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 MARCH 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
Commission File Number 000-28467
Z-TEL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 59-3501119
- ------------------------------------------ -----------------------------------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
601 South Harbour Island Boulevard, Suite 220
Tampa, Florida 33602
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(813) 273-6261
-------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
At May 4, 2000 the Registrant had outstanding 33,209,711 shares of
$.01 par value common stock.
<PAGE>
Z-TEL TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of
Operations for the three-month periods
ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash
Flows for the three-month periods ended
March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION 15
SIGNATURES 17
</TABLE>
2
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 58,513 $ 101,657
Accounts receivable, net of allowance for doubtful
accounts of approximately $1,060 at March 31,
2000 and $408 at December 31, 1999 12,968 4,245
Prepaid expenses and other current assets 3,144 2,304
---------- ----------
Total current assets 74,625 108,206
Property and equipment, net 36,316 28,549
Other 1,851 922
---------- ----------
Total assets $ 112,792 $ 137,677
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 12,496 $ 9,165
Current portion of long-term debt
and capital lease obligations 28 3,726
---------- ----------
Total current liabilities 12,524 12,891
Long-term debt and capital lease obligations 7 10,408
---------- ----------
Total liabilities 12,531 23,299
---------- ----------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock, $.01 par value; 150,000,000
shares authorized; 32,288,088 and 32,159,911 shares issued;
32,008,413 and 31,880,236 outstanding, respectively 323 322
Notes receivable from stockholders (1,317) (1,683)
Unearned stock compensation (1,340) (2,487)
Additional paid-in capital 167,482 167,637
Accumulated deficit (64,569) (49,093)
Treasury stock, 279,675 shares at cost (318) (318)
---------- ----------
Total stockholders' equity 100,261 114,378
---------- ----------
Total liabilities and stockholders' equity $ 112,792 $ 137,677
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
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
March 31,
---------------------------------
2000 1999
--------- --------
<S> <C> <C>
Revenues $ 13,976 $ 664
------------ -----------
Operating expenses:
Network operations 9,830 814
Sales and marketing 6,819 1,182
Research and development 1,299 1,113
General and administrative 10,461 2,597
Depreciation and amortization 2,088 801
------------ -----------
Total operating expenses 30,497 6,507
------------ -----------
Operating loss (16,521) (5,843)
------------ -----------
Nonoperating income (expense):
Interest income 1,286 118
Interest expense (241) (214)
------------ -----------
Total nonoperating income (expense) 1,045 (96)
------------ -----------
Net loss (15,476) (5,939)
Less mandatorily convertible redeemable
preferred stock dividends (192)
------------ -----------
Net loss attributable to common stockholders $ (15,476) $ (6,131)
============ ===========
Weighted average common shares outstanding 31,941,964 14,411,100
============ ===========
Basic and diluted net loss per share $ (.48) $ (.43)
============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (15,476) $ (5,939)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of fixed assets 2,088 801
Interest expense on capital lease obligation discount
Provision for bad debts 652 150
Change in operating assets and liabilities:
Increase in accounts receivable (9,375) (315)
Increase in prepaid expenses and other current assets (840) (215)
Increase in other assets (229) (778)
Increase (decrease) in accounts payable and accrued liabilities 2,203 (1,680)
Increase in deferred revenue 1,128
Other (43)
----------- -----------
Total adjustments (4,416) (2,037)
----------- -----------
Net cash used in operating activities (19,892) (7,976)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (9,201) (1,241)
Proceeds from sale and leaseback transaction 9,943
Investment in available for sale securities (700)
----------- -----------
Net cash provided by (used in) investing activities (9,901) 8,702
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 382
Proceeds from notes receivable 366
Payments on long-term debt and capital lease obligations (14,099) (396)
----------- -----------
Net cash used in financing activities (13,351) (396)
----------- -----------
Net increase (decrease) in cash and cash equivalents (43,144) 330
Cash and cash equivalents, beginning of period 101,657 7,973
----------- -----------
Cash and cash equivalents, end of period $ 58,513 $ 8,303
=========== ===========
Non-cash investing and financing activities:
Property and equipment acquired under capital lease obligations $ 9,943
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
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. 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., Tiger Acquisition Subsidiary, Inc. and Z-Tel
Investments, Inc. Z-Tel Technologies, Inc. is the parent company, and has
no other operations. Z-Tel Communications, Inc. is the operating entity.
