<PAGE>
As filed with the Securities and Exchange Commission on November 22, 1999
Registration No. 333-89063
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
Z-TEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 4822 59-3501119
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation) Classification Code
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)
--------------
Z-Tel Technologies, Inc.
601 South Harbour Island Boulevard, Suite 220
Tampa, Florida 33602
Attention: D. Gregory Smith
(813) 273-6261
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies of all correspondence to:
Randall C. Bassett, Esq. Mark C. Smith, Esq.
Michelle D. Bergman, Esq. Skadden, Arps, Slate, Meagher & Flom
Latham & Watkins LLP
885 Third Avenue 919 Third Avenue
New York, New York 10022 New York, New York 10022
(212) 906-1200 -------------- (212) 735-3000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this registration
statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Securities to Aggregate Amount of
be Registered Offering Price(1) Registration Fee(2)
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<S> <C> <C>
Common Stock, par value $.01 per share.............. $125,000,000 $34,750
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</TABLE>
(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933 solely
for the purpose of calculating the registration fee.
(2) Previously filed.
--------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 22, 1999
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS , 1999
[LOGO OF Z-TEL]
5,500,000 Shares
Common Stock
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This is an initial public offering of shares of common stock of Z-Tel
Technologies, Inc. We are offering 5.5 million shares in this offering. No
public market currently exists for our common stock.
We anticipate that the initial public offering price will be between $13 and
$15 per share. We have applied for quotation of our common stock on the Nasdaq
National Market under the symbol "ZTEL."
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Investing in our common stock involves risks. See "Risk Factors" on page 6.
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<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price $ $
Underwriting discount and commissions $ $
Proceeds to us $ $
</TABLE>
The underwriters have an option to purchase 825,000 additional shares of common
stock from us at the initial public offering price to cover any over-allotments
of shares at anytime until 30 days after the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
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Joint Book-running Managers
Thomas Weisel Partners LLC
Credit Suisse First Boston
------------
J.C. Bradford & Co. Stephens Inc.
<PAGE>
[Map of United States showing Z-Tel Network]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY....................................................... 1
RISK FACTORS............................................................. 8
USE OF PROCEEDS.......................................................... 19
DIVIDEND POLICY.......................................................... 19
CAPITALIZATION........................................................... 20
DILUTION................................................................. 22
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.......................... 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 24
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
BUSINESS................................................................... 33
MANAGEMENT................................................................. 61
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 68
FINANCING ARRANGEMENT...................................................... 71
PRINCIPAL STOCKHOLDERS..................................................... 72
DESCRIPTION OF CAPITAL STOCK............................................... 74
UNDERWRITING............................................................... 77
LEGAL MATTERS.............................................................. 79
EXPERTS.................................................................... 80
WHERE YOU CAN FIND MORE INFORMATION........................................ 80
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
Z-Tel is an emerging provider of advanced, integrated telecommunications
services primarily to residential and small business customers. We offer local
and long distance telephone services in combination with Internet-based
enhanced communications features. Through our uniquely designed web interface,
our subscribers are able to manage their voice communications using the power
of the Internet and the visual, "point and click" functionality of the personal
computer. Our services are designed to make communications easier and more
efficient.
Our business strategy takes advantage of the rapidly changing
telecommunications regulatory environment. With the passage of the
Telecommunications Act of 1996 along with favorable regulatory and court
decisions, we are able to gain access to the individual components of the
traditional local telephone service provider's networks. Access to these
components, in combination with our proprietary technology and advanced
communications network, enables us to provide cost-effective local and long
distance telephone services with enhanced features.
We currently offer two services, Z-Line Home Edition and Z-Line Community,
both centered around the Z-Line Communications Center. Located at
www.myzline.com, the Z-Line Communications Center combines the convenience of
the telephone with the power of the Internet. Accessible by telephone or the
Internet, the Z-Line Communications Center enables our customers to direct,
retrieve, deliver, compile and otherwise manage their voice communications.
We are a start-up company that began offering telecommunications services
to the public in September 1998 and we have incurred significant losses since
our inception. We intend to invest heavily in marketing and sales and the
continued development of our network infrastructure and technology. As of
September 30, 1999, we had an accumulated deficit of approximately $36.8
million.
Z-Line Home Edition
Z-Line Home Edition packages low-priced local and long distance telephone
services with our enhanced communication features and optional Internet access.
For example, we currently offer the following package in New York for $49.99
per month:
Services Features
. retain existing phone . web command and . multiple number
number control "find-me" service
. unlimited local calling . voice mail . group messaging
. 200 minutes of long . caller . user-defined
distance identification communities
. Z-Line Communications . call forwarding . one button call
Center . 3-way calling return
. optional Internet access . call waiting
for $17.95/month
1
<PAGE>
We began selling Z-Line Home Edition in New York City and Long Island in
late June 1999. In November 1999, we began offering our Z-Line Home Edition
service in the remainder of New York state that is served by Bell Atlantic. As
of November 17, 1999, we had approximately 21,250 customer lines in service and
approximately 10,500 orders that are in the process of being provisioned. We
expect to offer our Z-Line Home Edition service in Texas in December 1999, and
in Pennsylvania within the next twelve months. We will likely offer different
pricing packages as we roll-out our Z-Line Home Edition service to other
states.
Z-Line Community
We offer our Z-Line Community service primarily to sponsored communities
such as colleges, civic organizations and businesses requiring enhanced, cost-
effective communication services. Z-Line Community customers receive access to
our long distance telephone service and our Z-Line Communications Center
without changing their existing local or long distance telephone company. Z-
Line Community members generate revenue for us, and usually their sponsors,
when members use the Z-Tel network to make long distance calls. More important,
we expect that Z-Line Community members will be a source of Z-Line Home Edition
customers as members become familiar with our services and Z-Line Home Edition
becomes available in their markets.
As an example of an application of Z-Line Community, we have agreed to
provide Z-Line Community service to 31 colleges across the U.S., representing
approximately one million students, faculty and administrators. These colleges
expect to use Z-Line Community to simultaneously deliver voice mail messages to
their widely dispersed students, including personalized information such as
financial aid and class schedule updates. In addition, using the Z-Tel network,
students, faculty and administrators can set up their own sub-communities based
on student groups or other affiliations to disseminate information.
Regulatory Environment and Market Opportunity
The Telecommunications Act of 1996 requires traditional local telephone
companies nationwide to provide competitive telephone companies access to the
individual components of their networks. The principal advantage of access to
these network components is that competing local telephone companies like Z-Tel
are allowed to provide local telephone service without significant investments
in switching or local loop facilities and without requiring customers to change
their telephone numbers. In addition, the traditional local telephone companies
must provide these network components at favorable prices set by the state.
The initial states to adopt favorable prices for the complete platform of
the individual network components are New York, Pennsylvania and Texas.
According to the FCC, these states had over 19.6 million residential users and
1.4 million single line business users, with a total local and long distance
market that exceeded $34.1 billion annually at the end of
2
<PAGE>
1997. In addition, we believe that Maryland, Massachusetts, Vermont and New
Jersey, with another 8.9 million residential users and 449,000 single line
business users and a total local and long distance market of $16.4 billion, are
in the process of adopting favorable pricing for the complete network platform
that will permit us to cost-effectively implement our strategy.
Z-Tel Business Strategy
Our goal is to become the leading provider of integrated, web-enabled,
enhanced communications services to residential and small business customers.
In order to achieve this goal, we are focusing our resources on the following
key strategies:
. rapidly penetrate residential and small business markets in states with
regulations that have favorable pricing for individual telecommunications
network components;
. offer attractive bundled pricing for our suite of integrated services;
. expand Z-Line Community membership;
. acquire and maintain subscribers by providing integrated, Internet-based,
enhanced services;
. pursue an aggressive marketing campaign; and
. maintain state-of-the-art technology and an advanced communications
network.
Through our marketing and expansion efforts, we intend to raise consumer
awareness so that consumers ask the question: "Why have a phone line when you
can have a Z-Line?"
3
<PAGE>
The Offering
Common stock offered by us..........
5,500,000 shares
Common stock outstanding after the
offering..........................
30,454,158 shares
Use of proceeds.....................
We will receive net proceeds from this
offering of approximately $70.6 million,
assuming a $14 offering price. We intend
to use the proceeds for purchase and
installation of network equipment,
continued development of our software
applications, increased sales and
marketing expenditures and working
capital and general corporate purposes.
Proposed Nasdaq National Market
symbol............................
ZTEL
Common stock outstanding after this offering excludes:
. 5,530,257 shares of common stock issuable upon exercise of options
outstanding as of September 30, 1999 at a weighted average exercise price
of $3.17 per share.
. 521,832 shares of common stock issuable at $3.37 per share upon exercise
of outstanding warrants.
. 115,500 shares of common stock issued at $7.27 per share under a warrant
granted subsequent to September 30, 1999 in connection with the amendment
to the CMB leasing facility.
. 862,070 shares of common stock issuable upon exercise of options granted
to employees subsequent to September 30, 1999 at a weighted average
exercise price of $6.18 per share.
About this Prospectus
. You should read this summary together with the more detailed information
and financial statements and the related notes included elsewhere in this
prospectus.
. All references in this prospectus relating to the number of shares of our
common stock and options reflect our 11-for-10 stock split effected on
November 19, 1999.
. The information in this prospectus gives effect to the conversion of all
outstanding shares of preferred stock on a 11-for-10 basis as if our
common stock had split at the time of the issuance of such preferred
stock into shares of common stock unless otherwise indicated.
. Unless otherwise specifically stated, the information in this prospectus
does not take into account the possible issuance of additional shares of
common stock to the underwriters to cover over-allotments.
----------------
4
<PAGE>
We were incorporated in Delaware in January 1998. Our principal executive
offices are located at Knight's Point, 601 South Harbour Island Boulevard,
Suite 220, Tampa, Florida 33602. Our Z-Line number is (813) 273-6261. Our web
sites are located at www.z-tel.com and www.myzline.com. The information on our
web sites is not part of this prospectus.
Z-TEL is a trademark of Z-Tel Technologies, Inc., and a trademark
application for federal registration of the mark is currently pending in the
U.S. Patent and Trademark Office. This prospectus also includes trademarks of
companies other than Z-Tel.
5
<PAGE>
Summary Historical Financial Data
You should read the following Summary Historical Financial Data for Z-Tel
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and notes
thereto included elsewhere in this prospectus.
We have adjusted our balance sheet data to reflect:
. the sale by us in October 1999 of 2,794,800 shares (convertible into
3,074,280 common shares after the 11-for-10 stock split) of our Series C
mandatorily convertible redeemable preferred stock for net proceeds of
approximately $15 million; and
. the conversion of all shares of Series A, B and C mandatorily convertible
redeemable preferred stock to shares of our common stock; and
. the payment of approximately $1,164,000 of Series A and B mandatorily
convertible redeemable preferred stock cumulative dividends at September
30, 1999.
<TABLE>
<CAPTION>
Period January 15, 1998
(date of inception)
through
--------------------------- Nine Months
September 30, Ended
December 31, 1998 September 30,
1998 (Unaudited) 1999
------------ ------------- -------------
<S> <C> <C> <C>
Consolidated Statements of Operations
Data:
Revenue.............................. $ 140,000 $ -- $ 2,170,000
------------ ----------- ------------
Operating expenses:
Network operations................. 382,000 43,000 4,588,000
Sales and marketing................ 2,201,000 489,000 3,620,000
Research and development........... 4,728,000 2,735,000 3,469,000
General and administrative......... 4,718,000 3,036,000 8,924,000
Depreciation and amortization...... 1,283,000 634,000 2,749,000
------------ ----------- ------------
Total operating expenses......... 13,312,000 6,937,000 23,350,000
------------ ----------- ------------
Operating loss................... (13,172,000) (6,937,000) (21,180,000)
------------ ----------- ------------
Nonoperating income (expense):
Interest income.................... 228,000 64,000 319,000
Interest expense................... (178,000) (298,000) (2,786,000)
------------ ----------- ------------
Total nonoperating income
(expense)....................... 50,000 (234,000) (2,467,000)
------------ ----------- ------------
Net loss......................... (13,122,000) (7,171,000) (23,647,000)
Less mandatorily convertible
redeemable preferred stock
dividends....................... (190,000) -- (974,000)
------------ ----------- ------------
Net loss attributable to common
stockholders...................... $(13,312,000) $(7,171,000) $(24,621,000)
============ =========== ============
Weighted average shares outstanding.. 6,554,699 3,753,191 14,383,338
============ =========== ============
Basic and diluted net loss per common
share............................... $ (2.03) $ (1.91) $ (1.71)
============ =========== ============
Shares used in pro forma basic and
diluted net earnings/(loss) per
share calculation (unaudited)....... 10,992,102 21,786,116
============ ============
Pro forma basic and diluted net
earnings/(loss) per share
(unaudited)......................... $ (1.19) $ (1.09)
============ ============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------
As Adjusted
Actual (Unaudited)
------------ -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................ $ 2,682,000 $16,518,000
Working capital (deficit)............................ (8,096,000) 5,740,000
Total assets......................................... 24,958,000 38,794,000
Total debt........................................... 12,709,000 12,709,000
Mandatorily convertible redeemable preferred stock... 26,128,000 --
Total stockholders' equity (deficit)................. (23,045,000) 16,919,000
</TABLE>
7
<PAGE>
RISK FACTORS
Risks related to our financial condition and our business
We were formed in January 1998 and it is difficult to evaluate us because of
our limited operating history.
We were formed in January 1998 and began offering telecommunications
services to the public in September 1998. We have had fewer than 14 months of
actual marketing, sales and operational results.
In addition, in late June 1999, we began marketing our Z-Line Home Edition
service in New York City and Long Island. Our limited operating history and
results make it very difficult to evaluate or predict our ability to, among
other things, retain customers, generate and sustain a revenue base sufficient
to cover our operating expenses, and to achieve profitability. As a result, we
believe that our historical financial information is of little or no value in
projecting our future results, making it even more difficult to evaluate our
business and prospects.
The demand for Z-Line Home Edition and Z-Line Community is highly uncertain.
We initially began to market our products and services in September 1998.
In late June 1999, we focused our product offering on sales of our Z-Line Home
Edition service. Our products and services represent an emerging sector of the
telecommunications industry, and the demand for our services and our ability to
retain customers over time are highly uncertain. Consumer acceptance of our
products and services could be limited by:
. the willingness of customers to accept Z-Tel as an alternative provider
of local and long distance telephone services and of other enhanced,
integrated services;
. the presence and attractiveness of other enhanced telecommunications
service offerings in our target markets;
. the perception of complexity in using our services;
. the reliability of our technology and network infrastructure; and
. the quality of our customer service.
We have determined that substantial marketing effort, time and expense are
required to stimulate initial demand for our products and services. In
addition, we have incurred and will continue to incur substantial operating
expenses, have made, and will continue to make, significant capital investments
and have entered or plan to enter into real property leases, equipment supply
contracts and service arrangements, in each case based upon our expectations as
to the market acceptance of our products and services. We cannot be certain
that substantial markets will develop for our products and services, or, if
such markets develop, that we will be able to attract and maintain a sufficient
revenue-generating customer base to cover our operating expenses. Lack of
acceptance of our services in our target markets would materially and adversely
affect the commercial viability of our business, and as a consequence, the
value of your investment.
8
<PAGE>
In addition, to maintain our competitive posture, we must be in a position
to reduce the prices for our services in order to meet reductions in long
distance rates, if any, offered by others. We cannot be sure that we will be
able to match the reductions made by our competitors and, if we do, such
reductions could have an adverse effect on our business, operating results and
financial condition.
Our product and service offerings are in an early stage and as a result, we
expect to continue to incur substantial losses and experience negative cash
flow.
Our product and service offerings are at an early stage, and we cannot be
sure that sales of our products or services will generate revenues sufficient
to cover our operating expenses. Even if our products and services prove to be
commercially successful, our operations may not become profitable. Starting up
our company and developing our communications technology required substantial
capital and other expenditures and further development of our business will
require significant additional expenditures.
Since our inception in January 1998 through September 30, 1999, we have
incurred losses of $36.8 million. We expect to continue to have significant
operating losses and retained losses and will record significant negative net
cash flow before financing for the foreseeable future.
Our business strategy depends on a continued availability of unbundled network
components and on existing and additional states maintaining and adopting
favorable pricing rules for unbundled network components.
The public utilities commissions of the states of New York, Pennsylvania
and Texas have adopted favorable pricing rules for unbundled network
components. As a result of these regulatory initiatives, Bell Atlantic in New
York and Pennsylvania, and SBC Communications Inc. in Texas, are required to
offer to competitive local exchange carriers such as Z-Tel, at forward-looking,
long-run incremental cost-based prices, the facilities and equipment and the
features, functions and capabilities of their local exchange network on an
unbundled basis. We have recently commenced operations in New York state using
unbundled network components. However, given that the FCC order permitting
unbundled network components is subject to further appeal, we cannot be certain
that unbundled network components will continue to be available in their
present form in New York or other states or that these other states will ever
adopt favorable unbundled network components pricing. Further regulatory
changes may adversely affect unbundled network components or our Z-Line Home
Edition strategy. Our business model is based, in part, on availability and
favorable pricing of the unbundled network components, and any adverse changes
in the unbundled network elements platform regulatory or competitive
environment could have a material adverse effect on our business, financial
condition and results of operations.
Our strategy is to expand rapidly after we complete the offering and managing
our growth may be difficult.
We have rapidly expanded our operations since we were formed. After we
complete our offering, we expect to grow our business rapidly in terms of the
number of services we offer,
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<PAGE>
the number of customers we serve and the regions we serve. We cannot assure you
that we will successfully manage our efforts to:
. expand, train, manage and retain our employee base;
. expand and improve our customer service and support systems and improve
the performance of billing systems;
. introduce and market new products and services in addition to Z-Line
Home Edition and Z-Line Community;
. enhance and upgrade the features of our software;
. capitalize on new opportunities in the competitive marketplace; and
. control our expenses.
The strains posed by these demands are magnified by the start-up nature of
our operations. If we cannot manage our growth effectively, our results of
operations could be adversely affected.
As of September 30, 1999, we had 26 employees in sales and marketing, 20 of
whom have been employed by us for less than one year. In order to increase our
direct sales effort, we will need to significantly increase the size of our
internal sales and marketing staff and will be required to obtain personnel who
have experience in marketing services like ours. We cannot be certain that we
will be able to identify and attract sufficient numbers of qualified personnel
or that our sales and marketing organizations will successfully compete against
the more extensive and well-funded sales and marketing organizations of many of
our current and future competitors. Our inability to attract, recruit and
retain sufficient or additional qualified personnel could have a material
adverse effect on us.
Our success depends on our ability to develop, expand and adapt our network
infrastructure.
We must continue to develop, expand and adapt our network infrastructure as
the number of our users and the amount of information they wish to access and
transfer increases and as our customers' demands change. We cannot be sure that
we will be able to develop, expand or adapt the network infrastructure to meet
additional demand or our customers' changing requirements on a timely basis, at
a commercially reasonable cost, or at all. If we fail to expand our network
infrastructure on a timely basis or adapt it to either changing customer
requirements or evolving industry standards, these failures could cause our
business to perform poorly.
Our inability to accurately predict our need for resold long distance services
could subject us to various unexpected charges.
