net income (loss) $ (2,965,741) $ 715,816
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation depletion, and amortization 3,080,528 373,793
Non-cash general & administrative expenses 344,815 1,191,707
Deferred tax benefit (99,969) (824,714)
Gain on disposal of asset (59,232) --
Changes in assets and liabilities:
Accounts receivable (1,217,534) 209,502
Customer deposit -- (360,000)
Accounts payable and accrued liabilities 104,207 499,946
Unearned revenue (471,585) 93,602
Vendor deposit -- 324,791
Prepaid expenses -- (74,611)
Other current assets (52,826) 28,231
------------ ------------
Net cash provided by (used in) operating activities (1,337,337) 2,178,063
------------ ------------
Cash flows from investing activities:
Capital expenditures (451,836) (41,408)
Payment of deposits (368,055) --
Purchase of certificates of deposit (98,910) --
Proceeds from maturity of certificates of deposit 100,000 --
Sale of investments 138,721 --
Payment of cash for acquisitions, net of cash acquired (377,718) 432,414
------------ ------------
Net cash provided by (used in) investing activities (1,057,798) 391,006
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable to related parties 100,000 250,000
Principal payments on notes to related parties (249,090) --
Principal payments on obligations (141,494) (96,961)
Proceeds from notes payable 23,267 --
Payments of dividends -- (847,446)
------------ ------------
Net cash used in financing activities (267,317) (694,407)
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,662,452) 1,874,662
Cash and cash equivalents at beginning of period 2,895,402 394,740
------------ ------------
Cash and cash equivalents at end of period $ 232,950 $ 2,269,402
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 33,576 $ 31,034
============ ============
Cash paid during the year for income taxes $ 25,759 $ 27,180
============ ============
Supplemental disclosure of noncash investing and financing activities:
Purchase of equipment in exchange for note payable $ -- $ 518,918
============ ============
Reverse acquisition of Zydeco by DataVoN $ -- $ 27,962,700
============ ============
Acquisition of Video Intelligence by DTVN $ 4,678,086 $ --
============ ============
Acquisition of equipment under capital lease $ 460,096 $ --
============ ============
See accompanying notes to condensed consolidated financial statements.
5
DTVN HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
June 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 totals
approximately $28 million, which is 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 is being amortized to expense over a five-year period. This
goodwill is subject to an impairment test. As a result, an impairment of
goodwill may be required in the near term, and if so required, could be material
to the results of operations and financial position.
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 six months ended June 30, 2000. The unaudited pro forma
statement of operations data presented on the face of the statements of
operations for the three months and six months ended June 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
6
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 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 had been
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. During the second quarter of 2001,
186,687 vested options granted under the March 2000 Plan were forfeited when
they were not exercised during the stated time period. As of June 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 June 30, 2001,
the Company had granted options to purchase a total of 4,892,472 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 second quarter of 2001, 700,000 options were
forfeited when an employee left the Company. As of June 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 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 and enhanced video services. Zydeco is an independent
energy company that has been engaged in the exploration for oil and gas
utilizing advanced three-dimensional seismic and computer-aided exploration
techniques. Because of market conditions, Zydeco's operations were curtailed
prior to the Merger and it had focused its efforts on (1) conserving cash
resources; (2) concentrating on marketing salable assets; and (3) seeking
alternate sources of capital for possible drilling participation and general
working capital, including potential business combinations outside of the oil
and gas industry. The Zydeco operations are not material to the Company;
however, Zydeco retains assets. The Company is currently considering several
alternatives with respect to Zydeco and its assets.
7
The following is a summary of total assets by reportable segment:
June 30, 2001 December 31, 2000
------------- -----------------
DataVoN $ 4,338,131 $ 3,984,072
Zydeco 2,001,291 2,331,777
Goodwill from the Merger and
acquisition 25,131,758 23,562,199
----------- -----------
Total assets $31,471,180 $29,878,048
=========== ===========
(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. As of August 20, 2001, the Company was in
the process of refinancing this note.
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 June 21, 2000, the Company entered into a Loan and Security Agreement with a
bank that provided a $500,000 revolving credit facility. That facility expired
by its own terms on or about April 20, 2001. The Company never drew any funds
under the facility.
On November 5, 2000, the Company entered into a Variable Rate Installment
Agreement with a bank for $300,000. The note bears interest at the prime rate
plus 1% per annum. The note is due November 5, 2003.
