<PAGE> 1
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 JUNE 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
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(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 August 9, 2000 the Registrant had outstanding 33,495,147 shares of
$.01 par value common stock.
<PAGE> 2
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
three and six month periods ended June 30, 2000 and
1999 4
Condensed Consolidated Statement of Stockholders' Equity
for the six month periods ended June 30, 2000 5
Condensed Consolidated Statement of Cash Flows for the six
month periods ended June 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 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes In Securities and Use of Proceeds
Recent Sales of Unregistered Securities 21
Use of Proceeds from Initial Public Offering 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 25
</TABLE>
2
<PAGE> 3
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 10,656 $ 101,657
Accounts receivable, net of allowance for doubtful
accounts of approximately $3,451 at June 30,
2000 and $408 at December 31, 1999 36,476 4,245
Prepaid expenses and other current assets 5,074 2,304
--------- ---------
Total current assets 52,206 108,206
Property and equipment, net 52,018 28,549
Investments 7,088 --
Intangible assets, net 65,918 --
Other 3,220 922
--------- ---------
Total assets $ 180,450 $ 137,677
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 34,586 $ 9,165
Current portion of long-term debt
and capital lease obligations 4,835 3,726
--------- ---------
Total current liabilities 39,421 12,891
Long-term debt and capital lease obligations 17,216 10,408
--------- ---------
Total liabilities 56,637 23,299
--------- ---------
Commitments and contingencies (Notes 4 and 6)
Stockholders' equity:
Common stock, $.01 par value; 150,000,000
shares authorized; 33,681,175 and 32,159,911 shares issued;
33,401,497 and 31,880,236 outstanding, respectively 337 322
Notes receivable from stockholders (539) (1,683)
Unearned stock compensation (494) (2,487)
Additional paid-in capital 206,414 167,637
Accumulated deficit (87,624) (49,093)
Accumulated other comprehensive income 6,037 --
Treasury stock, 279,675 shares at cost (318) (318)
--------- ---------
Total stockholders' equity 123,813 114,378
--------- ---------
Total liabilities and stockholders' equity $ 180,450 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 40,157 $ 761 $ 54,133 $ 1,425
------------ ------------ ------------ ------------
Operating expenses:
Network operations 25,137 978 34,967 1,792
Sales and marketing 10,635 666 17,454 1,848
Research and development 1,790 352 3,089 1,465
General and administrative 20,878 2,390 31,339 4,987
Depreciation and amortization 4,404 863 6,492 1,664
------------ ------------ ------------ ------------
Total operating expenses 62,844 5,249 93,341 11,756
------------ ------------ ------------ ------------
Operating loss (22,687) (4,488) (39,208) (10,331)
------------ ------------ ------------ ------------
Nonoperating income (expense):
Interest income 455 114 1,741 232
Interest expense (823) (1,237) (1,064) (1,451)
------------ ------------ ------------ ------------
Total nonoperating income (expense) (368) (1,123) 677 (1,219)
------------ ------------ ------------ ------------
Net loss (23,055) (5,611) (38,531) (11,550)
Less mandatorily convertible redeemable
preferred stock dividends (414) (606)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (23,055) $ (6,025) $ (38,531) $ (12,156)
============ ============ ============ ============
Weighted average common shares outstanding 33,042,008 14,411,100 32,499,640 14,411,100
============ ============ ============ ============
Basic and diluted net loss per share $ (0.70) $ (0.42) $ (1.19) $ (0.84)
============ ============ ============ ============
</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
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE UNEARNED ADDITIONAL
------------------------ FROM STOCK PAID-IN
SHARES PAR VALUE STOCKHOLDERS COMPENSATION CAPITAL
------ --------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1999 31,880,236 $ 322 $ (1,683) $ (2,487) $167,637
Issuance of common stock for 1,100,000 11 39,275
acquisition of Touch 1
Issuance of common stock for 421,261 4 1,314
exercise of stock options
Repayment of Stockholders' note 1,144
Vesting of stock options granted 1,993 (2,467)
below intrinsic value
Warrants extinguished with debt 655
Net Loss
Foreign currency translation adjustment
Unrealized Gain on Investments
Comprehensive Income
---------- ----- ------ ------ --------
Balances, June 30, 2000 33,401,497 $ 337 $ (539) $ (494) $206,414
========== ===== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS'
EQUITY INCOME STOCK EQUITY
------ ------ ----- ------
<S> <C> <C> <C> <C>
Balances, December 31, 1999 $ (49,093) $ -- $ (318) $ 114,378