We offer long distance telephone services as part of our service packages.
We currently have agreements with various long distance carriers to provide
transmission and termination services for all of our long distance traffic.
These agreements generally provide for the resale
10
<PAGE>
of long distance services on a per-minute basis and contain minimum volume
commitments. If we incur underutilization charges, rate increases or
termination charges, these charges or rate increases could adversely affect our
operating results. In cases in which we have agreed to minimum volume
commitments and fail to meet them, we will be obligated to pay underutilization
charges.
Failure of our software could increase our costs, disrupt our services and
reduce demand for our products and services.
The software that we use and the software that we have developed internally
and are continuing to develop may contain undetected errors. Although we have
extensively tested our software, errors may be discovered in the software
during the course of its use. Any errors may result in partial or total failure
of our network, loss or diminution in service delivery performance, additional
and unexpected expenses to fund further product development or to add
programming personnel to complete or correct development, and loss of revenue
because of the inability of customers to use our products or services which
could adversely affect our business condition.
Our ability to protect our proprietary technology is limited and infringement
claims against us could impact our ability to conduct our business.
We currently rely on a combination of copyright, trademark and trade secret
laws and contractual confidentiality provisions to protect the proprietary
information that we have developed. Our ability to protect our proprietary
technology is limited, and we cannot assure you that our means of protecting
our proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Also, we cannot be certain that the
intellectual property that incumbent local exchange carriers or others claim to
hold and that may be necessary for us to provide our services will be available
on commercially reasonable terms. If we were found to be infringing upon the
intellectual property rights of others, we might be required to enter into
royalty or licensing agreements, which may be costly or not available on
commercially reasonable terms. If successful, a claim of infringement against
us and our inability to license the infringed or similar technology on terms
acceptable to us could adversely affect our business. For more information,
please see the sections entitled "Business--Intellectual Property and
Proprietary Rights" and "--Legal Proceedings."
Our billing, customer service and management information systems have been
developed by us and third parties and may not perform as anticipated.
Sophisticated information and processing systems are vital to our ability
to monitor costs, render monthly invoices for services, process customer orders
and achieve operating efficiencies. We rely on internal systems and third party
vendors, some of which have a limited operating history, to provide our
information and processing systems. If our systems fail to perform in a timely
and effective manner and at acceptable costs, or if we fail to adequately
identify all of our information and processing needs or if our related
processing or information systems fail, these failures could have a material
adverse effect on our business.
11
<PAGE>
In addition, our right to use third party systems is dependent upon license
agreements. Some of these agreements are cancelable by the vendor and the
cancellation or nonrenewal of these agreements could seriously impair our
ability to process orders or bill our customers. As we begin to provide local
telephone service, the need for sophisticated billing and information systems
will also increase significantly and we will have significant additional
requirements for data interface with incumbent local exchange carriers and
others. Similarly, the advent of number portability may impose even greater
demands on our billing and information systems. We cannot be certain that we
will be able to meet these additional requirements.
System failures could impair our ability to conduct our business.
The successful operation of our network will depend on a continuous supply
of electricity at multiple points. Although the system that carries signals has
been designed to operate under extreme weather conditions (including heavy
rain, winds and snow), like all other telecommunications systems, our network
could be adversely affected by such conditions. Our network, however, is
equipped with a back-up power supply and our existing network operations center
is equipped with both a battery back-up and an on-site emergency generator. If
a power failure causes an interruption in our service, the interruption could
negatively impact on our operations.
Our network also may be subject to physical damage, sabotage, tampering or
other breaches of security (by computer virus, break-ins or otherwise) that
could impair its functionality. In addition, our network is subject to unknown
capacity limitations that may cause interruptions in service or reduced
capacity for our customers. Any interruptions in service resulting from
physical damage or capacity limitations could cause our systems to fail.
Our inability to interconnect with the networks of other carriers on acceptable
terms could adversely affect our ability to conduct business.
As a competitive provider of local telephone service, we must interconnect
our network with the networks of incumbent local exchange carriers. We may not
be able to obtain the interconnection we require at rates and on terms and
conditions that permit us to offer services that are both competitive and
profitable. In the event that we experience difficulties in obtaining high
quality, reliable and reasonably priced services from other carriers, the
attractiveness of our services is likely to be significantly impaired.
We are dependent upon incumbent local exchange carriers to provide unbundled
network elements on a timely and accurate basis.
We rely on incumbent local exchange carriers to supply key unbundled
components of their network infrastructure to us on a timely and accurate
basis, and in the quantities and quality demanded by us. We may from time to
time experience delays or other problems in receiving unbundled services or
facilities which we request and there can be no assurance that we will able to
obtain such unbundled elements on the scale and within the time frames
12
<PAGE>
required by us. Any failure to obtain these components, services or additional
capacity on a timely and accurate basis could adversely affect us.
Our ability to obtain additional capital to fund our operations and finance our
growth may impair the value of your investment.
We believe that the estimated net proceeds from this offering, together
with our existing assets, anticipated debt and expected revenue growth will be
sufficient to fund our operations for the next 12 months. However, if we expand
more rapidly than currently anticipated or if our working capital needs exceed
our current expectations, we may need to raise additional capital from debt or
equity sources. If we cannot obtain financing on acceptable terms or at all, we
may be required to modify, delay or abandon our current business plan, which is
likely to materially and adversely affect our business and, as a result, the
value of your investment.
Our inability to obtain equipment and software from third party vendors could
seriously impact our operations.
We currently purchase the majority of our telecommunications equipment as
needed from third party vendors, including Excel Switching Corporation,
Dialogic Communications Corporation, Compaq Computer Corporation, and Sun
Microsystems, Inc. In addition, we currently license our software from third
party vendors, including Oracle Corporation, INPRISE Corporation, NOVERA Corp.,
and Netscape Communications, Inc. We typically do not enter into any long-term
agreements with our telecommunications equipment or software suppliers. Any
reduction or interruption in supply from our equipment suppliers or failure to
obtain suitable software licensing terms could have a disruptive effect on our
business and could adversely affect our results of operations.
Failure of computer systems and software products to be Year 2000 compliant
could disrupt our service.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. We believe that our
currently installed operating systems, software systems, third-party data
interfaces and hardware and software products are Year 2000 compliant. However,
until our software systems operate in a post-December 31, 1999 environment, it
is impossible to accurately predict whether our proprietary software, the
software we have purchased from third parties or any software embedded in or
hardware comprising our network will be Year 2000 compliant. In addition, we
use incumbent local exchange carriers and interexchange carrier facilities to
service our customers and these facilities currently utilize numerous date-
sensitive computer applications. If the incumbent local exchange carriers' or
the interexchange carriers' facilities are not Year 2000 compliant, or if the
systems of competitive local exchange carriers and others upon whom we rely are
not Year 2000 compliant, these systems could fail, which could have a material
adverse effect on our billing information systems and data storage and
retrieval systems.
13
<PAGE>
We depend on a limited number of key personnel who would be difficult to
replace.
We depend on a limited number of key management, sales, marketing and
product development personnel to manage and operate our business. In
particular, we believe that our success depends to a significant degree upon
our ability to attract and retain highly skilled personnel, including our
engineering and technical staff. If we are unable to attract and retain our key
employees, the value of your investment could suffer.
We have employment agreements with some of our officers and you should read
the discussion under "Management" for more information concerning the
experience of these individuals. If we lose the services of some of our key
personnel, our business could suffer. We currently maintain a $5,000,000 key
man life insurance policy on the life of Mr. D. Gregory Smith, our president,
chief executive officer and chairman of the board.
Risks related to our industry
Government regulation and legal uncertainties could increase our costs and
limit our ability to conduct our business.
We are subject to varying degrees of federal, state, and local regulation.
In states where we will provide intrastate services, we generally will be
subject to state certification or registration and tariff-filing requirements.
Delays in obtaining the required state regulatory approvals may have a material
adverse effect on our business. Challenges to our tariffs by third parties
could cause us to incur substantial legal and administrative expenses.
We must also comply with various state and federal obligations that are
subject to change, such as the duty to contribute to universal service
subsidies, the impact of which we cannot yet fully assess. While we do not
believe that compliance with federal and state reporting and regulatory
requirements will be burdensome, our failure to do so may result in fines or
other penalties being imposed on us, including loss of certification to provide
services.
Decisions of the FCC and state regulatory commissions providing incumbent
local exchange carriers with increased flexibility in how they price their
services and with other regulatory relief, could have a material adverse effect
on our business and that of other competitive local exchange carriers. Future
regulatory provisions may be less favorable to competitive local exchange
carriers and more favorable to their competitors. If incumbent local exchange
carriers are allowed by regulators to lower their rates, engage in substantial
volume and term discount pricing practices for their customers, or charge
competitive local exchange carriers higher fees for interconnection to the
incumbent local exchange carriers' networks, our business, operating results
and financial condition could be materially adversely affected. Incumbent local
exchange carriers may also seek to delay competitors through legal or
regulatory challenges, or by recalcitrant responses to requirements that they
open their markets through interconnection and unbundling of network elements.
Pending court cases in which certain provisions of the Telecommunications Act
of 1996 will be conclusively interpreted may increase the cost of unbundled
network elements to us.
14
<PAGE>
The markets we serve are highly competitive and many of our competitors have
much greater resources.
The telecommunications and information services markets are intensely
competitive and rapidly evolving. We expect competition to increase in the
future. Many of our potential competitors have longer operating histories,
greater name recognition, larger customer bases and substantially greater
financial, personnel, marketing, engineering, technical and other resources
than us. The principal competitive factors affecting our business operations
will be price, the desirability of our service offering, quality and
reliability of our services, innovation and customer service. Our ability to
compete effectively will depend upon our ability to maintain high quality,
market-driven services at prices generally equal to or below those charged by
our competitors. This competition could materially adversely affect our
business, financial condition and results of operations.
We face competition from a variety of participants in the
telecommunications market. The largest competitor for local service in each
market in which we compete is the incumbent local exchange carrier serving that
market. Incumbent local exchange carriers have established networks, long-
standing relationships with their customers, strong political and regulatory
influence, and the benefit of state and federal regulations that, until
recently, favored incumbent local exchange carriers. In the local exchange
market, the incumbent local exchange carriers continue to hold near-monopoly
positions. The long distance telecommunications market in which we compete has
numerous entities competing for the same customers and a high average churn
rate as customers frequently change long distance providers in response to the
offering of lower rates or promotional incentives.
Prices in the long distance market have declined significantly in recent
years and are expected to continue to decline. We will face competition from
large interexchange carriers such as AT&T Corp., MCI WorldCom, Inc. and Sprint
Communications Co. Other competitors are likely to include incumbent local
exchange carriers providing out-of-region (and, with the removal of regulatory
barriers, in-region) long distance services, other incumbent local exchange
carriers, other competitive local exchange carriers, cable television
companies, electric utilities, wireless telephone system operators, microwave
and satellite carriers and private networks owned by large end users.
The Telecommunications Act of 1996 facilitates such entry by requiring
incumbent local exchange carriers to allow competing providers to acquire local
services at wholesale prices for resale and to purchase unbundled network
elements at cost-based prices. A continuing trend toward combinations and
strategic alliances in the telecommunications industry, including potential
consolidation among incumbent local exchange carriers or competitive local
exchange carriers, or transactions between telephone companies and cable
companies outside of the telephone company's service area, or between
interexchange carriers and competitive local exchange carriers, could give rise
to significant new competitors.
The enhanced and information services markets are also highly competitive
and we expect that competition will continue to intensify. Our competitors in
these markets will
15
<PAGE>
include information service providers, telecommunications companies, on-line
services providers and Internet service providers.
Our risk management practices may not be sufficient to protect us from
unauthorized transactions or thefts of services.
We may be the victim of fraud or theft of service. From time to time,
callers have obtained our services without rendering payment by unlawfully
using our access numbers and personal identification numbers. We attempt to
manage these theft and fraud risks through our internal controls and our
monitoring and blocking systems. If these efforts are not successful, the theft
of our services may cause our revenue to decline significantly.
Risks relating to this offering
Our principal stockholders and management own a significant percentage of our
stock and will be able to exercise significant influence.
Following this offering, approximately 67% of our common stock will be
owned or voted by our executive officers and directors, together with BA
Capital Company, L.P. and Gramercy Z-Tel LLC. Consequently, our principal
stockholders, together with our management will have considerable control over
all of our affairs and will control the election of all members of our board of
directors and the outcome of all corporate actions requiring stockholder
approval.
Our stock price could be volatile.
The trading price of our common stock is likely to be volatile. The stock
market has experienced extreme volatility and this volatility has often been
unrelated to the operating performance of particular companies. We cannot be
sure that an active public market for our common stock will develop or continue
after this offering. Investors may not be able to sell their common stock at or
above our initial public offering price. Prices for the common stock will be
determined in the marketplace and may be influenced by many factors, including
variations in our financial results, changes in earnings estimates by industry
research analysts, investors' perceptions of us and general economic, industry
and market conditions.
The substantial number of shares that are eligible for future sale could affect
the market price of our common stock.
After this offering is completed, 30,454,158 shares of common stock will be
issued and outstanding, assuming no exercise of the underwriters' over-
allotment option. Of these shares, up to 15,603,453 will be available for sale,
subject to certain volume and manner of sale restrictions, under Rule 144 of
the Securities Act of 1933, beginning 180 days after the completion of the
offering. We cannot be sure what effect, if any, future sales of shares or the
availability of shares for future sale will have on the market price of our
common stock. In addition, the holders of our preferred stock, who will hold in
the aggregate, 10,477,057 shares of our common stock after the completion of
this offering and the mandatory conversion of the preferred stock, have up to
three demand registration rights and generally
16
<PAGE>
have unlimited piggyback registration rights on future registration statements
filed by us. The market price of our common stock could drop due to sales of a
large number of shares in the market after this offering or the perception that
sales of large numbers of shares could occur. These factors could also make it
more difficult to raise funds through future offerings of common stock. All of
the shares of common stock sold in this offering will be freely tradable under
the Securities Act unless purchased by our "affiliates," as that term is
defined in the Securities Act. In connection with this offering, our officers
and directors and all of our existing stockholders will be required not to sell
any shares of common stock for a period of 180 days after the date of this
prospectus without the written consent of Thomas Weisel Partners LLC and Credit
Suisse First Boston Corporation.
Our management will have broad discretion to allocate the proceeds of this
offering and if they do not allocate these proceeds wisely your investment
could suffer.
Our management will retain broad discretion to allocate the proceeds of
this offering. Their failure to apply these funds effectively could have a
material adverse effect on our business, results of operations and financial
condition. We estimate the net proceeds to us from this offering to be
approximately $70.6 million, after deducting estimated offering expenses. We
plan to use these proceeds for expansion of our network, continued development
of our integrated customer care and billing software, expanded marketing
efforts for our services and general corporate purposes. Please refer to the
section entitled "Use of Proceeds."
Purchasers in this offering will suffer immediate and substantial dilution of
their investment.
If you purchase common stock in this offering, you will pay more for your
shares than the amounts paid by existing stockholders for their shares. As a
result, assuming an initial public offering price of $14 per share, you will
experience immediate and substantial dilution of approximately $11.84 per
share. Please refer to the section entitled "Dilution."
This prospectus contains forward-looking statements and information relating to
our business and us that are not historical facts.
The forward-looking statements in this prospectus are based on the belief
of our management, as well as assumptions made by and information currently
available to our management. When used in this prospectus, the words "believe,"
"anticipate," "intend," "expect," "project" and similar expressions are
intended to identify forward-looking statements. These statements reflect our
current views with respect to future events and are subject to risks and
uncertainties about us, including, among other things:
. our ability to market our services successfully to new subscribers,
access markets and finance network developments, enhancement and
expansion;
. additions or departures of key personnel;
. competition, including the introduction of new products or services by
our competitors;
17
<PAGE>
. existing and future regulations affecting our business and our ability
to comply with these regulations;
. technological innovations;
. general economic and business conditions, both nationally and in the
regions in which we operate; and
. other factors described under "Risk Factors" in this prospectus.
We caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this prospectus. We do not undertake any
obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date of this prospectus
or to reflect the occurrence of unanticipated events.
18
<PAGE>
USE OF PROCEEDS
We will receive net proceeds from the sale of 5.5 million shares of common
stock, at an assumed public offering price of $14 per share, estimated to be
approximately $70.6 million. This amount will be approximately $81.3 million if
the underwriters exercise their over-allotment option in full, after deducting
the underwriting discounts and commissions and estimated offering expenses we
will owe. We intend to use these proceeds to pay approximately $1.2 million of
accrued and unpaid dividends on our mandatorily convertible redeemable
preferred stock and:
. approximately $30 million for the purchase and installation of network
equipment;
. approximately $15 million for the continued development of our software
applications, covering customer care, billing, provisioning and network
management;
. approximately $10 million for increased sales and marketing expenditures
for our Z-Line Community service throughout the United States and our Z-
Line Home Edition service in New York, Pennsylvania and Texas; and
. the remainder for working capital and general corporate purposes.
The amounts and timing of our actual expenditures will depend upon numerous
factors, including the status of our product development and deployment
efforts, the regulatory environment, marketing and sales activities, the amount
of cash generated by our operations and competition. Actual expenditures may
vary substantially from these estimates. We may find it necessary or advisable
to use portions of the proceeds for other purposes. Pending application of the
net proceeds described above, we intend to invest the net proceeds of this
offering in short-term, investment-grade, interest bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and have no plans to
do so in the foreseeable future. We currently intend to retain future earnings,
if any, to finance operations and the expansion of our business. Our board of
directors will determine whether to pay, and the amount of, any dividends on
our common stock, and that determination will depend on a number of factors,
including our earnings, capital requirements and overall financial condition.
Our ability to declare and pay cash dividends on our common stock is also
restricted by the terms of our equipment lease financing facility and could be
further limited by agreements governing indebtedness that we may incur.
19
<PAGE>
CAPITALIZATION
Please read this capitalization table together with the sections of this
prospectus entitled "Use of Proceeds," "Dividend Policy," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
our financial statements and related notes included in this prospectus.
The following table sets forth our capitalization as of September 30, 1999
without giving effect to the 11-for-10 stock split declared on November 19,
1999 on an actual basis with respect to our shares of preferred stock. We have
presented our cash and capitalization:
. on an actual basis;
. on a pro forma basis to give effect to (1) the issuance of 2,794,800
shares (convertible into 3,074,280 common shares after the 11-for-10
stock split) of Series C mandatorily convertible redeemable preferred
stock in October 1999, totalling approximately $15 million; (2) the
conversion of all outstanding shares of preferred stock into shares of
our common stock on a 11-for-10 basis to reflect our stock split which
was declared on November 19, 1999; and (3) payment of cumulative
dividends on Series A and B mandatorily convertible redeemable preferred
stock of approximately $1,164,000 at September 30, 1999; and
. on a pro forma, as adjusted basis to reflect our receipt of the
estimated net proceeds from the sale of 5,500,000 shares of common stock
in this offering, after deducting underwriting discounts and commissions
and estimated offering expenses.