On June 1, 2001, Video Intelligence entered into a Security Agreement and Note
Payable with a related party for $100,000. Until the final balance is paid on
June 1, 2002 the note bears interest at 9% per annum. The note is unsecured.
(6) General and Administrative Non-Cash Expenses
The Company incurred non-cash general and administrative expenses during the
three and six month periods ended June 30, 2001 and June 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 June 30,
2001 and 2000 was $291,832 and $824,841, respectively. The non-cash expense for
the six months ended June 30, 2001 and 2000 was $335,457 and $1,191,707,
respectively.
(7) Comprehensive Income (Loss)
Net income (loss) equals comprehensive income (loss) at June 30, 2001 and 2000.
(8) Contingencies
8
The Company is currently involved in litigation with a former sales agent with
regard to commissions allegedly owed to the former commissioned agent by the
Company. The trial stage of the litigation concluded on August 17, 2001 and
resulted in responses to a jury charge against the Company in the amount of $1.6
million plus attorneys' fees. As of August 20, 2001 there is no final judgment
and no reserve for this claim has been established. If a judgment against the
Company becomes final, the Company will appeal the judgment and continue to
vigorously defend against such claims. In addition, the Company will establish
or arrange for a reserve at the time the judgment against the Company becomes
final. An unfavorable outcome in this matter could have a material adverse
effect upon the Company's consolidated financial position and consume working
capital.
In February 2001, Cheniere Energy, Inc. submitted an issue to the American
Arbitration Association, which does not appear to have previously been
arbitrated between the parties, and does not appear to be an issue covered by
the joint operating agreement between the parties. The arbitration is in its
very early stages, and no determination of the outcome, nor if such arbitration
is appropriate under the Exploration Agreement, is possible at this time. Both
parties have agreed to hold the arbitration brought by Cheniere, in abeyance up
to one year, pending attempted resolution between the parties. Abeyance expires
in February 2002. If all matters have not been resolved at such time, then the
case will move forward, be dismissed or withdrawn. In May 2001, Harris County
Court entered a judgment confirming the arbitration award granted in December
1998.
(9) Subsequent Event
On August 13, 2001, the Company entered into an Agreement with Dynegy Technology
Capital Corp ("DTC"), a wholly owned subsidiary of Dynegy, Inc., a Texas
corporation. Under the terms of the Agreement the Company may receive an equity
investment of $3 million in exchange for 2,624,902 shares of Common Stock. On
August 13, 2001 $1.5 million of this investment was distributed at closing in
exchange for 1,312,451 shares, the balance to be distributed, subject to the
Company achieving certain performance metrics, at thirty day intervals from
closing at approximately $500,000 in exchange for approximately 437,000 shares
of common stock for each of the three intervals. However, the final $750,000 of
the investment is subject to post-closing negotiations of terms and conditions
between DTC and the Company regarding the exchange of warrants for equipment
financing to be provided by DTC. Contemporaneously with the investment, DTC and
the Company signed a commercial cooperation agreement under which DataVoN, Inc.,
the Company's wholly owned, enhanced communications services subsidiary will
provide a right of first look and last look for contracts to purchase equipment
and services, including bandwidth and IP telephony equipment, to DynegyConnect,
a worldwide provider of network solutions and connectivity for wholesale
customers.
9
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 six months ended June 30, 2001 should be read in conjunction with the
consolidated financial statements and footnotes for the three months and six
months ended June 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 July 31,
2001, the Company was providing services to several domestic carriers and
operating equipment in 12 markets with market presence in multiple metropolitan
areas. The term "Point of Presence" ("POP") formerly used to help describe the
Company's physical infrastructure has been replaced by market presence since the
ability to aggregate traffic from a large geographic area is now possible
without maintaining traditional POPs.
Through its network, the Company transports a large volume of toll-quality
voice, video and data services. The entrance point for communications traffic
over the network is referred to as a "Point of Interface" ("POI"). The Company's
customers interconnect with the Company's network by connecting dedicated voice
circuits from the customers' facilities to the Company's POI's. This POI can be
a physical asset of the Company, a leased facility, or provided locally or
remotely by the customer.
The Company was incorporated in 1993. The Company engaged in acquiring
leases, drilling, and producing reserves utilizing focused geological concepts.