Issuance of common stock for 39,286
acquisition of Touch 1
Issuance of common stock for 1,318
exercise of stock options
Repayment of Stockholders' note 1,144
Vesting of stock options granted
below intrinsic value (474)
Warrants extinguished with debt 655
Net Loss (38,531) (38,531)
Foreign currency translation adjustment (1) (1)
Unrealized Gain on Investments 6,038 6,038
---------
Comprehensive Income (32,494)
--------- ------- ------ ---------
Balances, June 30, 2000 $ (87,624) $ 6,037 $ (318) $ 123,813
========= ======= ====== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (38,531) $(11,551)
--------- --------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,492 1,664
Provision for bad debts 2,380 242
Change in operating assets and liabilities:
Increase in accounts receivable (25,762) (671)
Increase in prepaid expenses and other current assets (3,552) (860)
Increase in accounts payable and accrued liabilities 13,363 49
Increase in deferred revenue 3,376
Other 181 42
--------- --------
Total adjustments (3,522) 466
--------- --------
Net cash used in operating activities (42,053) (11,085)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and leaseback transaction 9,943
Purchases of property and equipment (20,154) (6,242)
Investment in securities available for sale (1,050)
Purchase of Touch 1, net of cash acquired (8,955)
--------- --------
Net cash provided by (used in) investing activities (30,159) 3,701
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,317
Proceeds from issuance of mandatorily convertible
redeemable preferred stock 3,548
Proceeds from notes receivable 1,144
Payments on long-term debt and capital lease obligations (21,250) (1,886)
--------- --------
Net cash provided by (used in) financing activities (18,789) 1,662
--------- --------
Net decrease in cash and cash equivalents (91,001) (5,722)
Cash and cash equivalents, beginning of period 101,657 7,973
--------- --------
Cash and cash equivalents, end of period $ 10,656 $ 2,251
========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital lease obligations $ -- $ 9,943
========= ========
ACQUISITION OF TOUCH 1
Fair value of assets acquired $ 85,967 $ --
Liabilities assumed (37,979) --
Common stock issued (40,201) --
---------- --------
Net cash paid for acquisition 7,787 --
Cash acquired in acquisition 1,168 --
---------- --------
Cash paid for acquisition $ 8,955 $ --
========= ========
</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, and Georgia. Z-Tel also provides long-distance 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 six
months ended June 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 material intercompany accounts and
transactions have been eliminated.
7
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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(CONTINUED)
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, "Accounting for Certain
Investments in Debt and Equity Securities," securities that are available
for sale are reported at fair value. At June 30, 2000, the Company had
approximately $6.7 and $0.4 million in available for sale securities and
investments accounted for at cost, respectively. There was an increase of
approximately $6.0 million in fair value, using the specific identification
method for calculating the unrealized gain, for the three months ended June
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.
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 approximately $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 operation of Touch 1 for the
period beginning April 10, 2000 (the closing date for accounting purposes)
are included in the accompanying condensed consolidated financial
statements. The acquisition of Touch 1 resulted in approximately $67.0
million of intangible assets, preliminarily allocated to customer lists and
goodwill, which are being amortized, on the straight line basis, over
periods of five and twenty years, 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.
8
<PAGE> 9
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(CONTINUED)
SIX MONTHS ENDED
In thousands, except per share date June 30,
------------------------------------------------------------------------
2000 1999
---- ----
Revenues $ 85,064 $ 31,531
Net loss (46,556) (17,115)
Loss per share (1.14) (1.10)
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. 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 a portion of these disputes and management believes that the
Company will prevail in these disputes. At June 30, 2000 and December 31,
1999, the disputed amounts were approximately $4.9 and $2.3 million,
respectively.
The Company has 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 to the
commitments.
5. 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 number of
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.
