<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
Commission File Number 000-28467
Z-TEL TECHNOLOGIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 59-3501119
------------------------------- ----------------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
601 South Harbour Island Boulevard, Suite 220
Tampa, Florida 33602
----------------------------------------------------
(Address of Principal Executive Offices)
(813) 273-6261
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
At November 13, 2000 the Registrant had outstanding 33,703,366 shares
of $.01 par value common stock.
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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
three and nine month periods ended September 30, 2000
and 1999 4
Condensed Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the nine month period
ended September 30, 2000 5
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes In Securities and Use of Proceeds
Recent Sales of Unregistered Securities 22
Items 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 25
2
<PAGE> 3
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,383 $ 101,657
Accounts receivable, net of allowance for doubtful
accounts of approximately $5,250 at September 30,
2000 and approximately $408 at December 31, 1999 52,719 4,245
Prepaid expenses and other current assets 5,088 2,304
--------- ---------
Total current assets 81,190 108,206
Property and equipment, net 55,014 28,549
Investments 5,704 --
Intangible assets, net 64,738 --
Other 3,388 922
--------- ---------
Total assets $ 210,034 $ 137,677
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 26,756 $ 9,165
Deferred revenue 6,047 --
Current portion of long-term debt
and capital lease obligations 7,617 3,726
--------- ---------
Total current liabilities 40,420 12,891
Long-term debt and capital lease obligations 13,923 10,408
--------- ---------
Total liabilities 54,343 23,299
--------- ---------
Mandatorily convertible redeemable preferred stock,
$.01 par value; 5,000,000 shares authorized;
4,688,247 issued and outstanding (aggregate
liquidation value of approximately $57,485
at September 30, 2000) 40,657 --
Commitments and contingencies (Notes 6 and 8)
Stockholders' equity:
Common stock, $.01 par value; 150,000,000
shares authorized; 33,939,324 and 32,159,911
shares issued; 33,659,649 and 31,880,236
outstanding, respectively 339 322
Notes receivable from stockholders (789) (1,683)
Unearned stock compensation (121) (2,487)
Additional paid-in capital 222,003 167,637
Accumulated deficit (110,733) (49,093)
Accumulated other comprehensive income 4,653 --
Treasury stock, 279,675 shares at cost (318) (318)
--------- ---------
Total stockholders' equity 115,034 114,378
--------- ---------
Total liabilities and stockholders' equity $ 210,034 $ 137,677
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 54,415 $ 745 $ 108,548 $ 2,170
------------ ------------ ------------ ------------
Operating expenses:
Network operations 33,032 2,039 67,999 3,831
Sales and marketing 11,742 2,112 29,196 3,960
Research and development 2,132 1,154 5,221 2,619
General and administrative 24,429 5,204 55,768 10,191
Depreciation and amortization 5,308 1,085 11,800 2,749
------------ ------------ ------------ ------------
Total operating expenses 76,643 11,594 169,984 23,350
------------ ------------ ------------ ------------
Operating loss (22,228) (10,849) (61,436) (21,180)
------------ ------------ ------------ ------------
Nonoperating income (expense):
Interest and other income 736 87 2,477 319
Interest and other expense (1,617) (1,335) (2,681) (2,786)
------------ ------------ ------------ ------------
Total nonoperating expense (881) (1,248) (204) (2,467)
------------ ------------ ------------ ------------
Net loss (23,109) (12,097) (61,640) (23,647)
Less mandatorily convertible redeemable
dividends and preferred stock accretion (1,257) (368) (1,257) (974)
Less beneficial conversion feature (7,358) (7,358)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (31,724) $ (12,465) $ (70,255) $ (24,621)
============ ============ ============ ============
Weighted average common shares outstanding 33,536,724 13,025,563 32,847,858 14,383,338
============ ============ ============ ============
Basic and diluted net loss per share $ (0.95) $ (0.96) $ (2.14) $ (1.71)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Common Stock Notes Other Total
----------------- Receivable Unearned Additional Compre- Stock-
Par From Stock Paid-In Accumulated hensive Treasury holders'
Shares Value Stockholders Compensation Capital Deficit Income Stock Equity
---------- ----- ------------ ------------ ---------- ----------- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1999 31,880,236 $ 322 $(1,683) $(2,487) $167,637 $ (49,093) $ -- $(318) $114,378
Issuance of common stock
for acquisition of Touch 1 1,100,000 11 39,275 39,286
Issuance of common stock for
exercise of stock options 679,413 6 2,091 2,097
Repayment of Stockholders'
note 894 894
Vesting of stock options
granted below intrinsic
value 2,366 (2,873) (507)
Warrants extinguished with
debt 655 655
Mandatorily convertible
redeemable dividends and
preferred stock accretion (1,257) (1,257)
Warrants issued with
preferred stock 16,475 16,475
Net Loss (61,640) (61,640)
Foreign currency translation
adjustment (1) (1)
Unrealized Gain on
Investments 4,654 4,654
--------
Comprehensive Income (56,987)
---------- ----- ------- ------ -------- ---------- ------ ----- --------
Balances, September 30, 2000 33,659,649 $ 339 $ (789) $ (121) $222,003 $ (110,733) $4,653 $(318) $115,034
========== ===== ======= ====== ======== ========== ====== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (61,640) $(23,647)
--------- --------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 11,800 2,749
Amortization of commitment fee 2,192
Provision for bad debts 4,842 859
Loss on sale of assets 572
Change in operating assets and liabilities:
Increase in accounts receivable (45,845) (1,452)
Increase in prepaid expenses and other assets (3,994) (1,467)
Increase in accounts payable and accrued liabilities 9,427 4,764
Increase in deferred revenue 5,529 --
Other (575) 102
--------- --------
Total adjustments (18,244) 7,747
--------- --------
Net cash used in operating activities (79,884) (15,900)
--------- --------
Cash flows from investing activities:
Proceeds from sale and leaseback transaction -- 13,768
Proceeds from sale of receivables 766
Purchases of property and equipment (26,257) (10,665)
Investment in securities (1,050) --
Purchase of Touch 1, net of cash acquired (8,955) --
--------- --------
Net cash provided by (used in) investing activities (35,496) 3,103
--------- --------
Cash flows from financing activities:
Proceeds from issuance of mandatorily convertible
redeemable preferred stock 55,875 10,000
Proceeds from issuance of common stock 2,097 --
Proceeds from notes receivable 894 --
Payments on long-term debt and capital lease obligations (21,760) (2,494)
--------- --------
Net cash provided by financing activities 37,106 7,506
--------- --------
Net decrease in cash and cash equivalents (78,274) (5,291)
Cash and cash equivalents, beginning of period 101,657 7,973
--------- --------
Cash and cash equivalents, end of period $ 23,383 $ 2,682
========= ========
Non-cash investing and financing activities:
Mandatorily convertible redeemable dividends and
preferred stock accretion 1,257 974
========= ========
Beneficial conversion 7,358 --
========= ========
Acquisition of Touch 1
Assets acquired, net of cash $ 85,967 $ --
Liabilities assumed $ 37,979 $ --
Cash acquired $ 1,168 $ --
Assets acquired in exchange for common stock $ 40,201 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. NATURE OF BUSINESS
DESCRIPTION OF BUSINESS
Z-Tel Technologies, Inc. and subsidiaries ("Z-Tel" or the "Company")
incorporated in Delaware on January 15, 1998 as Olympus
Telecommunications Group, Inc. In March 1998, Olympus
Telecommunications Group, Inc. changed its name to Z-Tel Technologies,
Inc. Z-Tel Technologies, Inc. is the parent company, and has no other
operations. The Company has eight wholly owned subsidiaries: Z-Tel
Communications, Inc., Z-Tel Business Networks, Inc., Z-Tel Holdings,
Inc., Z-Tel Communications of Virginia, Inc., Z-Tel, Inc., Z-Tel
Network Services, Inc., Z-Tel Investments, Inc. and Touch 1
Communications, Inc.