<TABLE>
<CAPTION>
As of September 30, 1999
----------------------------------------
Pro Forma,
Pro Forma as Adjusted
Actual (Unaudited) (Unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
Total long term debt and capital
lease obligations................... $ 12,709,000 $ 12,709,000 $ 12,709,000
------------ ------------ ------------
Mandatorily convertible redeemable
preferred stock:
Series A, $.01 par value, 2,695,795
shares authorized, actual;
2,695,795 shares issued and out-
standing, actual; and no shares is-
sued and outstanding, pro forma.... 10,000,000 -- --
Series B, $.01 par value, 4,034,003
shares authorized, actual;
4,034,003 shares issued and out-
standing, actual; and no shares is-
sued and outstanding, pro forma.... 14,964,000 -- --
Series C, $.01 par value, 2,794,800
shares authorized, actual; no
shares issued and outstanding, ac-
tual; and no shares issued and out-
standing, pro forma................ -- -- --
Accrued dividends on mandatorily
convertible redeemable Series A and
B preferred stock, actual; paid,
pro forma.......................... 1,164,000 -- --
------------ ------------ ------------
Total mandatorily convertible re-
deemable preferred stock......... 26,128,000 -- --
------------ ------------ ------------
Stockholders' equity (deficit):
Common stock, $.01 par value;
30,000,000 shares authorized,
14,411,100 shares issued and
outstanding, actual; and 21,813,878
shares issued and outstanding, pro
forma.............................. 144,000 249,000 304,000
Notes receivable for common stock... (3,011,000) (3,011,000) (3,011,000)
Deferred stock compensation......... (203,000) (203,000) (203,000)
Additional paid-in capital.......... 17,112,000 56,971,000 127,564,000
Accumulated deficit................. (36,769,000) (36,769,000) (36,769,000)
Treasury stock, 279,675 shares, at
cost............................... (318,000) (318,000) (318,000)
------------ ------------ ------------
Total stockholders' equity (defi-
cit).............................. (23,045,000) 16,919,000 87,567,000
------------ ------------ ------------
Total capitalization.............. $ 15,792,000 $ 29,628,000 $100,276,000
============ ============ ============
</TABLE>
20
<PAGE>
The share numbers in the table exclude:
. 5,530,257 shares of common stock issuable upon exercise of options
outstanding as of September 30, 1999 at a weighted average exercise
price of $3.17 per share.
. 521,832 shares of common stock issuable at $3.37 per share upon exercise
of outstanding warrants.
. 115,500 shares of common stock issued at $7.27 per share under a warrant
granted subsequent to September 30, 1999 in connection with the
amendment to the CMB leasing facility.
. 862,070 shares of common stock issuable upon exercise of options granted
to employees subsequent to September 30, 1999 at a weighted average
exercise price of $6.18 per share.
. 11,000 shares of common stock issued subsequent to September 30, 1999 in
connection with the purchase of the assets of a company.
. 55,000 shares of common stock issued subsequent to September 30, 1999 in
connection with an agreement between the Company and a third party
software vendor.
21
<PAGE>
DILUTION
You will experience immediate and substantial dilution in the net pro forma
tangible book value per share of your common stock.
We calculate dilution to new investors by subtracting pro forma net
tangible book value per share of common stock after this offering from the per
share price paid by new investors in this offering. We calculate net pro forma
tangible book value per share by subtracting total liabilities from total
tangible assets and then dividing that number by the number of shares of common
stock outstanding at September 30, 1999, after giving effect to the automatic
conversion of preferred stock upon consummation of this offering.
The following table illustrates the per share dilution to investors in this
offering:
<TABLE>
<CAPTION>
Per Share
---------
<S> <C> <C>
Assumed offering price.................................... $14.00
Net tangible book value as of September 30, 1999.......... $(0.20)
Pro forma increase attributable to new investors in this
offering................................................. 2.36
------
Pro forma net tangible book value after this offering..... 2.16
------
Pro forma dilution to new investors in this offering...... $11.84
======
</TABLE>
The following table summarizes on a pro forma basis as of September 30,
1999 after giving effect to this offering:
. the number of shares of common stock purchased from us;
. the total consideration paid to us; and
. the average consideration paid per share by existing stockholders and
by new investors in this offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ----------------------
Average Price
Number Percent Amount Percent Per Share
---------- ------- -------------- ------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Existing stockholders .. 24,888,158 81.7% $ 56,340 42.3% $ 2.26
Investors in this
offering............... 5,500,000 18.3 77,000 57.7 14.00
---------- ----- -------- -----
Total................. 30,454,158 100.0% 133,340 100.0% 4.38
========== ===== ======== =====
</TABLE>
The calculations on this page are based on shares outstanding as of
September 30, 1999. These calculations exclude from the number of outstanding
shares of common stock:
. 5,530,257 shares of common stock issuable upon exercise of stock options
outstanding as of September 30, 1999 at a weighted average exercise
price of $3.17 per share.
. 521,832 shares of common stock issuable at $3.37 per share upon exercise
of outstanding warrants.
. 115,500 shares of common stock to be issued at $7.27 per share under a
warrant granted subsequent to September 30, 1999 in connection with the
amendment to the CMB leasing facility.
If all of the options and warrants outstanding as of September 30, 1999 had
been exercised at that date, dilution to new investors in this offering would
be $11.53 per share.
22
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be read
in conjunction with the financial statements, related notes and other financial
information contained in this prospectus. You should also read "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contained later in this prospectus. The Consolidated Statements of Operations
Data for the periods from January 15, 1998 (inception) through December 31,
1998 and for the nine months ended September 30, 1999 and the consolidated
balance sheet data as of December 31, 1998 and September 30, 1999 are derived
from our financial statements that have been audited by our independent
auditors. The financial data as of September 30, 1998, and for the period
January 15, 1998 (inception) through September 30, 1998, are derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which we consider
necessary for a fair presentation of our financial position and the results of
our operations for these periods. The results of operations for the nine month
period ended September 30, 1999 are not necessarily indicative of the results
of operations to be expected for the full year.
<TABLE>
<CAPTION>
Period January 15, 1998
(date of inception)
through
--------------------------- Nine Months
September 30, Ended
December 31, 1998 September 30,
1998 (Unaudited) 1999
------------ ------------- -------------
<S> <C> <C> <C>
Consolidated Statements of Operations
Data:
Revenue.............................. $ 140,000 $ -- $ 2,170,000
------------ ----------- ------------
Operating expenses:
Network operations................. 382,000 43,000 4,588,000
Sales and marketing................ 2,201,000 489,000 3,620,000
Research and development........... 4,728,000 2,735,000 3,469,000
General and administrative......... 4,718,000 3,036,000 8,924,000
Depreciation and amortization...... 1,283,000 634,000 2,749,000
------------ ----------- ------------
Total operating expenses......... 13,312,000 6,937,000 23,350,000
------------ ----------- ------------
Operating loss................... (13,172,000) (6,937,000) (21,180,000)
------------ ----------- ------------
Nonoperating income (expense):
Interest income.................... 228,000 64,000 319,000
Interest expense................... (178,000) (298,000) (2,786,000)
------------ ----------- ------------
Total nonoperating income (ex-
pense).......................... 50,000 (234,000) (2,467,000)
------------ ----------- ------------
Net loss......................... (13,122,000) (7,171,000) (23,647,000)
Less mandatorily convertible re-
deemable preferred stock divi-
dends.......................... (190,000) -- (974,000)
------------ ----------- ------------
Net loss attributable to common
stockholders...................... $(13,312,000) $(7,171,000) $(24,621,000)
============ =========== ============
Weighted average shares outstanding.. 6,554,699 3,753,191 14,383,338
============ =========== ============
Basic and diluted net loss per common
share............................... $ (2.03) $ (1.91) $ (1.71)
============ =========== ============
Shares used in pro forma basic and
diluted net earnings/(loss) per
share calculation (unaudited)....... 10,992,102 21,786,116
============ ============
Pro forma basic and diluted net
earnings/(loss) per share
(unaudited)......................... $ (1.19) $ (1.09)
============ ============
<CAPTION>
As of
-----------------------------------------
September 30,
December 31, 1998 September 30,
1998 (Unaudited) 1999
------------ ------------- -------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............ $ 7,973,000 $ 1,032,000 $ 2,682,000
Working capital (deficit)............ 3,328,000 (7,177,000) (8,096,000)
Total assets......................... 20,274,000 10,880,000 24,958,000
Total debt........................... 724,000 1,203,000 12,709,000
Mandatorily convertible redeemable
preferred stock..................... 15,154,000 -- 26,128,000
Total stockholders' equity (defi-
cit)................................ (6,000) (2,186,000) (23,045,000)
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion together with the financial
statements and other financial information included in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those projected in
the forward-looking statements. Please see "Risk Factors--This prospectus
contains forward-looking statements and information relating to our business
and us that are not historical facts," elsewhere in this prospectus. Our fiscal
year ends on December 31.
Overview
Z-Tel is an emerging provider of advanced, integrated telecommunications
services primarily to residential and small business customers. We offer local
and long distance telephone services integrated with Internet-based enhanced
communications features. 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 revenue 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 began offering our Z-Line Home Edition product during late June 1999.
Currently, we derive most of our revenue from service fees charged to customers
located in New York City and Long Island for our Z-Line Home Edition service.
Charges for Z-Line Home Edition basic 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 for Z-Line Home Edition is recognized ratably
over time, which we believe approximates the actual provision of services. Our
Z-Line Home Edition customer agreements may be canceled on 30 days notice.
We also derive a significant portion of our revenue from our Z-Line
Community service offering. This revenue is principally for long distance
service charges to Z-Line Community customers located throughout the U.S. Z-
Line Community charges are billed monthly in arrears, and the associated
revenue is recognized in the month of service.
Our expenses are recognized as incurred, and are comprised of:
. network operations, which consists primarily of compensation and related
expenses for technical operations, and rent expense for space in data
centers;
. sales and marketing, which consists primarily of advertising and
compensation and related expenses;
. research and development, which consists of compensation and consulting
fees related to the development of our proprietary technologies;
. general and administrative, which consists primarily of compensation and
related expenses and occupancy costs; and
. depreciation and amortization, which consists primarily of the non-cash
reduction in carrying value of our long-lived assets.
24
<PAGE>
We have incurred significant losses since our inception and, as of
September 30, 1999, had an accumulated deficit of approximately $36.8 million.
We intend to invest heavily in marketing and sales and the continued
development of our network infrastructure and technology. 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 the states where we intend to initiate operations in the next year. As
a result, we expect to continue to incur substantial losses for the foreseeable
future.
Results of Operations
Comparison of the Period from January 15 (Inception) through September 30, 1998
and the Nine Month Period Ended September 30, 1999:
Revenue. Our revenue was $2.2 million for the nine month period ended
September 30, 1999 as compared to $0 for the period ended September 30, 1998.
The increase was due to the initiation of our service offerings and the
addition of new customers that generated monthly revenues.
Network Operations. Our network operations expense was $4.6 million during
the nine month period ended September 30, 1999 as compared to $43,000, during
the period ended September 30, 1998. The increase in network operations expense
was due primarily to increases in personnel and related expense and
depreciation and amortization as we developed and launched our service
offerings. Personnel and related expenses were approximately $0.6 million, or
12.9% of network operations expense, for the nine month period ended September
30, 1999 as compared to $0 for the period ended September 30, 1998, as we
increased our systems and customer support personnel from none at September 30,
1998 to 110 at September 30, 1999. We expect our network operations expense to
continue to increase in conjunction with the growth of our overall business.
Sales and Marketing. Sales and marketing expense increased $3.1 million to
$3.6 million, during the nine month period ended September 30, 1999 from $0.5
million, during the period ended September 30, 1998. The increase was due
primarily to an increase in sales and marketing personnel and related expenses
and increased advertising costs. Personnel and related expenses increased $0.3
million to $0.9 million, or 24.4% of sales and marketing expense, from $0.6
million for the period ended September 30, 1998. We increased our sales and
marketing personnel from six at September 30, 1998 to 26 at September 30, 1999.
We intend to significantly increase our sales and marketing expenditures during
the remainder of fiscal 1999.
Research and Development. Research and development expenditures consist
primarily of software development costs and totalled $5.6 million for the nine
month period ended September 30, 1999. We adopted the provisions of Statement
of Position (SOP) 98-1 "Accounting for the Cost of Computer Software Developed
or Obtained for Internal Use," at the beginning of 1999. As a result, $3.5
million of our research and development costs were expensed and $2.2 million
were capitalized. During the period January 15, 1998
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<PAGE>
through September 30, 1998, we incurred research and development costs of $5.0
million. We expensed our internal software development costs, totaling $2.7
million, and capitalized $2.3 million in software costs related to the purchase
of software from third parties. Our research and development costs in 1999
consisted primarily of personnel and consulting costs as compared to 1998,
which consisted primarily of purchased software and personnel costs. The
adoption of SOP 98-1 did not impact the amount of development costs expensed in
1998 as the 1998 costs did not meet the criteria for capitalization as defined
in SOP 98-1.
General and Administrative. General and administrative expense increased
$5.9 million to $8.9 million, during the nine month period ended September 30,
1999 from $3.0 million, for the period ended September 30, 1998. The increase
is primarily due to increases in personnel and related expenses and employee
recruiting fees. Personnel and related expenses increased $2.0 million to $2.9
million, or 34.0% of general and administrative expenses, for the nine month
period ended September 30, 1999 from $0.9 million for the period ended
September 30, 1998. We increased our number of employees in general and
administrative functions from 18 employees at September 30, 1998 to 81
employees at September 30, 1999. Rent expense increased by $635,000 due to the
increased office space obtained during 1999 and professional fees increased
$223,000 due to the increased regulatory activity required to establish our
presence in various jurisdictions throughout the United States. We also began
providing for potential bad debts as a result of the increasing revenues being
generated by our product lines. For the nine months ended September 30, 1999,
the provision for bad debts totalled $0.9 million. This amount included
additional provisions to recognize the temporary introductory credit policies
we employed in our early sales. There was no provision for bad debts for the
period ended September 30, 1998, as we had not begun generating revenue at that
date.
Depreciation and Amortization. Depreciation and amortization expense
increased approximately $2.1 million to $2.7 million for the nine month period
ended September 30, 1999 as we purchased approximately $4.3 million in computer
and related equipment since September 30, 1998.
Interest income and expense. Interest income and expense consist of
interest income on our cash balances and interest expense on our outstanding
notes payable and capital lease obligations. Interest earned on our cash and
cash equivalents increased $255,000 to $319,000 for the nine month period ended
September 30, 1999 from $64,000 for the period ended September 30, 1998. This
increase was due primarily to the closing of private placements of equity
securities in November 1998 which resulted in larger cash balances available
for investment. During the period ended September 30, 1998 and for the nine
month period ended September 30, 1999, we incurred interest expense in the
amount of $298,000 and $2.8 million, respectively. The increase was due
primarily to the increase in capital lease obligations related to computer
equipment.
Income taxes. No benefit for federal or state income taxes has been
recorded due to the full valuation allowance recorded against the deferred tax
asset.
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Net losses. Our net loss increased $16.4 million to $23.6 million for the
nine month period ended September 30, 1999 from $7.2 million for the period
ended September 30, 1998. This increase was due primarily to the increases in
expenses described above.
Discussion of the period from January 15, 1998 (Inception) through December 31,
1998:
The period from inception through December 31, 1998 was nearly a year of
sustained development for us. During this time we extensively evaluated the
feasibility of various configurations of network architecture design, and we
devoted substantial research and software programming efforts toward developing
our technology. Further, we spent much of our time and other resources studying
regulatory environments and market opportunities throughout the United States.
As a result, we did not begin generating revenue until the fourth quarter
of 1998. Revenues totalling $140,000 were earned and consisted of long distance
charges to customers. Research and development expenditures comprised $4.7
million of our operating expenses during this period, or 35.6% of our total
operating expenses of $13.3 for the period ended December 31, 1998. General and
administrative expenses were also $4.7 million, which were primarily composed
of organizational costs which were expensed. Sales and marketing expenses were
$2.2 million which were used in the analysis of markets and the introduction of
our test marketing programs. Depreciation and amortization accounted for $1.3
million, and was primarily the development of software which was expensed.
Network operations began late in the year and resulted in $.4 million to
support the initiation of operations late in the fourth quarter. We incurred an
operating loss of $13.2 million for the period from inception through December
31, 1998.
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Selected Quarterly Operating Results
The following table sets forth certain unaudited statement of operations
data for each of the five quarters in the period ended September 30, 1999. This
data has been derived from unaudited interim financial statements prepared on
the same basis as the audited financial statements contained in this
prospectus. The interim financial statements include all adjustments,
consisting of normal recurring adjustments, that we consider necessary for a
fair presentation of such information when read in conjunction with our
financial statements and notes thereto appearing elsewhere in this prospectus.
The operating results for any quarter should not be considered indicative of
the results for any future period.
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------------------------
June 30, September 30, December March 31, June 30, September 30,
1998 1998 31, 1998 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue................. $ -- $ -- $ 140,000 $ 664,000 $ 761,000 $ 745,000
----------- ----------- ----------- ----------- ----------- ------------
Operating expenses:
Network operations.... -- 43,000 339,000 870,000 1,039,000 2,679,000
Sales and marketing... 104,000 350,000 1,712,000 1,174,000 665,000 1,781,000
Research and
development.......... 1,111,000 1,515,000 2,054,000 1,113,000 351,000 2,005,000
General and adminis-
trative.............. 1,238,000 1,490,000 1,683,000 2,549,000 2,331,000 4,044,000
Depreciation and amor-
tization............. 188,000 435,000 649,000 801,000 863,000 1,085,000
----------- ----------- ----------- ----------- ----------- ------------
Total operating
expenses............. 2,641,000 3,833,000 6,437,000 6,507,000 5,249,000 11,594,000
----------- ----------- ----------- ----------- ----------- ------------
Operating loss........ (2,641,000) (3,833,000) (6,297,000) (5,843,000) (4,488,000) (10,849,000)
----------- ----------- ----------- ----------- ----------- ------------
Nonoperating income
(expense):
Interest income....... 7,000 29,000 186,000 118,000 114,000 87,000
Interest expense...... (82,000) (46,000) (50,000) (214,000) (1,237,000) (1,335,000)
----------- ----------- ----------- ----------- ----------- ------------
Total nonoperating
income (expense)..... (75,000) (17,000) 136,000 (96,000) (1,123,000) (1,248,000)
----------- ----------- ----------- ----------- ----------- ------------
Net loss.............. $(2,716,000) $(3,850,000) $(6,161,000) $(5,939,000) $(5,611,000) $(12,097,000)
=========== =========== =========== =========== =========== ============
Weighted average shares
outstanding............ 2,403,500 6,230,098 14,411,100 14,411,100 14,411,100 13,025,563
=========== =========== =========== =========== =========== ============
Basic and diluted net
loss per common share.. $ (1.13) $ (0.63) $ (0.44) $ (0.43) $ (0.41) $ (0.96)
=========== =========== =========== =========== =========== ============
Shares used in pro forma
and diluted net loss
per share calculation.. 2,403,500 6,230,098 18,848,503 18,848,503 18,848,503 20,428,341
=========== =========== =========== =========== =========== ============
Pro forma basic and
diluted net loss per
common share........... $ (1.13) $ (0.63) $ (0.32) $ (0.32) $ (0.30) $ (0.59)
=========== =========== =========== =========== =========== ============
</TABLE>
We began offering Z-Line Community service in the quarter ended December
31, 1998. In late June 1999, we began offering Z-Line Home Edition service and
refocused our marketing attention from Z-Line Community to the initiation of Z-
Line Home Edition. Our revenues were negatively impacted in the quarter ended
September 1999 due to the reduced number of students on campus at colleges
using our Z-Line Community service during the summer. We expect sales and
marketing expense to increase substantially as we roll-out our
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Z-Line Home Edition service to the remainder of New York state covered by Bell
Atlantic. Our roll-out schedule also includes expansion to Pennsylvania and
Texas as these states adopt pricing that we believe will be favorable to
implement our business strategy for competitive local access. Our roll-out
strategy 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
to work with third-party vendors and system integration consultants to
integrate and enhance our customer care and billing software applications.