9
<PAGE> 10
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(CONTINUED)
Net loss per share is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 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 $ (23,055) $ (5,611) $ (38,531) $ (11,550)
Less mandatorily convertible redeemable
preferred stock dividends -- (414) -- (606)
------------ ------------ ------------ ------------
Loss attributable to common stockholders $ (23,055) $ (6,025) $ (38,531) $ (12,156)
============ ============ ============ ============
Weighted average common shares outstanding 33,042,008 14,411,100 32,499,640 14,411,100
============ ============ ============ ============
Basic and diluted net loss per share $ (0.70) $ (0.42) $ (1.19) $ (0.84)
============ ============ ============ ============
</TABLE>
For each of the periods presented, basic and diluted net loss per share are
the same. Unexercised options to purchase 9,421,912 and 7,156,284 shares of
common stock at June 30, 2000 and December 31, 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.
6. 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. In the lawsuit, PTEK
asserts claims for patent infringement, misappropriation of trade secrets,
breach of contract, conversion, misappropriation of and conspiracy to
misappropriate corporate opportunities and tortious interference with
contractual relations between PTEK and its employees and with PTEK's actual
and prospective business relationships. PTEK seeks preliminary and
permanent injunctive relief against the defendants, an equitable trust of
an unspecified amount of common stock of Z-Tel, return of proceeds, with
interest, of moneys realized by Mr. Smith from the exercise and sale of
PTEK options, disgorgement of economic benefits wrongfully obtained, an
unspecified amount of actual and punitive damages arising out of the common
law claims, treble damages for willful infringement of the PTEK patent and
costs. The defendants believe the claims asserted in the lawsuit are
without merit, intend to defend it vigorously and have asserted
counterclaims against PTEK and Mr. Jones. It is the opinion of management
that the lawsuit will be resolved without material adverse effect on the
Company's financial position, results of operations, or cash flows.
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
10
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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(CONTINUED)
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.
7. SUBSEQUENT EVENTS
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 commitments to purchase
4,688,247 shares of the Series D Preferred at a price of $12.00 for
aggregate proceeds of $56.3 million, $43.1 million of which have been
received by the Company. 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 the Company. The 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 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 Z-Tel common stock
equal to one-half of the amount of Series D Preferred purchased by each
investor. Each warrant is exercisable at a price of $13.80 per share
subject to certain adjustments.
In July 2000, the Company entered into an accounts receivable facility with
RFC Capital Corporation ("RFC") providing for the sale of certain of the
Company's accounts receivable to RFC. RFC has agreed to purchase up to $25
million of the Company's accounts receivable, $10 million of which is
subject to the Company's meeting certain conditions, with provisions for a
commitment of up to $50 million, subject to successful syndication of the
receivables sales program by RFC. The Company has not utilized any of this
facility to date.
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 for the next three years subject to the successful
completion by the service firm of certain obligations in the future. The
minimum commitments under the contract, subject to certain adjustments, are
approximately $4.0, $7.0, and $9.0 million over the next three years. This
contract provides for various termination arrangements with related
severance fees.
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
11
<PAGE> 12
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. Specifically, Verizon Communications,
Inc., a local exchange carrier on which we rely to accomplish certain steps in
customer provisioning, service and billing for customers in certain locales in
New York, Massachusetts and Pennsylvania, is experiencing a strike involving its
principal labor force. We do not currently believe that the strike will
significantly impact our operations in these states. 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 the Company's financial results are described in the Company's
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.
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 New York, Texas, Massachusetts and Pennsylvania, and began offering
service in Georgia during July 2000. We anticipate entering additional states
before the end of the third quarter of 2000.
12
<PAGE> 13
We began offering an access card service, similar to our current Z-Line
Anywhere service, in the quarter ended December 31, 1998. Z-Line Anywhere is our
access card product that allows a customer to make long-distance calls using
Z-Tel's 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, with a closing date of April 10, 2000 for accounting
purposes. 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, in accordance with the purchase accounting method, 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 on April 10, 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 six months ended June 30, 2000.
RESULTS OF OPERATIONS
REVENUE. Revenue increased by $39.4 million to $40.2 million for the three
months ended June 30, 2000, compared to $0.8 million for the same period in the
prior year. The increase in revenue is primarily the result of the average Home
Edition customer count of 129,000 for the three months ended June 30, 2000,
compared to 0 for the same period in the prior year. The purchase of Touch 1 in
the second quarter of 2000 provided an increase in revenue of $12.0 million from
its existing 1+ long-distance offering for the three months ended June 30, 2000
and 1999.
