<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 14, 2000
Z-TEL TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-28467 59-3501119
------------------------------- ------------------------ ------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
601 S. Harbour Island Blvd., Suite 220, Tampa, FL 33602
------------------------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
(813) 273-6261
-------------------------------
(Registrant's telephone number,
including area code)
N/A
-------------------------------
(Former Name or Former Address,
if Changed Since Last Report)
<PAGE> 2
Item 2. Acquisition or disposition of assets
Z-Tel Technologies, Inc. ("Z-Tel") has completed the acquisition of
Touch 1 Communications, Inc. ("Touch 1"). Touch 1 was merged with a wholly-owned
subsidiary of Z-Tel and, effective April 14, 2000, has become a wholly-owned
subsidiary of Z-Tel. The purchase price for Touch 1 consisted of 1,100,000
shares of Z-Tel stock, plus approximately $9 million in cash derived from the
proceeds of Z-Tel's initial public offering completed in December 1999. The
purchase price was determined through arms-length negotiations by the parties
and is subject to adjustment based on a closing date balance sheet, now being
prepared, as detailed in the agreement and plan of merger. The acquisition is
being accounted for as a stock purchase. The parties have agreed to account for
the transaction as though the transaction were completed on April 10, 2000. In
connection with the merger, Z-Tel has entered into employment agreements with
several key members of Touch 1's management team, including James F. Corman who
will continue his position as President of Touch 1, which will operate under the
name Z-Tel Consumer Services. Prior to the merger, there were no material
relationships between Z-Tel and Touch 1, except that Z-Tel had hired Touch 1 to
provide telemarketing and other services at Touch 1's usual rates.
Item 5. Other Events
On June 9, 2000, PTEK Holdings, Inc. and Premiere Communications, Inc.
(collectively, "PTEK") filed a lawsuit against Z-Tel, Z-Tel Communications, Inc.
and several of its officers and directors. Z-Tel disclosed the existence of this
lawsuit and its response by press release dated June 12, 2000, which is attached
as Exhibit 99.2.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial statements of business acquired:
(1) The following historical audited financial statements are
attached hereto:
<TABLE>
<S> <C>
Independent Auditors' Report
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and 1998
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholders' Deficit for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
</TABLE>
(2) The following historical unaudited financial statements are
attached hereto:
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets as of March 31, 2000
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999
Condensed Consolidated Statement of Cash Flows for the
three months ended March 31, 2000
</TABLE>
(b) Pro forma condensed consolidated (unaudited) financial information
<TABLE>
<S> <C>
Basis of Presentation
Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 1999
Pro Forma Condensed Consolidated Statement of Operations for
the three months ended March 31, 2000
Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1999
</TABLE>
(c) Exhibits
The Exhibits to this report are listed in the Exhibit Index set
forth elsewhere herein.
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Touch 1 Communications, Inc.
We have audited the accompanying balance sheets of Touch 1 Communications, Inc.
and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the three
years ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Touch 1
Communications, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the three years ended
December 31, 1999 in conformity with generally accepted accounting principles.
Birmingham, Alabama
February 25, 2000
(Except for Note 19, as to which
the date is June 20, 2000)
<PAGE> 4
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 964,239 $ 777,637
Trade accounts receivable (net allowance for doubtful accounts
of $662,750 and $361,750, respectively) 7,763,804 8,458,621
Other receivables 8,371 59,744
Deferred tax asset 63,341 20,904
Prepaid expenses and other assets 35,949 74,954
------------ ------------
Total current assets 8,835,704 9,391,860
------------ ------------
PROPERTY AND EQUIPMENT, NET 8,624,051 10,010,865
------------ ------------
OTHER ASSETS
Deferred tax asset 8,879,238 9,553,556
Other assets 1,723,701 689,906
------------ ------------
Total other assets 10,602,939 10,243,462
------------ ------------
TOTAL ASSETS $ 28,062,694 $ 29,646,187
============ ============
</TABLE>
<PAGE> 5
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Lines of credit $ 1,362,822 $ 1,000,000
Notes payable - related party -- 50,146,433
Preferred dividends payable 1,039,027 --
Trade accounts payable 6,034,260 10,883,591
Accounts payable - related party -- 445,539
Accrued expenses 1,685,575 3,104,232
Capital lease obligations payable -- 630,349
Current portion of long-term debt:
Related party 4,294,878 127,355
Unrelated party 605,193 --
------------ ------------
Total current liabilities 15,021,755 66,337,499
------------ ------------
LONG-TERM LIABILITIES
Long-term debt:
Related party 22,295,049 3,140,487
Unrelated party 2,709,392 --
Deferred credit -- 8,355,555
------------ ------------
Total long-term liabilities 25,004,441 11,496,042
------------ ------------
Total liabilities 40,026,196 77,833,541
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 20)
STOCKHOLDERS' DEFICIT
Preferred stock, par value $.01 per share - authorized 4,000,000 shares;
3,338,936 shares issued and outstanding; liquidation
value $10.46 per share or $34,925,270 in the aggregate 33,389 --
Common stock, par value $.01 per share - authorized 6,000,000
shares; 985,044 shares issued; 938,147 shares outstanding 9,850 9,850
Additional paid-in capital 49,896,952 16,044,098
Accumulated deficit (60,506,547) (62,844,156)
Treasury stock, at cost, 46,897 shares (1,397,146) (1,397,146)
------------ ------------
Total stockholders' deficit (11,963,502) (48,187,354)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 28,062,694 $ 29,646,187
============ ============
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
<PAGE> 6
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
REVENUES $ 65,588,925 $ 65,533,414 $ 92,238,933
OPERATING EXPENSES:
Network operations 28,249,268 37,014,590 42,501,533
Sales and marketing 10,588,836 8,487,387 37,217,163
General and administrative 24,395,297 48,981,216 51,289,771
Depreciation and amortization 2,245,960 2,248,529 1,819,362
------------ ------------ -------------
Total operating expenses 65,479,361 96,731,722 132,827,829
------------ ------------ -------------
NONOPERATING INCOME (EXPENSES):
Interest income 548 5,876 157,835
Interest expense (2,829,810) (3,068,608) (5,437,381)
Miscellaneous 117,961 68,991 3,564
Gain on settlement of contract 4,480,505 4,983,333 1,611,111
Gain on sale of assets 181,119 -- --
Bankruptcy fees (1,086,902) (1,167,895) --
------------ ------------ -------------
Total nonoperating income (expenses) 863,421 821,697 (3,664,871)
------------ ------------ -------------
Net income (loss) before income taxes and
extraordinary items 972,985 (30,376,611) (44,253,767)
Income tax (provision) benefit (149,149) 6,161,346 3,545,073
------------ ------------ -------------
Net income (loss) before extraordinary items 823,836 (24,215,265) (40,708,694)
Extraordinary items, net of applicable taxes:
Gain on forgiveness of debt 1,513,773 -- 3,663,386
Gain on sale of stock -- -- 21,329,567
------------ ------------ -------------
Total extraordinary items 1,513,773 -- 24,992,953
------------ ------------ -------------
NET INCOME (LOSS) $ 2,337,609 $(24,215,265) $ (15,715,741)
============ ============ =============
EARNINGS PER COMMON SHARE:
Basic earnings per share:
Net income (loss) before extraordinary items $ 0.23 $ (25.81) $ (43.39)
Extraordinary items 1.61 0.00 26.64
------------ ------------ -------------
Net income (loss) $ 1.38 $ (25.81) $ (16.75)
============ ============ =============
Fully diluted earnings per share:
Net income (loss) before extraordinary items $ 0.42 $ (25.81) $ (43.39)
Extraordinary items 0.78 0.00 26.64
------------ ------------ -------------
Net income (loss) $ 1.20 $ (25.81) $ (16.75)
============ ============ =============
Weighted average shares outstanding
Basic 938,147 938,147 938,147
Diluted 1,006,255 938,147 938,147
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
<PAGE> 7
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
-------------------- ------------------ Paid-in Accumulated ----------------------
Par Value Shares Par Value Shares Capital Deficit Cost Shares Total
--------- --------- --------- ------- ------------ ------------ ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 12-31-96 $ -- -- $9,850 985,044 $ 8,800,358 $(17,231,012) $(1,397,146) (46,897) $ (9,817,950)
Net income -- -- -- -- -- (15,715,741) -- -- (15,714,741)
Prior period adjust-
ments -- -- -- -- -- (5,682,138) -- -- (5,682,138)
Contribution of
capital from
Touch 1, Inc. -- -- -- -- 5,000,000 -- -- -- 5,000,000
------- --------- ------ ------- ------------ ------------ ----------- ------- ------------
Balance at 12-31-97 -- -- 9,850 985,044 13,800,358 (38,628,891) (1,397,146) (46,897) (26,215,829)
Net income -- -- -- -- -- (24,215,265) -- -- (24,215,265)
Contribution of
capital from
Touch 1, Inc. -- -- -- -- 2,243,740 -- -- -- 2,243,740