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 collocation
of switches and transmission equipment in offices of existing public telephone
companies, which are generally referred to in the telecommunications industry
as incumbent local exchange carriers or ILECs. 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 Command Center. Because of recent developments in switching technology
and our ability to leverage and enhance that technology through innovations in
our software applications, we expect that fewer than twenty strategically
located Z-Nodes would be required to effectively serve over 80% of the U.S.
market. Therefore, we do not expect that the growth of our business will
require the levels of capital investment in fiber and switches that existed in
historical models. Instead, we will devote significant amounts of our resources
to continued software development and to marketing efforts which we have
designed to achieve rapid penetration of our target markets.
Since our inception, we have financed our operations through the private
placement of common and preferred stock, and through equipment lease financing.
At September 30, 1999, we had approximately $2.7 million in cash and cash
equivalents.
Net cash used in operating activities increased to approximately $15.9
million during the nine months ended September 30, 1999 compared to $609,000
provided by operations at September 30, 1998. This net change in cash used in
operating activities from year to year primarily resulted from increasing net
losses, partially offset by increased non-cash depreciation expense.
Net cash provided from investing activities increased to approximately $3.1
million for the nine months ended September 30, 1999, compared to net cash used
in investing activities of approximately $8.3 million for the period ended
September 30, 1998. For the period ended September 30, 1999, we invested
approximately $10.7 million in capital expenditures as compared to
approximately $8.3 million in the period ended September 30, 1998. These
expenditures were primarily for Z-Nodes and an Oracle database. Pursuant to our
adoption of Statement of Position 98-1, as of January 1, 1999, we capitalized
approximately $2.2 million of software development costs for the period ended
September 30, 1999. Our
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<PAGE>
software development costs in 1998 were expensed as incurred. On March 15,
1999, we entered into an agreement with CMB Capital, LLC to sell and lease back
certain equipment, which provided approximately $13.8 million in cash from
investment activities for the period ended September 30, 1999.
Net cash provided by financing activities totalled approximately $7.5
million for the nine months ended September 30, 1999, and as compared to net
cash provided of approximately $8.7 million for the period ended September 30,
1998. The change in 1998 resulted primarily from issuance of common stock
totalling $3.8 million and of notes payable to fund operations. Additionally in
1999, we issued preferred stock totalling $10.0 million and we made payments of
$1.9 million on capital lease obligations compared to $17,000 for the nine
months ended September 30, 1998.
Our capital requirements will depend on several factors, including market
acceptance of our services, the amount of resources we devote to investments in
our Z-Nodes and services development, the resources we devote to sales and
marketing of our services and our brand promotions and other factors. We have
experienced a substantial increase in our capital expenditures and operating
losses since our inception consistent with the growth in our operations and
staffing, and we anticipate that this will continue for the foreseeable future.
Additionally, we expect to make additional investments in technologies and our
network architecture, and plan to expand our sales and marketing programs and
conduct more aggressive brand promotions. We currently anticipate that the net
proceeds of the offering will be sufficient to meet our anticipated needs for
working capital and capital expenditures for at least the next 12 months.
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 may use cash. Consequently, any such future growth may
require us to obtain additional equity or debt financing which may not be
available on attractive terms, or at all, or may be dilutive. For more
information relating to our capital needs, please refer to the section entitled
"Risk Factors--We may need additional capital to fund our operations and
finance growth, and we may not be able to obtain it on terms acceptable to us."
We have a total commitment of $35.2 million from CMB of which $13.8 million
had been drawn as of September 30, 1999. The lease terms provide for repayment
of the original cost of the equipment plus interest at an approximate interest
rate of 10.3%, through equal payments of principal and interest over a 48 month
term. The agreement has been amended to allow us, at our option, to repay all
outstanding debt upon the completion of the offering. For more information on
this arrangement, please refer to the section entitled "Financing Arrangement."
The Year 2000 Issue
Impact of the Year 2000
Currently, many computer and software products are coded to accept two-
digit entries in the date code field. These date code fields may recognize "00"
as the year 1900 instead of the year 2000, commonly known as the Year 2000
issue. As a result, many companies'
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<PAGE>
software and computer systems will need to be upgraded or replaced to comply
with Year 2000 requirements. Failure to make such upgrades or replacements
could result in system failure or erroneous calculations, causing disruptions
of operations, such as an inability to process transactions, send invoices and
engage in other normal business activities. We recognize the need to ensure
that our operations are not adversely impacted by Year 2000 compliance problems
relating to our computer systems that would have a significant negative effect
on our business, operating results or financial condition.
Since our inception, we have conducted assessments of our state of Year
2000 readiness, including evaluating our internally developed and externally
obtained software and computer systems. We reviewed our computer systems,
network components, network operating systems, business applications and
technology infrastructure. These efforts have included analysis of
approximately 250 types of network components, such as switches, routers, and
voice recognition units comprised of thousands of individual devices. We
analyzed approximately 180 network operating support systems in the
provisioning, operating and engineering processes of the network. We analyzed
approximately 45 business applications supporting customer billing and
management, financial systems and human resources management. We also analyzed
our information technology infrastructure comprised of approximately 25 mid-
range and 150 personal computers.
We are not aware of any material operational impediments associated with
the Year 2000 issue. Although we cannot make any assurances, we believe that:
. all software and applications created by us including all related
supporting devices, data and files will function correctly into and
beyond the Year 2000, and that they will neither contain nor create any
logical or mathematical inconsistency, will not malfunction, and will
not cease to function when processing date and time data, when used with
equally compliant applications of software versions in the handling of
dates and times, and date and time related data;
. all our applications will accurately process date and time data, which
includes the years 1999 and 2000 and associated leap year calculations
as long as compliant versions of hardware and software are used
simultaneously; and
. when inter-operating with information technology products from other
vendors, our applications will accurately process date/time data to the
extent that the other vendor's software and/or hardware products, used
in combination with tested our applications, properly exchange
conforming date/time data.
We may experience unexpected or anomalous software behavior caused by non-
compliant date and time related data being received from another third-party
product. If we encounter non-compliant third-party products, we could
experience adverse consequences or material costs or both.
Because we are a new company, our development efforts since inception have
been planned with an awareness of the Year 2000 issue and it is not possible to
separately identify specific costs of efforts solely related to that activity.
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The most reasonably likely worst case Year 2000 scenario which we believe
we might face would be a pervasive outage of the public switched telephone
network. We rely on major carriers such as Bell Atlantic, MCI WorldCom, VarTec
Telecom, Inc. and BTI Telecom Corp. as third-party carriers for our
telecommunications transport. We would suffer a material adverse effect if any
carrier that we rely on experiences a catastrophic outage.
Contingency Plans
Our primary contingency plan is to provide for additional equipment
capacity and to have personnel available on key dates and times so that they
can be immediately mobilized. In the event of an outage, the plan further
provides procedures to provide full communication and escalation procedures to
direct technical and management resources toward further difficulties which
might emerge. There can be no assurances however that these procedures are
sufficient to address the virtually unlimited number of differing circumstances
relating to Year 2000 issues that might arise.
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<PAGE>
BUSINESS
Overview
We are an emerging provider of advanced, integrated telecommunications
services primarily to residential and small business customers. We offer local
and long distance telephone services in combination with Internet-based
enhanced communications features. Through our uniquely designed web interface,
our subscribers are able to manage their voice communications through the power
of the Internet and the visual, "point and click" functionality of the personal
computer. Our services are designed to make communications easier and more
efficient.
Our business strategy takes advantage of recent regulatory changes that
enable us to gain access to the individual components of the traditional local
telephone service provider's networks. Access to these components, in
combination with our proprietary technology and advanced communications
network, enables us to provide cost-effective local and long distance telephone
services with enhanced features.
We currently offer two services, Z-Line Home Edition and Z-Line Community,
both centered around the Z-Line Communications Center. Located at
www.myzline.com, the Z-Line Communications Center combines the convenience of
the telephone with the power of the Internet. Accessible by telephone or the
Internet, the Z-Line Communications Center enables our customers to direct,
retrieve, deliver, compile and otherwise manage their voice communications.
Industry Background
The Telecommunications Act of 1996 was passed principally to foster
competition in the telecommunications markets. The Telecommunications Act
imposes a variety of duties upon the traditional local telephone company
providers, which are commonly referred to in the telecommunications industry as
incumbent local exchange carriers, or ILECs, including the duty to provide
other communications companies with access to their network elements on an
unbundled basis at any feasible point, at rates and on terms and conditions
that are just, reasonable and nondiscriminatory. The Telecommunications Act
also establishes procedures under which the Bell operating companies will be
allowed to handle long distance calls originating from within their telephone
service area and terminating outside their area. The Bell operating companies
were divested by AT&T in 1984 pursuant to court order under which they were
prohibited from providing "in-region" long distance telephone service. With the
passage of the Telecommunications Act, a Bell operating company can provide
such in-region service, if it complies with a 14-point regulatory checklist,
including offering interconnection to other communications companies and
providing access to its unbundled network elements on terms approved by a state
public service commission. A network element is a facility or piece of
equipment of the local telephone company's network or the features, functions
or capabilities such facility or equipment provides.
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On September 10, 1999, in an effort to comply with the 14-point regulatory
checklist in order to be able to offer "in-region" long distance telephone
service, Bell Atlantic filed a tariff which establishes favorable rates, terms
and conditions under which competitors may purchase unbundled network elements
in New York State. In its New York tariff, Bell Atlantic undertakes to provide
unbundled network elements for provision of both residential telephone service
and small business telephone service, with the exclusion of business service
from end offices with two or more competitive local telephone service providers
which are commonly referred to in the telecommunications industry as
competitive local exchange carriers, or CLECs, collocated in that end office.
On November 5, 1999, the FCC released an order establishing the list of
unbundled network elements that incumbent local exchange carriers nationwide
must provide. Taken together, these unbundled network elements comprise the
most important facilities, features, functions and capabilities of the
incumbent local exchange carrier's network. Under the FCC's order, the
incumbent local exchange carriers must allow competing local telephone
companies such as Z-Tel to use the unbundled network elements to provide basic
local telephone service and must price the elements using a forward-looking,
long-run incremental cost methodology. We expect the individual network
components to be available at attractive prices nationwide as state regulatory
authorities and incumbent local exchange carriers conform to recent Supreme
Court and FCC mandates. Favorable pricing for unbundled network elements has
been adopted in New York, Pennsylvania and Texas, and we expect will be adopted
soon in Maryland, Massachusetts, Vermont and New Jersey. The prices for the use
of these individual network components will nevertheless vary from state to
state.
The Communications Problem
The Problem with the Telephone as a Communications Device
Today's conventional telephone system, while simple, reliable and
universal, is limited because it cannot effectively and easily locate people or
direct messages and billing options are often complex. Currently, callers must
know the telephone number of the party they are trying to reach prior to
placing the call. The telephone itself, while convenient and easy-to-use, is
limited in its ability to help the caller determine the correct number. Calling
has become even more complex with the proliferation of mobile phones and
pagers, as callers often need to try multiple numbers to reach a single party.
Moreover, many consumer groups, which we refer to as communities, experience
difficulty when sending messages out to multiple members, since they are not
linked by a common voice mail system. Consumers face the additional
complication of subscribing to multiple telephone services including local,
long distance, calling card and personal toll-free number service from
different companies, each of which has its own pricing and billing practices.
The Problem with the Internet as a Communications Device
The introduction of the Internet has offered an alternative to the
telephone system. Personal computers and other Internet access devices store
names and addresses, thereby easing directory difficulties. The Internet allows
users to send e-mail simultaneously to many people, whether they are present to
receive it or not, which is useful in serving the
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communication needs of large groups. The cost to consumers for access to the
Internet can be simple and known, usually based on a monthly fee paid to a
single Internet service provider. However, the Internet does not yet offer
voice communication of sufficient quality and reliability, and it does not have
the widespread access or ease of use of the telephone, so that many consumers
are not able to take advantage of its features.
We believe that combining the features of the telephone and Internet solves
many of the communication problems that consumers face. The telephone offers
easy to use voice communication, and the Internet provides easy access to user
directories and storing of messages. The telephone has been widely adopted by
most individual consumers, while the Internet facilitates group communication.
We believe that a significant market opportunity exists for a communications
provider that can combine the power and efficiency of the Internet with the
simplicity, reliability, and ease-of-access of the telephone.
Market Opportunity
We currently offer our services in the areas of New York state served by
Bell Atlantic, where we believe that we are one of few competitive local
exchange carriers specifically targeting the needs of residential and small
business customers. The initial states to adopt favorable prices for the
complete platform of the individual network components are New York,
Pennsylvania and Texas. According to the FCC, these states had over 19.6
million residential users and 1.4 million single line business users, with a
total local and long distance market that exceeded $34.1 billion annually at
the end of 1997. In addition, we believe that Maryland, Massachusetts, Vermont
and New Jersey, with another 8.9 million residential users and 449,000 single
line business users and a total local and long distance market of $16.4
billion, are in the process of adopting favorable prices for the complete
platform of the individual network components that will permit us to cost-
effectively implement our strategy. We believe that this represents a
significant market opportunity for our enhanced communications services.
The Z-Tel Solution
By integrating the simplicity of standard telephone service with the robust
features that our Internet applications deliver, we have created a unique
environment for managing communications which can be accessed by the telephone
or personal computer. Our services provide real-time communications with the
ability to integrate personal directories using our Internet interface, the Z-
Line Communications Center. Specifically, we have the following competitive
advantages:
Cost-effective local and long distance telephone service. We provide a
cost-effective bundled package of local and long distance telephone
services that includes all the enhanced features of the Z-Line
Communications Center in markets that have favorable regulatory
environments. We target residential and small business customers for
expansion of our Z-Line Home Edition service. We lease facilities of the
existing incumbent local exchange carrier at a forward-looking, long-term
incremental cost basis which enables us to avoid the need to invest
significant capital into switching
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equipment at the incumbent local exchange carrier's central office. As a
result, we are able to provide a competitively priced, bundled package
that includes local and long distance telephone services.
Enhanced communication services for groups and individual users
nationwide. We offer our Z-Line Community package of long distance
telephone service bundled with the Z-Line Communications Center to
consumers, organizations and business users nationwide. Z-Line Community
customers get access to the Z-Tel network's enhanced features and low-cost
long distance service while retaining their current phone number and local
and long distance service providers. The Z-Line Communications Center
capabilities, including specialized features for directories and group
messaging, provide value to users within sponsored communities by
facilitating communication among dispersed community members.
Seamless integration of personal organizational tools. The Z-Line
Communications Center has been designed to allow users to download their
personal directories from a variety of software packages, including
Microsoft Outlook and Netscape. In addition, other personal contact
managers such as Palm Pilot, can be downloaded into Outlook and then
downloaded into the Z-Line Communications Center. Once this information
has been downloaded, customers can use their database of contacts to
easily create sub-directories for special group messaging. By utilizing
the Z-Line Communications Center at www.myzline.com, customers can, with
the click of a mouse, initiate calls or forward messages to contacts that
have been stored in their personal directories. We believe the ability to
manage personal directories on our network creates a more loyal customer
over time due to the difficulty of transferring personal directories to
other services.
Scalable platform for new markets. The unbundling of network elements
allows us to lease the incumbent local exchange carrier's facilities to
provision our service to our customers. As a result, we can enter new
markets quickly as they adopt favorable pricing without a significant
investment in equipment. In addition, we have a centralized sales staff
that receives incoming calls for new service and electronically provisions
service to new customers. Using the Z-Line Communications Center,
customers can manage and configure their own service requirements, thus
minimizing the need for an expanded customer service infrastructure.
Advanced proprietary technology. We have created an integrated and
proprietary software and advanced network architecture that enables the
enhanced features of our service. We have created software applications
that can control the basic functions of initiating and completing a
telephone call regardless of the access device such as a telephone or
personal computer. This application allows our customers to simultaneously
control all the basic functions of a telephone call from either the
telephone or personal computer. In addition, we, in collaboration with a
third party, have created our own proprietary billing system. We are also
in the process of developing and enhancing our customer care, billing and
provisioning software into one seamlessly integrated package.
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Our network is designed to route traffic to our main network
operations center in Tampa for call management. This reduces our need to
collocate network equipment in the central offices of the incumbent local
exchange carrier in our target markets and enhances our ability to enter
new markets quickly and cost effectively. Our network architecture also is
designed to accommodate a number of developing technologies in the event
that any one of these technologies widely proliferates, such as telephone
calls over Internet protocol, digital subscriber line, asynchronous
transfer mode, or coaxial cable systems.
The Z-Tel Strategy
Our goal is to become the leading provider of integrated, web-enabled,
enhanced communication services to residential and business customers.
Significant elements of our strategy to achieve this goal include:
Rapidly Penetrate Residential and Small Business Markets in Targeted
States. We plan to exploit the new favorable pricing for unbundled network
elements by offering Z-Line Home Edition in selected states as incumbent
local exchange carriers conform to the FCC's mandate for these favorable
pricing guidelines. This regulatory environment allows us to utilize the
existing incumbent local exchange carriers' facilities in combination with
our unique centralized network architecture and proprietary software. Using
this technology, we are able to enter new markets both rapidly and with a
reduced level of capital investment. We initially plan to concentrate on
New York, Pennsylvania and Texas. In these states, we expect to be one of
the first companies to offer integrated communications packages that
include local and long distance telephone services as well as a host of
advanced, web-enabled communication features. We believe our Z-Line Home
Edition service will enable us to capture and retain market share in the
markets which we enter.
Offer Attractive Bundled Pricing for Our Suite of Integrated
Services. We currently offer our services on a bundled pricing basis. We
offer local and long distance telephone services at competitive prices and
include our enhanced features free of charge depending on usage levels.
Our integrated approach to offering a singular communications environment
that can be accessed by multiple devices is currently not duplicated by
our incumbent local exchange carrier competitors.
Expand Z-Line Community Membership. We plan to continue building Z-
Line Community membership by entering into arrangements with businesses,
universities and other organizations that have group communication
requirements to a large number of constituents. We expect our Z-Line
Community members will be an important source of Z-Line Home Edition
customers as members of these communities become familiar with our
advanced services and Z-Line Home Edition becomes available in their
markets.
Acquire and Maintain Subscribers by Providing Integrated, Web-enabled,
Enhanced Services. We intend to provide our customers with a full range of
enhanced service features and options on a single communications platform.
All of our current
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offerings include our Z-Line Communications Center which enables consumers
to retrieve, deliver, store, compile and otherwise manage their voice
communications. We are currently developing additional functionality that
will be included in future offerings, including voice recognition, e-mail
and fax by e-mail.
