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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
( ) 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.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 59-3501119
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(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
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(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 11, 2001 the Registrant had outstanding 33,821,466 shares of
$.01 par value common stock.
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Z-TEL TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2001 and 2000 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Loss for the three
months ended March 31, 2001 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 21
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Z-Tel Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents, including restricted cash of $1,267 $ 31,587 $ 46,650
Accounts receivable, net of allowance for doubtful
accounts of $12,570 and $9,026 68,525 65,432
Prepaid expenses and other current assets 11,852 7,159
--------- ---------
Total current assets 111,964 119,241
Property and equipment, net 63,387 59,200
Intangible assets, net 62,944 64,267
Other assets 4,475 3,753
--------- ---------
Total assets $ 242,770 $ 246,461
========= =========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 57,770 $ 44,693
Deferred revenue 8,225 7,666
Current portion of long-term debt and capital lease obligations 8,175 7,637
--------- ---------
Total current liabilities 74,170 59,996
Long-term debt and capital lease obligations 12,142 12,780
--------- ---------
Total liabilities 86,312 72,776
--------- ---------
Mandatorily redeemable convertible preferred stock, $.01 par value; 50,000,000
shares authorized; 8,854,914 issued and outstanding (aggregate liquidation
value of approximately $110,055 and $84,585) 87,142 84,585
--------- ---------
Commitments and contingencies (Notes 4 and 6)
Stockholders' equity:
Common stock, $.01 par value; 150,000,000
shares authorized; 34,110,788 and 34,033,910 shares issued;
33,831,113 and 33,754,235 outstanding, respectively 341 340
Notes receivable from stockholders (839) (839)
Unearned stock compensation (221) (255)
Additional paid-in capital 225,081 227,304
Accumulated deficit (154,710) (137,130)
Accumulated other comprehensive loss (18) (2)
Treasury stock, 279,675 shares at cost (318) (318)
--------- ---------
Total stockholders' equity 69,316 89,100
--------- ---------
Total liabilities, mandatorily redeemable convertible preferred stock
and stockholders' equity $ 242,770 $ 246,461
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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Z-Tel Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
THREE MONTHS ENDED
MARCH 31,
2001 2000
---------------------------------
(UNAUDITED)
Revenues $ 75,044 $ 13,976
------------ ------------
Operating expenses:
Network operations 43,302 9,830
Sales and marketing 12,761 6,819
Research and development 2,367 1,299
General and administrative 30,203 10,461
Depreciation and amortization 6,041 2,088
------------ ------------
Total operating expenses 94,674 30,497
------------ ------------
Operating loss (19,630) (16,521)
------------ ------------
Nonoperating income (expense):
Interest and other income 2,918 1,286
Interest and other expense (868) (241)
------------ ------------
Total nonoperating income 2,050 1,045
------------ ------------
Net loss (17,580) (15,476)
Less mandatorily redeemable convertible
preferred stock dividends and accretion (2,544) --
------------ ------------
Net loss attributable to common stockholders $ (20,124) $ (15,476)
============ ============
Weighted average common shares outstanding 33,790,809 31,940,556
============ ============
Basic and diluted net loss per share $ (.60) $ (.48)
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
COMMON STOCK NOTES
----------------- RECEIVABLE UNEARNED ADDITIONAL OTHER
PAR FROM STOCK PAID-IN ACCUMULATED COMPREHENSIVE
SHARES VALUE STOCKHOLDERS COMPENSATION CAPITAL DEFICIT LOSS
---------- ----- ------------ ------------ ---------- ----------- -------------
Balance, December 31, 2000 33,754,235 340 (839) (255) 227,304 (137,130) (2)
Issuance of common stock for exercise
of stock options 49,378 1 117
Issuance of common stock for the
purchase of software 27,500 -- 155
Vesting of stock options granted below
intrinsic value 34
Accelerated vesting of stock options 49
Mandatorily redeemable convertible
preferred dividends and stock
accretion (2,544)
Net loss (17,580)
Foreign currency translation adjustment (16)
Comprehensive loss
---------- ----- ------ ------ --------- --------- -----
Balance, March 31, 2001 33,831,113 $ 341 $ (839) $ (221) $ 225,081 $(154,710) $ (18)
========== ===== ====== ====== ========= ========= =====
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