Revenue increased by $52.7 million to $54.1 million for the six months ended
June 30, 2000, compared to $1.4 million for the same period in the prior year.
The increase in revenue is primarily the result of the average Home Edition
customer count of 105,000 for the six months ended June 30, 2000, compared to 0
for the same period in the prior year. The revenue from Touch 1 contributed
$12.0 million to the increase. The following tables outline the 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 June 30, 2000 June 30, 1999
--------------------------------------------------------------------------------
Z-Line Home Edition Subscribers 170,000 0
Z-Line Anywhere and Touch 1 (1+)
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Long Distance Services Subscribers 301,500 80,000
NETWORK OPERATIONS. Network operations expense increased by $24.1 million
to $25.1 million for the three months ended June 30, 2000, compared to $1.0
million for the same period in the prior year. Network operations expense
increased by $33.2 million to $35.0 million for the six months ended June 30,
2000, compared to $1.8 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 expense in both the three months and six months ended June 30, 2000 is
the result of our subscriber growth.
SALES AND MARKETING. Sales and marketing expense increased $9.9 million to
$10.6 million for the three months ended June 30, 2000, compared to $0.7 million
for the same period in the prior year. Sales and marketing expense increased
$15.7 million to $17.5 million for the six months ended June 30, 2000, compared
to $1.8 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
increased telemarketing hours and direct mail efforts. A large increase occurred
in the second quarter as a result of our purchase of Touch 1 in April 2000, and
the hiring of additional employees in their existing locations and the opening
of a new call center in Canada. Our direct mail campaign was continued through
the second 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.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $1.4
million to $1.8 million for the three months ended June 30, 2000, compared to
$0.4 million for the same period in the prior year. Research and development
expenses increased $1.6 million to $3.1 million for the six months ended June
30, 2000, compared to $1.5 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.
The enhancement of our current product offerings, development of new
services, and the integration of our customer care and billing software
contributed to increased research and development cost for both the three and
six months ended June 30, 2000. 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, $1.7 and $3.7
million of research and development costs relating to development of internal
use software were capitalized for the three and six months ended June 30, 2000,
compared to $1.1 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.
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GENERAL AND ADMINISTRATIVE. General and administrative expense increased
$18.5 million to $20.9 million for the three months ended June 30, 2000,
compared to $2.4 million for the same period in the prior year. General and
administrative expense increased $26.3 million to $31.3 million for the six
months ended June 30, 2000, compared to $5.0 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, and provisioning costs for Z-Line Home Edition Customers.
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 six months ended June 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 $3.5 million to $4.4 million for the three months ended June 30, 2000,
compared to $0.9 million for the same period in the prior year. Depreciation and
amortization expense increased $4.8 million to $6.5 million for the six months
ended June 30, 2000, compared to $1.7 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, which has
been preliminarily allocated to assets with 5 and 20 year lives, resulted in
amortization of $1.2 million in the second quarter of 2000. 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 six months ended June 30, 2000. We expect depreciation and
amortization to continue to increase as we increase our capital expenditures.
INTEREST INCOME. Interest income increased $0.4 million to $0.5 million for
the three months ended June 30, 2000, compared to $0.1 million for same period
in the prior year. Interest income increased $1.5 million to $1.7 million for
the six months ended June 30, 2000, compared to $0.2 million for same period in
the prior year. Interest income consists of income on our cash balances invested
in short-term liquid investments. The increase was primarily due to larger cash
reserves, resulting from funds raised in our initial public offering on December
15, 1999. We raised net proceeds of $109.1 million after underwriting discounts
and commissions. Our cash and cash equivalents were $10.7 million and $2.3
million at June 30, 2000 and 1999, respectively.
INTEREST EXPENSE. Interest expense decreased $0.4 million to $0.8 million
for the three months ended June 30, 2000, compared to $1.2 million for the same
period in the prior year. Interest expense decreased $0.4 million to $1.1
million for the six months ended June 30, 2000, compared to $1.5 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. On February 14, 2000,
we paid $14.4 million to extinguish our sale-leaseback credit facility. We
anticipate interest expense to increase in the future as a result of our
assumption of debt from the Touch 1
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acquisition and the borrowing of money to support operations through our
accounts receivable credit facility and possible additional funding prior to the
end of fiscal year 2000.