Z-Tel Investments, Inc. is used to make investments in other entities. The
remaining subsidiaries have no significant operations.
Z-Tel is an emerging provider of advanced, integrated telecommunications
services targeted to residential subscribers. The Company offers local and
long distance telephone services in combination with enhanced communication
features accessible through the telephone or the Internet. The Company
offers Z-Line Home Edition service in New York, Texas, and Massachusetts.
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 the 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 which are 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
months ended March 31, 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 with 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.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 2000, the Company adopted Statement of Financial
Accounting Standards Board No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("FAS 115"). FAS 115 addresses the valuation
and recording of debt and equity securities as held to maturity, trading
and available for sale. Under this standard, only debt and equity
securities that the Company has the positive intent and ability to hold to
maturity would be classified as held to maturity and reported at amortized
cost (with no period to period adjustments). A debt or equity security
purchased and held principally for the purpose of sale in the near term
should be classified as a trading security. Securities classified as
trading are reported at fair value with changes in fair value from period
to period included in earnings. Debt and equity securities not otherwise
classified as held to maturity or trading should be classified as available
for sale. Securities that are available for sale are reported at fair value
with changes in the fair value from period to period included as a separate
component of equity. At March 31, 2000, the Company had $0.7 million
invested in available for sale securities. There was no change in fair
value for the three months ended March 31, 2000 recorded as a separate
component of equity.
NEW ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the SEC issued Staff Accounting Bullentin No. 101
("SAB 101"), "Revenue Recongition 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.
6
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. 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 that 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 not paid for a portion of these disputes and management
believes that the Company will prevail in these disputes. At March 31, 2000
and December 31, 1999, the disputed amounts were approximately $4.0 and
$2.3 million, respectively.
The Company is involved in certain legal actions and claims arising in the
ordinary course of its business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on
the Company's financial position, results of operations, or cash flows. The
Company is also aware of a threatened claim primarily involving allegations
of improper use of trade secrets. No legal action has commenced related to
this alleged claim, which the Company believes is without merit. Should any
legal action result, the Company intends to vigorously defend its position.
4. 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.
Net loss per share is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
2000 1999
-------------- --------------
(In thousands, except share and per share data)
<S> <C> <C>
Basic and diluted net loss per share:
Loss attributable to common stockholders:
Net loss $ (15,476) $ (5,939)
Less mandatorily convertible redeemable preferred
stock dividends - (192)
-------------- --------------
Loss attributable to common stockholders $ (15,476) $ (6,131)
============== ==============
Weighted average common shares outstanding 31,941,964 14,411,100
============== ==============
Basic and diluted net loss per share $ (0.48) $ (0.43)
-------------- --------------
</TABLE>
For each of the periods presented, basic and diluted net loss per share are
the same. Unexercised options to purchase 7,180,530 and 4,934,282 shares of
common stock and mandatorily convertible redeemable preferred stock
convertible into 0 and 4,437,403 shares of common stock at March 31, 2000
and March 31, 1999, respectively, which could potentially dilute basic
earnings per
7
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
5. SUBSEQUENT EVENTS
On April 14, 2000, Z-Tel Technologies, Inc. acquired Touch 1
Communications, Inc. ("Touch 1") through merger for consideration of $9.0
million in cash and 1.1 million shares of Z-Tel common stock. The purchase
of Touch 1 will be recorded using the purchase method of accounting.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Quarterly Report on Form 10-Q
contain forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those projected in the forward-looking
statements as a result of certain factors. Factors that may affect our results
of operations include, but are not limited to, our limited operating history and
cumulative losses, uncertainty of customer demand, rapid expansion, potential
software failures and errors, potential network and interconnection failure,
dependence on local exchange carriers, dependence on third party vendors,
dependence on key personnel, uncertainty of government regulation, legal
uncertainties, and competition. We disclaim any obligation to update information
contained in any forward-looking statement. In addition to the factors noted
above, other risks, uncertainties, assumptions, and factors that could affect
the Company's financial results are described in the Company's 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
8
<PAGE>
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.
We offer Z-Line Home Edition service in New York, Texas, Massachusetts,
and Pennsylvania. Z-Line Home Edition is our principal service offering. Z-Line
Home Edition includes low-priced local and (1+) long-distance 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 expect sales and marketing
expenses to increase substantially as we introduce our Z-Line Home Edition
service into new markets. We anticipate entering additional states before the
end of the second quarter of 2000. Our expansion will require us to hire
additional sales and marketing personnel to build awareness of our services. We
will also need to hire technical personnel to continue to expand our network
architecture and enhance our service offerings. In addition to our internal
technical staff, we expect to continue our relationship with third-party vendors
and system integration consultants to integrate and enhance our customer care
and billing software applications. We will continue to expand our network
through leased facilities, strategic alliances, and acquisitions.