------- --------- ------ ------- ------------ ------------ ----------- ------- ------------
Balance at 12-31-98 -- -- 9,850 985,044 16,044,098 (62,844,156) (1,397,146) (46,897) (48,184,354)
Net income -- -- -- -- -- 2,337,609 -- -- 2,337,609
Issuance of preferred
stock 33,389 3,338,936 -- -- 34,891,881 -- -- -- 34,925,270
Preferred stock
dividends -- -- -- -- (1,039,027) -- -- -- (1,039,027)
------- --------- ------ ------- ------------ ------------ ----------- ------- ------------
Balance at 12-31-99 $33,389 3,338,936 $9,850 985,044 $ 49,896,952 $(60,506,547) $(1,397,146) (46,897) $(11,963,502)
======= ========= ====== ======= ============ ============ =========== ======= ============
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
<PAGE> 8
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,337,609 $(24,215,265) $(15,715,741)
Adjustments to reconcile net income
(loss) to net cash flows:
Depreciation and amortization 2,245,960 2,248,529 1,819,362
Gain on settlement of contract (4,480,505) (4,983,333) (1,611,111)
Loss due to impairment of asset 390,000 -- --
Gain on disposal of assets (181,119) -- --
Gain from forgiveness of debt (1,996,505) -- --
Proceeds from sale of customer base -- -- 14,950,000
Realized gain on sale of WorldCom stock -- -- (21,329,567)
(Increase) decrease in assets:
Trade accounts receivable (net) 694,817 20,147,529 (482,095)
Related party receivables -- -- 5,513,574
Other receivables 51,373 (44,272) (10,362)
Deferred tax asset 631,881 (6,161,346) (3,545,073)
Prepaid expenses 39,005 8,170,714 4,309
Other assets (1,033,793) (574,136) 1,740,991
Increase (decrease) in liabilities:
Accounts payable - trade 859,890 575,861 (13,871,548)
Accounts payable - related party 543,192 445,539 --
Accrued expenses 1,534,549 1,594,159 421,027
----------- ------------ ------------
NET CASH FLOWS PROVIDED BY
(USED IN) OPERATING ACTIVITIES 1,636,354 (2,796,021) (32,116,234)
----------- ------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (1,137,841) (93,620) (2,175,952)
Proceeds from sale of property and equipment 225,250 -- --
Proceeds from sale of WorldCom stock -- -- 21,329,567
----------- ------------ ------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (912,591) (93,620) 19,153,615
----------- ------------ ------------
FINANCING ACTIVITIES
Bank overdraft -- (6,466,483) 316,046
Net borrowings (payments) on lines of credit 1,259,199 (2,466,931) 1,422,726
Payments on capital lease obligations (373,090) (280,607) (445,887)
New borrowings - notes payable - related party 3,000,000 14,970,496 15,474,793
Payments on notes payable - related party (2,875,174) (2,421,242) (7,451,032)
Payments on long-term debt - related party (127,355) (113,936) (101,930)
New borrowings - long-term debt - unrelated party -- 283,733 3,550,000
Payments on long-term debt - unrelated party (1,420,741) (337,752) (4,802,097)
Capital contribution from Touch 1, Inc. -- 500,000 5,000,000
----------- ------------ ------------
NET CASH FLOWS PROVIDED BY
(USED IN) FINANCING ACTIVITIES (537,161) 3,667,278 12,962,619
----------- ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 186,602 777,637 --
CASH AND CASH EQUIVALENTS, beginning of year 777,637 -- --
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 964,239 $ 777,637 $ --
=========== ============ ============
</TABLE>
<PAGE> 9
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Cash paid during the year for interest $ 1,064,637 $ 1,703,717 $ 4,672,381
Cash paid during the year for income taxes $ -- $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of preferred stock resulting in:
Decrease in notes payable $(29,225,669) $ -- $ --
Decrease in accounts payable - related party (988,731) -- --
Decrease in accrued expenses (835,820) -- --
Decrease in deferred credit (3,875,050) -- --
Decrease in stockholders' deficit 34,925,270 -- --
Disallowance of capital leases by
bankruptcy court 234,649 -- --
Preferred dividends accrued (1,039,027) -- --
Conversion of notes payable to long-term debt resulting in:
Decrease in line of credit (765,429) -- --
Decrease in note payable (23,059,355) -- --
Increase in long-term debt - unrelated
party 765,429 -- --
Increase in long-term debt - related party 23,059,355 -- --
Conversion of accrued interest to long-term debt resulting in:
Decrease in accrued expenses (2,117,388) -- --
Increase in line of credit 103,623 -- --
Increase in notes payable 2,013,765 -- --
</TABLE>
<PAGE> 10
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Contribution of property and equipment
from Touch 1, Inc. $ -- $ 1,743,740 $ --
Conversion of Premiere long-term debt to
note payable and accounts payable to
notes payable -- 8,124,949 --
Conversion of United Bank loan to notes
payable -- 107,894 --
Conversion of First National Bank of Atmore
loan to notes payable -- 1,000,000 --
Conversion of WorldCom accounts payable to
Corman Elegre Capital, L.L.C. note payable -- 15,704,088 --
Conversion of accrued interest to notes
payable -- (179,104) --
Prior period adjustments resulting in:
Decrease in property and equipment -- -- 2,198,430
Increase in long-term debt -
related party deficit -- -- 3,483,708
Increase in accumulated deficit -- -- (5,682,138)
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
<PAGE> 11
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Touch 1 Communications, Inc. and Subsidiaries ("the Company") provide long
distance service to subscribers throughout the United States. During the year
ended December 31, 1998, Touch 1 Communications, Inc. formed two wholly-owned
subsidiaries, direcTEL, Inc. (which provides telemarketing services) and
direcCONNECT, Inc. (which functions as a multi-level marketing company). The
consolidated financial statements for the years ended December 31, 1999 and 1998
include the results of Touch 1 Communications, Inc., direcTEL, Inc., and
direcCONNECT, Inc. All significant intercompany accounts have been eliminated in
consolidation. The financial statements for the year ended December 31, 1997,
include the results of Touch 1 Communications, Inc. In addition, the Company was
a wholly-owned subsidiary of Touch 1, Inc. until September, 1999.
On June 29, 1998 and July 9, 1998, Touch 1 Communications, Inc. and direcTEL,
Inc. (a wholly-owned subsidiary of Touch 1 Communications, Inc.), respectively,
filed proceedings under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. The
Bankruptcy Plan, as amended, was consummated on September 13, 1999. (See
Note 3.)
REVENUE RECOGNITION
Revenues are recognized when earned. Revenues are earned at the time the
long-distance call is originated.
PROPERTY AND EQUIPMENT
Property and equipment are capitalized at the lower of cost or market.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets for financial reporting purposes. Accelerated
depreciation is used for income tax purposes, where permitted. Improvements to
leased properties or fixtures are amortized over their estimated useful lives or
lease period, whichever is shorter.
Leased property meeting certain criteria is capitalized and the present value of
the related lease payments is recorded as a liability. Amortization of capital
lease assets is computed on the straight-line method over the estimated useful
life of the asset or the term of the applicable lease, whichever is shorter.
Normal repairs and maintenance are expensed as incurred. Expenditures that
materially increase the value or extend the useful life of an asset are
capitalized. The related costs and accumulated depreciation of disposed assets
are eliminated and any gain or loss on disposition is included in the current
year consolidated statement of operations.
<PAGE> 12
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets when events or
circumstances indicate that such assets might be impaired. The Company
determines impairment by comparing the undiscounted future cash flows estimated
to be generated by these assets to their respective carrying value. In the event
impairment exists, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") 109, "Accounting for Income Taxes."
Under SFAS 109, deferred tax assets and liabilities are recognized for the
future tax benefit or consequence attributable to the differences between the
financial statement and tax bases of assets and liabilities. Valuation
allowances are established when necessary, to reduce deferred tax assets to an
amount expected to be realized.
As a subsidiary of Touch 1, Inc., the Company is included in the parent's
consolidated federal corporate income tax returns for the years ended December
31, 1997 and 1998. Due to the ownership change discussed in Note 16, the Company
will be included in the parent's consolidated federal corporate income tax
return for the period January 1, 1999 through September 13, 1999. For the period
beginning September 14, 1999 through December 31, 1999, the Company will file
its federal corporate income tax return as a separate entity. The Company and
its subsidiaries generally file separate state income tax returns, unless an
applicable state allows a consolidated return to be filed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in the bank. Cash equivalents
include all time deposits purchased with a maturity of three months or less.
In connection with the bankruptcy process, Touch 1 Communications, Inc.
established three debtor-in-possession accounts, and direcTEL, Inc. established
two debtor-in possession accounts. These accounts were created to facilitate the
Bankruptcy Court's review of all disbursements. The balances in these accounts
were $1,980,902 at December 31, 1998. These bank accounts were no longer under
review after the Company was released from bankruptcy.