-------- ----------------
Balance, December 31, 2000 (318) 89,100
Issuance of common stock for exercise
of stock options 118
Issuance of common stock for the
purchase of software 155
Vesting of stock options granted below
intrinsic value 34
Accelerated vesting of stock options 49
Mandatorily redeemable convertible
dividends and preferred stock accretion (2,544)
Net loss (17,580)
Foreign currency translation adjustment (16)
---------
Comprehensive loss (17,596)
------ ---------
Balance, March 31, 2001 $ (318) $ 69,316
====== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2001 2000
---------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (17,580) $ (15,476)
--------- ---------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,041 2,088
Provision for bad debts 4,309 652
Expense charged for granting of stock options 83 --
Increase in accounts receivable (7,402) (9,375)
Increase in prepaid expenses and other current assets (628) (840)
Increase in other assets (5,087) (229)
Increase in accounts payable and accrued liabilities 13,077 2,203
Increase in deferred revenue 559 1,128
Other 78 (43)
--------- ---------
Total adjustments 11,030 (4,416)
--------- ---------
Net cash used in operating activities (6,550) (19,892)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note receivable 7 --
Issuance of note receivable (100) --
Purchases of property and equipment (7,460) (9,201)
Purchase of securities -- (700)
--------- ---------
Net cash used in investing activities (7,553) (9,901)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 118 382
Proceeds from notes receivable 366
Payments on long-term debt obligations (1,078) (14,099)
--------- ---------
Net cash used in financing activities (960) (13,351)
--------- ---------
Net decrease in cash and cash equivalents (15,063) (43,144)
Cash and cash equivalents, beginning of period 46,650 101,657
--------- ---------
Cash and cash equivalents, end of period $ 31,587 $ 58,513
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. 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. and Subsidiaries.
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, the
Internet and certain personal digital assistants. Z-Tel offers its
Z-Line Home Edition service, at least on an initial test basis, in
nineteen states. Z-Tel also provides long-distance telecommunications
services to customers nationally.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and are in the
form prescribed by the Securities and Exchange Commission in
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. The interim unaudited financial statements should
be read in conjunction with the audited financial statements of the
Company as of and for the year ended December 31, 2000, 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, 2001
are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated.
NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Account Standard ("SFAS") No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" will be applied prospectively for transfers of financial
assets occurring after March 31, 2001. The SFAS replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 140 revises the standards for
accounting for securitizations and other
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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS No. 125's provisions
without reconsideration.
SFAS No. 140 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes
the financial and service assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. Management is addressing the impact that adoption will have
on the Company's financial position and results of operations.
3. ACCOUNTS RECEIVABLE AGREEMENT
In July 2000, the Company entered into an accounts receivable agreement
with RFC Capital Corporation, a division of Textron, Inc. ("RFC"),
providing for the sale of certain of the Company's accounts receivable
to RFC. RFC has agreed to purchase up to $25.0 million of the Company's
accounts receivable, at any given time, with provisions for a
commitment of up to $50.0 million, at any given time, subject to
successful syndication of the receivable program by RFC.
In connection with the accounts receivable agreement described above,
the Company sold approximately $31.5 million of receivables in the
first quarter of 2001. Cash received from the sale was approximately
$20.8 million and is included in cash flows from operating activities.
At March 31, 2001, a net amount receivable relating to the sale of
approximately $10.7 million is included in accounts receivable and the
costs related to the agreement of approximately $0.1 million are
included in interest and other expense.
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 the invoicing of billings and access
charges received from certain IXCs and ILECs 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, 2001 the disputed
amount calculated was approximately $12.4 million.