The Company 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 Company's common stock. The DataVoN merger was
accounted for as a reverse acquisition of the Company by DataVoN under the
purchase method of accounting. Accordingly, the historical financial statements
of DataVoN prior to the DataVoN merger
10
have become the Company'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 are not
currently material to the Company's combined results of operations, 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 POI's where the equipment is located.
Termination fees are paid to local service providers to terminate calls.
Equipment costs are capitalized and depreciated over their useful lives and
minor items are expensed directly. Other expenses include charges for
connections between the Company's POI's and its vendors for termination services
and software support and management systems required in maintaining its network.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE
MONTHS ENDED JUNE 30, 2000
Net Service Revenue. The Company's net service revenue increased by
approximately $2.63 million to approximately $5.41 million for the three months
ended June 30, 2001, from approximately $2.78 million for the three months ended
June 30, 2000. The increase in net revenue resulted from an increase in the
amount of traffic carried over the Company's network to approximately 480.5
million minutes for the three months ended June 30, 2001, from approximately 410
million minutes for the three months ended June 30, 2000 and higher per minute
pricing for traffic derived from new products.
Cost of Services. Cost of services increased by approximately $2.70 million to
approximately $4.26 million for the three months ended June 30, 2001, from
approximately $1.56 million for the three months ended June 30, 2000. The
increase in expense principally resulted from the increase in traffic described
above. As a result of this increased traffic, collocation facility fees
increased to $200,085 for the three months ended June 30, 2001, from $21,246 for
the three months ended June 30, 2000 and telecommunications fees increased to
approximately $3.91 million for the three months ended June 30, 2001, from
approximately $1.46 million for the three months ended June 30, 2001. As a
percentage of net service revenue, cost of services expense increased to
approximately 78.7% for the three months ended June 30, 2001, from approximately
56.1% for the three months ended June 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 include expenses
relating to the salaries, payroll taxes, benefits and commissions that the
Company pays for sales personnel and the expenses associated with the
development and implementation of its promotion and marketing campaigns,
including expenses relating to its outside public relations firm and industry
analysts. Selling and marketing expenses increased by $75,566 to $105,801 for
the three months ended June 30, 2001, from $30,235 for the three months ended
June 30, 2000. This increase is attributable to additional sales personnel,
increased commissions due to increased sales, and the development and
implementation of new products.
General and Administrative Expenses. General and administrative expenses include
salary, payroll tax and benefit expenses and related costs for general corporate
functions, including executive management, administration, office facilities,
information technology and human resources. General and administrative expenses
decreased by $82,581 to approximately $1.26 million for the three months ended
June 30, 2001, from approximately $1.34 million for the three months ended June
30, 2000. General and administrative
11
expenses decreased primarily due to a decrease in the non-cash expenses related
to the unearned stock compensation charge. As a percentage of net revenue,
general and administrative expenses decreased to approximately 23.2% for the
three months ended June 30, 2001, from approximately 48.1% for the three months
ended June 30, 2000.
Depreciation, Depletion, and Amortization Expense. Depreciation, depletion, and
amortization expense increased by approximately $1.29 million to approximately
$1.65 million for the three months ended June 30, 2001, from approximately
$359,000 for the three months ended June 30, 2000. This increase primarily
resulted from amortization of 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.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2000
Net Service Revenue. The Company's net service revenue increased by
approximately $3.70 million to approximately $8.99 million for the six months
ended June 30, 2001, from approximately $5.29 million for the six months ended
June 30, 2000. The increase in net revenue resulted from an increase in the
amount of traffic carried over the Company's network to approximately 945
million minutes for the six months ended June 30, 2001, from approximately 773
million minutes for the six months ended June 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 $3.98 million to
approximately $6.79 million for the six months ended June 30, 2001, from
approximately $2.81 million for the six months ended June 30, 2000. The increase
in expense generally resulted from the increase in traffic described above. As a
result of this increased traffic, collocation facility fees increased to
$358,993 for the six months ended June 30, 2001, from $38,511 for the six months
ended June 30, 2000, and telecommunications fees increased to approximately
$6.21 million for the six months ended June 30, 2001, from approximately $2.70
million for the six months ended June 30, 2001. As a percentage of net service
revenue, cost of services expense increased to approximately 75.5% for the six
months ended June 30, 2001, from approximately 53.1% for the six months ended
June 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 include expenses
relating to the salaries, payroll taxes, benefits and commissions that the
Company pays for sales personnel and the expenses associated with the
development and implementation of its promotion and marketing campaigns,
including expenses relating to its outside public relations firm and industry
analysts. Selling and marketing expenses increased by $172,524 to $210,390 for
the six months ended June 30, 2001 from $37,866 for the six months ended June
30, 2000. This increase is attributable to the implementation of promotion and
marketing campaigns.