<PAGE> 13
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions for
the reporting period and as of the financial statement date. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities, and the reported amounts of revenues and
expenses. Actual results could differ from these estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets'
fair values.
Lines of credit: The carrying amounts reported on the balance sheet for
the lines of credit approximate those liabilities' fair value.
Notes payable: The fair value of the Company's notes payable are
estimated using discounted cash flow analysis, based on the Company's
incremental borrowing rates for similar types of borrowing
arrangements.
Fixed rate long-term debt: The fair value of the Company's fixed rate
long-term debt is estimated using discounted cash flow analysis, based
on the Company's incremental borrowing rates for similar types of
borrowing arrangements.
Variable rate long-term debt: The fair value of the Company's variable
rate long-term debt approximates its carrying value.
SEGMENT REPORTING
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information," requires that the Company
report financial and descriptive information about reportable segments, and how
these segments were determined. The Company operated during the years ended
December 31, 1999, 1998 and 1997 in a single segment. The Company allocates
resources and assesses performance based on total operations. Based on these
factors, management has determined that the Company operates as one segment as
defined by SFAS No. 131.
<PAGE> 14
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
The Company adopted statement of Position (SOP) 98-1 "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use" on January 1, 1999.
SOP 98-1 requires computer software costs related to internal software that is
incurred in the preliminary project stage to be expensed as incurred. When the
capitalization criteria of SOP 98-1 have been met, costs of developing or
obtaining internal-use computer software are capitalized. The Company
capitalized approximately $141,733 of software obtained during the year ended
December 31, 1999. Internal use software is included as a component of property
and equipment on the consolidated balance sheet.
SELF-INSURANCE
The Company utilizes third-party insurance subject to varying retention levels
of self-insurance. Such self-insurance relates primarily to employee health
insurance. Expenses are accrued based upon the Company's estimates of the
aggregate liability for claims incurred using the Company's prior experience.
The Company has stop-loss insurance that begins at $45,000 per claim. The policy
will pay a total of $2,000,000 per year in aggregate claims, at which point the
Company is liable for any additional claims.
ADVERTISING COSTS
The Company expenses advertising costs to operations as they are incurred.
Advertising expenses included in sales and marketing expenses were $-0-,
$2,143,958 and $121,640, for the years ended December 31, 1999, 1998 and 1997,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS
On November 24, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 100 ("SAB 100"), "Restructuring and Impairment
Charges." SAB 100 provides the SEC staff's views regarding the accounting for
and disclosure of certain expenses commonly reported in connection with exit
activities and business combinations. The Company does not anticipate that SAB
100 will have a material impact on its consolidated financial statements.
On December 3, 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.
<PAGE> 15
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 2 - RELATED PARTIES AND RELATED PARTY TRANSACTIONS
As detailed below, Touch 1 Communications, Inc., Touch 1, Inc., Corman
Foundation, Inc., and Corman Elegre' Capital, L.L.C. are all related due to
matters of individual control. Generally accepted accounting principles
generally require that financial statements of parties related due to matters of
individual control be presented in combination or consolidation. In this
instance, it is management's belief that such a presentation could result in a
misleading presentation of the consolidated financial statements of Touch 1
Communications, Inc. and Subsidiaries and therefore the other related party
financial statements have not been included.
The Company is involved in several related party transactions. Listed below are
the various related parties and their relationships to the Company:
TOUCH 1, INC.
Touch 1, Inc. owns 100% of the outstanding common stock of Touch 1
Communications, Inc. and of Touch 1 Wireless, Inc. At December 31, 1999, no
preferred stockholders of Touch 1 Communications, Inc. had exercised their
rights to convert to common stock.
JAMES F. CORMAN
James F. Corman is the President of Touch 1, Inc. and Subsidiaries including
Touch 1 Communications, Inc. James F. Corman directly owns approximately 20% of
the Class A voting common stock and 100% of the Class B non-voting common stock
of Touch 1, Inc. The Company had notes payable to James F. Corman in the amounts
of $277,732 and $362,845 at December 31, 1999 and 1998, respectively. Interest
expense for the note payable was $5,250, $-0- and $-0- for the years ended
December 31, 1999, 1998 and 1997, respectively.
CORMAN FOUNDATION, INC.
The Corman Foundation, Inc. ("the Foundation") is a 501(c)(3) private charitable
foundation and non-profit corporation whose primary function is providing
charitable grants to various organizations from funds donated to the Foundation.
James F. Corman is the founder and executive director of the Corman Foundation.
The Foundation owns 100% of Corman Elegre' Capital, L.L.C., and approximately
27.4% of the preferred stock of Touch 1 Communications, Inc.
<PAGE> 16
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 2 - RELATED PARTIES AND RELATED PARTY TRANSACTIONS - CONTINUED
CORMAN ELEGRE' CAPITAL, L.L.C.
Corman Elegre' Capital, L.L.C. ("Corman Elegre'") is a single member limited
liability corporation formed as a holding company for various investments.
Corman Elegre' owns 100% of the preferred stock of Touch 1, Inc. and
approximately 61.7% of the preferred stock of Touch 1 Communications, Inc. The
Company had notes payable to Corman Elegre' in the amounts of $16,251,489 and
$29,629,037 at December 31, 1999 and 1998, respectively. (See Note 3 -
Bankruptcy). Interest expense for the Corman Elegre' notes payable was
$1,449,284, $869,587 and $-0- for the years ended December 31, 1999, 1998 and
1997, respectively.
WILLIAM F. CORMAN CHARITABLE TRUST
The William F. Corman Charitable Trust ("the WFCC Trust") is a charitable trust
which acquired all of the common stock of Touch 1, Inc. held by William F.
Corman (father of James F. Corman) on July 20, 1998. James F. Corman is a
trustee of the Trust along with the treasurers of the First Presbyterian Church
of Atmore and the First United Methodist Church of Atmore. The WFCC Trust owns
approximately 34.6% of the Class A voting common stock of Touch 1, Inc.
FIRST REVOCABLE TRUST OF W. F. CORMAN
The First Revocable Trust of W. F. Corman owns approximately 0.8% of the
preferred stock of Touch 1 Communications, Inc. James F. Corman and his three
sisters are the trustees and beneficiaries. Each is entitled to a 25% share of
the trust assets. The Company had notes payable to the First Revocable Trust in
the amounts of $822,227 and $1,432,274 at December 31, 1999 and 1998,
respectively. Interest expense for the notes payable was $15,544, $-0- and $-0-,
for the years ended December 31, 1999, 1998 and 1997, respectively.
BRATT INVESTMENTS, INC.
Bratt Investments, Inc. is a real estate holding company. In 1997, it purchased
the corporate offices of Touch 1 Communications, Inc. and then leased the
building back to the Company. The common stock of Bratt Investments, Inc. was
100% owned by Andrew L. Smith, Esquire, corporate counsel to Touch 1, Inc. and
Touch 1 Communications, Inc. The Company had notes payable to Bratt Investments,
Inc. in the amounts of $0 and $9,323,260 at December 31, 1999 and 1998,
respectively. Interest expense for this note payable was $-0-, $392,642 and
$174,620 for the years ended December 31, 1999, 1998 and 1997, respectively. On
September 10, 1999 Bratt Investments, Inc. was dissolved and the note payable
was transferred to The Corman Foundation, Inc. This note payable was
subsequently exchanged for Touch 1 Communications, Inc. preferred stock.
<PAGE> 17
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 2 - RELATED PARTIES AND RELATED PARTY TRANSACTIONS - CONTINUED
BROOKWOOD, L.L.C.
Brookwood, L.L.C. owned and leased the building where Touch 1 Communications,
Inc. technology infrastructure is housed. Mr. James F. Corman owns approximately
28% of Brookwood, L.L.C. and the First Revocable Trust of W. F. Corman owns
approximately 12%. Touch 1 Communications, Inc. leased this building and was
obligated under a 15-year capital lease. Included in the capital lease was a
provision by which a sale of 50% or more of the stock of Touch 1 Communications,
Inc., would require the Company to purchase the property at its original cost.
Based on the merger agreement between Touch 1, Inc. and Z-Tel Technologies, Inc.
referred to in Note 19 - Subsequent Events, and application of professional
standards for material subsequent events, Touch 1 Communications, Inc. will
purchase the facility from Brookwood, L.L.C. The Company had a note payable to
Brookwood, L.L.C. in the amount of $3,267,842 at December 31, 1998 and a note
payable in the amount of $3,530,573 at December 31, 1999. (See Note 4 - Prior
Period Adjustments). Interest expense for this note payable was $359,158,
$372,577 and $384,583 for the years ended December 31, 1999, 1998 and 1997,
respectively.
RICHARD MILLER
Richard Miller is an investor and a member of the Board of Directors of Touch 1
Communications, Inc.