5. COMPUTATION OF NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss attributable
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per share assumes the
exercise of common stock equivalents for which market price exceeds
exercise price, less shares assumed purchased by the Company with
related proceeds. Incremental shares of common stock equivalents are
not included in the calculation
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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
of net loss per share as the inclusion of such equivalents would be
anti-dilutive; therefore, for each of the periods presented basic and
diluted net loss per share are the same.
Net loss per share is calculated as follows:
THREE MONTHS ENDED
MARCH 31,
2001 2000
------------ ------------
BASIC AND DILUTED NET LOSS PER SHARE:
Net loss attributable to common stockholders:
Net loss $ (17,580) $ (15,476)
Less mandatorily redeemable convertible
preferred stock dividends and accretion (2,544) --
------------ ------------
Net loss attributable to common stockholders $ (20,124) $ (15,476)
============ ============
Weighted average common shares outstanding 33,790,809 31,940,556
============ ============
Basic and diluted net loss per share $ (0.60) $ (0.48)
============ ============
For each of the periods presented, basic and diluted net loss per share
are the same. Unexercised options to purchase 8,144,400 and 7,180,530
shares of common stock, unexercised warrants to purchase 5,297,767 and
637,332 shares of common stock, mandatorily redeemable convertible
preferred stock convertible into 9,043,481 and 0 shares of common stock
for the three months ended March 31, 2001 and 2000, respectively, which
could potentially dilute basic earnings per share in the future, were
not included in the computation of diluted net loss per share.
6. LEGAL AND REGULATORY PROCEEDINGS
On March 15, 2001, the Company filed a lawsuit against AT&T Corp.
(AT&T). The Company alleged that AT&T has received originating and
terminating access service from the Company and has unlawfully withheld
access charges for such services. The Company currently seeks damages
from AT&T in the amount of approximately $7.9 million, and has alleged
the Company is entitled to late fees and interest on such amount and
any future amounts, consequential damages, punitive damages, attorney's
fees and costs. The Company also has asked the Court to enter an order
directing AT&T to pay access charges to the Company in the future if
AT&T continues to use its service. AT&T has filed an answer and
counterclaims and has moved to stay the proceedings. The Company has
filed a motion to dismiss AT&T's counterclaims and has opposed the
motion to stay. The Court has not ruled on any of the pending motions.
In the ordinary course of business, the Company is involved in legal
proceedings that are generally incidental to its operations. In
addition, from time to time, the Company is the subject of customer
complaints filed with the state utility commissions of the states in
which it operates or the FCC. Most complaints are handled informally.
While there can be no
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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
You should read the following discussion together with the condensed
consolidated financial statements and related notes and other sections of this
Quarterly Report on Form 10-Q. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those projected in the forward-looking statements as a result of
certain factors. Factors that may affect our results of operations include, but
are not limited to, our limited operating history and cumulative losses,
uncertainty of customer demand, rapid expansion, potential software failures and
errors, potential network and interconnection failure, dependence on local
exchange carriers, dependence on third party vendors, dependence on key
personnel, uncertainty of government regulation, legal and regulatory
uncertainties, and competition. We disclaim any obligation to update information
contained in any forward-looking statement. In addition to these factors, other
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 30, 2001.
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
calling, and remote access to long distance calling through our Z-Line Anywhere
access card service, the full functionality of the Z-Line Features and, for an
additional fee, Internet access. We offer Z-Line Home Edition service, at least
on an initial marketing basis, in nineteen states.
We intend to continue to pursue offering Z-Line Home Edition in additional
states as soon as favorable pricing and implementation rules are imposed in
those states. We have also developed other bundled combinations of our services
at varied price points in order to stimulate and expand customer interest in our
services. For example, we have begun to offer, in five states, a lower
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price version of Z-Line Home Edition that includes fewer bundled long distance
minutes and features. Additional long distance minutes and features are being
offered separately for an additional monthly fee. We also have offered to all of
our Z-Line Home Edition subscribers the ability, through our member-to-member
program, to make unlimited long distance telephone calls to other Z-Line Home
Edition subscribers for an additional monthly fee.
