SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| (Mark One) | ||
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 2002 | |
| OR | ||
| [ ] |
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 (State or other jurisdiction of incorporation or organization) |
59-3501119 (I.R.S. Employer Identification Number) |
601 SOUTH HARBOUR ISLAND BOULEVARD, SUITE 220
TAMPA, FLORIDA 33602
(813) 273-6261
(Address, including zip code, and
telephone number including area code, of
Registrant’s principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, PAR VALUE $.01 PER SHARE, PREFERRED STOCK PURCHASE RIGHTS
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 [ ]
The number of shares of the Registrant’s Common Stock outstanding as of November 12, 2002 was approximately 35,192,095.
TABLE OF CONTENTS
PART I |
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| Item 1. | Financial Statements | |||||||||||
| Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 | 3 | |||||||||||
| Consolidated
Statements of Operations for the three and nine months ended
September 30, 2002 and 2001 |
4 | |||||||||||
| Consolidated Statement of Changes in Stockholders' Deficit for the nine months ended June 30, 2002 | 5 | |||||||||||
| Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 | 6 | |||||||||||
| Notes to Consolidated Financial Statements | 7 | |||||||||||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||||||||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 25 | ||||||||||
| Item 4. | Controls and Procedures | |||||||||||
PART II |
||||||||||||
| Item 1. | Legal Proceedings | 25 | ||||||||||
| Item 6. | Exhibits, and Reports on Form 8-K | 26 | ||||||||||
Signatures |
29 | |||||||||||
2
Z-Tel Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
| September 30, | December 31, | |||||||||||
| 2002 | 2001 | |||||||||||
| (Unaudited) | ||||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 13,464 | $ | 18,892 | ||||||||
Accounts receivable, net of allowance for doubtful
accounts of $11,215 and $17,064 |
26,538 | 27,042 | ||||||||||
Prepaid expenses and other current assets |
5,300 | 3,961 | ||||||||||
Total current assets |
45,302 | 49,895 | ||||||||||
Property and equipment, net |
52,556 | 56,231 | ||||||||||
Intangible assets, net |
4,573 | 5,945 | ||||||||||
Other assets |
6,829 | 4,666 | ||||||||||
Total assets |
$ | 109,260 | $ | 116,737 | ||||||||
Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Stockholders’ Deficit |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable and accrued liabilities |
$ | 49,965 | $ | 49,622 | ||||||||
Deferred revenue |
9,595 | 5,951 | ||||||||||
Current portion of long-term debt
and capital lease obligations |
5,958 | 6,305 | ||||||||||
Total current liabilities |
65,518 | 61,878 | ||||||||||
Deferred revenue |
5,613 | — | ||||||||||
Long-term debt and capital lease obligations |
5,525 | 9,461 | ||||||||||
Total liabilities |
76,656 | 71,339 | ||||||||||
Mandatorily redeemable convertible preferred stock, $.01 par value; 50,000,000 shares authorized; 8,855,089 issued and outstanding (aggregate liquidation value of $144,087 and $135,298) |
124,331 | 112,570 | ||||||||||
Stockholders’ deficit: |
||||||||||||
Common stock, $.01 par value; 150,000,000 shares authorized; 35,533,645 and 34,341,855 shares issued; 35,192,095 and 34,000,305 outstanding, respectively |
355 | 343 | ||||||||||
Notes receivable from stockholders |
(1,589 | ) | (1,589 | ) | ||||||||
Unearned stock compensation |
(22 | ) | (122 | ) | ||||||||
Additional paid-in capital |
208,425 | 217,782 | ||||||||||
Accumulated deficit |
(298,508 | ) | (283,198 | ) | ||||||||
Treasury stock, 341,550 shares at cost |
(388 | ) | (388 | ) | ||||||||
Total stockholders’ deficit |
(91,727 | ) | (67,172 | ) | ||||||||
Total
liabilities, mandatorily redeemable convertible preferred stock and
stockholders’ deficit |
$ | 109,260 | $ | 116,737 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Z-Tel Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
Revenues |
$ | 58,715 | $ | 68,569 | $ | 178,208 | $ | 216,755 | ||||||||||
Operating expenses: |
||||||||||||||||||
Network operations |
23,799 | 38,279 | 69,863 | 123,299 | ||||||||||||||
Sales and marketing |
2,334 | 3,885 | 9,384 | 25,519 | ||||||||||||||
General and administrative |
31,540 | 33,339 | 92,164 | 130,661 | ||||||||||||||
Asset impairment charge |
— | — | 1,129 | 59,194 | ||||||||||||||
Wholesale development costs |
— | — | 1,018 | — | ||||||||||||||
Restructuring charge |
— | — | 1,861 | — | ||||||||||||||
Depreciation and amortization |
6,169 | 5,279 | 17,751 | 17,803 | ||||||||||||||
Total operating expenses |
63,842 | 80,782 | 193,170 | 356,476 | ||||||||||||||