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 six month periods ended June 30, 2000 and for the same
periods in the prior year.
NET LOSS. Our net loss increased $17.1 million to $23.1 million for the
three months ended June 30, 2000, compared to $6.0 million for the same period
in the prior year. Our net loss increased $26.3 million to $38.5 million for the
six months ended June 30, 2000, compared to $12.2 million for the same period in
the prior year. This increase was due primarily to the increases in expenses
described above.
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 a company's financial performance. While
EBITDA is not a measure under 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
$14.7 million to $18.3 million for the three months ended June 30, 2000,
compared to $3.6 million for the same period in the prior year. Our negative
EBITDA increased $24.0 million to $32.7 million for the six months ended June
30, 2000, compared to $8.7 million for the same period in the prior year. We
expect to experience a reduction in negative EBITDA during the remainder of
fiscal year 2000 as a result of our increases in subscribers.
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. Our network architecture is designed with remotely located
points of presence, or Z-Nodes, that can be interconnected through local and
long distance communications networks to the Z-Tel enterprise management center.
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 June 30, 2000, we had an accumulated deficit
of $87.6 million. We have funded these expenditures primarily through operating
revenues, private securities offerings, a sale-leaseback 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.
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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 preliminarily being allocated to assets being amortized over 5 and 20
years.
The Company also has 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 to 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 $0.5 million
cash payment for set-up fees and minimum commitment fees for the next three
years, subject to the service firm attaining certain milestones in the future.
The minimum commitments under the contract, subject to certain adjustments, are
$4.0, $7.0, and $9.0 million over the next three years. This contract provides
for various termination arrangements with related severance fees.
NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating
activities increased by $31.0 million to $42.1 million for the six months ended
June 30, 2000, compared to $11.1 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.
NET CASH USED IN INVESTING ACTIVITIES. Net cash used in investing
activities was $30.2 million for the six months ended June 30, 2000, compared to
$3.7 million provided by investing activities for the same period in the prior
year, a change of $33.9 million. For the six months ended June 30, 2000, we
invested $9.0 million in cash to acquire Touch 1 and purchased property and
equipment of $20.2 million. For the six months ended June 30, 1999, we received
$9.9 million in a sale and leaseback transaction and purchased property and
equipment of $6.2 million.
The increase in net cash used in investing activities is a direct result of
our continued preparation for rapid growth and our plans to lower network and
infrastructure costs. In 2000, we are focused on product development and the
establishment of our infrastructure, the operation of our technology and a
network that primarily involves the purchases of equipment for our Z-Nodes. As
discussed earlier, the purchase of Touch 1 has greatly increased our back office
operations. We have increased our employees at all locations including our
newest call center in Canada. 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.
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NET CASH USED IN FINANCING ACTIVITIES. Net cash used in financing
activities was $18.8 million for the six months ended June 30, 2000, compared to
net cash provided by financing activities of $1.6 million for the same period in
the prior year, a change of $20.4 million. The overall change is primarily
attributable to our payment of $23.1 million during the second quarter of 2000
for the extinguishment of debt. We extinguished our sale-leaseback credit
facility, assumed debt from the Touch 1 acquisition relating to a line of credit
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 and 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. The cash used in financing
activities was offset by the receipt of payments of cash for notes receivable
from stockholders for common stock and cash received for
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the exercise of stock options, in the amounts of $1.1 and $1.3 million,
respectively, for the six months ended June 30, 2000.
In July 2000, we filed a Certificate of Designation authorizing the
issuance of 5.0 million shares of Series D convertible preferred stock ("Series
D Preferred"). We have received commitments to purchase 4,688,247 shares of the
Series D Preferred at a price of $12.00 for aggregate proceeds of $56.3 million,
$43.1 million of which have been received by us. 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. The 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 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 each investor. Each warrant is
exercisable at a price of $13.80 per share subject to certain adjustments.