Z-Tel is an emerging provider of advanced, integrated
telecommunications services targeted to residential subscribers. Z-Tel
offers local and long distance telephone services in combination with
enhanced communication features accessible through the telephone or
the Internet. Z-Tel offers its Z-Line Home Edition service in New
York, Texas, Massachusetts, Pennsylvania, Georgia, Oregon, Maryland,
California, and Illinois. Z-Tel also provides long-distance
telecommunications services to customers nationally.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information and
are in the form prescribed by the Securities and Exchange Commission
in instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. The interim unaudited financial statements
should be read in conjunction with the audited financial statements of
the Company as of and for the year ended December 31, 1999, included
in the Company's Annual Report on Form 10-K. In the opinion of
management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three and
nine months ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2000.
Certain amounts in the prior period's consolidated financial
statements have been reclassified to conform to the current period
presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated.
INVESTMENTS
Included in investments are available for sale securities and
investments accounted for utilizing the cost method of accounting for
those investments without a readily identifiable market. In accordance
with Statement of Financial Accounting Standards Board No. 115,
7
<PAGE> 8
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
"Accounting for Certain Investments in Debt and Equity Securities"
securities that are available for sale are reported at fair value with
changes in the fair value from period to period included as a separate
component of comprehensive income in equity. At September 30, 2000, the
Company had approximately $5.3 and $0.4 million in available for sale
securities and investments accounted for at cost, respectively. There
was an increase of approximately $4.7 million in fair value, using the
specific identification method for calculating the unrealized gain, for
the nine months ended September 30, 2000 recorded as a separate
component of comprehensive income in equity.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements." While not
intended to change current literature related to revenue recognition,
SAB 101 provides additional guidance on revenue recognition policies
and procedures. The Company believes that its current accounting
policies and procedures related to revenue recognition comply with SAB
101.
In March 2000, the Financial Accounting Standards Board ("FASB")
released FIN 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25," which provides
clarification of Opinion 25 for certain issues such as the
determination of an employee, the criteria for determining whether a
plan qualifies as a non-compensatory plan, the accounting consequences
of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock
compensation awards in a business combination. The Company believes
that its practices are in conformity with this guidance, and therefore
FIN 44 has not had a material impact on the Company's consolidated
financial statements.
In June 1998, the FASB released Statement of Financial Account
Standards ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes the accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS No. 133 is effective for
fiscal quarters of fiscal years beginning after June 15, 2000. The
Company believes that the adoption of SFAS No. 133 will not have a
material impact on the Company's consolidated financial statements.
3. ACQUISITION OF TOUCH 1
The Company completed the acquisition of Touch 1 Communications, Inc.
("Touch 1"), a reseller of long distance service to subscribers
throughout the United States, on April 14, 2000. Touch 1 is the parent
Company to its two wholly owned subsidiaries direcTel, Inc., and
direcCONNECT, Inc. The purchase price for Touch 1 consisted of 1.1
million shares of the Company's common stock at a price of $35.71 per
share, approximately $9.0 million in cash, and $1.0 million in
transaction and related fees. The acquisition of Touch 1 was accounted
for using the purchase method of accounting and, accordingly, the
results of operations of Touch 1 for the period from April 1, 2000
(the closing date for accounting
8
<PAGE> 9
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
purposes) are included in the accompanying condensed consolidated
financial statements. The acquisition of Touch 1 resulted in
approximately $67.0 million of intangible assets. The intangible assets
are composed of approximately $9.2 million for customer lists and
approximately $57.8 million for goodwill, being amortized, on the
straight line basis, over periods of five and twenty years,
respectively. The Company recorded approximately $1.2 and $2.4 million
of amortization of the intangible assets for the three and nine
months ended September 30, 2000, respectively.
The following unaudited pro forma information presents a summary of
our consolidated results of operations as if the acquisition had
occurred at the beginning of the periods presented.
Nine Months
In thousands, except per share date September 30,
----------------------------------- ----------------
2000 1999
---- ----
Revenues $127,462 $ 50,355
Net loss (60,013) (14,645)
Net loss attributable to
common stockholders (68,628) (15,619)
Loss per share (1.81) (1.11)
The pro forma condensed consolidated financial information is not
necessarily indicative of what Z-Tel's results of operations would
have been had the acquisition been completed at the beginning of the
period presented or the future results of the Company's operations.
4. ACCOUNTS RECEIVABLE AGREEMENT
In July 2000, the Company entered into an accounts receivable agreement
with RFC Capital Corporation, a division of Textron, Inc., ("RFC")
providing for the sale of certain of the Company's accounts receivable
to RFC. RFC has agreed to purchase up to $25.0 million of the Company's
accounts receivable, with provisions for a commitment of up to $50.0
million, subject to successful syndication of the receivables sales
program by RFC. Z-Tel has sold approximately $1.3 million of
receivables, for net proceeds of approximately $0.8 million, during the
third quarter of 2000.