Pursue an Aggressive Marketing Campaign. To achieve rapid penetration
of our markets, we are planning an aggressive marketing strategy. We will
attempt to establish recognition of our "Z" brand through advertisements
and direct marketing campaigns. We will directly solicit new customers and
may enter into joint marketing and co-branding arrangements with companies
that have large, well-established customer franchises in our target
markets. By forming alliances with Internet service providers, paging
operators, other local telephone companies, cable television companies,
utilities, newspapers, banks and credit card companies, we believe that we
can efficiently penetrate large customer bases with a relatively small
capital outlay. To date, we have not formed any of these types of
alliances, but we are in active negotiations with potential marketing
partners.
Maintain State-of-the-Art Technology and an Advanced Communications
Network. We intend to devote substantial resources to expanding and
improving the technology that underlies our service offerings, as well as
investing in our back office, customer support and billing systems. We
believe that the scalable and modular design of our network architecture
allows the addition of future communications service offerings without
significant additional equipment costs. We may add new technologies and
services such as digital subscriber line service through joint ventures
and other relationships.
Service Offerings
We offer local and long distance service and Internet access integrated
with a full array of conventional and Internet-based, enhanced communication
features primarily to consumers and small businesses. Our services merge the
familiarity and simplicity of the telephone with the power and the visual,
"point and click" functionality of the personal computer. We currently have two
principal services, Z-Line Home Edition and Z-Line Community, both of which are
based on our core Z-Line Communications Center.
Z-Line Communications Center
The core feature of our service offerings is the Z-Line Communications
Center. The Z-Line Communications Center is a web site located at
www.myzline.com, where our subscribers can retrieve, forward, deliver, store,
compile and otherwise manage their voice mail and other communication needs.
For example, users can view a list of their voice mail messages, create on-line
address books, place calls with the click of a mouse or deliver voice messages
to groups of other subscribers. The Z-Line Communications Center includes the
following features:
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<PAGE>
Messaging. From the Messaging tab on our web site, a subscriber can access
voice mail messages and enable the Notify Me feature.
. Voice Mail: Subscribers
can view,
store,
forward and
return
voicemail
messages
with the
click of a
mouse.
. Notify Me: Subscribers
can enable
the Notify Me
feature to
contact them
via pager or
e-mail upon
the receipt
of a new
voice mail
message.
[Z-TEL SCREEN CAPTURE]
Calling. From the Calling tab on our web site, a subscriber can invoke the
Web Dial feature or set up the Find Me feature.
. Web Dial: Subscribers
can input a
contact's
telephone
number or
select a
frequently
dialed number
from a user-
defined pull-
down menu
whereby the
service dials
the intended
contact.
. Find Me: Subscribers
can designate
up to three
numbers where
the service
can attempt to
dial the
subscriber
when an
outside party
is attempting
to call or,
alternatively,
the subscriber
can choose the
"do not
disturb" feature that will automatically forward all calls to
voice mail.
[Z-TEL SCREEN CAPTURE]
39
<PAGE>
Address Book. From the Address Book tab on our web site, a subscriber can
add contacts, create group lists, import contacts from a variety of software
packages, look up other subscribers in the General Directory and refer others
to become subscribers to our service.
. Contacts: Subscribers
can add
contacts
manually and,
from their
stored contact
list, dial
these contacts
directly with
the click of a
mouse.
. Lists: Subscribers
can create
user-defined
distribution
lists from
their personal
contact lists
for group
messaging
functions.
. Import: Subscribers
can import
their contacts
from a variety
of software
packages,
including
Microsoft
Outlook and
Netscape.
[Z-TEL SCREEN CAPTURE]
. General
Directory: Subscribers can look up the names and listed phone numbers of other
subscribers, searching either by last name, first name, city or
state.
. Refer Others: Subscribers can refer other individuals to become subscribers
by providing up to three e-mail addresses which will send out
an automatic e-mail notifying the individuals of the benefits
of our service.
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<PAGE>
Communities. From the Communities tab on our web site, a subscriber can
view their list of communities, search and join designated communities, invite
other individuals to join communities and administrate the user access options
of a community. Communities are pre-defined groups of users usually based on
professional or personal affinities, that can be established either by group
sponsors or individual subscribers.
. My
Communities: Subscribers
can access
their pre-
defined
communities
to send
messages to
specific
community
members or
the entire
group.
. Search/Join:Subscribers
can search
for and join
communities
that have
been
designated
for the
individual
member's
inclusion.
[Z-TEL SCREEN CAPTURE]
. Invite:Subscribers can
invite other
subscribers to join their user-defined communities.
. Administrate:Subscribers can create and administrate communities by defining
the parameters of their user-defined community. Communities can
be set up to limit access to specified individuals.
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<PAGE>
Account. From the Account tab on our web site, a subscriber is able to
manage numerous administrative features and create user-defined pull-down menus
for frequently used numbers.
. My ID: Subscribers
can change
their personal
identification
and passwords
from this
location on
our web site.
. My Numbers: Subscribers
can define
up to ten
commonly
used numbers
for easy
selection
from pull-
down menus
used on
other
locations of
our web
site.
. Fast Access: Subscribers
can enter
up to six
phone
numbers
from which
they can
access
Z-Line,
which will
give the
[Z-TEL SCREEN CAPTURE]
subscriber immediate access to the Z-Tel Network when dialing in
from these numbers.
. Profile: Subscribers can manage their personal profile options including
updating home address and billing information.
Z-Line Home Edition
Z-Line Home Edition packages low-priced local and long distance telephone
services with our enhanced communication features and optional Internet access.
Our Z-Line Home Edition service offering in New York includes, on a monthly
basis:
<TABLE>
<CAPTION>
Option 1 Option 2 Option 3
------------ ------------ ------------
<S> <C> <C> <C>
Z-Line Home Edition Price............. $49.99/month $69.99/month $89.99/month
Free Long Distance*................... 200 minutes 600 minutes 1000 minutes
Local Calling......................... Unlimited Unlimited Unlimited
Enhanced Z-Line Features ............. Free Free Free
Optional Internet Access.............. $17.95/month $17.95/month $17.95/month
</TABLE>
- --------
* Additional minutes are billed at a rate of 7.9 cents to 10 cents per minute.
Based on our assumptions about a typical user's calling patterns, we
believe that the monthly cost of a service package comparable to Option 1 above
from Bell Atlantic Corporation, the incumbent local telephone service provider
in New York state, along with
42
<PAGE>
a long distance package from a long distance service provider, would cost the
consumer approximately $75. The Z-Tel package represent a savings of $25 per
month, or 33%. We also offer packages with more long distance minutes for an
additional monthly fee.
Each of our Z-Line Home Edition plans also includes the following:
. retain existing phone . multiple number "find-me' service
number . group messaging
. Z-Line Communications . create communities
Center . call waiting
. web command and control . 3-way calling
. caller ID
. call forwarding
. voice mail
Favorable unbundled network element platform pricing also has been adopted
in Pennsylvania and Texas, and we also anticipate that favorable pricing will
soon be issued in Maryland, Massachusetts, Vermont and New Jersey. Favorable
pricing requirements for unbundled network elements and their wide availability
were also a feature of the SBC Communications Inc./Ameritech Corporation merger
order conditions recently approved by the FCC. Accordingly, we expect favorable
pricing to be available soon in each state in the combined SBC/Ameritech
regions. We intend to pursue these markets as soon as favorable pricing is
implemented in each individual state.
Z-Line Community
Our Z-Line Community service is a package of usage-based long distance
calling options bundled with the Z-Line Communications Center, offered to
sponsored communities such as colleges, civic organizations and businesses. Z-
Line Community customers get access to our enhanced features and low-cost long
distance service while retaining their current phone number and local and long
distance telephone service providers. Customers can access the Z-Tel network by
dialing a toll-free or local telephone number and inputting a personal
identification number or by calling from a pre-designated telephone number, in
which case the Z-Tel network uses caller identification technology to recognize
the caller and grant immediate access. Once connected, customers can place low-
cost long distance calls or use the full suite of enhanced Z-Line
Communications Center capabilities, including specialized features for
messaging within their sponsored community.
Our marketing efforts for Z-Line Community have focused on building
communities in partnership with major sponsors, who may receive a portion of
the revenue generated by their community members. We have an agreement with
Delta Airlines, for example, under which they sponsor a community made up of
their pilots, flight engineers and flight attendants. We also have agreed to
provide Z-Line Community service to 31 colleges, including approximately one
million students, faculty and administrators.
Z-Line Community has features that benefit both the sponsor and members of
a community. Sponsors can use group messaging features to deliver voice mail
messages to their widely-dispersed members. Colleges, for instance, can use our
services to
43
<PAGE>
simultaneously deliver voice mail messages to their widely dispersed students,
including personalized information such as financial aid and class schedule
updates. Students, faculty and administrators, meanwhile, can take advantage of
low long distance rates, or set up their own sub-communities based on student
groups or other affiliations in order to use the Z-Tel network to disseminate
information.
We generate revenue from Z-Line Community service when members use the Z-
Tel network to make long distance calls or when a member uses voice mail in
excess of preset monthly limits. Currently, we price our Z-Line Community long
distance telephone service at a rate of 7.9 cents to 10 cents per minute, and
charge 5 cents per minute when the member utilizes voice mail in excess of 300
minutes of voice mail in a month, excluding messages left by the community
sponsor. More importantly, we expect that Z-Line Community members will be an
important source of Z-Line Home Edition subscribers as they become familiar
with our services and Z-Line Home Edition becomes available in their markets.
Currently, we are providing Z-Line Community service in all 50 states.
Billing and Collection
We have three primary methods for billing and collecting from our
customers. For our Z-Line Home Edition customers, we can either mail a bill to
their address for payment by check or set up an automatic withdrawal from the
customer's checking account. For our Z-Line Community members, we require
credit card billing, in which case we receive payment directly from the
customer's credit card company. Our billing software can be further customized
to handle new and different billing programs that we may offer to our
customers.
Sales and Marketing
As of September 30, 1999, our sales organization consisted of 26 employees
in two major groups, direct and partnership marketing and community marketing,
each of which sells both Z-Line Home Edition and Z-Line Community. Our sales
activities include the following:
Z-Line Home Edition. We primarily target residential and small
business customers for our Z-Line Home Edition service through direct
marketing programs. We are currently pursuing partnerships with Internet
websites, Internet service providers, cellular carriers, paging carriers,
financial institutions and utility companies. In most cases we intend to
not only co-brand our offering with the partner, but also provide
functional integration. For example, a partner may notify jointly-held
customers of account balances, payments due, portfolio updates, sport
scores or other events. We believe that the integrated functionality of
our services will create additional loyalty from both partners and
customers.
Z-Line Community. We target Z-Line Community services to large
organizations that require special integration and also to small and
medium organizations that can use the standard community creation and
maintenance capabilities available through www.myzline.com. Targeted large
organizations include colleges and universities, transportation workers
and national professionals and trade associations. Targeted small
44
<PAGE>
and medium organizations include social, educational, religious and sports
organizations as well as small businesses and multi-level marketing
companies. Our sales approach includes both tailored solutions sold by our
sales associates as well as direct marketing and partnership programs.
Communities that fit this profile typically have communications needs
that are un-served or under-served. As a result, these communities
represent a significant opportunity to acquire a large number of customers
at a low acquisition cost. We believe that, over time, Z-Line Community
customers will be a rich source of Z-Line Home Edition customers as they
become familiar with the features of our services and Z-Line Home Edition
becomes available in their market.
Our marketing organization has the following primary responsibilities:
. acquiring and conducting market research to ensure our products have the
functionality, usability and value that are attractive to our target
customers;
. ensuring continuity in our branding and increasing awareness of Z-Tel
brands, both on a standalone basis and in conjunction with our partners;
. coordinating direct marketing programs and preparing all material for
distribution; and
. managing our interaction with the media and other external groups.
We brand our services under the "Z" label. We expect to make active inroads
in customer awareness and positive perception of Z-Tel and our brands. In these
efforts, we leverage the uniqueness of our products and the differences between
our products and the products of the incumbent providers. We intend to market
our services by encouraging our target customers to ask, "Why have a phone line
when you can have a Z-Line?"
Network Architecture
Our network consists of the Z-Tel Command Center located in Tampa, Florida
and seven remote network communication facilities, called Z-Nodes, located
throughout the U.S. The Z-Nodes are linked to each other and to the Z-Tel
Command Center via a sophisticated voice and data communications network. The
Z-Tel Command Center is the centralized location for housing the hardware and
proprietary software that manages our enhanced, web-enabled, integrated
features. In addition, the Z-Tel Command Center can remotely monitor and
operate all components of the remote Z-Nodes and distribute software updates
across the entire network without disrupting service.
Our network architecture is designed to provide regional points of presence
that can be accessed locally by customers travelling outside of their home
territories. Each regional Z-Node is connected to local and long distance
communication networks and to the Z-Tel Command Center so that all proprietary
customer information is instantaneously available to the customer for managing
his or her communication needs. The communications network links each Z-Node to
multiple calling areas, allowing less than 20 Z-Nodes to cost effectively serve
80% of the U.S. market.
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<PAGE>
This distributed architecture allows us to both flexibly deploy hardware
and also procure network services from a variety of providers, enabling us to
minimize our capital investment and optimize our bandwidth requirements and
origination and termination costs.
Our proprietary software technology is designed to control the basic
functions of initiating and completing a telephone call, regardless of the
access device, by inserting our network technology throughout the call process.
For example, an individual who is speaking on the telephone and is logged into
our web site can simultaneously control the features of the telephone from
either the personal computer or the telephone. In this example, without hanging
up the telephone receiver, a caller can terminate the phone call with a click
of the mouse and initiate the next call with a click of the mouse on a stored
contact name located in the callers personal directory.
Z-Line Home Edition
The network configuration for the Z-Line Home Edition includes network
elements leased from the incumbent local exchange carriers pursuant to tariffs
plus network elements directly provided by us. The network elements we provide
include a Class IV switch for each major geographical region, interconnection
with long haul and short haul long distance carriers and direct connections to
the Z-Tel Command Center. The Class IV switch serves all central offices with
our bundled service offering and provides connectivity to the long distance
networks. In New York, we have one Class IV switch through which we plan to
initiate servicing 168 central offices covering New York City and Long Island
beginning in 2000. We maintain dedicated transport between our Class IV switch
in New York City and our Z-Tel Command Center.
The Z-Tel Command Center includes the following elements:
. programmable Excel switches that accept incoming calls;
. Sun servers that host our proprietary software applications, primarily
written in Java, and our Oracle databases;
. Windows NT servers that include Dialogic voice processing hardware; and
. web servers that interface with the Sun servers.
We believe our network architecture provides us with the following
advantages:
. low capital investment to enter a new market; and
. a highly intelligent network that makes the Z-Tel network unique in
functionality and usability for end users.
Currently, our Z-Nodes provide toll-free and local city access to the Z-
Line Community service offering. However, the Z-Nodes can be easily upgraded to
provide Z-Line Home Edition service with a modest amount of additional
investment in equipment and network facilities.
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<PAGE>
Future Network Planning
An important part of our technology platform is the separation of our
intelligent network components. Our proprietary software applications reside in
our Sun servers, which can connect to many different types of networks. As a
result, we will be able to accommodate numerous transport modes including
circuit switched, packet switched, digital subscriber lines and Internet
protocol.
Z-Tel Operations Support Systems and Customer Support
We have invested substantially in our software platform which includes
integrated customer ordering and provisioning, customer service and billing
functionality for our services. For Z-Line Community service, a new subscriber
can enroll via the Internet or our toll free number with service immediately
activated. The Z-Line Communications Center allows our Z-Line Home Edition
customers to change billing options and service feature configurations. A
subscriber may also update service configurations on the telephone.
The Z-Line Home Edition orders require us to interact with the applicable
local exchange carrier. Currently, after receiving a signed letter of
authorization, we enter orders in an electronic Web-based interface provided by
Bell Atlantic and our provisioning agents also enter the order in the Z-Tel
system.
We expect to invest over the next year to expand our operations support
systems to include electronic gateways to the major incumbent local exchange
carriers, network element management software, and a standard internal
provisioning interface that can handle multiple incumbent local exchange
carrier ordering systems. This investment will include outside integration and
consulting assistance.
We currently employ 110 people in our customer service and provisioning
groups. Our customer service center is open 24 hours per day, 7 days per week.
Intellectual Property and Proprietary Rights
We have developed our own proprietary software that governs the interaction
among our hardware and software, known as the Z-Tel Network, and the systems of
the incumbent local exchange carriers and interexchange (or long distance)
carriers with which our network interconnects. We have designed proprietary
software applications that govern the interaction of numerous hardware
components of our network. Our proprietary software applications also enable
our Z-Nodes to access and utilize diverse databases.
Our intellectual property reflects the know-how, work product and
inventions of our over 70 engineers, programmers and development professionals,
each of whom has executed a confidentiality agreement with us. Our research and
development team, based at our technology center in Atlanta, has substantial
experience in computer technology, telecommunications, web-based services,
database management and integration, and network development, architecture,
operation and management.
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<PAGE>
We have also entered into, and will continue to enter into, nondisclosure
agreements with our employees, independent contractors, business customers and
others. We believe these agreements will protect our confidential and
proprietary information, whether or not such information is copyrighted or
subject to trademark or patent protection. We intend to take all appropriate
legal action to protect our ownership and the confidentiality of all our
proprietary software, including the filing of copyrights in the U.S. Copyright
Office.
We have filed trademark applications for federal registration of more than
forty trademarks with the United States Patent and Trademark Office including
Z-TEL, Z-TEL TECHNOLOGIES, INC., Z-TEL COMMUNICATIONS, INC. AND DESIGN, Z-NODE,
Z-LINE, Z-NOTIFY, Z-SITE, Z-MAILBOX, Z-DIRECTORY, Z-NOW!, Z-NUMBER, Z-BILL
PAYMENT SERVICES, Z-NET, GENERATION Z, MYZLINE and YOUR PERSONAL
TELECOMMUNICATIONS PORTAL.
Competition
Overview
The telecommunications industry is highly competitive. At present, few
telecommunications carriers provide the type of bundled packages that include
the range of services and features we offer, but various competitors offer one
or more of the services that make up our service offering. Competition in the
local telephone services market is still emerging, but already has attracted
many strong competitors. Competition in the long distance and information
services markets, which have fewer entry barriers, is already intense and is
expected to remain so.
We believe that the principal competitive factors affecting our business
will be the quality and reliability of our services, innovation, customer
service and price. Our ability to compete effectively will depend upon our
continued ability to offer innovative, high-quality, market-driven services at
prices generally equal to or below those charged by our competitors. Many of
our current and potential competitors have greater financial, marketing,
personnel and other resources than we do, as well as other competitive
advantages.
Local Telephone Service
Incumbent Local Exchange Carriers
In each of our target markets, we will compete with the incumbent local
exchange carrier serving that area, such as the Bell operating companies and
GTE Corporation. As a recent entrant in the telecommunications services
industry, we have not achieved and do not expect to achieve a significant
market share for any of our services in our markets in the foreseeable future.