Z-Line Anywhere is our access card service that allows a customer to make
long-distance calls using our network from any phone simply by dialing a local
access or toll-free 1-800 number. No change in phone service is required.
Subscribers of Z-Line Anywhere also receive the full functionality of our Z-Line
Features. Z-Line Anywhere customers are billed monthly in arrears, and the
associated revenue is recognized in the month of service. Z-Line Anywhere is
available nationwide, although we are not actively marketing the service.
Touch 1 Long Distance is our (1+) long distance product. Touch 1 Long Distance
is also available nationwide, although we are not actively marketing the
service.
We completed the acquisition of Touch 1 Communications, Inc. ("Touch 1"), on
April 14, 2000. The purchase price of Touch 1 consisted of 1.1 million shares of
our common stock and $9.0 million in cash. The acquisition was accounted for as
a purchase business combination. Touch 1 provides employees in sales,
provisioning, and customer service. This acquisition provided us with the
opportunity to further grow our back-office operations to provide capacity for
market entry into new states.
RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 2001 COMPARED TO QUARTER ENDED
MARCH 31, 2000
REVENUES. Revenues increased by $61.0 million to $75.0 million for the quarter
ended March 31, 2001, compared to $14.0 million for the same quarter in the
prior year. The increase is attributable to average Home Edition subscriber
lines of 360,000 for the quarter ended March 31, 2001, compared to 63,000 for
the same quarter in the prior year. The purchase of Touch 1 provided an
additional increase in revenue of $6.7 million from its existing 1+
long-distance offering for the quarter ended March 31, 2001. The following
tables outline the approximate number of subscriber lines 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 March 31, 2001 March 31, 2000
Z-Line Home Edition 380,000 86,000
Z-Line Anywhere and Touch 1 (1+)
Long Distance Services 234,000 8,100
NETWORK OPERATIONS. Network operations expense increased by $33.5 million to
$43.3 million for the quarter ended March 31, 2001, compared to $9.8 million for
the same quarter in the prior year. Our gross margin increased to 42.3% for the
quarter ended March 31, 2001, compared to 29.7% for the same period in the prior
year. The network operations expense
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primarily consists of fixed and variable transmission expenses for
interconnection agreements with incumbent local exchange carriers (ILECs),
service level agreements with inter-exchange carriers (IXCs), and
transmission services based on tariff arrangements. The increase in network
operation expenses and improved margins is the result of our subscriber growth.
SALES AND MARKETING. Sales and marketing expense increased $6.0 million to $12.8
million for the quarter ended March 31, 2001, compared to $6.8 million for the
same quarter in the prior year. The sales and marketing expense primarily
consists of telemarketing, direct mail, brand awareness advertising, agent
commissions and salaries and benefits paid to employees engaged in sales
for the same quarter in the prior year and marketing activities.
The increase is attributable to an overall increase in sales, marketing, and
advertising activities. We had increased telemarketing in the first quarter of
2001 compared to the same quarter in the prior year because of offering service
to nineteen states in 2001 compared to three states for the same quarter in the
prior year. We increased the use of radio and billboard advertising in 2001,
especially in the states in which we recently introduced service. The radio and
billboard advertising, coupled with commissions from our various agent programs
contributed to the increase in our sales and marketing expense in 2001.
We are intensifying our focus on sales and marketing channels with lower
acquisition costs per subscriber for 2001. We have eliminated direct mail
campaigns that resulted in higher than anticipated acquisition and operating
costs. We also will be reducing our telemarketing hours through the closure of a
call center resulting in approximately 80 telemarketers and 12 support positions
being eliminated. We believe our roll-out of the member-to-member campaign to
all states in which we offer Z-Line Home Edition, coupled with the introduction
of our online sales channel and electronic agent program, should contribute to
lower acquisition costs during the next quarter and throughout 2001. We will
continue to build the overall awareness of our "Z" brand, and pursue alliances
and ventures with other companies.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $1.1
million to $2.4 million for the quarter ended March 31, 2001, compared to $1.3
million for the same quarter 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 increase in research and development is a result of increased employees in
this area at March 31, 2001 compared to the same quarter in 2000.