General and Administrative Expenses. General and administrative expenses include
salary, payroll tax and benefit expenses and related costs for general corporate
functions, including executive management, administration, office facilities,
information technology and human resources. General and administrative expenses
increased by $85,728 to approximately $2.13 million for the six months ended
June 30, 2001, from approximately $2.05 million for the six months ended June
30, 2000. General and administrative expenses increased primarily due to an
increase in the number of personnel and an increase in consulting and
professional fees but the increase was offset by a decrease in the unearned
stock compensation charge. As a percentage of net revenue, general and
administrative expenses decreased to approximately 23.7% for the six months
ended June 30, 2001, from approximately 38.8% for the six months ended June 30,
2000.
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Depreciation, Depletion, and Amortization Expense. Depreciation, depletion, and
amortization expense increased by approximately $2.71 million to approximately
$3.08 million for the six months ended June 30, 2001, from approximately
$370,000 for the six months ended June 30, 2000. This increase primarily
resulted from amortization of goodwill associated with the DataVoN merger in
June of 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.
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 $1.34 million for
the six months ended June 30, 2001, as compared to net cash provided by
operating activities of approximately $2.18 million for the six months ended
June 30, 2000. Cash used by operating activities was primarily attributable to
increased selling, general and administrative expenses related to the Company's
network and its expansion.
Net cash used in investing activities was approximately $1.06 million for
the six months ended June 30, 2001, as compared to net cash provided by
investing activities of approximately $390,000 for the six months ended June 30,
2000. The increase was attributable to the payment of deposits on leases,
capital expenditures and the acquisition of Video Intelligence. Net cash used in
financing activities was approximately $267,000 for the six months ended June
30, 2001, as compared to net cash used in financing activities of approximately
$690,000 for the six months ended June 30, 2000. The decrease is attributable to
financing related to the Company's network and its expansion.
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 purchase 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 of which approximately
$250,000 was outstanding as of July 31, 2001. As of August 20, 2001 the Company
was in the process of refinancing this note.
On June 21, 2000, the Company entered into a Loan and Security Agreement
with a bank that provided a $500,000 revolving credit facility. That facility
expired by its own terms on or about April 20, 2001. The Company never drew any
funds under the facility.
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. As of
July 31, 2001, the balance was approximately $200,000.
On June 1, 2001, Video Intelligence entered into a Security Agreement and
Note Payable with a related party for $100,000. Until the final balance is paid
on June 1, 2002 the note bears interest at 9% per annum. The note is unsecured.
13
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.
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 $452,000 for the six months
ended June 30, 2001. The Company expects to continue the expansion of its
network throughout 2001 and intends to increase its capital expenditures
accordingly. The Company has incurred approximately $5.33 million in network
expansion costs, approximately $910,000 of which were capital leases and cash
from operations and $4.42 million of which were operating leases, during the
first two quarters of 2001. The Company intends to incur approximately $8.82
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
14
The Company is currently involved in litigation with a former sales agent with
regard to commissions allegedly owed to the former commissioned agent by the
Company. The trial stage of the litigation concluded on August 17, 2001 and
resulted in responses to a jury charge against the Company in the amount of $1.6
million plus attorneys' fees. As of August 20, 2001 there is no final judgment
and no reserve for this claim has been established. If a judgment against the
Company becomes final, the Company will appeal the judgment and continue to
vigorously defend against such claims. In addition, the Company will establish
or arrange for a reserve at the time the judgment against the Company becomes
final. An unfavorable outcome in this matter could have a material adverse
effect upon the Company's consolidated financial position and consume working
capital. See also Note 8 to the Condensed Consolidated Financial Statements
included herein.