In particular, the incumbent local exchange carriers have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than ours, have the potential to subsidize
services which compete with
48
<PAGE>
our services with revenue from a variety of other unregulated businesses, and
currently benefit from certain existing regulations that favor the incumbent
local exchange carriers over us in certain respects.
Recent regulatory initiatives which allow competitive local exchange
carriers, such as us, to interconnect with incumbent local exchange carrier
facilities and acquire and combine the unbundled network elements of an
incumbent local exchange carrier provide increased business opportunities for
us. However, such interconnection opportunities have been, and likely will
continue to be, accompanied by increased pricing flexibility and relaxation of
regulatory oversight for the incumbent local exchange carriers.
Competitive Local Exchange Carriers. The Telecommunications Act radically
altered the market opportunity for competitive local exchange carriers.
Competitive access providers who entered the market prior to passage of the
Telecommunications Act built their own infrastructure to offer exchange access
services to large end-users. Since passage of the Telecommunications Act, many
competitive access providers have added switches to become competitive local
exchange carriers in order to take advantage of the opening of the local
market. With the Telecommunications Act requiring unbundling of the incumbent
local exchange carrier networks, competitive local exchange carriers will now
be able to more rapidly enter the market by leasing switches, trunks and loop
capacity until traffic volume justifies building facilities. Newer competitive
local exchange carriers, like us, will not have to replicate existing
facilities and can be more opportunistic in designing and implementing networks
that could have the effect of increasing competition for local exchange
services.
Interexchange Carriers. We also expect to face competition from other
current and potential market entrants, including interexchange carriers such as
AT&T, MCI WorldCom, and Sprint, seeking to enter, reenter or expand entry into
the local exchange market. A continuing trend toward consolidation of
telecommunications companies and the formation of strategic alliances within
the telecommunications industry, as well as the development of new
technologies, could give rise to significant new competitors. For example, in
September 1998, WorldCom merged with MCI Communications Corp. and, in October
1999, MCI WorldCom and Sprint Communications Company, L.P. announced merger
plans. In March 1999, AT&T acquired Tele-Communications, Inc., the largest
provider of cable television services in the United States. These types of
consolidations and strategic alliances could put us at a competitive
disadvantage.
Long Distance Telephone Service
The long distance telecommunications industry has numerous entities
competing for the same customers and a high average churn rate because
customers frequently change long distance providers in response to the offering
of lower rates or promotional incentives by competitors. Our primary
competitors include major interexchange carriers such as AT&T, MCI WorldCom,
Sprint and Qwest Communications International Inc., certain incumbent local
exchange carriers and resellers of long distance services. We believe that
pricing levels are a principal competitive factor in providing long distance
telephone service; however, we
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<PAGE>
plan to avoid direct price competition by bundling long distance telephone
service with a wide array of value-added services.
Incumbent local exchange carriers that offer a package of local, long
distance telephone and information services will be particularly strong
competitors. Incumbent local exchange carriers, other than the Bell operating
companies, are currently providing long distance as well as local services. We
believe that Bell operating companies will attempt to offset share losses in
their local markets by attempting to capture a significant percentage of the
long distance market.
Enhanced Services
Our Z-Tel Home Edition will compete with a variety of enhanced service
companies including onebox.com, jfax.com, Virtel and AccessLine Communications.
Enhanced services markets are highly competitive, and we expect that
competition will continue to intensify. Our competitors in these markets will
include Internet service providers, web-based communications service providers
and other telecommunications companies, including the major interexchange
carriers, incumbent local exchange carriers, competitive local exchange
carriers and wireless carriers.
Other Market Entrants
We may face competition in local, long distance and information services
from other market entrants such as electric utilities, cable television
companies, fixed and mobile wireless system operators, and operators of private
networks built for large end-users. All of these companies are free to offer
bundled services similar to those that we offer. Electric utilities have
existing assets and low cost access to capital that could allow them to enter a
market rapidly and accelerate network development. Cable television companies
are also entering the telecommunications market by upgrading their networks
with fiber optics and installing facilities to provide fully interactive
transmission of broadband voice, video and data communications. Wireless
companies have developed, and are deploying in the United States, wireless
technology as a substitute for traditional wireline local telephones. The
recent World Trade Organization agreement on basic telecommunications services
could increase the level of competition we face. Under this agreement, the
United States and 68 other member states of the World Trade Organization
committed to open their respective telecommunications markets, including
permitting foreign companies to enter into basic telecommunications services
markets. This development may increase the number of established foreign-based
telecommunications carriers entering the U.S. markets.
The Telecommunications Act includes provisions which impose certain
regulatory requirements on all local exchange carriers, including competitive
local exchange carriers. At the same time, the Telecommunications Act expands
the FCC's authority to reduce the level of regulation applicable to any or all
telecommunications carriers, including incumbent local exchange carriers. The
manner in which these provisions are implemented and enforced could have a
material adverse effect on our ability to compete successfully against
incumbent local exchange carriers and other telecommunications service
providers.
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Government Regulation
Overview
We operate as an unregulated provider of information services, as that term
is defined in the Communications Act of 1934, as amended by the
Telecommunications Act of 1996, and as an enhanced service provider, as that
term is defined in the FCC rules, in providing our non-common carrier services
such as voice mail, "find-me," notification and directory services offered
through the Z-Line Communications Center. These operations currently are not
regulated by the FCC or the states where we operate. In providing Z-Line Home
Edition and our long distance services, we are regulated as a common carrier at
the state and federal level. In offering these regulated telecommunications
services as a common carrier, we are subject to additional rules and policies
not applicable to providers of information services alone. In addition, we are
certificated as a competitive local exchange carrier in a number of states, and
are seeking this certification in additional states.
The local and long distance telecommunications services we provide are
regulated by federal, state, and, to some extent, local government authorities.
The FCC has jurisdiction over all telecommunications common carriers to the
extent they provide interstate or international communications services. Each
state regulatory commission has jurisdiction over the same carriers with
respect to the provision of intrastate communications services within that
state. Local governments sometimes seek to impose franchise requirements on
telecommunications carriers and regulate construction activities involving
public rights-of-way. Changes to the regulations imposed by any of these
regulators could have a material adverse effect on our business, operating
results and financial condition.
In recent years, the regulation of the telecommunications industry has been
in a state of flux as the United States Congress and various state legislatures
have passed laws seeking to foster greater competition in telecommunications
markets. The FCC and state utility commissions have adopted many new rules to
implement this legislation and encourage competition. These changes, which are
still incomplete, have created new opportunities and challenges for us and our
competitors. The following summary of regulatory developments and legislation
is intended to describe the most important, but not all, present and proposed
federal, state and local regulations and legislation affecting the
telecommunications industry. Some of these and other existing federal and state
regulations are the subject of judicial proceedings and legislative and
administrative proposals which could change, in varying degree, the manner in
which this industry operates. We cannot predict the outcome of any of these
proceedings, or their impact on the telecommunications industry at this time.
Some of these future legislative, regulatory or judicial changes may have a
material adverse impact on our business.
Federal Regulation
FCC Policy on Enhanced and Information Services
In 1980, the FCC created a distinction between basic telecommunications
services, which it regulates as common carrier services, and enhanced services,
which remain
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unregulated. The FCC exempted enhanced service providers from federal
regulations governing common carriers, including the obligation to pay access
charges for the origination or termination of calls on carrier networks and the
obligation to contribute to universal service. The Telecommunications Act of
1996 established a similar distinction between telecommunications services and
information services. Changing technology and changing market conditions,
however, sometimes make it difficult to discern the boundary between
unregulated and regulated services.
In general, information services are value-added services that use
regulated transmission facilities only as part of a services package that also
includes network or computer software to change or enhance the information
transmitted. We believe that most of the services we provide, including voice
mail, "find me," notification, and directory services offered through the Z-
Line Communications Center fall within this definition. Because the regulatory
boundaries in this area are somewhat unclear and subject to dispute, however,
the FCC could seek to characterize some of our information services as
"telecommunications services." If that happens those services would become
subject to FCC regulation, although the impact of that reclassification is
difficult to predict.
In general, the FCC does not regulate the rates, services, and market entry
and exit of non-dominant telecommunications carriers, but does require them to
contribute to universal service and comply with other regulatory requirements.
We are currently regulated as non-dominant with respect to both our local and
long distance telephone services.
FCC Regulation of Common Carrier Services
We currently are not subject to price cap or rate of return regulation at
the federal level and are not currently required to obtain FCC authorization
for the installation, acquisition or operation of our domestic exchange or
interexchange network facilities. However, we must comply with the requirements
of common carriage under the Communications Act of 1934. We are subject to the
general requirement that our charges and terms for our telecommunications
services be "just and reasonable" and that we not make any "unjust or
unreasonable discrimination" in our charges or terms. The FCC has jurisdiction
to act upon complaints against any common carrier for failure to comply with
its statutory obligations.
Comprehensive amendments to the Communications Act of 1934 were made by the
Telecommunications Act of 1996, which was signed into law on February 8, 1996.
The Telecommunications Act effected changes in regulation at both the federal
and state levels that affect virtually every segment of the telecommunications
industry. The stated purpose of the Telecommunications Act is to promote
competition in all areas of telecommunications. While it may take years for the
industry to feel the full impact of the Telecommunications Act, it is already
clear that the legislation provides us with new opportunities and challenges.
Interconnection. The Telecommunications Act greatly expands the
interconnection requirements applicable to the incumbent local exchange
carriers, i.e., generally, those existing local exchange carriers that, in the
past, enjoyed virtual or legal monopoly status. The Telecommunications Act
requires the incumbent local exchange carriers to:
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. provide physical collocation, which allows companies such as us and
other competitive local exchange carriers to install and maintain our
own network termination equipment in incumbent local exchange carrier
central offices or, if requested or if physical collocation is
demonstrated to be technically infeasible, virtual collocation;
. offer components of their local service networks on an unbundled basis
so that other providers of local service can use these elements in their
networks to provide a wide range of local services to customers; and
. establish "wholesale" rates for their services to promote resale by
competitive local exchange carriers. We currently do not have plans to
enter any markets by reselling incumbent local exchange carrier service.
In addition, all local exchange carriers must:
. interconnect with the facilities of other carriers;
. establish number portability, which will allow a customer to retain its
existing phone number if it switches from the local exchange carrier to
a competitive local service provider;
. provide nondiscriminatory access to telephone poles, ducts, conduits and
rights-of-way; and
. compensate other local exchange carriers on a reciprocal basis for
traffic originated by one local exchange carrier and terminated by
another local exchange carrier.
The FCC is charged with establishing national guidelines to implement
certain portions of the Telecommunications Act. The FCC issued its
interconnection order on August 8, 1996. Among other rules, the FCC established
a list of seven network elements, comprising most of the significant
facilities, features, functionalities, or capabilities of the network, that the
incumbent local exchange carriers must unbundle. It is possible for competitors
to provide competitive local exchange service using only these unbundled
network elements. In addition, the FCC mandated a particular forward looking
pricing methodology for these network elements that produces relatively low
element prices that are favorable to competitors.
On July 18, 1997, however, the United States Court of Appeals for the
Eighth Circuit issued a decision vacating the FCC's pricing rules, as well as
certain other portions of the FCC's interconnection rules, on the grounds that
the FCC had improperly intruded into matters reserved for state jurisdiction.
On January 25, 1999, the Supreme Court largely reversed the Eighth Circuit's
order, holding that the FCC has general jurisdiction to implement the local
competition provisions of the Telecommunications Act. In so doing, the Supreme
Court stated that the FCC has authority to set pricing guidelines for unbundled
network elements, to prevent incumbent local exchange carriers from
disaggregating existing combinations of network elements, and to establish
"pick and choose" rules regarding interconnection agreements. "Pick and choose"
rules would permit a carrier seeking interconnection to pick and choose among
the terms of service from other interconnection
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agreements between the incumbent local exchange carriers and other competitive
local exchange carriers. This action reestablishes the validity of many of the
FCC rules vacated by the Eighth Circuit.
Although the Supreme Court affirmed the FCC's authority to develop pricing
guidelines, the Supreme Court did not evaluate the specific forward-looking
pricing methodology mandated by the FCC and has remanded the case to the Eighth
Circuit for further consideration. Some incumbent local exchange carriers have
argued that this pricing methodology does not allow adequate compensation for
the provision of unbundled network elements. The Eighth Circuit heard oral
arguments on this pricing issue on September 16, 1999, but has not yet issued a
ruling.
The Supreme Court also remanded the list of unbundled network elements to
the FCC for further consideration of the necessity of each one under the
statutory standard. On November 5, 1999, the FCC released an order largely
retaining its list of unbundled network elements, but eliminating the
requirement that incumbent local exchange carriers provide unbundled access to
local switching for customers with four or more lines in the densest parts of
the top 50 Metropolitan Statistical Areas, and to operator services and
directory assistance. The FCC concluded that the market has developed since
1996 such that competitors can and do self-provision these services, or acquire
them from alternative sources. The FCC also noted that incumbent local exchange
carriers remain obligated under the non-discrimination requirements of the
Communications Act of 1934 to comply with the reasonable request of a carrier
that purchases these services from the incumbent local exchange carriers to
rebrand or unbrand those services, and to provide directory assistance listings
and updates in daily electronic batch files. In addition, the competitive
checklist contained in section 271 of the Communications Act of 1934 requires
Bell operating companies to provide nondiscriminatory access to these services.
These new FCC rules are likely to be the subject of further appeals. Thus,
while the Supreme Court resolved many issues, including the FCC's
jurisdictional authority, other issues remain subject to further consideration
by the courts and the FCC. We cannot predict the ultimate disposition of those
matters. If the Eighth Circuit fails to affirm the FCC's pricing methodology--
which is favorable to competitors such as us because it is based on forward-
looking costs--then unbundled network element prices, including prices for
unbundled network element combinations, may rise. Such increases would have a
materially adverse effect on our business.
Interconnection Agreements. The Telecommunications Act obligates incumbent
local exchange carriers to negotiate with us in good faith to enter into
interconnection agreements. Competitive local exchange carriers like us can
purchase unbundled network elements under such an agreement or under a tariff
or a Statement of Generally Available Terms filed with the state regulators.
Although we purchase the unbundled network element platform in New York under
Bell Atlantic's tariff, we will need interconnection agreements in some states
to provide enhanced connectivity to our network and to provide local exchange
services, including Z-Line Home Edition. If we cannot reach agreement, either
side may petition the applicable state commission to arbitrate remaining
disagreements. These arbitration
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proceedings can last up to 9 months. Moreover, state commission approval of any
interconnection agreement resulting from negotiation or arbitration is
required, and any party may appeal an adverse decision by the state commission
to federal district court, although some federal district courts have refused
to exercise jurisdictions over such cases. The potential cost in resources and
delay from this process could harm our ability to compete in certain markets,
and there is no guarantee that a state commission would resolve disputes,
including pricing disputes, in our favor.
Collocation and Line Sharing. The FCC recently adopted new rules designed
to make it easier and less expensive for competitive local exchange carriers to
obtain collocation at incumbent local exchange carrier central offices by,
among other things, restricting the incumbent local exchange carriers' ability
to prevent certain types of equipment from being collocated and requiring
incumbent local exchange carriers to offer alternative collocation arrangements
to competitive local exchange carriers. On November 18, 1999, the FCC also
adopted a new order requiring incumbent local exchange carriers to provide line
sharing, which will allow competitive local exchange carriers to offer data
services over the same line that a consumer uses for voice services without the
competitive local exchange carriers having to provide the voice service. While
we expect that the FCC's new rules will be beneficial to competitive local
exchange carriers, we cannot be certain that these new rules will be
implemented by the incumbent local exchange carrier in a favorable manner.
Moreover, incumbent local exchange carriers or other parties may ask the FCC to
reconsider some or all of these rules, or may appeal these rules in federal
court. We cannot predict the outcome of these actions or the effect they may
have on our business.
Bell Operating Company Entry into the Long Distance Market. The
Telecommunications Act permitted Bell operating companies to provide long
distance services outside their local service regions immediately, and will
permit them to provide in-region long distance service upon demonstrating to
the FCC and state regulatory agencies that they have adhered to the
Telecommunication Act's Section 271 14-point competitive checklist. Some Bell
operating companies have filed applications with various state public utility
commissions and the FCC seeking approval to offer in-region interLATA service.
Some states have denied these applications while others have approved them.
However, to date, the FCC has denied each of the Bell operating company
applications brought before it because it found that the Bell operating company
had not sufficiently made its local network available to competitors. On
September 29, 1999, Bell Atlantic filed with the FCC an application to provide
in-region long distance service originating in New York State. The FCC is
expected to issue a decision on this Petition by December 28, 1999. We also
expect other Bell operating companies to file similar applications in 1999 and
2000. We cannot predict the outcome of the New York Section 271 application
but, if granted, it could increase competition in the long distance market in
New York.
Universal Service. In May 1997, the FCC released an order establishing a
significantly expanded universal service regime to subsidize the cost of
telecommunications service to high cost areas, as well as to low-income
customers and qualifying schools, libraries, and rural health care providers.
Providers of interstate telecommunications services, like us, as well as
certain other entities, must pay for these programs. We are also eligible to
receive
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funding from these programs if we meet certain requirements, but we do not
currently have plans to do so. Our share of the payments into these subsidy
funds will be based on our share of certain defined telecommunications end-user
revenues. Currently, the FCC is assessing such payments on the basis of a
provider's revenue for the previous year. Various states are also in the
process of implementing their own universal service programs. We are currently
unable to quantify the amount of subsidy payments that we will be required to
make and the effect that these required payments will have on our financial
condition. On July 30, 1999, the United States Court of Appeals for the Fifth
Circuit overturned certain of the FCC's rules governing the basis on which the
FCC collects subsidy payments from telecommunications carriers and recovery of
those payments by incumbent local exchange carriers. In October 1999, on
remand, the FCC issued new universal service rules. These or other changes to
the universal service program could affect our costs. One or more parties may
seek review of the new FCC rules by the Fifth Circuit and subsequently by the
Supreme Court. The Fifth Circuit also remanded other rules to the Commission
for further consideration.
Tariffs and Rates. In 1996, the FCC issued an order that required
nondominant interexchange carriers, like us, to cease filing tariffs for our
domestic interexchange services. The order required mandatory detariffing and
gave carriers nine months to withdraw federal tariffs and move to contractual
relationships with their customers. This order subsequently was stayed by a
federal appeals court, and it is unclear at this time whether the detariffing
order will be implemented. In June 1997, the FCC issued another order stating
that nondominant local exchange carriers, like us, could withdraw their tariffs
for interstate access services provided to long distance carriers. If the FCC's
orders become effective, nondominant interstate services providers will no
longer be able to rely on the filing of tariffs with the FCC as a means of
providing notice to customers of prices, terms and conditions under which they
offer their interstate services. If we cancel our FCC tariffs as a result of
the FCC's orders, we may need to implement customer contracts which could
result in substantial administrative expenses.
In March 1999, the FCC adopted further rules that, while still maintaining
mandatory detariffing, nonetheless require interexchange carriers to make
specific public disclosures on their web sites of their rates, terms and
conditions for domestic interstate services. The effective date for these rules
is also delayed until a court decision on the appeal of the FCC's detariffing
order.