In accordance with generally accepted accounting principles, we have capitalized
$1.3 and $0.4 million of salary and related costs for research and development
relating to the development of internal use software, rather than expensing
these costs in research and development, at March 31, 2001 and 2000,
respectively.
We partnered with an outside consulting firm to establish an electronic gateway
to increase our provisioning and overall order processing efficiency. In
addition to assisting with improving operations, our
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research and development team is working to develop speech recognition and other
new service offerings to provide consumers with more reasons to become and
remain our customers.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $19.7
million to $30.2 million for the quarter ended March 31, 2001, compared to $10.5
million for the same quarter in the prior year. Increases in employee salaries,
bad debt expense, billing and collection expense, occupancy costs, and
provisioning costs were necessary to support the growth we experienced.
Increases in subscriber lines have created increased support and operating
expense that have contributed to increased general and administrative expense in
2001.
The overall increase in general and administrative costs is a result of our
support of an average of 360,000 subscriber lines in the first quarter 2001
compared to an average of 63,000 subscriber lines for the same quarter in the
prior year. Additional employees for our back-office operation were required
during 2001 to support the nineteen states in which we now provide service. The
reduction in workforce resulting from implementing our electronic gateway during
the first quarter of 2001 contributed to some reduction in overall general and
administrative expense, however, the complete benefits of this reduction will
not be fully recognized until the second quarter of 2001.
The increase in bad debt expense during the first quarter of 2001 resulted from
supporting additional subscribers and a write-off of certain carrier access
related receivables. We continue to evaluate our operations for efficiencies and
the opportunity for any improvements in customer provisioning, billing, and
collection. We are evaluating our employee staffing requirements as they relate
to increased efficiency and expect to see reductions in the next quarter. We
expect our efforts will provide us with efficiencies that will provide an
overall reduced general and administrative cost per subscriber.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$3.9 million to $6.0 million for the quarter ended March 31, 2001, compared to
$2.1 million for the same quarter in the prior year. The increase in
depreciation and amortization is primarily due to higher levels of fixed assets
and capitalized software, as well as intangible assets related to our purchase
of Touch 1 in April 2000.
INTEREST AND OTHER INCOME. Interest and other income increased $1.6 million to
$2.9 million for the quarter ended March 31, 2001, compared to $1.3 million for
the same quarter in the prior year. Interest and other income includes late fees
from subscriber and carrier receivables, interest earned from our cash balances
invested in interest bearing accounts and any gains from the sale of investments
or securities. The increase was primarily due to $2.5 million in late fees
charged on customer and carrier access related receivables. This increase was
partially offset by the lower interest earned on cash investments as a result of
lower cash balances for the quarter ended March 31, 2001 compared to the first
quarter of 2000.
INTEREST AND OTHER EXPENSE. Interest and other expense increased $0.7 million to
$0.9 million for the quarter ended March 31, 2001, compared to $0.2 million for
the same quarter in the prior year. Our interest expense is a result of the
interest charged on our capital lease and
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other debt obligations. The increase in 2001 is from the assumption of debt from
the Touch 1 acquisition and certain expenses associated with the sale of our
accounts receivable.
INCOME TAX EXPENSE. No provision or benefit for federal or state income taxes
has been recorded due to the recording of a full valuation allowance against the
net deferred tax asset for the quarters ended March 31, 2001 and 2000.
NET LOSS. Our net loss increased $2.1 million to $17.6 million for the quarter
ended March 31, 2001, compared to $15.5 million in the same quarter in the prior
year. This increase was due primarily to the increases in expenses described
above.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss attributable to
common stockholders increased $4.6 million to $20.1 million for the quarter
ended March 31, 2001, compared to $15.5 million for the same quarter in the
prior year. This increase was due primarily to the increases in expenses
described above and the issuance of the Series D and E Preferred Stock. In
conjunction with the Series D and E Preferred we recorded $2.5 million of
non-cash charges relating to cumulative dividends and preferred stock accretion
during the first quarter of 2001.