5. MANDATORILY CONVERTIBLE REDEEMABLE PREFERRED STOCK
In July 2000, the Company filed a Certificate of Designation
authorizing the issuance of 5.0 million shares of Series D convertible
preferred stock ("Series D Preferred"). The Company has received
aggregate proceeds of approximately $56.3 million in connection with
the sale of 4,688,247 shares of Series D Preferred at a price of
$12.00. The deal costs associated with the transaction were
approximately $0.4 million. The Series D Preferred is convertible at a
conversion price of $12.00, which price is subject to adjustment, into
common stock at the option of the holder (i.e., initially convertible
on a one-for-one basis); however, there are certain circumstances that
provide for a forced conversion of the
9
<PAGE> 10
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
stock by the Company. Series D Preferred is mandatorily redeemable 8
years from the original issue date, has an 8% cumulative dividend
payable at times in cash and at times in-kind with additional Series D
Preferred and has certain liquidation preferences and voting rights.
Each purchaser of Series D Preferred received a warrant to purchase a
number of shares of Z-Tel common stock equal to one-half of the amount
of Series D Preferred purchased by such investor. Each warrant is
exercisable at a price of $13.80 per share subject to certain
adjustments.
In accordance with Emerging Issues Task Force 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," Accounting Principles Board
14, "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants," and Statement of Financial Standards Board 128,
"Earning Per Share" the Company has recorded approximately $7.4, $0.4,
and $0.9 million relating to a beneficial conversion, preferred stock
accretion and cumulative dividend as a result of the Series D Preferred
transaction. The recording of the beneficial conversion and preferred
stock accretion is the result of a fair value allocation of the net
proceeds received from the Series D Preferred between the Series D
Preferred and the warrants issued. The Company used the Black-Scholes
valuation model to calculate a fair value and allocated value of $12.23
and $6.87, respectively, for each warrant. These items are included in
the calculations of the net loss attributable to common stockholders
and the Company's loss per share calculation.
6. COMMITMENTS AND CONTINGENCIES
The Company has disputed billings and access charges from certain
inter-exchange carriers (IXCs) and incumbent local exchange carriers
(ILECs). The Company contends these billings and access charges are
not in accordance with the interconnection, service level, or tariff
agreements entered between the Company and certain IXCs and ILECs. The
Company has paid for and recognized a portion of these disputes and
management believes that the Company will prevail in these disputes.
At September 30, 2000 and December 31, 1999, the disputed amounts were
approximately $5.0 and $2.3 million, respectively.
In July 2000, the Company entered into an agreement with a service
firm to provide various content and new service offerings through the
telephone. Under this agreement Z-Tel has invested $3.0 million and is
committed to an additional $4.0 million in cash payments for future
services. This contract provides for early termination under certain
circumstances with adjustments of the commitments.
In August 2000, the Company entered into an agreement with a service
firm to outsource customer provisioning through electronic bonding
with incumbent local exchange carriers. Under this agreement, Z-Tel is
committed to approximately $0.5 million cash payment for set-up fees
and minimum commitment fees, subject to certain adjustments, for the
next three years of approximately $4.0, $7.0, and $9.0 million. The
payment of these fees are subject to the successful completion by the
service firm of certain obligations in the future. This contract
provides for various termination arrangements with related severance
fees.
10
<PAGE> 11
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. COMPUTATION OF NET LOSS PER SHARE
Basic and diluted net loss per share are computed by dividing net loss
attributable to common stockholders by the weighted average common
shares outstanding during the period. Incremental shares of common
stock equivalents are not included in the calculation of diluted net
loss per share, as the inclusion of such equivalents would be
anti-dilutive.
Net loss per share is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C>
Basic and diluted net loss per share:
Loss attributable to common stockholders:
Net loss $ (23,109) $ (12,097) $ (61,640) $ (23,647)
Less mandatorily convertible redeemable
dividends and preferred stock accretion (1,257) (368) (1,257) (974)
Less beneficial conversion feature (7,358) -- (7,358) --
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (31,724) $ (12,465) $ (70,255) $ (24,621)
============ ============ ============ ============
Weighted average common shares outstanding 33,536,724 13,025,563 32,847,858 14,383,338
============ ============ ============ ============
Basic and diluted net loss per share $ (0.95) $ (0.96) $ (2.14) $ (1.71)
============ ============ ============ ============
</TABLE>
For each of the periods presented, basic and diluted net loss per
share are the same. Unexercised options to purchase 9,139,495 and
6,052,089 shares of common stock and unexercised mandatorily
convertible redeemable preferred stock convertible into 4,688,247 and
7,402,778 shares of common stock at September 30, 2000 and 1999,
respectively, which could potentially dilute basic earnings per share
in the future, were not included in the computation of diluted net
loss per share for these periods because to do so would have been
anti-dilutive in each case.
8. LEGAL AND REGULATORY PROCEEDINGS
On June 9, 2000, PTEK Holdings, Inc. and Premiere Communications, Inc.
(collectively, "PTEK") filed a lawsuit against the Company, Z-Tel
Communications, Inc., David Gregory Smith, Z-Tel's Chairman, Chief
Executive Officer and President, Eduard Mayer, one of Z-Tel's directors
and James Kitchen, a Senior Vice President of Z-Tel (the "Lawsuit").
11
<PAGE> 12
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
On November 14, 2000, the parties to the Lawsuit agreed to resolve in
full all claims asserted by each party against the other. In
connection with the settlement, the Company agreed to issue a warrant
to PTEK Holdings, Inc. to purchase 175,000 shares of the Company's
common stock at an exercise price of $12.00, which price is subject to
certain adjustments. The warrant is fully vested and non-forfeitable
but is not exercisable until two years after the issue date of the
warrant. As a result of the issuance of the warrant and the accrual of
legal fees related to the Lawsuit, the Company has recognized an
expense of approximately $1.0 million.