We began offering an access card service, similar to our current Z-Line
Anywhere service, in the quarter ended December 31, 1998. All of the revenue
generated for the first quarter 1999 was from our access card services. 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 began offering Z-Line Home Edition in June 1999. During the first
quarter of 2000, we derived most of our revenue from service fees charged to
Home Edition customers located in areas of New York, Massachusetts, and Texas.
In the second quarter of 2000 we began offering service in Pennsylvania. We
intend to offer the Z-Line Home Edition service throughout the United States,
subject to the establishment, implementation, operation, and favorable pricing
of the unbundled network elements by each state in accordance with the
Telecommunications Act of 1996 and the more recent November 5, 1999 FCC order.
Charges for our Z-Line Home Edition services are billed in advance on a
monthly basis. Long distance services in excess of a subscriber's basic package
are billed in arrears. Revenue from Z-Line Home Edition is recognized as earned.
Our Z-Line Home Edition customer agreements may be canceled on 30 days notice.
OPERATING EXPENSES
Operating expenses are comprised of:
9
<PAGE>
o network operations, which consists primarily of fixed and variable
transmission expenditures, and rent expense for space in data centers;
o sales and marketing, which consists primarily of telemarketing,
advertising, sales compensation and related expenses;
o research and development, which consists primarily of compensation and
consulting fees related to the development of our proprietary technologies;
o general and administrative, which consists primarily of compensation and
related expenses, bad debt expense, occupancy costs and various
administrative expenses; and
o depreciation and amortization, which consists primarily of the non-cash
reduction in carrying value of our long-lived assets.
We expect to expand our operations and workforce, including our network
operations, technical support, sales, marketing and administrative resources. In
particular, we intend to expand our existing sales force and create a locally
based sales force in selected metropolitan areas where we intend to initiate
service. As a result, we expect to continue to incur substantial losses for the
foreseeable future.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1999
REVENUE. Revenue increased by $13.3 million to $14.0 million for the three
months ended March 31, 2000, compared to $0.7 million for the same period in the
prior year due to the introduction of our Z-Line Home Edition service and
subscriber growth. The following tables outline the approximate number of
subscribers for Z-Line Home Edition and Z-Line Anywhere:
TYPE OF SERVICE March 31, 2000 March 31, 1999
- --------------------------------------------------------------------------------
Z-Line Home Edition Subscribers 86,000 0
Z-Line Anywhere Subscribers 26,100 8,100
NETWORK OPERATIONS. Network operations expense increased by $9.0 million
to $9.8 million for the three months ended March 31, 2000, compared to $0.8
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 operations expense was due primarily to growth
in the number of subscribers resulting from the introduction of our Z-Line Home
Edition and the expansion of the
10
<PAGE>
service area. We expect our network operations expense to continue to increase
significantly in future periods due to additional increases in subscribers and
the expansion of our service area.
SALES AND MARKETING. Sales and marketing expense increased $5.6 million
to $6.8 million for the three months ended March 31, 2000, compared to $1.2
million for the same period in the prior year. Sales and marketing expense
primarily consists of telemarketing, development of brand awareness through
promotional and advertising materials, and employee salaries and benefits.
The increase in sales and marketing expense is attributable to our
expanded sales and marketing efforts. We increased our telemarketing and
advertising expenses in the first quarter of 2000 in connection with the
expansion of our Z-Line Home Edition service to Texas and Massachusetts. We
initiated a direct mail campaign to all of our service areas. We have increased
the number of employees in sales and marketing from 13 at March 31, 1999 to 30
at March 31, 2000. We intend to significantly increase our sales and marketing
expenditures during the year 2000 as we explore other marketing channels.
RESEARCH AND DEVELOPMENT. Research and development expenses
increased $0.2 million to $1.3 million for the three months ended March 31,
2000, compared to $1.1 million for the same period in the prior year. Our
research and development expenses consist primarily of software development
costs and employee salaries and benefits. The research and development efforts
that qualified for capitalization relating to internal use software for the
three months ended March 31, 2000 decreased to $0.4 million from $0.7 million
for the three months ended March 31, 1999.