OWL'S HEAD INVESTMENTS, L.L.P.
The Company was indebted to Owl's Head Investments, L.L.P., owned in part by
Miller Investments, in the amounts of $0 and $2,100,000 at December 31, 1999 and
1998, respectively. (See Note 3 - Bankruptcy). Interest expense for this note
payable was $-0-, $21,032 and $-0- for the years ended December 31, 1999, 1998
and 1997, respectively.
FRANKLIN INVESTMENTS
The Franklin Investments are limited partnerships formed to raise capital for
general corporate purposes. Entities related to Richard Miller provided
approximately 90% of the funds for Franklin VI and approximately 80% of the
funds of Franklin VIII. The Company had notes payable to Franklin VI in the
amounts of $741,119 and $954,155 at December 31, 1999 and 1998, respectively.
The Company had notes payable to Franklin VIII in the amounts of $4,966,787 and
$6,344,862 at December 31, 1999 and 1998, respectively (See Note 3 -
Bankruptcy). Interest expense for these notes payable was $88,186, $218,489 and
$247,893 for the years ended December 31, 1999, 1998 and 1997, respectively.
<PAGE> 18
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 2 - RELATED PARTIES AND RELATED PARTY TRANSACTIONS - CONTINUED
LAST CALL, LLC
Last Call, LLC is a service provider company headquartered in Minot, North
Dekota. Its President, Marius "Buzz" Stitzer is also the President of direcTEL,
Inc. During the year ended December 31, 1999, direcTEL, Inc. entered into an
agreement with Last Call, LLC to provide telemarketing services in exchange for
certain prescribed hourly rates. The agreement states that after an 18-month
vesting period, Touch 1 Communications, Inc. will own 10% of Last Call, LLC.
Touch 1 Communications, Inc. is entitled to 10% of the profits during the
vesting period, although actual ownership of the stock will not occur until the
vesting period is over. As of December 31, 1999, Touch 1 Communications, Inc.
had not received any profit distributions from Last Call, LLC.
NOTE 3 - BANKRUPTCY
On June 29, 1998, Touch 1 Communications, Inc. filed for Chapter 11 protection
in the United States Bankruptcy Court for the Southern District of Alabama.
DirecTEL, Inc., a wholly-owned subsidiary of Touch 1 Communications, Inc., filed
for Chapter 11 on July 9, 1998. The filing was necessitated by a foreclosure
initiated by the Company's inability to pay approximately $15.7 million in past
due management fees, network charges, related interest and penalties owed to MCI
WorldCom.
Pursuant to the bankruptcy code, the debtors continued to operate their
businesses as debtors-in-possession while their reorganization case was pending.
On August 6, 1999 (the "Confirmation Date"), the U.S. Bankruptcy Court confirmed
the Touch 1 Communications, Inc. and direcTel, Inc. (the "Companies") combined
Companies' Amended Joint Plan of Reorganization (the "Reorganization"), and on
September 13, 1999, the Companies were released from bankruptcy. Pursuant to the
Reorganization, on such date certain indebtedness of the company was settled in
exchange for cash, new indebtedness and/or new equity interests and certain
other pre-petition claims were discharged, certain claims were settled, certain
contracts and leases were affirmed and certain contracts and leases were
rejected.
<PAGE> 19
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3 - BANKRUPTCY - CONTINUED
In satisfaction of the Reorganization, the pre-petition claimants were organized
into eight classes for purposes of claim settlement, and are briefly described
below.
<TABLE>
<CAPTION>
Bankruptcy Class Class Name
---------------- ----------
<S> <C>
Class 1 Priority Claims
Class 2 Tax Lien Claims
Class 3 Secured Claim of Corman Elegre' Capital, L.L.C.
Class 4 Secured Claim of Premiere
Class 5 Secured Claim of WorldCom
Class 6 Touch 1 Unsecured Claims
Class 7 direcTEL Unsecured Claims
Class 8 Equity Interest
</TABLE>
CLASS 1
All priority claims were paid in full for the allowed claim as of the effective
date of the Reorganization.
CLASS 2
Each tax lien holder is to be paid over the six years subsequent to the
effective date of the Reorganization.
CLASS 3
The debtor has issued a two-year note payable in the amount of $3,000,000 plus
interest at a rate of prime plus one and one-half percent (1.5%). The balance of
the Corman Elegre' note was converted into preferred stock of Touch 1
Communication, Inc.
CLASS 4
The Premiere liens were released and extinguished and the secured claim of
Premiere was treated as a Class 6 -- Touch 1 unsecured claim.
Corman Elegre' had assumed the secured claim of Premiere and as such had
received preferred stock for the full value of the claim.
<PAGE> 20
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3 - BANKRUPTCY - CONTINUED
CLASS 5
Corman Elegre' Capital, L.L.C. as the assignee of the MCI WorldCom ("MCI") claim
in satisfaction of its claim has accepted the following:
Issuance of a five-year note payable in the amount of $13,850,000 with
interest at a rate of 6%. The residual claim balance of $1,854,088 was
paid to the claimant in Touch 1 Communication, Inc. preferred stock
CLASS 6
Holders of unsecured claims of Touch 1 Communications, Inc. were offered three
different methods of satisfaction:
Payment of 40% of the unsecured claim as of the petition date, or Payment
of 100% of the unsecured claim under the following terms:
20% on the effective date of the Reorganization, and 80% residual
paid over five years with interest of 6% per annum, or
Payment of 100% of the allowed claim by the issuance of shares in the
reorganized Touch 1 Communication, Inc. preferred stock.
CLASS 7
Holders of unsecured claims of direcTEL, Inc. were offered three methods of
claim satisfaction:
1. Payment of 40% of the unsecured claim as of the petition date, or Payment
of 100% of the unsecured claim under the following terms:
20% on the effective date of the Reorganization, and 80% residual
paid over five years with interest of 6% per annum, or
Payment of 100% of the allowed claim by the issuance of shares in the
reorganized Touch 1 Communication, Inc. preferred stock.
<PAGE> 21
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3 - BANKRUPTCY - CONTINUED
CLASS 8
Retain rights to all assets unimpaired by the Reorganization.
PRE-PETITION CLAIM SATISFACTION
The table below provides a summary of pre-petition claims provided by the
bankruptcy agreement.
<TABLE>
<S> <C> <C>
Total debt balance at confirmation, September 13, 1999 $ 52,935,500
Less:
Stock conversion $ 21,942,619
Cash payments at confirmation 4,449,379
Cash payments post-confirmation 1,412,777
Debt forgiveness 1,757,756
------------
Total debt balance at December 31, 1999 $ 23,372,969
============
</TABLE>
As of the date of this report, the Companies were in compliance with the
Reorganization.
Claim settlements upon exit from bankruptcy proceedings resulted in gains of
$1,513,773, net of tax, from the early extinguishments of debt (See Note 17 -
Extraordinary Gain).
In accordance with the Reorganization, various creditors opted to cancel a
portion of the debt owed to them in exchange for preferred stock of Touch 1
Communication, Inc. Claims were converted based on a conversion price of $10.46
per share. All fractional shares resulting from the conversion were paid in
cash. The following debts were exchanged for preferred stock:
<TABLE>
<CAPTION>
Number of
Shares
Balance Acquired via
Note Converted Conversion
---- ------------ ---------
<S> <C> <C>
Corman Foundation - Bratt $ 9,555,224 913,501
Corman Elegre' - Premiere 4,602,619 440,020
Spectrum Equity - Premiere 3,072,330 293,721
Patrick Maxwell - Premiere 228,400 21,835
Jerry Ray - Premiere 221,600 21,185
Corman Elegre' - Debtor-in-possession facility 5,800,000 554,493
Corman Elegre' - Accrued interest 2,318,871 221,689
Corman Elegre' - Owl's Head 2,121,903 202,858
Corman Elegre' - WorldCom 1,854,088 177,255
Corman Elegre' - Revenue payable 987,476 94,404
First Revocable Trust of William F. Corman 286,455 27,385
Pre-petition trade payables 1,333 127
------------ ---------
$ 31,050,299 2,968,473
============ =========
</TABLE>
<PAGE> 22
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3 - BANKRUPTCY - CONTINUED
CLASS 8 - CONTINUED
PRE-PETITION CLAIM SATISFACTION - CONTINUED
Pursuant to the Reorganization, Touch 1 Communications, Inc. transferred 370,463
shares of preferred stock to Corman Elegre' in exchange for the Premiere Calling
Card Base.
<TABLE>
<S> <C>
Shares transferred via Chapter 11 Debt Conversion 2,968,473
Shares transferred via Premiere' Calling Card Base 370,463
---------
Total preferred shares issued 3,338,936
=========
</TABLE>
NOTE 4 - PRIOR PERIOD ADJUSTMENTS
BROOKWOOD, L.L.C.