In the ordinary course of business, the Company is involved in legal
proceedings that are generally incidental to its operations. In
addition, from time to time, the Company is the subject of customer
complaints filed with the state utility commissions of the states in
which it operates or the FCC. Most complaints are handled informally
and at this time there are no formal proceedings pending. While there
can be no assurance of the ultimate disposition of incidental legal
proceedings or customer complaints, the Company does not believe their
disposition will have a material adverse effect on the Company's
consolidated results of operations or financial position.
9. SUBSEQUENT EVENTS
In November 2000, the Company filed a Certificate of Designation
authorizing the issuance of approximately 6.3 million shares of $.01
par value Series E Convertible Preferred Stock ("Series E Preferred").
The Company has received proceeds of approximately $50.0 million in
connection with the sale of 4,166,667 shares of Series E Preferred at a
price of $12.00. The purchaser of Series E Preferred received a warrant
to purchase a number of shares of Z-Tel common stock equal to one-half
of the amount of Series E Preferred purchased by such investor. The
purchaser of Series E Preferred has the option, for ninety days from
November 13, 2000 (initial closing), to purchase (or designate another
person who intends to purchase) an additional 2,083,333 shares of
Series E Preferred along with warrants to purchase 1,041,667 shares of
Z-Tel common stock, for approximately $25.0 million. Series E Preferred
is convertible at a conversion price of $12.00, which price is subject
to adjustment, into common stock at the option of the holder (i.e.,
initially convertible on a one-for-one basis); however, there are
certain circumstances that provide for a forced conversion of the stock
by the Company. Series E Preferred is mandatorily redeemable 8 years
from the original issue date, has an 8% cumulative dividend payable in
cash and has certain liquidation preferences and voting rights. Each
warrant is exercisable at a price of $13.80 per share subject to
certain adjustments.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Quarterly Report on Form 10-Q
contain forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those projected in the
forward-looking statements as a result of certain factors. Factors that may
affect our results of operations include, but are not limited to, our limited
operating history and cumulative losses, uncertainty of customer demand, rapid
expansion, potential software failures and errors, potential network and
interconnection failure, dependence on local exchange carriers, dependence on
third party vendors, dependence on key personnel, uncertainty of government
regulation, legal and regulatory uncertainties, and competition. We disclaim
any obligation to update information contained in any forward-looking
statement. In addition to the factors noted above, other risks, uncertainties,
assumptions, and factors that could affect our financial results are described
in our 1999 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 2000.
The forward-looking statements are based on the belief of our
management, as well as assumptions made by and information currently available
to our management. Forward-looking statements also may be included in other
written and oral statements made or released by us. You can identify
forward-looking statements by the fact that they do not relate strictly to
historical or current facts. The words "believe," "anticipate," "intend,"
"expect," "estimate," "project" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements describe our
expectations today of what we believe is most likely to occur or reasonably
achievable in the future, but they do not predict or assure any future
occurrence and may turn out to be wrong.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this document.
OVERVIEW
We are an emerging provider of advanced, integrated telecommunications
services targeted primarily to residential subscribers. For management
purposes, we are organized into one reportable operating segment. We offer
local and long distance telephone services in combination with enhanced
communication features accessible through the telephone or the Internet. The
nature of our business is rapidly evolving and we have a limited operating
history. As a result, we believe that period-to-period comparisons of our
revenues and operating results, including our network operations and other
operating expenses as a percentage of total revenue, are not meaningful and
should not be relied upon as indicators of future performance. We do not
believe that our historical growth rates are indicative of future results.
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Z-Line Home Edition is our principal service offering. Z-Line Home
Edition includes low-priced local and long-distance (1+) residential telephone
services using a customer's existing telephone number, bundled with enhanced
features, including caller identification, call forwarding, three-way calling,
speed dialing, and dial-up remote access through our Z-Line Anywhere access
card product, the full functionality of the Personal Communication Center
("PCC") and, for an additional fee, Internet access. We offer Z-Line Home
Edition service in the following nine states: New York, Texas, Massachusetts,
Pennsylvania, Georgia, Oregon, Maryland, California, and Illinois. We
anticipate entering additional states before the end of the fourth quarter of
2000.
Z-Line Anywhere is our access card product that allows a customer to
make long-distance calls using our network from any phone simply by dialing a
local access or toll-free 1-800 number. No change in phone service is required.
Subscribers of Z-Line Anywhere also receive the full functionality of our PCC.
Z-Line Anywhere is offered nationwide. Z-Line Anywhere customers are billed
monthly in arrears, and the associated revenue is recognized in the month of
service.
We completed the acquisition of Touch 1 Communications, Inc. ("Touch
1"), on April 14, 2000. The purchase price of Touch 1 consisted of 1.1 million
shares of our common stock and $9.0 million in cash. Touch 1 provides employees
in sales, provisioning, and customer service. We anticipate that this
acquisition will provide operating efficiencies and lower customer acquisition
costs. We believe that Touch 1 also has provided us with the opportunity to
further grow our back-office operations to provide capacity for market entry
into new states.
We used the purchase accounting method for our acquisition of Touch 1.
Therefore, the below discussions of the results of operations and liquidity and
capital resources do not include any discussions regarding Touch 1 prior to our
acquisition of Touch 1, for accounting purposes, on April 1, 2000. This
treatment is in accordance with the adoption of the purchase method of
accounting. A pro forma discussion and schedule is included in Footnote 3 to
the financial statements that display the pro forma statement of operations of
us and Touch 1 for the nine months ended September 30, 2000.
RESULTS OF OPERATIONS
REVENUE. Revenue increased by $53.6 million to $54.4 million for the three
months ended September 30, 2000, compared to $0.8 million for the same period in
the prior year. The increase of $43.8 million of revenue is attributable to the
average Home Edition customer count of 213,000 for the three months ended
September 30, 2000, compared to 3,000 for the same period in the prior year. The
purchase of Touch 1 provided an additional increase in revenue of $9.8 million
from its existing 1+ long-distance offering for the three months ended September
30, 2000.