Jurisdictional Nature of Internet Traffic. Recently, the FCC has determined
that both continuous access and dial-up calls from a customer to an Internet
service provider are interstate, not local, calls, and, therefore, are subject
to the FCC's jurisdiction. The FCC has initiated a proceeding to determine the
effect that this regulatory classification will have on the obligation of local
exchange carriers to pay reciprocal compensation for dial-up calls to Internet
service providers that originate on one local exchange carrier network and
terminate on another local exchange carrier network. Moreover, several states
are considering this issue, and several states have held that local exchange
carriers do not need to pay reciprocal compensation for calls terminating at
Internet service providers. We cannot predict the effect that the FCC's
resolution of these issues will have on our business.
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Numbering and Number Portability. In August 1997, the FCC issued rules
transferring responsibility for administering and assigning local telephone
numbers from the Bell operating companies and other incumbent local exchange
carriers to a neutral entity in each geographic region in the United States. In
August 1996, the FCC issued new numbering regulations that prohibit states from
creating new area codes that could unfairly hinder competitive local exchange
carrier by requiring their customers to use 10 digit dialing while existing
incumbent local exchange carrier customers use seven digit dialing. In
addition, each carrier is required to contribute to the cost of numbering
administration through a formula based on net telecommunications revenues.
Beginning in March 2000, contributions for this purpose will be based on end
user telecommunications revenues.
In July 1996, the FCC released rules requiring all local exchange carriers
to have the capability to permit both residential and business consumers to
retain their telephone numbers when switching from one local service provider
to another, known as "number portability." Number portability has been
implemented in some of the areas, including New York where we contemplate
providing service, but has not been implemented everywhere in the United
States. Some carriers have obtained waivers of the requirement to provide
number portability, and others have delayed implementation by obtaining
extensions of time before compliance is required. Lack of number portability in
a given market could adversely affect our ability to attract customers for our
competitive local exchange service offerings, particularly business customers.
In May, 1999, the FCC also initiated a proceeding to address the problem of
the declining availability of area codes and phone numbers. Many of these
numbering-related issues are subject to further change by the FCC and the
courts, and could produce added administrative expenses for us.
Restrictions on Bundling. Current FCC rules prohibit dominant carriers from
bundling their non-competitive, regulated telecommunications services with
their unregulated enhanced or information services. The Commission has never
enforced this rule with respect to competitive local exchange carriers and has
proposed eliminating the rule for all carriers.
Slamming. A customer's choice of local or long distance telecommunications
company is encoded in a customer record, which is used to route the customer's
calls so that the customer is served and billed by the desired company. A user
may change service providers at any time, but the FCC and some states regulate
this process and require that specific procedures be followed. When these
procedures are not followed, particularly if the change is unauthorized or
fraudulent, the process is known as "slamming." Slamming is such a significant
problem that it has been addressed in detail by Congress in the
Telecommunications Act, by some state legislatures, and by the FCC in recent
orders. The FCC has levied substantial fines for slamming. The risk of
financial damage and to business reputation from slamming is significant. Even
one slamming complaint could cause extensive litigation expenses for us. The
FCC recently decided to apply its slamming rules (which originally covered only
long distance) to local service as well.
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Network Information. The Communications Act of 1934 and FCC rules protect
the privacy of certain information about telecommunications customers that a
telecommunications carrier such as Z-Tel acquires by providing
telecommunications services to such customers. Such protected information,
known as Customer Proprietary Network Information, includes information related
to the quantity, technological configuration, type, destination and the amount
of use of a telecommunications service. Under the FCC's rules, a carrier may
not use the customer proprietary network information acquired through one of
its offerings of telecommunications services to market certain other services
without the approval of the affected customers. The United States Court of
Appeals for the Tenth Circuit recently overturned the FCC's rules regarding the
use and protection of customer proprietary network information. The FCC
recently relaxed its customer proprietary network information rules somewhat,
but it also has sought reconsideration of the Tenth Circuit decision.
Other Issues. We also may be required to contribute to a governmental fund
supporting Telecommunications Relay Service, which permits persons with hearing
or speech disabilities to use the telecommunications network more easily. We
also will be subject to annual regulatory fees assessed by the FCC, and must
also file an annual employment report to comply with the Commission's Equal
Employment Opportunity policies.
State Regulation
To the extent that we provide telecommunications services which originate
and terminate in the same state, we are subject to the jurisdiction of that
state's public service commission. As our local service business and product
lines expand, we will offer more intrastate service and may become increasingly
subject to state regulation. The Telecommunications Act maintains the authority
of individual state utility commissions to preside over rate and other
proceedings, and to impose their own regulation on local exchange and
intrastate interexchange services, so long as such regulation is not
inconsistent with the requirements of federal law. For instance, states may
require us to obtain a Certificate of Public Convenience and Necessity before
commencing service in the state, and may impose tariff and filing requirements,
consumer protection measures, and obligations to contribute to universal
service and other funds. State commissions also have jurisdiction to approve
negotiated rates, or establish rates through arbitration, for interconnection,
including rates for unbundled network elements. We have state regulatory
authority to provide competitive local exchange services in 27 states. We also
have state regulatory authority to provide interexchange services in
approximately 43 states.
We are subject to requirements in some states to obtain prior approval for,
or notify the state commission of, any transfers of control, sales of assets,
corporate reorganizations, issuances of stock or debt instruments and related
transactions. Although we believe such authorizations could be obtained in due
course, there can be no assurance that state commissions would grant us
authority to complete any of these transactions.
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The Telecommunications Act generally preempts state statutes and
regulations that restrict the provision of competitive services. As a result of
this broad preemption, we will be generally free to provide the full range of
local, long distance, and data services in any state. While this action greatly
increases our potential for growth, it also increases the amount of competition
to which we may be subject. States, however, may still restrict competition in
some rural areas.
In particular, we expect to provide our Z-Line Home Edition service in
Texas and Pennsylvania within the next twelve months. In Texas, we obtained
facilities-based local exchange authority from the Texas public service
commission in late October 1999. We plan to operate in Texas under the terms
and conditions of a recently adopted tariff that provides for items that we
need to provide residential service offerings in a manner similar to that which
we are currently providing in New York. To date, SBC Communications Inc. (the
Bell operating company operating in Texas) has declined to make these terms and
conditions available to us until the Texas public service commission approves
SBC Communications Inc's. application to provide out-of-region long distance
service. In the meantime, we are considering other options to provide service
in Texas, including electing to participate in a number of existing
interconnection agreements that make available the unbundled network elements
necessary to provide our Z-Line Home Edition Service. In Pennsylvania, we
expect to operate according to Bell Atlantic's unbundled network element
platform tariff, which is similar to the tariff under which we currently
operate in New York. The Pennsylvania public service commission has recently
granted a stay to Bell Atlantic with respect to its order to make substantial
revisions to its unbundled network element platform tariff. Bell Atlantic is
now required to refile by December 1, 1999. Bell Atlantic has appealed the
Pennsylvania public service commission's order to the Pennsylvania state
supreme court. We are awaiting the new tariff and the outcome of Bell
Atlantic's appeal to make a final determination regarding our plans to commence
offering our Z-Line Home Edition service in Pennsylvania.
Local Government Regulation
We may be required to obtain street opening and construction permits from
municipal authorities to install our facilities in some cities. In some of the
areas where we provide service, we may be subject to municipal franchise
requirements requiring us to pay license or franchise fees either on a
percentage of gross revenue, flat fee or other basis. The Telecommunications
Act prohibits municipalities from discriminating among telecommunications
service providers in imposing fees or franchise requirements. In some
localities, the FCC has preempted fees and other requirements determined to be
discriminatory or to effectively preclude entry by competitors, but such
proceedings have been lengthy and the outcome of any request for FCC preemption
would be uncertain.
Employees
As of September 30, 1999, we had approximately 200 full-time employees,
excluding approximately 60 individuals employed by a temporary employment
service, some of whom we expect to offer full-time employment and three
independent contractors. None of our employees are covered under collective
bargaining agreements and we believe that our relationships with our employees
are good.
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In connection with the deployment of our network architecture and the
execution of our business plan, we believe that the number of our customer
service, information systems installation and sales and marketing personnel
will increase significantly.
Properties
We currently lease our principal executive offices in Tampa, Florida and
our principal engineering offices in Atlanta, Georgia.
Legal Proceedings
We are a party to various routine administrative proceedings. For more
information, please refer to the sections entitled "Business--Government
Regulation."
In addition, in May 1998 we received a letter from Premiere Technologies,
Inc. ("Premiere"), threatening legal action based on the allegation that our
chief executive officer, Mr. Smith, a founder, director and executive vice
president of Premiere, had, among other things, improperly used trade secrets
belonging to Premiere in connection with the development of our technology.
Although the parties have subsequently had some discussions and exchanged
correspondence, Premiere has never commenced any legal proceedings against us
or Mr. Smith. While we believe that Premiere's alleged claims are without
merit, we cannot assure you that Premiere will not try to pursue its claims
through litigation or what the outcome of such litigation would be.
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MANAGEMENT
Directors and Executive Officers
The following sets forth certain information regarding our directors and
executive officers as of October 1, 1999:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- ------------------------------------------------
<S> <C> <C>
D. Gregory Smith........... 40 President, Chief Executive Officer and Chairman
of the Board and Director
David J. Malfara, Sr....... 44 President, Z-Tel Network Services, Inc.
John M. Hutchens........... 52 Senior Vice President--Chief Financial Officer
Charles W. McDonough....... 48 Senior Vice President--Chief Technology Officer
J. Bryan Bunting........... 53 Senior Vice President--Engineering and Technical
Support
James A. Kitchen........... 39 Senior Vice President--Chief Architect
Mark H. Johnson............ 42 Secretary and Treasurer
Andrew L. Graham........... 41 Chief Legal Officer
Robert A. Curtis........... 32 Senior Vice President--Strategic Planning
Doug W. Jackson............ 34 Vice President--Marketing
Eduard J. Mayer............ 47 Director and Vice President--Strategic Alliances
Douglas C. Williamson...... 48 Director
Jeffrey A. Bowden.......... 53 Director
Buford H. Ortale........... 38 Director
Laurence S. Grafstein...... 39 Director
</TABLE>
D. Gregory Smith, a founder of Z-Tel, has served as chairman of the board
and chief executive officer of Z-Tel since inception. Mr. Smith was a director
of Premiere Technologies, Inc. from 1991 to 1997, executive vice president from
1994 to 1997 and vice president from 1991 to 1994. From 1987 to 1991, Mr. Smith
was a management and financial consultant with Olympus Telecommunications, Inc.
and Olympus Partners, Inc., companies that he founded. Mr. Smith has also held
positions with NationsBank of Florida, N.A. and Chase Bank of Florida. Mr.
Smith received his B.S. in Commerce from the University of Virginia.
David J. Malfara, Sr. has served as president of Z-Tel Network Services,
Inc. since February 1999. Mr. Malfara has over twenty-four years of
telecommunications experience. He founded and sold Pace Long Distance Service
and Pace Network Services. He has previously served as vice president of
engineering at National Computer Corporation, as technical
advisor/telecommunications at Honeywell Information Systems and as senior
engineer at GTE Telenet.
John M. Hutchens has served as senior vice president--chief financial
officer since September 1999. From 1982 through 1999 he was an employee and
then a partner at Arthur Andersen LLP. Mr. Hutchens received a B.S. in
Accountancy from the University of Illinois, and a Masters of Health
Administration from the Ohio State University. Mr. Hutchens is a Certified
Public Accountant licensed in Florida.
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Charles W. McDonough has served as senior vice president--chief technology
officer since August 1998. From 1975 through 1998, he was an employee and then
a partner at Andersen Consulting LLP. Mr. McDonough received a B.A. in
Industrial Engineering and a M.S. in Industrial Administration from Carnegie
Mellon University.
J. Bryan Bunting has served as senior vice president--engineering and
technical services since January 1999. Mr. Bunting served as senior vice
president--Z-Tel Business Networks from August l998 to January 1999. From 1968
through 1998, he was an officer of NationsBank, serving most recently as senior
vice president of direct banking. Mr. Bunting attended Old Dominion University.
James A. Kitchen, a founder of Z-Tel, has served as senior vice president--
chief architect of Z-Tel since January 1999. He served as vice president,
engineering from January 1998 to December 1998 and was a chief architect and
developer of Premiere Communications, Inc. from 1992 to 1997. Mr. Kitchen
received his B.S. in Engineering from Georgia Institute of Technology.
Mark H. Johnson has served as secretary and treasurer of Z-Tel since August
1999. From May 1998 until his arrival at Z-Tel, Mr. Johnson was an employee of
Olympus Management, a venture firm. From November 1991 until May 1998, Mr.
Johnson was an employee of First Union National Bank. Mr. Johnson holds a B.A.
from the University of Virginia.
Andrew L. Graham has served as chief legal officer of Z-Tel since September
1999. He has practiced corporate and tax law in Tampa, Florida since 1988, most
recently with the firm of Cass & Graham. He earned his Bachelor's in accounting
from Florida State University and his law degree, with honors, from the
University of Florida College of law in 1987 and went on to earn a Master of
Laws in Taxation there in 1988.
Robert A. Curtis has served as senior vice president--strategic planning
since July 1999. From May 1998 to June 1999, Mr. Curtis was vice president--
business development and legal affairs at Z-Tel. From September 1995 to April
1998, Mr. Curtis was an attorney at the Houston office of Fulbright & Jaworski,
LLP, where he specialized in antitrust and complex federal litigation. Mr.
Curtis graduated from the Duke University School of Law in 1995. Mr. Curtis
received his B.A. in Philosophy from Trinity University and his Doctor of
Philosophy (D. Phil) from the University of Oxford (England).
Doug W. Jackson has served as vice president--marketing of Z-Tel since June
1999. From 1996 through 1999 he held the position of senior brand manager for
the Coca-Cola Company and prior to that from 1992 to 1996 he was an associate
product manager for Kraft General Foods Corp. Mr. Jackson received his B.A.
from University of Virginia and his M.B.A. from University of Michigan.
Eduard J. Mayer has been a director of Z-Tel since July 1998 and vice
president--strategic alliances since July 1999. Mr. Mayer is the president of
Acorn Ventures, Inc., and the manager of BG Acorn Capital Fund and FESA
Enterprise Venture Capital Fund of
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Canada, Ltd., two venture capital providers based in Toronto, Ontario, Canada.
Mr. Mayer holds a B.S. in Commerce from the University of Windsor and a M.B.A.
from New York University.
Douglas C. Williamson has been a director of Z-Tel since December 1998.
Mr. Williamson has been senior vice president and managing director of Bank of
America Capital Investors (formerly NationsBank Capital Corporation) since
1989. He is a member of the board of directors of CallWare Technologies, Inc.,
Empirical Software, Inc., GX Technology Corporation, HAHT Software, Inc., Med
Solutions, Inc., Memorial Operations Company, North American Technologies
Group, Inc. and Takeout Taxi Holdings, Inc. Mr. Williamson received a B.A. from
Denison University and a M.B.A. from Columbia University.
Jeffrey A. Bowden a founder of Z-Tel, has served as a director of Z-Tel
since July 1998. Mr. Bowden is currently a director of the Boston Consulting
Group. Mr. Bowden was vice president of Bell Atlantic Corporation from 1997 to
1998. Mr. Bowden was a vice president of The Nynex Corporation from 1994 to
1997 and vice president and a director of The Boston Consulting Group from 1988
to 1994. Mr. Bowden received his B.S. from the University of Michigan and his
M.B.A. from the Harvard Graduate School of Business.
Buford H. Ortale has been a director of Z-Tel since July 1998. Since 1996
Mr. Ortale has been the president of Sewanee Ventures, LLC, a private
investment firm. From 1993 to 1996 Mr. Ortale was a director and then a
managing director of NationsBanc Capital Markets Inc. He is a member of the
board of directors of Digital Medical Systems. Mr. Ortale received his B.A.
degree from The University of the South and a M.B.A. from Vanderbilt
University.
Laurence S. Grafstein has been a director of Z-Tel since October 1999. Mr.
Grafstein is a co-founder of Gramercy Communications Partners, a private equity
fund based in New York specializing in telecommunications investments.
Previously, he was head of the global telecommunications practice at Credit
Suisse First Boston. He is currently a member of the Executive Committee of the
Wall Street Division of the United Jewish Appeal and a member of the boards of
the Arts Connection and the Jerusalem Foundation. Mr. Grafstein received his
B.A. from Harvard University, his M. Phil from Balliol College of Oxford
University and an LL.B from the University of Toronto Law.
Committees of the Board of Directors
We will appoint a compensation committee. The compensation committee will
be responsible for all decisions concerning executive officer compensation,
including decisions regarding grants of incentive stock options.
We have appointed an audit committee composed of two independent directors.
Its functions are to:
. recommend the appointment of independent accountants;
. review the arrangements for and scope of the audit by independent
accountants;
. review the independence of the independent accountants;
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. consider the adequacy of the system of internal accounting controls and
review any proposed corrective actions;
. review and monitor our policies regarding business ethics and conflicts
of interest;
. discuss with management and the independent accountants our draft annual
financial statements and key accounting and reporting matters; and
. review the activities and recommendations of our accounting department.
Director Compensation
Directors do not currently receive any cash compensation for services
rendered to Z-Tel in their capacities as directors. Pursuant to the terms of
The 1998 Equity Participation Plan of Z-Tel Technologies, Inc., each outside
director receives options to purchase 2,750 shares of Z-Tel's common stock for
each year of service.
Employment Agreements
We have entered into the following employment agreements:
<TABLE>
<CAPTION>
Annual
Officer Term Salary Position
- ------------------------ ----------------------------- -------- ----------------------------------
<S> <C> <C> <C>
D. Gregory Smith........ July 1998-July 2001 $162,000 President, Chief Executive
Officer and Chairman
John Hutchens........... September 1999-September 2002 $150,000 Senior Vice President--
Chief Financial Officer
Charles W. McDonough.... August 1998-August 2001 $162,000 Senior Vice President--
Chief Technology Officer
J. Bryan Bunting........ August 1998-August 2001 $162,000 Senior Vice President--
Engineering and Technical Services
James A. Kitchen........ July 1998-July 2001 $162,000 Senior Vice President--
Chief Architect
</TABLE>
The employment agreements with Messrs. Smith, Hutchens, McDonough, Bunting
and Kitchen also provide for:
. automatic renewal for subsequent one year terms unless either party
elects not to renew prior to 90 days from the end of the then current
term of the agreement;
. a bonus or other incentive compensation in an amount to be determined by
our compensation committee;
. the payment of his base salary and any other benefits to which he would
have been entitled for the term of the agreement if he is terminated
without cause (as defined in the agreements);
. generally, if a change of control occurs, the payment of two and nine-
tenths (2.9) times his base salary and any incentive or bonus paid in
the prior year if, within three years of the occurrence of a change of
control, specified events occur;
. his obligation to keep our nonpublic information confidential; and
. his obligation not to compete with us in the United States and not to
solicit our employees.