In 1996, the Company incorrectly classified the nature of a lease on the South
Brookwood office building as an operating lease. This resulted in an
understatement of interest and depreciation expense of $196,393 and $18,250,
respectively, and an overstatement of rent expense by $243,257 during the
applicable period.
An independent appraisal performed in 1996 indicated that there was an
impairment in the reported value of the building. This impairment has been
recorded resulting in a devaluation of the building in the amount of $2,080,572.
Income and expense were not affected other than in the disclosure above.
BRATT INVESTMENTS, INC.
In 1996, the Company acquired the North Brookwood office building from Touch 1
Long Distance, Inc. for $6,514,045 which was Touch 1 Long Distance, Inc.'s
original cost. In 1996, prior to the issuance of financial statements, the
Company received an independent real estate appraisal of the fair market value
of this office building that indicated a value of only $2,584,000, including
land. An impairment of $3,930,045 was not recognized until 1997, at which time
the adjustment was calculated incorrectly. This transaction resulted in an
excess charge to earnings of approximately $637,542. The Company later sold the
office building to Bratt Investments, Inc. for $9,500,000 and recognized a
deferred gain of $7,553,542. The Company immediately leased the office building
back from Bratt Investments, Inc. and recorded a capital lease in the amount of
$9,500,000, which was the net present value of the future minimum lease
payments.
<PAGE> 23
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 4 - PRIOR PERIOD ADJUSTMENTS - CONTINUED
BRATT INVESTMENTS, INC. - CONTINUED
During the bankruptcy proceedings, Corman Foundation was the recipient of a
donation of 100% of Bratt Investments, Inc. stock. Therefore the Company became
indebted to the Corman Foundation. During the Chapter 11 Reorganization, the
debt obligation was approved by the Bankruptcy Court and was exchanged for Touch
1 Communications, Inc. preferred stock. On September 7, 1999, Bratt Investments,
Inc. transferred the deed for the building to Touch 1 Communications, Inc. for
$10 and the holding company was subsequently dissolved.
Generally accepted accounting principles require that the capital asset and
lease obligation be recorded at fair market value when fair market value is less
than the present value of the minimum lease payments. However, this particular
transaction was a related party transaction in which the value of the capital
lease was overstated and the transaction lacked economic substance. In
accordance with Statement of Financial Accounting Standards No. 13, Accounting
for Leases, in order to present fairly the economic substance of the
transaction, the Company has impaired the asset from its time of completion in
1995, recorded the building at the fair market value, and disregarded the sale
and subsequent leaseback of the building. The culmination of these transactions
resulted in an understatement of depreciation expense of approximately $158,691.
NOTE 5 - PROPERTY AND EQUIPMENT
Following is a summary of property and equipment as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
Estimated Balance at Balance at
Useful Lives 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Office furniture and equipment 5 - 7 years $ 10,885,114 $ 9,666,172
Buildings and land 30 years 4,191,950 4,191,950
Leasehold improvements 5 - 15 years 61,976 61,976
Building held under capital lease 30 years -- 1,794,985
------------ ------------
15,139,040 15,715,083
Less: Accumulated depreciation and amortization (6,514,989) (5,704,218)
------------ ------------
Net property and equipment $ 8,624,051 $ 10,010,865
============ ============
</TABLE>
<PAGE> 24
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 6 - LINES OF CREDIT
During 1999, the Company negotiated a new secured $8,000,000 line of credit with
FINOVA Capital Corporation ("FINOVA"). Borrowings under this line of credit are
secured by the Local Exchange Carrier (the "LEC") receivable base and
substantially all of the Company's fixed assets. The borrowing base is limited
to 80% of the confirmed call-data tapes transmitted to the LECs. Interest on
amounts outstanding under the line-of-credit is payable at two percent above the
prime rate which was 10.5% at December 31, 1999. This line-of-credit matures on
September 10, 2000 and is renewable annually at the option of the lender. The
weighted average interest rate for the year ended December 31, 1999 was 10.36%.
The agreement contains certain financial covenants with respect to tangible net
worth, liquidity, and other ratios. In addition, without prior consent of the
lender, the agreement does not allow the payment of dividends and restricts,
among other things, the incurrence of additional debt, guarantees, lease
arrangements or sale of certain assets. On April 10, 2000 the Company paid
accrued, preferred dividends in the amount of $2,045,588 without FINOVA's
approval thereby placing the Company in violation of the loan agreement. FINOVA
has indicated to the Company that the line of credit will be cancelled and a
$250,000 cancellation fee will be assessed. At December 31, 1999, borrowings of
approximately $1,360,000 were outstanding. The carrying amount of this line of
credit approximates fair market value.
At December 31, 1998, the Company had a $1,000,000 line of credit with The First
National Bank of Atmore. The line was personally guaranteed by James F. Corman.
The interest rate and amount outstanding at December 31, 1998 were 8.5% and
$1,000,000, (approximates fair value) respectively. During bankruptcy
proceedings, this note was converted to long-term debt.
NOTE 7 - CAPITAL LEASES
The Company leased various items of computer equipment under capital leases
expiring in the years 1999 and 2000. The assets and liabilities under these
capital leases were recorded at the lower of the present value of the minimum
lease payments or the fair market value of the asset. The assets were amortized
over their estimated useful lives. Amortization of assets under capital leases
in the amounts of $252,063, $378,094 and $378,094 is included in depreciation
expense for the years ended December 31, 1999, 1998 and 1997. Interest rates on
capitalized leases varied from 9.8% to 13.5%.
During bankruptcy proceedings, these capital lease obligations were rejected,
thereby reducing the liabilities to $0 at December 31, 1999.
<PAGE> 25
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 8 - NOTES PAYABLE - RELATED PARTY
The following is a detail of notes payable - related party at December 31, 1998:
<TABLE>
<S> <C>
Note payable to James F. Corman, unsecured, interest rate at 9.5%, due on demand. $ 362,845
Note payable to First Revocable Trust of W.F. Corman, unsecured, interest rate
at 9.5%, due on demand. 1,432,274
Notes payable to Corman Elegre', secured by customer base, interest rate
at 9.5%, due on demand. 15,704,088
Notes payable to Corman Elegre', secured by customer base, interest rate
at 9.5%, due on demand. 5,800,000
Note payable to Corman Elegre', secured by calling card revenue base, interest rate
at 9.5%, due on demand. 8,124,949
Note payable to Bratt Investments, Inc., secured by real estate, interest rate
at 7.375%, due on demand. 9,323,260
Notes payable to Franklin Investment Funds, unsecured, interest rate at 9.0%,
due on demand. 7,299,017
Note payable to Owl's Head Investments, unsecured, interest rate at 9.5%,
due on demand. 2,100,000
-----------
$50,146,433
===========
</TABLE>
At December 31, 1998, the carrying value of these related party notes payable
approximated fair value. During bankruptcy proceedings, these notes either were
exchanged for cash, converted to long-term debt or exchanged for preferred stock
in Touch 1 Communications, Inc.
NOTE 9 - ACCOUNTS PAYABLE - RELATED PARTIES
At December 31, 1998, the Company had accounts payable to related parties in the
amount of $445,539. This payable was due to Corman Elegre' in connection with
their assumption of the Premiere debt as discussed in Note 14 - Gain on
Settlement of Contract. During bankruptcy proceedings, this debt was exchanged
for preferred stock in Touch 1 Communications, Inc.
<PAGE> 26
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 10 - LONG-TERM DEBT - RELATED PARTY
Following is a summary of long-term debt as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Note payable to Corman Elegre', secured by customer base, balloon
payment due May 2001, interest rate at prime plus one and one-half
percent which was 9.75% at December 31, 1999, due May 31, 2001.
Estimated fair value at $3,000,000 at December 31, 1999. $ 3,000,000 $ --
Note payable to Corman Elegre', secured by customer base, 60 monthly
installments of $267,759, interest rate at 6%, due September 2004.
Estimated fair value of $11,846,164 at December 31, 1999. 13,251,489 --
Note payable to First Revocable Trust of W. F. Corman,
unsecured, 60 monthly installments of $16,614, interest rate
at 6%, due September 2004. Estimated fair value of
$735,035 at December 31, 1999. 822,227 --
Note payable to James F. Corman, unsecured, 60 monthly
installments of $5,612, interest rate at 6%, due September 2004.