Revenue increased by $106.3 million to $108.5 million for the nine months ended
September 30, 2000, compared to $2.2 million for the same period in the prior
year. The increase of $86.7 million of revenue is primarily the result of the
average Home Edition customer count of 148,050 for the nine months ended
September 30, 2000, compared to 3,000 for the same period in the prior year. The
revenue from Touch 1 contributed $21.8 million to the increase. The following
tables outline the
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approximate number of subscribers for Z-Line Home Edition, Z-Line Anywhere and
Touch 1 (1+) long distance services as of the end of the period:
TYPE OF SERVICE September 30, 2000 September 30, 1999
------------------------------------------------------------------------------
Z-Line Home Edition Subscribers 256,000 6,000
Z-Line Anywhere and Touch 1 (1+)
Long Distance Services Subscribers 281,000 84,000
NETWORK OPERATIONS. Network operations expense increased by $31.0
million to $33.0 million for the three months ended September 30, 2000,
compared to $2.0 million for the same period in the prior year. Network
operations expense increased by $64.2 million to $68.0 million for the nine
months ended September 30, 2000, compared to $3.8 million for the same period
in the prior year. The network operations expense primarily consists of fixed
and variable transmission expenses for interconnection agreements with
incumbent local exchange carriers (ILECs), service level agreements with
inter-exchange carriers (IXCs), and transmission services based on tariff
arrangements. The increase in network operation expenses for both the three and
nine months ended September 30, 2000 is the result of our subscriber growth.
SALES AND MARKETING. Sales and marketing expense increased $9.6
million to $11.7 million for the three months ended September 30, 2000,
compared to $2.1 million for the same period in the prior year. Sales and
marketing expense increased $25.2 million to $29.2 million for the nine months
ended September 30, 2000, compared to $4.0 million for the same period in the
prior year. The sales and marketing expense primarily consists of
telemarketing, direct mail, brand awareness advertising, and employee salaries
and benefits paid to employees engaged in sales and marketing activities.
The increase in sales and marketing expense is attributable to our
continued increased telemarketing hours and direct mail efforts. The purchase of
Touch 1 in the second quarter has greatly increased our telemarketing efforts in
addition to the hiring of additional employees in their existing locations. Our
direct mail campaign continued through the third quarter of 2000 after its
successful introduction in first quarter 2000. We intend to significantly
increase our sales and marketing expenditures during the remainder of the year
2000 as we increase our telemarketing and direct mail campaigns and develop
other marketing channels. We have launched a brand awareness campaign and
additional sales and marketing associated with our City of America campaign that
provides unlimited calling between Z-Line members. This campaign has been
introduced in Texas and provides Texas members with a bundle of
telecommunications services that include the benefit of calling any other Z-Line
member at no additional cost. In the future, we expect to expand this offering
to all states in which we are offering Z-Line Home Edition.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$0.9 million to $2.1 million for the three months ended September 30, 2000,
compared to $1.2 million for the same period in the prior year. Research and
development expenses increased $2.6 million to $5.2 million for the nine months
ended September 30, 2000, compared to $2.6 million for the same period in the
prior year. Our research and development expenses consist primarily of salaries
and benefits paid to employees engaged in research and development activities
and outside third party development costs.
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The enhancement of our current product offerings, development of new
products and services and internal use software development have contributed to
increased research and development cost for both the three and nine months
ended September 30, 2000. We introduced Z-Alerts during the third quarter of
2000 and continue to develop new product offerings. We adopted the provisions
of Statement of Position ("SOP") 98-1 "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use," at the beginning of 1999. As
a result, $2.0 and $5.7 million of research and development costs relating to
development of internal use software were capitalized for the three and nine
months ended September 30, 2000, compared to $1.8 and $2.2 million for the same
periods in the prior year. We expect research and development costs to increase
in the future as we enhance and develop new services.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased $19.2 million to $24.4 million for the three months ended September
30, 2000, compared to $5.2 million for the same period in the prior year.
General and administrative expense increased $45.6 million to $55.8 million for
the nine months ended September 30, 2000, compared to $10.2 million for the
same period in the prior year. General and administrative expenses consist
primarily of employee salaries, temporary services, bad debt expense, billing
and collection expense, occupancy costs, provisioning costs for Z-Line Home
Edition customers and our litigation settlement.
The acquisition of Touch 1 and the increase in subscribers has caused
an increase in expenses for general and administrative purposes for both the
three and nine months ended September 30, 2000 compared to the same periods in
the prior year. We increased our capacity for back-office operations to provide
for our anticipated growth and introduction of Z-Line Home Edition to new
states. We anticipate general and administrative expenditures will continue to
increase in the future as we increase our subscribers, expand our services and
enter new states.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $4.2 million to $5.3 million for the three months ended September 30,
2000, compared to $1.1 million for the same period in the prior year.
Depreciation and amortization expense increased $9.1 million to $11.8 million
for the nine months ended September 30, 2000, compared to $2.7 million for the
same period in the prior year.
The increase in depreciation and amortization is a result of the
acquisition of Touch 1 and purchases of equipment. The amortization of the $67.0
million of intangible assets, constituting the amount of consideration in excess
of the fair market value of the net assets purchased from Touch 1. Intangible
asset are composed of $9.2 million and $57.8 million allocated to customer lists
and goodwill, amortized over 5 and 20 year lives, respectively, resulted in
amortization of $1.2 and $2.4 million for the three months and nine months
ended, respectively. In addition, the purchase of computer equipment, switching
equipment, furniture and leasehold improvements required to maintain our growth
and expand our operations has also contributed to the increased depreciation and
amortization expense for both the three and nine months ended September 30,
2000. We expect depreciation and amortization to continue to increase
significantly as we increase our capital expenditures.
INTEREST AND OTHER INCOME. Interest and other income increased $0.6
million to $0.7 million for the three months ended September 30, 2000, compared
to $0.1 million for same period in the prior year. Interest and other income
increased $2.2 million to $2.5 million for the nine months ended September 30,
2000, compared to $0.3 million for same period in the prior year. Interest and
other income consist of income on our cash balances invested in short-term
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liquid investments. The increase was primarily due to larger cash reserves,
resulting from funds raised in our initial public offering and Series D
Preferred share offering. We raised net proceeds of $109.1 million after
underwriting discounts and commissions in our initial public offering and net
proceeds of $55.9 million in our Series D Preferred share offering. Our cash
and cash equivalents were $23.4 million and $2.7 million at September 30, 2000
and 1999, respectively.