Operating loss |
(5,127 | ) | (12,213 | ) | (14,962 | ) | (139,721 | ) | ||||||||||
Nonoperating income (loss): |
||||||||||||||||||
Interest and other income |
1,179 | 1,531 | 2,663 | 5,801 | ||||||||||||||
Interest and other expense |
(1,014 | ) | (1,173 | ) | (3,011 | ) | (3,258 | ) | ||||||||||
Total nonoperating income (loss) |
165 | 358 | (348 | ) | 2,543 | |||||||||||||
Net loss |
(4,962 | ) | (11,855 | ) | (15,310 | ) | (137,178 | ) | ||||||||||
Less mandatorily redeemable convertible
preferred stock dividends and accretion |
(3,969 | ) | (5,278 | ) | (11,761 | ) | (10,869 | ) | ||||||||||
Less deemed dividend related to beneficial
conversion feature |
(47 | ) | (8,885 | ) | (139 | ) | (8,885 | ) | ||||||||||
Net loss attributable to common stockholders |
$ | (8,978 | ) | $ | (26,018 | ) | $ | (27,210 | ) | $ | (156,932 | ) | ||||||
Weighted average common shares outstanding |
35,191,836 | 33,982,665 | 34,861,229 | 33,885,022 | ||||||||||||||
Basic and diluted net loss per share |
$ | (0.26 | ) | $ | (0.77 | ) | $ | (0.78 | ) | $ | (4.63 | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Z-Tel Technologies, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Deficit and Comprehensive Income
(In thousands, except share data)
(Unaudited)
| Common Stock | Notes Receivable | Unearned | Additional | Total | |||||||||||||||||||||||||||||||
| from | Stock | Paid-In | Accumulated | Treasury | Stockholders' | ||||||||||||||||||||||||||||||
| Shares | Par Value | Stockholders | Compensation | Capital | Deficit | Stock | Deficit | ||||||||||||||||||||||||||||
Balance, December 31, 2001 |
34,000,305 | $ | 343 | $ | (1,589 | ) | $ | (122 | ) | $ | 217,782 | $ | (283,198 | ) | $ | (388 | ) | $ | (67,172 | ) | |||||||||||||||
Issuance of common stock |
1,000,000 | 10 | 2,320 | 2,330 | |||||||||||||||||||||||||||||||
Issuance of common stock for exercise of warrants |
171,429 | 2 | 2 | ||||||||||||||||||||||||||||||||
Issuance of common stock for exercise of options |
361 | — | — | ||||||||||||||||||||||||||||||||
Vesting
of stock options granted below
fair value of stock |
100 | 100 | |||||||||||||||||||||||||||||||||
Accelerated vesting of stock options and issuance of shares |
20,000 | — | 84 | 84 | |||||||||||||||||||||||||||||||
Mandatorily redeemable convertible preferred
stock dividends and accretion |
(11,761 | ) | (11,761 | ) | |||||||||||||||||||||||||||||||
Net loss |
(15,310 | ) | (15,310 | ) | |||||||||||||||||||||||||||||||
Balance, September 30, 2002 |
35,192,095 | $ | 355 | $ | (1,589 | ) | $ | (22 | ) | $ | 208,425 | $ | (298,508 | ) | $ | (388 | ) | $ | (91,727 | ) | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Z-Tel Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2002 | 2001 | ||||||||||
Cash flows from operating activities: |
|||||||||||
Net loss |
$ | (15,310 | ) | $ | (137,178 | ) | |||||
Adjustments to reconcile net loss to net cash used in
operating activities: |
|||||||||||
Depreciation and amortization |
17,751 | 17,803 | |||||||||
Provision for bad debts |
17,929 | 51,033 | |||||||||
Asset impairment charge |
1,129 | 59,194 | |||||||||
Expense charged for granting of stock options |
184 | 149 | |||||||||
Change in operating assets and liabilities: |
|||||||||||
Increase in accounts receivable |
(17,425 | ) | (15,813 | ) | |||||||
Increase in prepaid expenses and other current assets |
(765 | ) | (4,875 | ) | |||||||
Increase in accounts payable and accrued liabilities |
343 | 4,407 | |||||||||
Increase in deferred revenue |
9,257 | (1,332 | ) | ||||||||
Other |
(127 | ) | (283 | ) | |||||||
Total adjustments |
28,276 | 110,283 | |||||||||
Net cash provided by (used in) operating activities |
12,966 | (26,895 | ) | ||||||||
Cash flows from investing activities: |
|||||||||||
Proceeds from note receivable |
590 | 7 | |||||||||
Issuance of note receivable |
(997 | ) | (100 | ) | |||||||
Purchases of property and equipment |
(13,706 | ) | (10,311 | ) | |||||||
Net cash used in investing activities |
(14,113 | ) | (10,404 | ) | |||||||
Cash flows from financing activities: |
|||||||||||
Proceeds
from issuance of mandatorily redeemable
convertible preferred stock |
— | 17,050 | |||||||||
Proceeds from exercise of stock options |
— | 184 | |||||||||
Proceeds from exercise of common stock warrants |
2 | — | |||||||||
Payments on long-term debt and capital lease obligations |
(4,283 | ) | (6,233 | ) | |||||||
Net cash provided by (used in) financing activities |
(4,281 | ) | 11,001 | ||||||||
Net decrease in cash and cash equivalents |
(5,428 | ) | (26,298 | ) | |||||||
Cash and cash equivalents, beginning of period |
18,892 | 46,650 | |||||||||