Estimated fair value $248,285 at December 31, 1999. 277,732 --
Notes payable to Franklin Investment Funds, unsecured,
60 monthly installments of $115,314, interest rate at 6%,
due September, 2004. Estimated fair value $5,181,709
at December 31, 1999. 5,707,906 --
Note payable to Brookwood Investments, L.L.C., secured by
real estate, 180 monthly installments of $40,543, interest
rate at 11.186%, due August, 2014. Estimated fair value
$3,530,573 and $3,267,842 at December 31, 1999 and
1998, respectively. 3,530,573 3,267,842
------------ -----------
26,589,927 3,267,842
Less: Current portion (4,294,878) (127,355)
------------ -----------
Net $ 22,295,049 $ 3,140,487
============ ===========
</TABLE>
<PAGE> 27
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 10 - LONG-TERM DEBT - RELATED PARTY - CONTINUED
The following is a summary of the principal maturities of long-term debt -
related party maturing for each of the next five years and thereafter, and in
the aggregate, ending December 31:
<TABLE>
<S> <C>
2000 $ 4,294,878
2001 7,154,588
2002 4,418,732
2003 4,701,248
2004 3,780,378
Thereafter 2,240,103
-----------
$26,589,927
===========
</TABLE>
NOTE 11 - LONG-TERM DEBT - UNRELATED PARTY
The following is a summary of long-term debt - unrelated party outstanding at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Note payable to First National Bank of Atmore, unsecured, personally guaranteed
by James F. Corman, 60 monthly installments of $15,466, interest rate at 6%,
maturing September, 2004. Estimated fair value of $684,215 at December 31, 1999. $ 765,429 $ --
Notes payable to pre-petition creditors (trade vendors), unsecured, 60 monthly
installments of $40,019, interest rate 6%, maturing September, 2004. Estimated
fair value of $1,770,576 at December 31, 1999. 2,072,522 --
Notes payable to pre-petition creditors (trade vendors) priority, unsecured, 72
monthly installments of $8,295, interest rate at 6%, maturing September, 2005
Estimated fair value $422,778 at December 31, 1999. 476,634 --
----------- -----------
3,314,585 --
Less: Current portion (605,193) --
----------- -----------
Net $ 2,709,392 $ --
=========== ===========
</TABLE>
<PAGE> 28
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 11 - LONG-TERM DEBT - UNRELATED PARTY - CONTINUED
The following is a summary of the principal maturities of long-term debt -
unrelated party maturing for each of the next five years and thereafter, and in
the aggregate, ending December 31:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 605,193
2001 642,521
2002 682,150
2003 724,224
2004 596,006
Thereafter 64,491
----------
$3,314,585
==========
</TABLE>
NOTE 12 - PREFERRED STOCK
In connection with the Bankruptcy Reorganization, as discussed in Note 3, the
Company issued 3,338,936 shares of $.01 par, cumulative convertible preferred
stock in satisfaction of notes payable in the amount of $35,024,016.
The convertible preferred stock pays dividends at the rate of 10%. The stock is
cumulative, and is convertible, at the option of the holder at any time, into
common stock on a one-to-one basis. The preferred stockholders are not entitled
to voting privileges. The liquidation value of the preferred stock is $10.46 per
share, which is equal to the original issue price.
NOTE 13 - COMPUTATION OF NET INCOME (LOSS) PER SHARE
Basic net income per share is computed by dividing net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share
assumes the conversion of the outstanding preferred stock to common stock on a
one-to-one basis.
Net income (loss) per share is calculated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Basic net income (loss) per share:
Net income (loss) $ 2,337,609 $(24,215,265) $(15,715,741)
Less preferred stock dividends (1,039,027) -- --
----------- ------------ ------------
Net income (loss) attributable to common
shareholders $ 1,298,582 $(24,215,265) $(15,715,741)
=========== ============ ============
Weighted average shares outstanding $ 938,147 $ 938,147 $ 938,147
=========== ============ ============
Basic net income (loss) per share $ 1.38 $ (25.81) $ (16.75)
=========== ============ ============
</TABLE>
<PAGE> 29
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13 - COMPUTATION OF NET INCOME (LOSS) PER SHARE - CONTINUED
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Diluted net income (loss) per share:
Net income (loss) $ 2,337,609 $(24,215,265) $(15,715,741)
=========== ============ ============
Weighted average common shares outstanding $ 938,147 $ 938,147 $ 938,147
Dilutive weighted average preferred shares
outstanding 1,006,255 -- --
----------- ------------ ------------
Dilutive weighted average shares outstanding $ 1,944,402 $ 938,147 $ 938,147
=========== ============ ============
Diluted net income (loss) per share $ 1.20 $ (25.81) $ (16.75)
=========== ============ ============
</TABLE>
NOTE 14 - GAIN ON SETTLEMENT OF CONTRACT
In 1997, the Company sold their calling card customer revenue base to Premiere
Communications, Inc. ("Premiere") for $14,950,000 in cash. The Company also
executed a promissory note payable for $6,550,000 under which up to $6,550,000
could be borrowed under a Voice Mailbox Wholesale Agreement. The Company would
receive credit against this loan for each voice mailbox it sold.
Simultaneously, the Company entered into a management and consulting agreement
with Premiere whereby the Company would continue to manage the calling card
customer base and would guarantee Premiere revenue of $1,500,000 per month for
thirty-six months after deducting a management fee of 25% and the cost of sales
associated with the revenue generated. The $14,950,000 gain was recognized as a
deferred gain to be amortized over thirty-six months.
In June 1998, the Company filed for protection under Chapter 11 of the United
States Bankruptcy Code as discussed in Note 3. The Bankruptcy Court modified the
payments to Premiere, reducing them to $525,000 per month. In November 1998,
Corman Elegre' paid $2,000,000 in cash and entered into a note payable of
$10,000,000 for the rights to the Premiere contract. The Company was then
indebted to Corman Elegre' under the same terms as formerly obligated to
Premiere, except the management and consulting agreement was terminated, and
Corman Elegre' voluntarily reduced the Company's monthly commitment to
approximately $253,000.
Gains were recognized in connection with this contract in the amounts of
$4,480,505, $4,983,333 and $1,611,111 for the years ended December 31, 1999,
1998 and 1997, respectively.
<PAGE> 30
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 15 - RETIREMENT PLAN
The Company participates in a defined contribution plan as defined by section
401(k) of the Internal Revenue Code. Participants may contribute between 1% and
20% of their gross annual salary not to exceed $10,000. The Company's matching
contribution equals 50% of the first 5% of gross salary that the participant
elects to contribute to the plan. The participant is fully vested in the
Company's contribution after six years of credited service. Participants
automatically become fully vested upon attainment of normal retirement age, upon
retirement due to disability, upon death, and upon termination of the Plan. The
Company contributed $127,317, $92,286 and $157,417 for the years ended December
31, 1999, 1998 and 1997, respectively, on behalf of the plan participants.
NOTE 16 - PROVISION FOR INCOME TAXES
The components of the Company's deferred tax assets at December 31, 1999 and
1998 which reflect the tax effects of the Company's temporary differences and
net operating loss carryforwards (NOLs) consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets (liabilities):
Tax benefit of NOLs $ 12,889,300 $ 14,436,872
Accounts receivable 238,590 130,230
Property and equipment (2,179,753) (2,071,089)
Accrued expenses 83,600 28,168
Capitalized bankruptcy expenses 770,990 377,242
------------ ------------
Total deferred tax asset 11,802,727 12,901,423
Valuation allowance (2,860,148) (3,326,963)
------------ ------------
Deferred income tax assets, net $ 8,942,579 $ 9,574,460
============ ============
</TABLE>
The valuation allowance, as required by SFAS 109, increased in 1998 by
$2,351,596, and decreased in 1999 by $466,815. These changes reflect the
estimated changes in the amounts of deferred tax assets which may not be
recognized in future years due primarily to expiring NOLs and the IRC Section
382 limitations noted below.
<PAGE> 31
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 16 - PROVISION FOR INCOME TAXES - CONTINUED
At December 31, 1999, 1998 and 1997, the provision for income taxes consists of
the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Deferred income tax benefit (expense)
arising from changes in:
NOL tax benefit carryforwards $(1,547,572) $ 7,934,428 $ 6,502,445
Accounts receivable allowance for
doubtful accounts 108,360 46,889 83,340
Capitalization of bankruptcy fees 393,749 377,242 --
Property and equipment basis (108,664) 154,719 (2,093,849)
Accrued expenses 55,432 (336) 28,504
Valuation allowance decrease 466,815 (2,351,596) (975,367)
----------- ------------ ------------
Total deferred tax benefit (expense) (631,880) 6,161,346 3,545,073
Less: Provision for income taxes for
extraordinary item 482,731 -- --
----------- ------------ ------------
Provision for income taxes $ (149,149) $ 6,161,346 $ 3,545,073
=========== ============ ============
</TABLE>
The difference between the statutory federal income tax rate and the effective
tax is attributable to the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% (34.0%) (34.0%)
Increase (decrease) in tax rate resulting from:
State income taxes, net of federal benefit 2.0% (2.0%) (2.0%)
Differences in book and tax bases of assets (40.4%) 1.9% 4.5%
Change in valuation allowance (48.0%) 7.7% 2.2%
Change in benefits from net operating loss
carryforwards 62.0% 6.1% 21.3%
Changes in accrued expenses 5.7% 0.0% 0.0%
----------- ------------ ------------
Effective income tax rate 15.3% (20.3%) (8.0%)
=========== ============ ============
</TABLE>
<PAGE> 32
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 16 - PROVISION FOR INCOME TAXES - CONTINUED
At December 31, 1999 the Company had available approximate federal net operating
losses to reduce future taxable income as follows:
<TABLE>
<CAPTION>
Year of Loss Expiration Date Amount
------------ --------------- ------------
<S> <C> <C>
1997 December 31, 2017 $ 15,000,000
1998 December 31, 2018 21,000,000
------------
Total $ 36,000,000
============
</TABLE>
As explained in Note 3, Corman Elegre' Capital, L.L.C. acquired preferred stock
of Touch 1 Communications, Inc. in September 1999. As a result, under IRC
Section 382 and the regulations thereunder, this stock acquisition qualifies as
an ownership change of a more than 5% stockholder. Accordingly, the availability
of pre-change net operating losses for income in future years is limited to
approximately $2,300,000 per year. The valuation allowances noted above have
been adjusted to reflect the annual limitation.