EBITDA. Many securities analysts use the measure of earnings before deducting
interest, taxes, depreciation and amortization, also commonly referred to as
"EBITDA," as a way of evaluating our financial performance. EBITDA is not a
measure under generally accepted accounting principles, is not meant to be a
replacement for generally accepted accounting principles and should not be
considered an alternative to net income as a measure of performance or to cash
flows as a measure of liquidity. We have included EBITDA data because it is a
measure commonly used in the telecommunications industry and is presented to
assist in understanding our operating results. Our negative EBITDA decreased
$0.8 million to $13.6 million for the quarter ended March 31, 2001, compared to
$14.4 million for the first quarter of 2000. We expect to achieve positive
EBITDA on a monthly basis sometime during the second half of 2001. We believe
the attainment of positive EBITDA will primarily arise from our strategic growth
which is focused on improved operating efficiencies and lowered subscriber
acquisition costs.
LIQUIDITY AND CAPITAL RESOURCES The competitive local telecommunications service
business is traditionally considered to be a capital intensive business owing to
the significant investments required in fiber optic communication networks and
the co-location of switches and transmission equipment in incumbent local
exchange carriers' central offices. Although we will continue our capital
expenditures, we do not expect the growth of our business will require the
levels of capital investment in fiber optics and switches that existed in
historical telecommunications facilities-based 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 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. At March 31, 2001, we had an accumulated deficit of
$154.7 million and $31.6 million in cash and cash equivalents. We have
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funded our expenditures primarily through operating revenues, private securities
offerings, a sale-leaseback credit facility, a receivables sale agreement, and
an initial public offering that raised net proceeds of $109.1 million.
On February 14, 2000, we paid $14.4 million to extinguish the outstanding CMB
Capital, LLC capital lease obligation and purchase the related assets. This was
the repayment of transactions involving the sale-leaseback of various furniture
and equipment payable over four years from the date of the transactions. This
transaction accounted for a $1.6 million increase in the carrying value of our
assets, resulting from the payments made to terminate the lease and the carrying
value of our capital lease obligation. This $1.6 million was added to the value
of the assets purchased and is depreciated over the estimated remaining useful
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.
Net cash used in operating activities improved by $13.3 million to $6.6 million
for the quarter ended March 31, 2001 compared to $19.9 million for the same
quarter in the prior year. The improvement resulted from increased cash
collections on our receivables and slower payment of accounts payable.
Included in our net cash used in operating activities for the quarter ended
March 31, 2001 was the sale of $31.5 million of receivables for proceeds of
$20.8 million. At March 31, 2001, a net amount receivable relating to the sale
of $10.7 million is included in accounts receivable and the cost relating to the
agreement of $0.1 million are included in interest and other expense.
We had payments on long-term debt and capital lease obligations totaling $1.1
million for the quarter ended March 31, 2001. These payments primarily relate to
the debt we assumed in the Touch 1 acquisition. Our payments for the first
quarter of 2001 are substantially less than the $14.4 million paid for the same
quarter in the prior year due to the extinguishment of our sale-leaseback
facility.
Our capital expenditures for the quarter ended March 31, 2001 were $7.5 million
compared to $9.2 in the same quarter of the prior year. During 2000 our efforts
were directed toward enhancing our network and billing infrastructure. Our
focus in 2001 has been to conserve capital and focus on profitability.
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. As growth
dictates, we expect to make strategic investments in technology and our network
architecture in the future.
Our debt is primarily fixed rate related party that is primarily payable in
monthly installments through 2004. We paid a $3.0 million balloon payment due on
a loan in May 2001. We will make investments in sales and marketing to build our
overall "Z" brand and build awareness about
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our member-to-member service and lower priced service offerings in an attempt to
attract new customers. We will focus on what we expect to be more efficient
marketing channels such as our on-line agent program and expect to lower
acquisition costs per subscriber.