In July 2000, we entered into an accounts receivable facility with RFC
Capital Corporation ("RFC") providing for the sale of certain of our accounts
receivable to RFC. RFC has agreed to purchase up to $25 million of our accounts
receivable, $10 million of which is subject to our meeting certain conditions,
with provisions for a commitment of up to $50 million, subject to successful
syndication of the receivables sales program by RFC. We have not utilized any of
this facility to date. In connection with this agreement, we have granted RFC a
security interest in our accounts, lists, agreements, letter of authorizations,
contract rights, instruments, documents, chattel paper, general intangibles, and
all proceeds of the foregoing. The annual interest rate equivalent charged to us
under this agreement floats at prime rate plus 2.0% to 2.5%, depending upon the
nature of receivables sold.
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. As of June 30, 2000,
we had $10.7 million in cash and cash equivalents. We believe that cash on hand
combined with our recent offering of Series D Convertible Preferred Stock for a
total committed amount of $56.3 million and the up to $50 million potentially
available under the RFC Capital Corporation accounts receivable facility will be
sufficient to meet our projected capital requirements through the end of fiscal
year 2000. Nevertheless, to address new opportunities that the Company has
identified internally and other opportunities that have been presented to Z-Tel,
it is possible that additional funding will be necessary. Consequently, we may
need to obtain additional equity or debt financing which may not be available on
attractive terms, or at all, or may be dilutive. If we are not able to obtain
such financing or obtain it on terms that are not attractive, we may be required
to modify, delay or abandon our current business plan, which is likely to
materially and adversely affect our business.
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 June 9, 2000, PTEK Holdings, Inc. and Premiere Communications, Inc.
(collectively, "PTEK") filed a lawsuit against Z-Tel Technologies, Inc.
("Z-Tel"), 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. In the lawsuit, PTEK claims
that the defendants have infringed and are continuing to infringe a patent that
purports to, among other things, describe a method for enabling a user to
manipulate data underlying a web site using a telephone, and have
misappropriated and are continuing to misappropriate trade secrets belonging to
PTEK, particularly those relating to a unified messaging platform, that Messrs.
Smith and Kitchen breached contractual obligations owed to PTEK by, among other
things, misappropriating PTEK's trade secrets and improperly soliciting PTEK's
customers and employees, that the defendants have engaged in unfair competition,
that the defendants have converted PTEK's physical and intellectual property,
that Messrs. Smith, Kitchen and Mayer misappropriated corporate opportunities of
PTEK, that the defendants conspired to misappropriate corporate opportunities of
PTEK, and that the defendants tortiously interfered with contractual relations
between PTEK and its employees and with PTEK's actual and prospective business
relationships. PTEK seeks preliminary and permanent injunctive relief against
the defendants, an equitable trust of an unspecified amount of common stock of
Z-Tel, return of proceeds, with interest, of moneys realized by Mr. Smith from
the exercise and sale of PTEK options, disgorgement of economic benefits
wrongfully obtained, an unspecified amount of actual and punitive damages
arising out of the common law claims, treble damages for willful infringement of
the PTEK patent and costs. The defendants believe the claims asserted in the
lawsuit are without merit and intend to defend it vigorously.
The corporate defendants have answered the complaint and have filed
counterclaims against PTEK and Boland Jones ("Jones"), its Chairman and Chief
Executive Officer. The counterclaims allege that PTEK and Jones tortiously
interfered with actual and prospective business relationships between Z-Tel and
certain investment bankers, defamed Z-Tel and made false and defamatory
statements to Z-Tel while knowing or having a reason to know that they would be
disclosed to third parties. PTEK and Jones have moved to dismiss Z-Tel's
counterclaims, and Z-Tel has filed a response. The Court has not ruled on PTEK's
and Jones' motion.
PTEK also has filed motions for a preliminary injunction and for expedited
discovery. Z-Tel has responded to each of those motions, and the Court has
denied PTEK's motion for expedited discovery without prejudice on the ground
that it failed to comply with certain of the Court's local rules. PTEK has
submitted further briefing on these issues, but the Court has not issued any
further rulings or set any hearing on PTEK's motion for preliminary injunction.
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
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Bankruptcy Court for the Southern District of Alabama (the "Bankruptcy Court").