The Company has state net operating loss carryforwards of varying amounts and
expiration dates available to offset future state taxable income.
NOTE 17 - EXTRAORDINARY GAIN
In connection with the bankruptcy proceedings, the Company recognized an
extraordinary gain of $1,513,773, net of taxes of $482,731, for early
extinguishment of debt for the year ended December 31, 1999. (See Note 3 -
Bankruptcy)
In September 1997, WorldCom, Inc. issued 595,972 shares of its publicly traded
common stock to the Company at no cost. The Company sold all of these shares for
proceeds of $21,329,567. The funds were used to pay overdue trade payables which
the company owed WorldCom, Inc. Additionally, $3,663,386 of WorldCom, Inc. debt
was forgiven resulting in an extraordinary gain of $24,992,953 for the year
ended December 31, 1977.
NOTE 18 - CONCENTRATIONS OF CREDIT RISK
The Company and its Subsidiaries maintain cash balances in several accounts with
one financial institution. The total of a customer's accounts at the institution
are insured by the Federal Deposit Insurance Corporation up to $100,000. At
December 31, 1999 and 1998, the Company had uninsured balances of $653,554 and
$681,446, respectively.
<PAGE> 33
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998 AND 1997
NOTE 19 - SUBSEQUENT EVENT
On April 10, 2000, the Company merged with a wholly-owned subsidiary (Tiger
Acquisition Subsidiary, Inc.) of Z-Tel Technologies, Inc. (Z-Tel). Touch 1
Communications, Inc. is the surviving corporation and the merger qualifies as a
"reorganization" as defined in Section 368(a) of the Internal Revenue code. The
shareholders of Touch 1 Communications, Inc. received 1,100,000 shares of Z-Tel
common stock and $8,955,384 in cash.
As discussed in Note 6, the Company violated a loan covenant in connection with
its line of credit FINOVA Capital Corporation ("FINOVA"). FINOVA has indicated
to the Company it will cancel the line of credit and assess a $250,000
cancellation fee. The Company is pursuing alternate financing sources through
its parent, Z-Tel Technologies, Inc.
NOTE 20 - COMMITMENTS
The Company is obligated to maintain a minimum of $12,000 per week of Network
Maintenance System (NMS) usage charges under its contract with Premiere as
amended November 4, 1998. This obligation will remain in effect until the total
aggregate payments to Premiere for NMS usage equals $1,876,000. At December 31,
1999 the Company had a balance of $1,409,714 remaining.
<PAGE> 34
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
2000
------------
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,168,296
Trade accounts receivable (net allowance for doubtful accounts
of $662,750 and $662,750, respectively) 8,836,438
Other receivables 12,776
Deferred tax asset 9,117
Prepaid expenses and other assets 30,306
------------
Total current assets 10,056,933
------------
PROPERTY AND EQUIPMENT, NET 8,625,868
------------
OTHER ASSETS
Deferred tax asset 6,638,445
Other assets 1,486,083
------------
Total other assets 8,124,528
------------
TOTAL ASSETS $ 26,807,329
============
</TABLE>
<PAGE> 35
LIABILITIES AND STOCKHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 987,626 $ 1,000,000
Notes payable - related party -- 50,146,433
Preferred dividends payable 1,923,282 --
Trade accounts payable 6,893,655 12,124,825
Accounts payable - related party -- 987,475
Accrued expenses 1,788,003 3,687,165
Capital lease obligations payable -- 523,357
Current portion of long-term debt:
Related party 3,918,292 127,355
Unrelated party 600,159 --
------------ ------------
Total current liabilities 16,111,017 68,596,610
------------ ------------
LONG-TERM LIABILITIES
Long-term debt:
Related party 21,728,924 3,498,733
Unrelated party 2,483,858 --
Deferred credit -- 7,109,722
------------ ------------
Total long-term liabilities 24,212,782 10,608,455
------------ ------------
Total liabilities 40,323,799 79,205,065
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 20)
STOCKHOLDERS' DEFICIT
Preferred stock, par value $.01 per share - authorized 4,000,000 shares;
3,338,936 shares issued and outstanding; liquidation
value $10.46 per share or $34,925,271 in the aggregate 33,389 --
Common stock, par value $.01 per share - authorized 6,000,000
shares; 985,044 shares issued; 938,147 shares outstanding 9,850 9,850
Additional paid-in capital 49,012,697 16,044,098
Accumulated deficit (61,175,260) (63,522,398)
Treasury stock, at cost, 46,897 shares (1,397,146) (1,397,146)
------------ ------------
Total stockholders' deficit (13,516,470) (48,865,596)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 26,807,329 $ 30,339,469
============ ============
</TABLE>
<PAGE> 36
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUES $ 18,913,832 $ 14,982,302
OPERATING EXPENSES:
Network operations 5,976,340 7,716,613
Sales and marketing 2,830,198 2,786,220
General and administrative 7,350,047 5,942,969
Depreciation and amortization 487,400 573,159
------------ ------------
Total operating expenses 16,643,985 17,018,961
------------ ------------
NONOPERATING INCOME (EXPENSES):
Interest income 31,251 250
Interest expense (621,234) (661,443)
Miscellaneous 10,406 52,645
Gain on settlement of contract -- 1,245,833
Gain on sale of assets (63,967) (390,085)
Bankruptcy fees -- (270,339)
------------ ------------
Total expenses (643,544) (23,139)
------------ ------------
Net income (loss) before income taxes 1,626,303 (2,059,798)
Income tax (provision) benefit (2,295,016) 1,381,556
------------ ------------
Net loss $ (668,713) $ (678,242)
============ ============
EARNINGS PER COMMON SHARE:
Basic earnings per share:
Net loss $ (.71) $ (.72)
============ ============
Fully diluted earnings per share:
Net loss $ (.16) $ (.72)
============ ============
</TABLE>
<PAGE> 37
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (668,713) $ (678,242)
Adjustments to reconcile net loss to net cash flows:
Depreciation and amortization 487,400 573,159
Gain on settlement of contract -- (1,245,833)
Loss due to impairment of asset -- 390,085
Gain on disposal of assets 63,967 --
(Increase) decrease in assets:
Trade accounts receivable (net) (1,072,634) 388,690
Other receivables (4,405) 50,197
Deferred tax asset 2,295,016 (1,381,556)
Prepaid expenses 5,644 9,248
Other assets 237,618 (1,957)
Increase in liabilities:
Accounts payable - trade 859,395 1,241,233
Accounts payable - related party -- 541,936
Accrued expenses 102,426 582,933
----------- -----------
NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES 2,305,714 469,893
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (553,182) (51,535)
----------- -----------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (553,182) (51,535)
----------- -----------
FINANCING ACTIVITIES
Net borrowings (payments) on lines of credit (375,196) --
Payments on capital lease obligations -- (106,992)
Payments on notes payable - related party -- (31,838)
Net borrowings on long-term debt - related party (942,711) --
Payments on long-term debt - unrelated party (230,568) --
----------- -----------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (1,548,475) (138,830)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 204,057 279,528
CASH AND CASH EQUIVALENTS, beginning of year 964,239 777,637
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,168,296 $ 1,057,165
=========== ===========
</TABLE>
<PAGE> 38
TOUCH 1 COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 392,336 $ 102,521
Cash paid during the year for income taxes $ -- --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Preferred dividends accrued $ 884,255 $ --
</TABLE>
<PAGE> 39
Basis of Presentation
Pro Forma Condensed Consolidated (Unaudited) Financial Information
(In Thousands)
Pro forma condensed consolidated balance sheet data as of March 31, 2000,
and the condensed consolidated statements of operations for the three months
ended March 31, 2000 and the year ended December 31, 1999, include the completed
acquisition of Touch 1 Communications, Inc. by Z-Tel Technologies, Inc. as if
this event occurred at the beginning of the respective periods presented.
The acquisition is accounted for using the purchase method of accounting.