The development of our Z-Line Home Edition, and the integration of our
customer care and billing software required significant expenditures related to
employee compensation and outside consulting fees. These efforts resulted in
adding functionality and significant enhancements to our technology. A portion
of these services and purchases of software are capitalized from research and
development expense to property and equipment as software development. We expect
research and development costs to increase in the future as we improve and
enhance our services and develop new services.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
$7.9 million to $10.5 million for the three months ended March 31, 2000,
compared to $2.6 million for the same period in the prior year. The increase in
general and administrative expense was primarily due to increases in employee
salaries, temporary services and bad debt expense.
We increased the number of employees in general and administrative
functions to 346 employees at March 31, 2000, from 69 employees at March 31,
1999. We increased our provision for bad debts to $1.0 million at March 31, 2000
from $0.2 million at March 31, 1999, respectively, primarily because of our
increase in subscribers. We have implemented additional credit policies and are
closely monitoring collection procedures to increase our cash flow while
minimizing future bad debt expense. We anticipate general and administrative
expenditures will continue to increase in the future as we increase our services
and enter new states.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.3 million to $2.1 million for the three months ended March 31,
2000, compared to $0.8 million for the same period in the prior year. The
increase was due to the purchases of
11
<PAGE>
equipment, facilities, and the capitalized costs associated with internal
software development totaling $9.2 million for the three months ended March 31,
2000, compared to $1.2 million for the same period in the prior year. The total
ending fixed assets before depreciation was $44.1 million and $14.2 million, at
March 31, 2000 and 1999, respectively, which also contributed to the increase in
depreciation and amortization expense. We expect depreciation and amortization
to continue to increase significantly as we increase our capital expenditures.
INTEREST INCOME. Interest income increased $1.2 million to $1.3 million
for the three months ended March 31, 2000, compared to $0.1 million for the same
period in the prior year. Interest income consists of income on our cash
balances invested in short-term liquid investments. This increase was primarily
due to larger cash reserves for the three months ended March 31, 2000 resulting
from our initial public offering on December 15, 1999. We raised net proceeds of
$109.1 million after underwriting discount and commissions.
INTEREST EXPENSE. Interest expense was $0.2 million for the three month
periods ended March 31, 2000 and 1999, respectively. Our interest expense is a
result of the interest charge on our capital lease and other debt obligations.
On February 14, 2000, we paid $14.4 million to extinguish our venture leasing
credit facility.
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 months ended March 31, 2000 and for the same period in
the prior year.
NET LOSS. Our net loss increased $9.6 million to $15.5 million for the
three months ended March 31, 2000, compared to $5.9 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 concept recognized by 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 $9.4 million to $14.4 million for the three months ended March 31,
2000, compared to $5.0 million for the same period in the prior year. We expect
to experience increasing operating losses and negative EBITDA as result of our
network development and the expansion of our markets and the growth and
expansion of our operations.
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
models. However, we have and will continue to devote significant amounts of our
capital resources to continued software development and marketing efforts that
we have designed to achieve rapid penetration of our target markets.
12
<PAGE>
We have incurred significant 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 March 31, 2000, we had an
accumulated deficit of $64.6 million. We have funded these expenditures
primarily through operating revenues, private securities offerings, a
sale-leaseback credit facility and an initial public offering. We intend to
continue building our organization in anticipation of future growth and believe
that our operating expenditures will also continue to increase. As of March 31,
2000, we had $58.5 million in cash and cash equivalents.
NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating
activities increased by $11.9 million to $19.9 million for the three months
ended March 31, 2000, compared to $8.0 million for the same period in the prior
year. This net change in cash used in operating activities increased primarily
because of increased net losses and accounts receivable. This increase was
partially off-set by non-cash charges associated with bad debt expense and
depreciation.
NET CASH USED IN INVESTING ACTIVITIES. Net cash used in investing
activities increased by $18.6 million to $9.9 million used in investing
activities for the three months ended March 31, 2000, compared to $8.7 million
provided by investing activities for the same period in the prior year. For the
three months ended March 31, 2000, we invested $9.9 million and $0.7 million,
respectively, in capital expenditures and investments in affiliates as compared
to $1.2 million and $0, respectively, in the same period in the prior year. For
the three months ended March 31, 1999 we also received $9.9 million in a sale
and leaseback transaction compared to $0 for the three months ended March 31,
2000, respectively. These purchases were primarily for the following items:
o continued enhancement and improvement of our network;
o employee compensation and outside consulting fees associated with the
internal development and integration of our customer care and billing
software; and
o the build-out of our headquarters in Tampa, Florida.