INTEREST AND OTHER EXPENSE. Interest and other expense increased $0.3
million to $1.6 million for the three months ended September 30, 2000, compared
to $1.3 million for the same period in the prior year. Interest and other
expense decreased $0.1 million to $2.7 million for the nine months ended
September 30, 2000, compared to $2.8 million for the same period in the prior
year. Our interest expense is a result of the interest charged on our capital
lease and other debt obligations. We anticipate interest expense to increase in
the future as a result of our assumption of debt from the Touch 1 acquisition
and the borrowing of money to support operations through potential new funding
sources.
INCOME TAX EXPENSE. No provision for federal or state income taxes has
been recorded due to the full valuation allowance recorded against the deferred
tax asset for the three and nine month periods ended September 30, 2000 and for
the same periods in the prior year.
NET LOSS. Our net loss increased $11.0 million to $23.1 million for
the three months ended September 30, 2000, compared to $12.1 million for the
same period in the prior year. Our net loss increased $38.0 million to $61.6
million for the nine months ended September 30, 2000, compared to $23.6 million
for the same period in the prior year. This increase was due primarily to the
increases in expenses described above.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
attributable to common stockholders increased $19.2 million to $31.7 million
for the three months ended September 30, 2000, compared to $12.5 million for
the same period in the prior year. Our net loss attributable to common
stockholders increased $45.7 million to $70.3 million for the nine months ended
September 30, 2000, compared to $24.6 million for the same period in the prior
year. This increase was due primarily to the increases in expenses described
above and the issuance of the Series D Preferred. In conjunction with the
Series D Preferred we incurred $8.7 million of non-cash charges relating to net
loss attributable to common stockholders composed of $7.4, $0.9 and $0.4
relating to a beneficial conversion, cumulative dividend and preferred stock
accretion.
EBITDA. Many securities analysts use the measure of earnings before
deducting interest, taxes, depreciation and amortization, also commonly
referred to as "EBITDA," as a way of evaluating our financial performance.
While EBITDA is not a measure under generally accepted accounting principles,
and is not meant to be a replacement for generally accepted accounting
principles, EBITDA is a measure commonly used in the telecommunications industry
and is presented to assist in understanding our operating results. Our negative
EBITDA increased $7.1 million to $16.9 million for the three months ended
September 30, 2000, compared to $9.8 million for the same period in the prior
year. Our negative EBITDA increased $31.2 million to $49.6 million for the nine
months ended September 30, 2000, compared to $18.4 million for the same period
in the prior year. We expect to experience a reduction in negative EBITDA during
the remaining fiscal year 2000 as a result of our increases in subscribers and
operating efficiency.
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LIQUIDITY AND CAPITAL RESOURCES
The competitive local telecommunications service business is
traditionally considered to be a capital intensive business owing to the
significant investments required in fiber optic communication networks and the
co-location of switches and transmission equipment in incumbent local exchange
carriers' central offices. Although we will continue our capital expenditures
we do not expect that the growth of our business will require the levels of
capital investment in fiber optics and switches that existed in historical
telecommunications models. Instead, we will devote significant amounts of our
capital resources to continued operations, software development and marketing
efforts that we have designed to achieve rapid penetration of our target
markets.
We have incurred accumulated losses since our inception as a result of
developing our business, research and development, building and maintaining
network infrastructure and technology, sales and promotion of our services, and
administrative expenditures. As of September 30, 2000, we had an accumulated
deficit of $110.7 million. We have funded these expenditures primarily through
operating revenues, private securities offerings, a sale-leaseback credit
facility, receivables credit facility and an initial public offering of 6.9
million shares of common stock (including the underwriters' over-allotment
option) that raised net proceeds of $109.1 million after underwriting discounts
and commissions. We intend to continue building our organization in
anticipation of future growth and believe that our operating expenditures will
also continue to increase.
On April 14, 2000, we completed the acquisition of Touch 1 for
approximately $9.0 million in cash and 1.1 million shares of our common stock.
The Touch 1 acquisition was accounted for using the purchase method of
accounting. The acquisition of Touch 1 resulted in $67.0 million of intangible
assets being amortized over 5 to 20 years.
In July 2000, we also entered into an agreement with a service firm to
provide various content and new service offerings through the telephone. Under
this agreement we have invested $3.0 million and are committed to an additional
$4.0 million in cash payments for future services. This contract provides for
early termination under certain circumstances with adjustments of the
commitments.
In August 2000, we entered into an agreement with a service firm to
outsource customer provisioning through electronic bonding with incumbent local
exchange carriers. Under this agreement, we are committed to a $0.5 million
cash payment for set-up fees and minimum commitment fees, subject to certain
adjustments, for the next three years of $4.0, $7.0, and $9.0 million, subject
to the successful completion by the service firm of certain obligations in the
future. This contract provides for various termination arrangements with
related severance fees.
In November 2000, we filed a Certificate of Designation authorizing
the issuance of approximately 6.3 million shares of $.01 par value Series E
Convertible Preferred Stock ("Series E Preferred"). We have received proceeds
of approximately $50.0 million in connection with the sale of 4,166,667 shares
of Series E Preferred at a price of $12.00. The purchaser of Series E preferred
received a warrant to purchase a number of shares of our common stock equal to
one-half of the amount of Series E Preferred purchased by such investor. The
purchaser of Series E Preferred has the option, for ninety days after the
initial closing, to purchase (or designate another person who intends to
purchase) an additional 2,083,333 shares of Series E
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Preferred along with warrants to purchase 1,041,667 shares of our common stock,
for approximately $25.0 million. Series E Preferred is convertible at a
conversion price of $12.00, which price is subject to adjustment, into common
stock at the option of the holder (i.e., initially convertible on a one-for-one
basis); however, there are certain circumstances that provide for a forced
conversion of the stock by us. Series E Preferred is mandatorily redeemable 8
years from the original issue date, has an 8% cumulative dividend payable in
cash and has certain liquidation preferences and voting rights. Each warrant is
exercisable at a price of $13.80 per share subject to certain adjustments.
NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating
activities increased by $64.0 million to $79.9 million for the nine months
ended September 30, 2000, compared to $15.9 million for the same period in the
prior year. Our increase in cash used in operating activities increased was
primarily because of increasing net losses and increases in accounts receivable
from increased revenue and billings.