In the quarter ended March 31, 2001 we eliminated approximately 20% of our
workforce through a formal reduction in force, a hiring freeze, and normal
attrition. During the second quarter of 2001, we will examine the possibility of
further reductions, consistent with our goals of slower growth and our strategic
focus on profitability. We expect the above and other factors to result in the
achievement of positive EBITDA on a monthly basis during the second half of 2001
and positive cash flow from operations sometime thereafter. We believe that we
have sufficient funding to execute our current business plan; however, any
acceleration or change to the business plan may require additional equity or
debt financing which may not be available on attractive terms, or at all, or may
be dilutive.
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 and our long-term
debt obligations would not be significantly impacted by either a 100 basis point
increase or decrease in interest rates due mainly to the short-term or fixed
nature of these types of items.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
1. Case Number 1:01CV00551; Z-Tel Communications, Inc. v AT&T Corp.; in
the United States District Court for the District of Columbia.
On March 15, 2001, we filed the captioned suit. In that suit, we have
alleged that AT&T has received originating and terminating access service from
us and has unlawfully withheld access charges for such services from us. We seek
damages from AT&T in the current amount of approximately $7.9 million, and have
alleged we are entitled to late fees and interest on such amount and any future
amounts, consequential damages, punitive damages, attorney's fees and costs. We
also have asked the Court to enter an order directing AT&T to pay access charges
to us in the future if AT&T continues to use our services. AT&T has filed an
answer and counterclaims and has moved to stay the proceedings. We have filed a
motion to dismiss AT&T's counterclaims and have opposed the motion to stay. The
Court has not ruled on any of the pending motions.
2. In March 2001, Z-Tel management informed John Hutchens, our senior vice
president-chief financial officer, that we had commenced a search that could
result in his possible replacement as chief financial officer. Mr. Hutchens and
the company have been engaged since that time in discussions regarding severance
arrangements. Pending the outcome of these negotiations, Mr. Hutchens remains an
employee of the company, but is no longer performing the duties of chief
financial officer. The company is currently seeking a chief financial officer
and, in the interim, Dumas Garrett is serving as acting chief financial officer
of the company.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
RECENT SALES OF UNREGISTERED SECURITIES
On February 21, 2001, we issued 27,500 shares of our common stock,
$0.01 par value (the "Common Stock") to DiPub, Inc. ("DiPub") in connection with
our purchase of software from DiPub. We believe that this transaction is exempt
from registration based on Section 4(2) of the Securities Act of 1933 as a
transaction by an issuer not involving a public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed as part of this report:
Exhibit
Number Description
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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.(A)
3.1 Amended and Restated Certificate of Incorporation of Z-Tel, as
amended(B)
3.2 Amended and Restated Bylaws of Z-Tel(C)
4.1 Form of Common Stock Certificate(C)
4.2 See Exhibits 3.1 and 3.2 of this Form 10-Q for provisions of the
Amended and Restated Certificate of Incorporation, as amended,
and the Bylaws of Z-Tel defining rights of security holders
4.3 Stock Purchase Agreement, dated July 6, 2000, by and between the
Registrant and the various purchasers of the Registrant's Series
D Convertible Preferred Stock(D)
4.4 Certificate of Designations, Preferences and Relative Rights,
Qualifications, Limitations and Restrictions relating to the
Registrant's Series D Convertible Preferred Stock(D)
4.5 Form of Registration Rights Agreement by and between the
Registrant and each of the purchasers of the Registrant's Series
D Convertible Preferred Stock(D)
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4.6 Form of Warrant for the purchase of shares of common stock of the
Registrant by each of the purchasers of the Registrant's Series D
Convertible Preferred Stock(D)
4.7 Stock and Warrant Purchase Agreement, dated October 19, 2000, by
and among the Registrant and The 1818 Fund III, L.P.(E)
4.8 Certificate of Designation of 8% Convertible Preferred Stock,
Series E, Setting Forth the Powers, Preferences, Rights,
Qualifications, Limitations and Restrictions of Such Series of
Preferred Stock(E)
4.9 Registration Rights Agreement between and among the Registrant
and The 1818 Fund III, L.P.(E)
4.10 Warrant for the purchase of shares of common stock of the
Registrant by The 1818 Fund III, L.P.(E)
4.11 Certificate of Designation of Series F Junior Participating
Preferred Stock(H)
4.12 Rights Agreement dated as of February 19, 2001 between Z-Tel
Technologies, Inc. and American Stock Transfer & Trust Company,
as Rights Agent(F)
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(C)