The total costs of such acquisition are allocated to the tangible and intangible
assets acquired and liabilities assumed based upon their respective fair values.
The allocation of the purchase price included in the pro forma financial
statements is preliminary. We do not expect that the final allocation of the
purchase price will significantly differ from the preliminary allocation.
The pro forma adjustments are based upon available information and upon
certain assumptions that we believe are reasonable. The pro forma consolidated
financial information should be read in conjunction with Z-Tel Technologies,
Inc.'s financial statements and notes thereto included in the reports on Forms
10-Q and 10-K. The pro forma condensed consolidated financial information is not
necessarily indicative of what our results of operations would have been had the
acquisition been completed as of the beginning of the periods presented or of
our future results of operations.
<PAGE> 40
Z-Tel Technologies, Inc.
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2000
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Consolidated
Historical Historical
Z-Tel Touch 1 Adjustments Pro Forma
------------ ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents 58,513 1,169 (8,955)(a) 50,727
Accounts receivable, net 12,968 8,836 -- 21,804
Prepaid expenses and other current assets 3,144 52 -- 3,196
-------- ------- -------- --------
Total current assets 74,625 10,057 (8,955) 75,727
Property and equipment, net 36,316 8,626 -- 44,942
Intangible assets and goodwill -- -- 59,205 (a) 59,205
Other 1,851 8,124 -- 9,975
-------- ------- -------- --------
Total assets 112,792 26,807 50,250 189,849
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities 12,496 10,605 -- 23,101
Current portion of long-term debt and
capital lease liabilities 28 5,505 -- 5,533
-------- ------- -------- --------
Total current liabilities 12,524 16,110 -- 28,634
Long-term debt and capital lease obligations 7 24,213 (2,280)(b) 21,940
-------- ------- -------- --------
12,531 40,323 (2,280) 50,574
-------- ------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock -- 33 (33)(a) --
Common stock 323 10 383 (a) 716
Notes receivable from stockholders (1,317) -- -- (1,317)
Unearned stock compensation (1,340) -- -- (1,340)
Additional paid-in capital 167,482 49,013 (9,237)(a) 207,258
Accumulated deficit (64,569) (61,175) 60,020 (a) (65,724)
Treasury stock (318) (1,397) 1,397 (a) (318)
-------- ------- -------- --------
Total stockholder's equity (deficit) 100,261 (13,516) 52,530 139,275
-------- ------- -------- --------
112,792 26,807 50,250 189,849
======== ======= ======== ========
</TABLE>
<PAGE> 41
Z-Tel Technologies, Inc.
Pro Forma Condensed Consolidated Statement of Operations for the Three
Months Ended March 31, 2000
(In Thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Consolidated
Historical Historical
Z-Tel Touch 1 Adjustments Pro Forma
---------- ------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues 13,976 18,914 -- 32,890
----------- ------- ----------- -----------
Operating expenses:
Network operations 9,830 5,976 -- 15,806
Sales and marketing 6,819 2,830 -- 9,649
Research and development 1,299 -- -- 1,299
General and administrative 10,461 7,350 -- 17,811
Depreciation and amortization 2,088 488 1,091 (a) 3,667
----------- ------- ----------- -----------
Total operating expenses 30,497 16,644 1,091 48,232
----------- ------- ----------- -----------
Operating gain (loss) (16,521) 2,270 (1,091) (15,342)
----------- ------- ----------- -----------
Nonoperating income (expense):
Interest income 1,286 41 -- 1,327
Interest expense (241) (685) (64)(b) (990)
----------- ------- ----------- -----------
Total nonoperating income (expense) 1,045 (644) (64) 337
----------- ------- ----------- -----------
Net income (loss) before income taxes (15,476) 1,626 (1,155) (15,005)
Income tax provision -- 2,295 -- 2,295
----------- ------- ----------- -----------
Net loss (15,476) (669) (1,155) (17,300)
=========== ======= =========== ===========
Weighted average number of common shares 31,941,964 33,241,964 (c)
=========== ===========
Basic and diluted loss per common share: $ (0.48) $ (0.45)
=========== ===========
</TABLE>
<PAGE> 42
Z-Tel Technologies, Inc.
Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 1999
(In Thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Consolidated
Historical Historical
Z-Tel Touch 1 Adjustments Pro Forma
---------- ------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues 6,615 65,589 -- 72,204
----------- ------- ----------- -----------
Operating expenses:
Network operations 7,942 28,249 -- 36,191
Sales and marketing 8,588 10,589 -- 19,177
Research and development 3,562 -- -- 3,562
General and administrative 15,379 24,395 -- 39,774
Depreciation and amortization 4,372 2,246 4,365 (a) 10,983
----------- ------- ----------- -----------
Total operating expenses 39,843 65,479 4,365 109,687
----------- ------- ----------- -----------
Operating gain (loss) (33,228) 110 (4,365) (37,483)
----------- ------- ----------- -----------
Nonoperating income (expense):
Interest income 608 4,780 -- 5,388
Interest expense (3,351) (3,917) (258)(b) (7,526)
----------- ------- ----------- -----------
Total nonoperating income (expense) (2,743) 863 (258) (2,138)
----------- ------- ----------- -----------
Net income (loss) before income taxes and
extraordinary items (35,971) 973 (4,623) (39,621)
Income tax provision -- 149 -- 149
----------- ------- ----------- -----------
Net income (loss) before extraordinary items (35,971) 824 (4,623) (39,770)
Gain on forgiveness of debt, net of taxes -- 1,514 (1,514)(d) --
----------- ------- ----------- -----------
Net income (loss) (35,971) 2,338 (6,137) (39,770)
Less mandatorily convertible redeemable
preferred stock dividends (1,654) -- -- (1,654)
----------- ------- ----------- -----------
Net loss attributable to common stockholders (37,625) 2,338 (6,137) (41,424)
=========== ======= =========== ===========
Weighted average number of common shares 15,099,359 16,199,359 (c)
=========== ===========
Net loss attributable to common shareholder $ (2.49) $ (2.56)
=========== ===========
</TABLE>
<PAGE> 43
Pro Forma Z-Tel Technologies, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
(a) Purchase price, intangibles and goodwill information
This adjustment reflects the elimination of Touch 1 Communications, Inc's
stockholder's deficit, the excess consideration over the net assets acquired
(intangible assets and goodwill) and the related amortization expense. The
goodwill has been calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 8,955
Issuance of 1,100,000 share of
Z-Tel Technologies, Inc. common stock 39,286
Z-Tel Technologies, Inc. transaction costs 883
-------
Total consideration 49,124
Historical Touch 1 Communications, Inc.
net liabilities assumed at March 31, 2000 11,172
-------
Preliminary goodwill and intangibles $60,296
=======
</TABLE>
The allocation of the purchase price of Touch 1 Communications, Inc. to certain
intangibles such as customer lists and goodwill will be amortized over periods
of five and twenty years. The pro forma condensed consolidated statements of
operations includes adjustments to record additional amortization expense of
$1,091 and $4,365 for the three months ended March 31, 2000 and the year ended
December 31, 1999. The pro forma condensed consolidated balance sheet includes
an adjustment to record accumulated amortization against the carrying value of
the intangible assets and goodwill of $4,365 as of December 31, 1999.
(b) Reduction of liabilities to reflect fair market value
This long-term liabilities are marked to fair market value at the date of
acquisition resulting in a $2,344 reduction in liabilities at March 31, 2000 and
December 31, 1999, respectively. Included with this adjustment is an increase in
interest expense of $64 and $258 for the three months ended March 31, 2000 and
the year ended December 31, 1999, respectively.
(c) Issuance of stock
The weighted shares outstanding calculation includes the 1,100,000 shares of
common stock issued for the purchase of Touch 1 Communications, Inc. as if the
common stock had been outstanding at the beginning of the respective period
being presented.
(d) Extraordinary gain
The extraordinary gain of $1,514 for the year ended December 31, 1999, is a
result of the early extinguishment of debt from bankruptcy proceedings. This
gain has been eliminated from the pro forma column of the financial statements
because of the gain's nonrecurring nature.
<PAGE> 44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Z-TEL TECHNOLOGIES, INC.
Date: June 26, 2000 By: /s/ Jeffrey H. Kupor,
----------------------------------------
General Counsel
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 -- Agreement and Plan of Merger dated April 10, 2000 by and
among Z-Tel Technologies, Inc., Tiger Acqisition Subsidiary,
Inc., Touch 1 Communications, Inc., and certain shareholders
of Touch 1 Communications, Inc. (previously filed with the
Commission)
10.3 -- Form of Employment Agreement for certain key Touch 1
employees, including James F. Corman, President of Touch 1
(previously filed with the Commission)
99.1 -- Press release announcing the acquisition of Touch 1
Communications, Inc. (previously filed with the Commission)
99.2 -- Press release of Registrant, dated June 12, 2000
</TABLE>