The significant increase in capital expenditures is a direct result of our rapid
growth in subscribers and the need to build and purchase infrastructure to
support our current and future needs. 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. Pursuant to our adoption of Statement of Position 98-1 for the
three months ended March 31, 2000, we capitalized $0.4 million of software
development costs compared to $0.7 million for the same period in the prior
year. Capitalized software development costs, in conjunction with capital
outlays, contributed to the increased capital expenditures. We expect cash used
in investing activities to increase as we maintain and develop our network.
On April 14, 2000, we completed the acquisition of Touch 1
Communications, Inc. (Touch 1) for $9.0 million in cash and 1.1 million shares
of our common stock. The purchase of Touch 1 provides more than 950 employees
primarily for our sales, provisioning and customer service departments,
13
<PAGE>
and is expected to improve operating efficiencies and lower customer acquisition
costs. The Touch 1 acquisition will be accounted for using the purchase method
of accounting.
NET CASH USED IN FINANCING ACTIVITIES. Net cash used in financing
activities increased $13.0 million to $13.4 million for the three months ended
March 31, 2000, compared to $0.4 million for the same period in the prior year.
The overall increase is primarily attributable to our payment of $14.4 million
on February 14, 2000 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
resulted in a $1.6 million increase in the carrying value of our assets,
resulting from the difference between the payments made to terminate the lease
and the carrying value of our capital lease obligation. This $1.6 million will
be added to the value of the assets purchased and 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. The net
increase in cash used in financing activities was also increased by the payments
of our long-term debt, off-set by the receipt of payments for notes receivable
for stock from stockholders, and cash received for the exercise of stock
options, in the amounts of $0.0, $0.4, and $0.4 million, respectively, for the
three months ended March 31, 2000, compared to $0.2, $0.0, and $0.0 million,
respectively, for the same period in the prior year.
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
network architecture, and plan to expand our sales and marketing programs and
conduct more aggressive 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 large
amounts of cash. Consequently, future growth will require us to obtain
additional equity or debt financing which may not be available on attractive
terms, or at all, or may be dilutive. If we are unable 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.
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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
We 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 our common stock (including the underwriters'
over-allotment option). For the three months ended March 31, 2000, approximately
$36.6 million of the net offering proceeds were used in the following estimated
amounts and for the following purposes: $2.5 million for the purchase and
installation of network equipment, $2.5 million for the purchase of software and
support and software development, $1.7 million for marketing expenses, $14.4
million for the repayment of indebtedness, $13.4 million for operational
expenses, $1.4 million for construction of plant, building and facilities and
$0.7 million for the purchase of available for sale securities. 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 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
3.2(*) Amended and Restated Bylaws of Z-Tel
4.1(*) Form of Common Stock Certificate
4.2 See Exhibits 3.1 and 3.2 of this Quarterly Report
on Form 10-Q.
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
15
<PAGE>
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(*) 1998 Equity Participation Plan
10.3(**) Form of Employment Agreement for certain key Touch
1 employees, including James F. Corman, President
of Touch 1
27 Financial Data Schedules
99.1(**) Press release announcing the acquisition of Touch 1
Communications, Inc.
(*) 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.
(B) REPORTS ON FORM 8-K.
None.
16
<PAGE>
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.
May 12, 2000 Z-TEL TECHNOLOGIES, INC.
(Registrant)
By: /s/_______________________________________________
John M. Hutchens
Chief Financial Officer
(Authorized officer of Registrant and principal
financial officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet at March 31, 2000 and the condensed
consolidated statement of operation for the three-month period ended March 31,
2000 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 58,513,000
<SECURITIES> 0
<RECEIVABLES> 14,028,000
<ALLOWANCES> 1,060,000
<INVENTORY> 0
<CURRENT-ASSETS> 74,625,000
<PP&E> 44,057,000
<DEPRECIATION> 7,741,000
<TOTAL-ASSETS> 112,792,000
<CURRENT-LIABILITIES> 12,524,000
<BONDS> 0
0
0
<COMMON> 323,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 112,792,000
<SALES> 13,976,000
<TOTAL-REVENUES> 13,976,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,497,000
<LOSS-PROVISION> 1,000,000
<INTEREST-EXPENSE> 241,000
<INCOME-PRETAX> 15,476,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,476,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,476,000
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.48
</TABLE>