The Debtors proposed their Joint Plan of Reorganization of Touch 1
Communications, Inc. and direcTEL, Inc. under Chapter 11 of the United States
Bankruptcy Code (the "Plan"), which received overwhelming acceptance by the
Debtors' creditors. On August 6, 1999, the Bankruptcy Court entered an Order
Confirming Amended Joint Plan of Reorganization of Touch 1 Communications, Inc.
and direcTEL, Inc. Under Chapter 11 of the United States Bankruptcy Code (the
"Confirmation Order"). As a result, the Debtors were discharged of certain
obligations except as provided for in the Plan.
Since the entry of the Confirmation Order, the Debtors' activities in
the Bankruptcy Court have been limited to resolving contested claims. On or
about August 3, 2000, direcTEL filed a pleading with the Bankruptcy Court to
close its bankruptcy case, and it is anticipated that Touch 1's bankruptcy case
will be closed during the third quarter of 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
RECENT SALES OF UNREGISTERED SECURITIES
During the period covered by this report, Z-Tel sold, in connection with
the closing of its acquisition of Touch 1 Communications, Inc., in the
aggregate, 1,100,000 shares of its common stock to the holders of the
outstanding common and preferred stock of Touch 1 Communications, Inc. who
executed the definitive agreement relating to the acquisition. Z-Tel claims an
exemption from registration under Section 4(2) of the Securities Act of 1933
because such transactions were by an issuer and did not involve a public
offering.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
Z-Tel filed a registration statement (Commission file no. 333-89063), which
became effective on December 14, 1999, with respect to the initial public
offering of 6,900,000 shares of its common stock (including the underwriters'
over-allotment option). For the six months ended June 30, 2000, approximately
$67.4 million of the net offering proceeds were used in the following estimated
amounts and for the following purposes: $6.4 million for the purchase and
installation of network equipment, $7.0 million for the purchase of software and
support and software development, $4.3 million for marketing expenses, $19.9
million for the repayment of indebtedness, $26.6 million for operational
expenses, $2.1 million for construction of plant, building and facilities and
$1.1 million for the purchase of investments. The remaining offering proceeds
have been placed in temporary investments in cash and cash equivalents. Except
for dividend payments made to entities affiliated with our directors based on
their pro rata ownership of our convertible preferred stock, none of the net
offering proceeds have been paid, directly or indirectly, to our directors,
officers, 10% shareholders or affiliates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 30, 2000, the following
proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until their successors are
elected and qualified:
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Number of Shares
For Withheld
Laurence S. Grafstein 24,730,914 120,473
Eduard J. Mayer 24,730,914 120,473
Buford H. Ortale 24,730,914 120,473
Jeffrey A. Bowden 24,730,914 120,473
D. Gregory Smith 24,730,914 120,473
2. To approve the second amendment to Z-Tel's Amended and Restated Certificate
of Incorporation classifying the Board of Directors of Z-Tel:
For: 20,453,916
Against: 3,282,631
Abstain: 374
3. To approve the 2000 Equity Participation Plan of Z-Tel:
For: 20,034,388
Against: 3,636,054
Abstain: 66,479
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 for provisions
of the Amended and Restated Certificate
of Incorporation, as amended, and the
amended and restated Bylaws of Z-Tel
defining rights of security holders
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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 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 Z-Tel
Technologies, Inc. by each of the
purchasers of the Registrant's Series D
Convertible Preferred Stock.
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
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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
99.1(**) Press release announcing the acquisition
of Touch 1 Communications, Inc.
99.2(*****) Press release of Registrant, dated June
12, 2000.
(*) 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 exhibit to
the Registrant's Current Report on Form 8-K, filed June 26, 2000
(B) REPORTS ON FORM 8-K.
The Registrant filed a Current Report on Form 8-K on April 28,
2000, in which it announced the closing of its acquisition of Touch 1
Communications, Inc.
The Registrant filed a Current Report on Form 8-K on June 26,
2000, which contained financial statements of Touch 1 Communications,
Inc. and its subsidiaries and pro forma financial information of the
Registrant as if the acquisition of Touch 1 Communications, Inc. had
occurred at the beginning of the periods presented in such financial
information. That Current Report also reported the filing of the
litigation referenced in the first paragraph of Item 1 hereof.
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.
August 11, 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