NET CASH USED IN INVESTING ACTIVITIES. Net cash used in investing
activities was $35.5 million for the nine months ended September 30, 2000,
compared to $3.1 million provided by investing activities for the same period
in the prior year, a change of $38.6 million. For the nine months ended
September 30, 2000, we received $0.8 million from selling our receivables, we
invested $9.0 million in cash to acquire Touch 1 and purchased property and
equipment of $26.3 million. For the nine months ended September 30, 1999, we
received $13.8 million in a sale-leaseback transaction and purchased property
and equipment of $10.7 million.
In July 2000, we entered into an accounts receivable facility with RFC
Capital Corporation, a division of Textron, Inc., ("RFC") providing for the sale
of certain of our accounts receivable to RFC. RFC has agreed to purchase up to
$25.0 million of our accounts receivable, with provisions for a commitment of up
to $50.0 million, subject to successful syndication of the receivables sales
program by RFC. We have sold $1.3 million of receivables, for net proceeds of
$0.8 million, during the third quarter of 2000.
The increase in net cash used in investing activities is a direct
result of our continued preparation for rapid growth and our plans for network
infrastructure and introduce new service offerings. In 2000, we have been
focused on product development and the establishment of our infrastructure, the
operation of our technology and a network that primarily involves the
development and purchases of software for additional service offerings,
internal operations, and the operation of telecommunication services. As
discussed earlier, the purchase of Touch 1 has greatly increased our
back-office operations. We have increased our employees at all locations. The
increase in employees coupled with our increase in subscribers has required us
to make capital investments in switching equipment, computer equipment,
software, leasehold improvements, and office equipment to provide for our
growing employee and subscriber base.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Net cash provided by
financing activities was $37.1 million for the nine months ended September 30,
2000, compared to net cash provided by financing activities of $7.5 million for
the same period in the prior year, a change of $29.6 million. The overall
change is primarily attributable to the sale of our Series D Preferred. In July
2000, we filed a Certificate of Designation authorizing the issuance of 5.0
million shares of Series D convertible preferred stock and warrants ("Series D
Preferred"). We have received aggregate proceeds of approximately $56.3 million
in connection with the sale of 4,688,247 shares of Series D Preferred at a
price of $12.00. The deal costs associated with the transaction were
approximately $0.4 million. The Series D Preferred is convertible at a
conversion price of $12.00, which price is subject to adjustment, into common
stock at the option of the holder (i.e., initially convertible on a one-for-one
basis); however, there are certain circumstances that provide for a forced
conversion of the stock by us. Series D
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Preferred is mandatorily redeemable 8 years from the original issue date, has
an 8% cumulative dividend payable at times in cash and at times with in-kind
contributions of additional Series D Preferred and has certain liquidation
preferences and voting rights. Each purchaser of Series D Preferred received a
warrant to purchase a number of shares of our common stock equal to one-half of
the amount of Series D Preferred purchased by such investor. Each warrant is
exercisable at a price of $13.80 per share subject to certain adjustments.
In addition to our Series D Preferred we received cash of $0.9 and
$2.1 million of notes receivable from stockholders for common stock and the
exercise of stock options, respectively, for the nine months ended September
30, 2000.
The receipts of cash noted above were off-set by the payment of
long-term debt and capital lease obligations totaling $21.8 million for the
nine months ended September 30, 2000. We extinguished our sale-leaseback credit
facility, extinguished a line of credit assumed in the Touch 1 acquisition and
paid off a lease obligation in the amounts of $14.4, $1.0 and $3.5 million,
respectively. The remaining payments on long-term debt and capital lease
obligations are the debt service for the debt assumed from the Touch 1
acquisition. On February 14, 2000, we paid $14.4 million to extinguish the
outstanding CMB Capital, LLC capital lease obligation and purchase the related
assets. This was the repayment of transactions involving the sale-leaseback of
various furniture and equipment payable over four years from the date of the
transactions. This transaction accounted for a $1.6 million increase in the
carrying value of our assets, resulting from the payments made to terminate the
lease and the carrying value of our capital lease obligation. This $1.6 million
was added to the value of the assets purchased and is depreciated over the
estimated remaining lives in accordance with FASB Interpretation No. 26
-Accounting for Purchase of a Leased Asset by the Lessee during the Term of the
Lease, an interpretation of FASB Statement No. 13.
Our ongoing capital requirements will depend on several factors,
including market acceptance of our services, the amount of resources we devote
to investments in our networks, facilities, build-out of additional enterprise
management centers, services development and brand promotions, the resources we
devote to sales and marketing of our services, and other factors. We have
experienced a substantial increase in our capital expenditures and operating
losses since our inception consistent with the growth in our operations and
staffing, and we anticipate that this will continue for the foreseeable future.
Additionally, we expect to make additional investments in technologies and our
network architecture, and plan to expand our sales and marketing programs and
conduct more brand promotions. Although operating activities may provide cash
in certain periods, to the extent we experience growth in the future, we
anticipate that our operating and investing activities will use cash.
Consequently, any such future growth
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will require us to obtain additional equity or debt financing which may not be
available on attractive terms, or at all, or may be dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
The new accounting pronouncements in Footnote 1 of our Condensed
Consolidated Financial Statements are incorporated by reference.
YEAR 2000 COMPLIANCE
We did not experience any significant disruptions in our operations
during the transition into the Year 2000. We believe we have completed
necessary assessments, modifications or replacement and testing of systems
critical for the delivery of our services. We believe our Year 2000 readiness
objectives have been met. We also prepared a contingency plan to mitigate
potential adverse effects that might have arisen from non-compliant systems or
third parties that had not adequately addressed the Year 2000 issue. While we
did not experience any significant Year 2000 disruptions during the transition
into the Year 2000, we will continue to monitor our operations and systems and
address any date-related problems that may arise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have instruments sensitive to market risk relating to
exposure to changing interest rates and market prices. We do not enter into
financial instruments for trading or speculative purposes and do not currently
utilize derivative financial instruments. Our operations are conducted
primarily in the United States and as such are not subject to material foreign
currency exchange rate risk.
The fair value of our investment portfolio or related income would not
be significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. Civil Action File No. 8:00 CV-1148-T-24B; PTEK Holdings, Inc., f/k/a
Premiere Technologies, Inc., and Premiere Communications, Inc. v.
Z-Tel Technologies, Inc., Z-Tel Communications, Inc., David Gregory
Smith, James Kitchen and Eduard Mayer; in the United States District
Court for the Middle District of Florida, Tampa Division.