10.1.2 Employment Agreement dated July 1998 between the Company and D.
Gregory Smith(C)
10.1.3 Employment Agreement dated September 1999 between the Company and
John Hutchens(C)
10.1.4 Employment Agreement dated August 1998 between the Company and
Charles W. McDonough(C)
10.1.5 Employment Agreement dated August 1998 between the Company and J.
Bryan Bunting(C)
10.1.6 Employment Agreement dated July 1998 between the Company and
James A. Kitchen(C)
10.1.7 Investment Agreement dated March 15, 1999 between the Company and
CMB Capital LLC(C)
10.2.1 1998 Equity Participation Plan(C)
10.2.2 2000 Equity Participation Plan(G)
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10.3 Form of Employment Agreement for certain key Touch 1 employees,
including James F. Corman, President of Touch 1(A)
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.(D)
10.5 Form of Indemnification Agreement for executive officers and
directors of the Company(H)
10.6 Loan and Guaranty Agreement dated January 11, 2001 between the
Company and James A. Kitchen(H)
10.7 Secured Promissory Note dated January 11, 2001 delivered by James
A. Kitchen to the Company(H)
10.8 Pledge and Security Agreement dated January 11, 2001 between
James A. Kitchen and the Company(H)
10.9 Promissory Note, dated September 10, 1999, between Touch 1
Communications, Inc. and Corman Elegre Capital(H)
10.10 Promissory Note, dated May 11, 1999, between Touch 1
Communications, Inc. and Corman Elegre Capital(H)
10.11 Promissory Note, dated September 10, 1999, from Touch 1
Communications, Inc. and William F. Corman (First Revocable
Trust)(H)
10.12 Promissory Note, dated September 10, 1999, from Touch 1
Communications, Inc. and James F. Corman(H)
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(A) Incorporated by reference to the correspondingly numbered exhibit
to the Registrant's Current Report on Form 8-K filed April 28,
2000.
(B) Incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8, filed on July 18, 2000.
(C) 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.
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(D) Incorporated by reference to the correspondingly numbered
exhibits to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ending June 30, 2000, filed on August 14,
2000.
(E) Incorporated by reference to the correspondingly numbered
exhibits to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ending September 30, 2000, filed on November
14, 2000.
(F) Incorporated by reference to Exhibit 4.1 to the Registrant's Form
8-A Registration Statement filed February 21, 2001.
(G) Incorporated by reference to Appendix B to the Registrant's
Preliminary Proxy Statement filed on April 14, 2000.
(H) Incorporated by reference to the correspondingly numbered
exhibits to the Registrant's Annual Report on Form 10-K for the
annual period ending December 31, 2000, filed on March 30, 2001.
(b) Reports on Form 8-K.
During the period covered by this report, we filed one Current Report
on Form 8-K on February 21, 2001, which Report reported our adoption of a
Stockholder Rights Plan pursuant to a Rights Agreement and declared a dividend
of Preferred Stock Purchase Rights in connection therewith.
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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.
Z-TEL TECHNOLOGIES, INC.
(Registrant)
Date: May 14, 2001 By: /s/ N. Dumas Garrett
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N. Dumas Garrett
Senior Vice President--Finance and
Administration
(Authorized officer of Registrant
and principal financial officer)
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