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
On August 13, 2001, the Company entered into an Agreement with Dynegy
Technology Capital Corp ("DTC"), a wholly owned subsidiary of Dynegy, Inc., a
Texas corporation. Under the terms of the Agreement the Company may receive an
equity investment of $3 million in exchange for 2,624,902 shares of the
Company's Common Stock. On August 13, 2001 $1.5 million of this investment was
distributed at closing in exchange for 1,312,451 shares, the balance to be
distributed, subject to the Company achieving certain performance metrics, at
thirty day intervals from closing at approximately $500,000 in exchange for
approximately 437,000 shares of common stock for each of the three intervals.
However, the final $750,000 of the investment is subject to post-closing
negotiations of terms and conditions between DTC and the Company regarding the
exchange of warrants for equipment financing to be provided by DTC.
Contemporaneously with the investment, DTC and the Company signed a commercial
cooperation agreement under which DataVoN, Inc., the Company's wholly owned,
enhanced communications services subsidiary will provide a right of first and
last look for contracts to purchase equipment and services, including bandwidth
and IP telephony equipment, from DynegyConnect, a worldwide provider of network
solutions and connectivity for wholesale customers.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting ("SFAS") No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
Replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and is effective after March 31, 2001. The
Company adopted SFAS 140 in the second quarter of 2001. The adoption of SFAS 140
did not have a material impact on the Company's consolidated financial
statements and related disclosures.
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 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 and 142
is not expected to have a material impact on the Company's consolidated
financial statements and related disclosures.
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.
Management believes that SFAS 142 will have a material non-cash impact on
the Company's consolidated financial statements, as it will not allow for
amortization of goodwill, which approximates $6 million annually. At this time
the Company has not determined how goodwill will be allocated to specific
reporting units as of
15
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 the new standard.
16
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 April 13, 2001, in connection with the Video Intelligence merger, the
Company issued 6,749,775 shares of its common stock, par value $0.001 per share,
to the holders of capital stock of Video Intelligence, in addition to a cash
payment of $493,225. (See Note 2 to the consolidated financial statements
included herein). 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 stockholders of Video
Intelligence represented that they were 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 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).
4.1 Registration Rights Agreement, dated April 12, 2001,
among DTVN Holdings, Inc. and each security holder
named therein that becomes a party to the agreement
by the execution and delivery of a counterpart
signature page thereto (incorporated by reference
from Exhibit 4.1 to the Company's Current Report on
Form 8-K (File No. 0-22076) filed with the SEC on
April 27, 2001).
10.1 Agreement and Plan of Merger, dated April 12, 2001,
among DTVN Holdings, Inc., Videos Intelligence, Inc.,
Video Intelligence, Inc., Philip O'Reilly, Roger
Vergin, Bruce Hawkins, and Bryan Morriss
(incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K (File No. 0-
22076) filed with the SEC on April 27, 2001).
10.2 Relinquishment Agreement, dated April 12, 2001, among
DTVN Holdings, Inc., Videos Intelligence, Inc.,
Philip O'Reilly as the Holder Representative, Philip
O'Reilly, Bruce Hawkins, Joy Thompson, Bryan Morriss,
Scott Winterstein, Joe Yapsuga, Roger Vergin, Michal
West, and Robert Harris (incorporated by reference
from Exhibit 2.2 to the Company's Current Report on
Form 8-K (File No. 0-22076) filed with the SEC on
April 27, 2001).
17
(b) Reports on Form 8-K
The Company filed the following Reports on Form 8-K during the quarter
ended June 30, 2001:
Current Report on Form 8-K dated April 13, 2001 and filed April 27,
2001, reporting, on Items 2 and 7, the completion of the acquisition of
Video Intelligence, Inc. pursuant to an Agreement and Plan of Merger
dated April 12, 2001 (the "Merger Agreement"). The Merger Agreement and
related documents are attached as exhibits thereto.
Amendment to Current Report on Form 8-K/A dated April 13, 2001 and
filed May 14, 2001, correcting a misstatement contained in Item 2 of
the Form 8-K filed on April 27, 2001.
Current Report on Form 8-K dated May 14, 2001 and filed May 22, 2001,
reporting, on Item 5, two press releases announcing the resignation of
a director and the appointment of a director and chief financial
officer.
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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: August 20, 2001 /s/ Philip N. O'Reilly
-------------------------------
Philip N. O'Reilly
Chief Financial Officer (Duly Authorized
Officer and Principal Financial Officer)
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