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On November 14, 2000, the parties reached an agreement to resolve in
full all claims asserted by each party against the other. In connection with
that settlement, the parties executed mutual releases and agreed to dismiss the
claims against each other with prejudice. Z-Tel also agreed to issue a warrant
to PTEK Holdings, Inc. for the purchase of 175,000 shares of Z-Tel common stock.
2. Case No. 98-12260; In re Touch 1 Communications, Inc.; in the United
States Bankruptcy Court for the Southern District of Alabama
Case No. 98-12402; In re direcTEL; in the United States Bankruptcy
Court for the Southern District of Alabama
Touch 1 Communications, Inc. ("Touch 1") and its wholly owned
subsidiary, direcTEL, Inc. ("direcTEL") (collectively, the "Debtors"), filed
voluntary petitions for relief under chapter 11 of the Bankruptcy Code on June
29, 1999 and July 9, 1999, respectively, in the United States Bankruptcy Court
for the Southern District of Alabama (the "Bankruptcy Court"). The Bankruptcy
Court entered final decrees closing the direcTEL case on October 5, 2000 and
the Touch 1 case on October 30, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
RECENT SALES OF UNREGISTERED SECURITIES
Over a period from July 6, 2000 to October 17, 2000, Z-Tel sold a
total of 4,688,247 shares of its Series D Convertible Preferred Stock (the
"Series D Preferred") and warrants (the "Warrants") for the purchase of up to
2,344,124 shares of its common stock, par value $0.01 per share ("Common
Stock"), for aggregate consideration of $56,258,964. Z-Tel claims an exemption
from registration under Section 4(2) of the Securities Act of 1933 because the
transaction was by an issuer and did not involve a public offering.
The Series D Preferred is initially convertible into 4,688,247 shares
of Common Stock. The Warrants are initially exercisable at an exercise price of
$13.80 per share. The conversion rates of the Series D Preferred and the
exercise price of the Warrants are subject to adjustment upon the occurrence of
certain events that would cause dilution in the ownership of the holders of the
Series D Preferred and Warrants.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed as part of this report:
Exhibit
Number Description
------ -----------
2.1(**) Agreement and Plan of Merger dated April 10, 2000 by and
among Z-Tel Technologies, Inc., Tiger Acquisition Subsidiary,
Inc., Touch 1 Communications, Inc., and certain shareholders
of Touch 1 Communications, Inc.
3.1(***) Amended and Restated Certificate of Incorporation of Z-Tel,
as amended
3.2(*) Amended and Restated Bylaws of Z-Tel
4.1(*) Form of Common Stock Certificate
4.2 See Exhibits 3.1 and 3.2 of this Registration Statement for
provisions of the Amended and Restated Certificate of
Incorporation, as amended, and the Bylaws of Z-Tel defining
rights of security holders
4.3(*****) Stock Purchase Agreement, dated July 6, 2000, by and between
the Registrant and the various purchasers of the Registrant's
Series D Convertible Preferred Stock
4.4(*****) Certificate of Designations, Preferences and Relative Rights,
Qualifications, Limitations and Restrictions relating to the
Registrant's Series D Convertible Preferred Stock
4.5(*****) Form of Registration Rights Agreement by and between the
Registrant and each of the purchasers of the Registrant's
Series D Convertible Preferred Stock
4.6(*****) Form of Warrant for the purchase of shares of common stock of
the Registrant by each of the purchasers of the Registrant's
Series D Convertible Preferred Stock
4.7 Stock and Warrant Purchase Agreement, dated October 19, 2000,
by and among the Registrant and The 1818 Fund III, L.P.
4.8 Certificate of Designation of 8% Convertible Preferred Stock,
Series E, Setting Forth the Powers, Preferences, Rights,
Qualifications, Limitations and Restrictions of Such Series
of Preferred Stock
4.9 Registration Rights Agreement between and among the
Registrant and The 1818 Fund III, L.P.
4.10 Warrant for the purchase of shares of common stock of the
Registrant by The 1818 Fund III, L.P.
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10.1.1(*) Stockholders' Agreement dated October 8, 1999, between and
among the company, BA Capital Corporation, Sewanee Partners
II, L.P., Gramercy Z-Tel LLC and the other parties set forth
therein
10.1.2(*) Employment Agreement dated July 1998 between the Company and
D. Gregory Smith
10.1.3(*) Employment Agreement dated September 1999 between the Company
and John Hutchens
10.1.4(*) Employment Agreement dated August 1998 between the Company
and Charles W. McDonough
10.1.5(*) Employment Agreement dated August 1998 between the Company
and J. Bryan Bunting
10.1.6(*) Employment Agreement dated July 1998 between the Company and
James A. Kitchen
10.1.7(*) Investment Agreement dated March 15, 1999 between the Company
and CMB Capital LLC
10.2.1(*) 1998 Equity Participation Plan
10.2.2(****) 2000 Equity Participation Plan
10.3(**) Form of Employment Agreement for certain key Touch 1
employees, including James F. Corman, President of Touch 1
10.4(*****) Receivables Sales Agreement dated as of July 27, 2000 by and
between Z-Tel Communications, Inc., as seller and
subservicer, Touch 1 Communications, Inc., as seller and
subservicer, and RFC Capital Corporation, as purchaser.
27 Financial Data Schedules
(*) Incorporated by reference to the correspondingly numbered exhibit to
the Registrant's Registration Statement on Form S-1 (File No.
333-89063), originally filed October 14, 1999, as amended and as
effective December 14, 1999.
(**) Incorporated by reference to the correspondingly numbered exhibit to
the Registrant's Current Report on Form 8-K filed April 28, 2000.
(***) Incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8, filed on July 18, 2000.
(****) Incorporated by reference to Appendix B to the Registrant's
Preliminary Proxy Statement filed on April 14, 2000.
(*****) Incorporated by reference to the correspondingly numbered exhibits to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ending June 30, 2000, filed on August 14, 2000.
(b) Reports on Form 8-K.
None
24
<PAGE> 25
Z-TEL TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, Registrant's principal financial officer,
thereunto duly authorized.
November 14, 2000 Z-TEL TECHNOLOGIES, INC.
(Registrant)
By: /s/ John M. Hutchens
---------------------------------------
John M. Hutchens
Chief Financial Officer
(Authorized officer of
Registrant and principal
financial officer)
25