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Executive Compensation
Summary Compensation. The following table provides summary information
concerning compensation paid or accrued by us to, or on behalf of, our "Named
Executive Officers," which are our Chief Executive Officer and the executive
officers who earned more than $100,000 during the fiscal year ended December
31, 1998. The aggregate amount of perquisites and other personal benefits,
securities or property received by each of the Named Executive Officers was
less than either $50,000 or 10% of the total annual salary and bonus reported
for that Named Executive Officer:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation Awards
-------------- ------------
Shares
Underlying
Name and Principal Position Salary Bonus Options
- --------------------------- -------- ----- ------------
<S> <C> <C> <C>
D. Gregory Smith................................... $162,000 $ -- --
President, Chief Executive Officer and Chairman
*Russell T. Alba................................... $162,000 -- --
Senior Vice President--Business Development and
Chief Legal Officer
James A. Kitchen................................... $162,000 -- --
Senior Vice President-Chief Architect
</TABLE>
- --------
*Effective September 1999, Mr. Alba was no longer employed by us.
Option Grants in Last Fiscal Year. The following table contains information
concerning the stock option grants made to each of the Named Executive Officers
during the fiscal year ended December 31, 1998, subject to the following:
. Stock options granted to the Named Executive Officers were granted
pursuant to our 1998 Equity Participation Plan (the "Equity Plan").
Under the Equity Plan, the stock options are granted as of the
employee's start date. The options vest over a three year period
commencing on the start date and expire ten years thereafter (unless the
employee at the time of grant owned more than 10% of the total combined
voting power of all classes of stock, in which case they expire over
five years). Shares of common stock purchased pursuant to the options
are subject to a right of first refusal by us. Moreover, we have the
right to repurchase the shares at fair market value if the employee's
employment terminates other than by death or retirement.
. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by the rules of the Securities and Exchange
Commission. We cannot be certain that the actual stock price
appreciation over the ten-year option term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of the
common stock appreciates over the option term, no value will be realized
from the option grants. The potential realizable value is calculated by
assuming that the fair market value of the common stock as determined by
the Board of Directors on the
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date of grant of the options appreciates at the indicated rate of the
entire term of the option and that the option is exercised at the
exercise price and sold on the last day at the appreciated price.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Option Term
---------------------------------------------------------- ---------------------
Number of Shares % of Total Weighted
of Common Stock Options Granted Average
Underlying to Employees Exercise Price Expiration
Name Options Granted in 1998 Per Share Date 5% 10%
---- ---------------- --------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
D. Gregory Smith........ 550,000 13.48% $3.64 2/28/08 $1,258,000 $3,187,000
*Russell T. Alba........ 275,000 6.74% $3.64 4/02/08 629,000 1,594,000
James A. Kitchen........ 550,000 13.48% $3.64 1/26/08 1,258,000 3,187,000
</TABLE>
- --------
* Effective September 1999, Mr. Alba was no longer employed by us.
Year-End Option Values. The following table sets forth information
concerning option holdings through December 31, 1998 by each of the Named
Executive Officers, subject to the following:
. "exercisable" refers to those options which will be vested and
exercisable immediately upon completion of this offering, while
"unexercisable" refers to those options which will be unvested at such
time; and
. value is determined by subtracting the exercise price from the fair
market value of the common stock based on an assumed initial public
offering price of $14, multiplied by the number of shares underlying
the options.
<TABLE>
<CAPTION>
Number of Shares of Value of Unexercised
Common Stock Underlying In-the-Money Options
Options at Year End at Year End
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
D. Gregory Smith............ -- 550,000 -- --
*Russell T. Alba............ -- 275,000 -- --
James A. Kitchen............ -- 550,000 -- --
</TABLE>
- --------
* Effective September 1999, Mr. Alba was no longer employed by us, and 145,200
of his previously held options were forfeited.
Equity Plan. Our Board of Directors has adopted and our stockholders have
approved The 1998 Equity Participation Plan of Z-Tel Technologies, Inc., which
we also refer to as the Equity Plan. The principal purpose of the Equity Plan
is to attract, retain and motivate selected officers, employees, consultants
and directors through the granting of stock-based compensation awards. The
Equity Plan provides for a variety of awards, including non-qualified stock
options, incentive stock options (within the meaning of Section 422 of the
Internal Revenue Code), stock appreciation rights, restricted stock, deferred
stock, dividend equivalents, performance awards, stock payments, and other
stock-related benefits. A total of 8,250,000 shares of common stock are
reserved for issuance under the Equity Plan, 6,331,380 of which are currently
subject to outstanding awards. Awards under the plan
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<PAGE>
are generally made at no less than fair market value. The fair market value of
the options is determined based on the price per share of other common stock
sales to unrelated third parties, if any, at the dates the options are granted.
If there are no sales of common stock, fair market value is based on the sale
of other equity instruments at the time the options are granted. The maximum
number of shares which may be subject to awards granted under the Equity Plan
to any individual in any calendar year cannot exceed 550,000.
Prior to the initial public offering of our common stock, our Board of
Directors will administer the Equity Plan with respect to all awards. Following
such registration, a committee of independent directors (each of whom is a
"non-employee director" for purposes of Rule 16b-3 under the Exchange Act and
an "outside director" under Section 162(m) of the Internal Revenue Code) will
administer grants to employees and consultants. The full Board will administer
the Equity Plan with respect to options granted to independent directors.
The Equity Plan provides that the committee has the authority to select the
employees and consultants to whom awards are to be made, to determine the
number of shares to be subject thereto and the terms and conditions thereof,
and to make all other determinations and to take all other actions necessary or
advisable for the administration of the Equity Plan with respect to employees
or consultants.
The Equity Plan also provides that at certain times our independent
directors will automatically be granted options to purchase shares of our
common stock. All options granted to our independent directors will have an
exercise price per share equal to the fair market value per share of our common
stock as of the date of grant. Each individual who is an independent director
at the time of the initial public offering of our common stock will be granted
an option to purchase 2,750 shares of our common stock at the time of the
initial public offering and will be granted an option to purchase an additional
2,750 shares of our common stock at each annual meeting of our stockholders
after the initial public offering at which he or she is reelected to our Board
of Directors. Independent directors who are initially elected to our Board of
Directors following the initial public offering will be granted an option to
purchase 2,750 shares of our common stock at on the date of such initial
election and will be granted an option to purchase an additional 2,750 shares
of our common stock at each annual meeting of our stockholders after the
initial public offering at which he or she is reelected to our Board of
Directors.
The committee (and the Board) is authorized to adopt, amend and rescind
rules relating to the administration of the Equity Plan, and to amend, suspend
and terminate the Equity Plan. We have attempted to structure the Equity Plan
in a manner such that remuneration attributable to stock options and other
awards will not be subject to the deduction limitation contained in Section
162(m) of the Internal Revenue Code.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Purchases of Common Stock
On January 15, 1998, Rob Curtis purchased 110,000 shares of our common
stock for a purchase price of $125,000. Mr. Curtis' note to us in the principal
amount of $93,750, bears interest at a rate of 8% per annum, matures on
December 31, 2001 and is secured by a pledge of his common stock.
In agreements dated September 1, 1998, each of D. Gregory Smith, James A.
Kitchen, Charles W. McDonough and J. Bryan Bunting, together referred to as the
officer investors, purchased, in the aggregate, 9,570,000 shares of our common
stock for an aggregate purchase price of $10.88 million. In connection with the
purchase of these shares, we loaned: (1) $750,000 to Mr. Smith for the purchase
price of 660,000 of his shares, (2) $750,000 to Mr. Kitchen for the purchase
price of 660,000 of his shares; (3) $468,750 to Mr. McDonough for the purchase
price of 550,000 of his shares and (4) $187,500 to Mr. Bunting for the purchase
price of 220,000 of his shares. These loans, which bear interest at an 8%
annual rate and mature on December 31, 2001, are secured by a pledge to us of
the common stock.
These agreements permit Messrs. Smith and Kitchen, first, and us, second,
to purchase from the officer investors a portion of their shares in the event
of a termination (as defined in the agreements) of the officer's employment
with us. This purchase option must be exercised within 18 months after the
termination of the respective officer's employment with us. In addition, the
purchase option lapses automatically if we are involved in a corporate
transaction (as defined in the agreements).
After we have completed this offering and after March 1, 2001, the officer
investors have a right, subject to quantity limitations we determine, or
determined by underwriters, if applicable, to request that we register their
common stock that is no longer subject to the purchase option. In addition, the
officer investors must first offer to sell or transfer to us any shares of
common stock that are no longer subject to the purchase option before those
shares can be sold or transferred to anyone other than underwriters in an
initial public offering.
On September 1, 1999, Mr. Smith purchased an additional 85,800 shares of
our common stock for $97,500 as a result of his exercise of his purchase option
to buy shares from an individual who left the company. Mr Smith paid for this
purchase with a note which has a principal amount of $97,500 and is on
substantially the same terms as Mr. Smith's other note to the company.
Purchases of Series A Preferred Stock
On November 4, 1998, BA Capital Company, L.P. (formerly NationsBanc Capital
Corporation) and Sewanee Partners II, L.P. purchased, in the aggregate,
2,965,375 shares of Series A Preferred Stock for an aggregate purchase price of
$10 million.
Each holder of Series A Preferred Stock will receive on conversion the
number of shares of common stock arrived at by dividing the aggregate purchase
price for the holder's
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shares of Series A Preferred Stock by the conversion price which will equal
$3.37 per share upon the closing of this offering.
Purchases of Series B Preferred Stock
On November 4, 1998, 53 persons purchased, in the aggregate, 1,472,029
shares of Series B Preferred Stock for an aggregate purchase price of $5
million.
Each holder of Series B Preferred Stock will receive on conversion the
number of shares of common stock arrived at by dividing the aggregate purchase
price for the holder's shares of Series B Preferred Stock by the conversion
price which will equal $3.37 upon the closing of this offering.
In addition, on September 22, 1999, we sold an additional 2,964,500 shares
of Series B Preferred Stock for consideration of approximately $10 million. The
sale of this stock was on substantially the same price, terms and conditions as
the initial sale of Series B Preferred Stock.
Purchases of Series C Preferred Stock
In an agreement dated September 30, 1999, Gramercy Z-Tel LLC purchased
3,074,280 shares of Series C Preferred Stock for a purchase price of $15
million.
Each holder of Series C Preferred Stock will receive, on conversion, the
number of shares of common stock arrived at by dividing the aggregate purchase
price for the holder's shares of Series C Preferred Stock by the conversion
price which will equal $4.88 per share upon the closing of this offering.
All shares of outstanding preferred stock will automatically convert into
shares of common stock on a one-for-one basis, upon the closing of this
offering. Each outstanding share of preferred stock will accrue interest at a
rate of 8% per annum, which, until conversion, may, at our option, be paid-in-
kind with shares of our common stock. Upon conversion, we are required under
the terms of the preferred stock to pay this accrued interest in cash.
Stock Purchase Agreement and Stockholders' Agreement
Registration Rights. The terms of the Series A Preferred Stock and Series C
Preferred Stock provide that the holders of common stock issued upon conversion
of, or as a dividend on, Series A Preferred Stock or Series C Preferred Stock,
as the case may be, may require us to register that common stock under the
Securities Act beginning no earlier than 180 days after the effective date of a
registration statement for an initial public offering of our common stock.
Holders of common stock issued upon conversion of, or as a dividend on, Series
A Preferred Stock and Series C Preferred Stock also have the right to cause us
to register that common stock on Form S-3 when it becomes available to us if
they propose to register securities having a value of at least $10 million. We
will bear all registration expenses incurred in connection with the first three
of these demands for registration. In
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<PAGE>
addition, if we propose to register securities under the Securities Act, other
than registrations on Form S-4 or Form S-8, then, the holders of common stock
issued upon conversion of, or as a dividend on, Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock have a right, subject to
quantity limitations determined by underwriters if the offering involves an
underwriting, to request that we register such holders' common stock. If
holders of common stock issued upon conversion of, or as a dividend on, Series
A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
participate in that registration, holders of common stock issued upon
conversion of, or as a dividend on, Series A Preferred Stock and Series C
Preferred Stock will have priority over all other holders of common stock
(other than Z-Tel).
Loan from D. Gregory Smith to Z-Tel
In August 1998, D. Gregory Smith loaned us $5.35 million pursuant to a loan
bearing interest at a rate of eight percent per year until paid. In August
1998, we issued 4,708,000 shares of our common stock to Mr. Smith in exchange
for the $5.35 million of debt we owed to him.
Other Transactions
We and Mr. Russell T. Alba are parties to an agreement, dated September 3,
1999, where we, among other things, agreed to make severance payments, provide
health benefits and provide for the extension of the exercise period of stock
options for Mr. Alba. Mr. Alba and we also provided each other with a mutual
release of any prior legal claims.
On November 4, 1998, Mark Johnson purchased 14,826 shares of Series B
Preferred Stock for cash at a purchase price of $3.37 per share.
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FINANCING ARRANGEMENT
CMB Capital LLC (CMB)
In March 1999, we entered into a lease financing facility with CMB Capital
LLC, a technology leasing company based in Tampa, Florida. The line is a $35.2
million commitment, used to fund the majority of our equipment purchases. The
line has funded approximately $13.5 million to date, and as of October 1, 1999,
has availability of approximately $21.7 million remaining. The facility is
secured by substantially all of our assets.
The term of the facility is two years, with funding permitted through March
2001. Each individual drawdown on the line is repayable over a four-year term,
at a lease factor that equates approximately to an 10.3% interest rate. As
further consideration for extending the line, we granted CMB 521,832 warrants
which vest in relation to the amount which we borrow under the leasing
facility, convertible into an equal number of shares of our common stock. CMB
is controlled by Mr. Clay Biddinger, who owns approximately 1% of our preferred
stock which will convert into common stock on the closing of this offering.
In November 1999, the facility was modified to allow us to prepay all
outstanding debt. In addition, CMB agreed to waive certain technical defaults
under the facility. In consideration for this modification, we agreed that all
existing warrants were earned and we granted warrants to purchase an additional
115,500 shares at a strike price of $7.27 per share.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of November 15, 1999 (unless otherwise
stated), information regarding the beneficial ownership of our common stock and
common stock equivalents (assuming all of our outstanding shares of preferred
stock are converted into common stock) before this offering and as adjusted to
reflect the consummation of this offering by:
. each person who we know to be a beneficial owner of 5% or more of our
outstanding common stock;
. each of our directors; and
. all executive officers and directors as a group.
<TABLE>
<CAPTION>
Percentage of
Shares of Ownership(1)
Common Stock or ----------------------
Common Stock Before this After this
Beneficial Owner Equivalents offering offering
- --------------------------------------- --------------- ----------- ----------
<S> <C> <C> <C>
D. Gregory Smith(2)(3)................. 7,667,651 24.7% 20.7%
James A. Kitchen(2)(4)................. 1,726,388 5.6 4.7
Charles W. McDonough(2)(5)............. 741,378 2.4 2.0
J. Bryan Bunting(2)(6)................. 343,241 1.1 *
Eduard J. Mayer(2)(7).................. 1,100 * *
Buford H. Ortale(2)(8)................. 2,582,686 8.5 7.1
Douglas C. Williamson(2)(9)............ -0- * *
Jeffrey Bowden(2)(10).................. 293,027 1.0 *
Laurence S. Grafstein(11).............. -0- * *
The Mayer Trust(12).................... 2,348,520 7.6 6.4
BA Capital Company, L.P.(13)........... 1,779,225 5.8 4.8
Gramercy Z-Tel LLC(14)................. 3,074,280 10.1 8.4
All other executive officers and
directors............................. 10,544,463 33.1 27.8
All directors and executive officers as
a group............................... 13,356,571 40.3 34.1
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the aggregate number of
shares beneficially owned by the individual stockholders and groups of
stockholders described above and the percentage ownership of such
individuals and groups, shares of common stock subject to options or
warrants that are currently exercisable or exercisable within 60 days of
the date of this prospectus are deemed outstanding. Such shares, however,
are not deemed outstanding for the purposes of computing the percentage
ownership of the other stockholders or groups of stockholders.
(2) The address for each of Messrs. Smith, Kitchen, McDonough, Bunting, Mayer,
Ortale, Williamson and Bowden is c/o Z-Tel Technologies, Inc., 601 South
Harbour Island Boulevard, Suite 220, Tampa, Florida 33602.
(3) Does not include 229,249 shares of common stock issuable upon the exercise
of employee stock options which are not currently exercisable.
(4) Does not include (i) 198,612 shares of common stock issuable, upon the
exercise of employee stock options which are not currently exercisable and
(ii) 165,000 shares held in trust as to which Mr. Kitchen does not
exercise voting or investment power and as to which Mr. Kitchen disclaims
beneficial ownership.
(5) Does not include 248,622 shares of common stock issuable upon the exercise
of employee stock options which are not currently exercisable.
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(6) Does not include 151,759 shares of common stock issuable upon the exercise
of employee stock options which are not currently exercisable.
(7) Does not include 2,348,520 shares owned directly by Fulmead Ventures
Limited, which is beneficially owned by The Mayer Trust. Mr. Mayer is a
principal beneficiary of The Mayer Trust. Mr. Mayer disclaims beneficial
ownership of these shares as he does not have voting, investment or
dispositive power with respect to these shares.
(8) Includes 1,186,150 shares owned by Sewanee Partners II, L.P., of which an
affiliate of Mr. Ortale is the general partner.
(9) Excludes 1,779,225 shares owned by BA Capital Company, L.P., of which Mr.
Williamson is a senior officer. Mr. Williamson disclaims beneficial
ownership of the shares owned by BA Capital Company, L.P.
(10) Does not include 148,073 shares of common stock issuable upon the exercise
of stock options which are not currently exercisable.
(11) Excludes 3,074,280 shares owned by Gramercy Z-Tel LLC, of which Mr.
Grafstein is a senior officer. Mr. Grafstein disclaims beneficial
ownership of the shares owned by Gramercy Z-Tel LLC.
(12) The address for The Mayer Trust is c/o Hemisphere Trust (Jersey) Limited,
P.O. Box 274, Hemisphere House, 36 Hilgrave Street, St. Helier, Jersey
JE4 8TR.
(13) The address for BA Capital Company, L.P. is 901 Main Street; 22nd Floor;
Dallas, Texas 75202-3714.
(14) The address for Gramercy Z-Tel LLC is 712 Fifth Avenue; New York, New
York 10019.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of our capital stock is not intended to
be complete. Because the terms of our capital stock must comply with the
provisions of our Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws, which are included as exhibits to the registration
statement, and the Delaware General Corporation Law, you should read these
documents carefully.
We have the authority to issue up to 150,000,000 shares of common stock,
$.0l par value per share, and 50,000,000 shares of preferred stock, $.0l par
value per share. As of the date of the closing of this offering, there will be
30,454,158 shares of common stock issued and outstanding and no shares of
preferred stock issued and outstanding.
Common Stock
Each holder of common stock is entitled to one vote per share on all
matters voted upon by stockholders, and has no statutory preemptive or other
rights to subscribe for additional securities. Holders of common stock do not
have the right to vote their shares cumulatively in the election of directors.
All shares of common stock are entitled to participate pro rata in
distributions and in dividends as declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding shares of preferred stock. Subject to the prior rights of
creditors, all shares of common stock are entitled, in the event of
liquidation, to participate ratably in the distribution of all of our remaining
assets after distribution in full of preferential amounts, if any, to be
distributed to holders of preferred stock. The rights of holders of common
stock are subject to, and may be adversely affected by, the rights of holders
of preferred stock.
Preferred Stock
Under our Amended and Restated Certificate of Incorporation, the board of
directors is authorized, without further action by our stockholders, to issue
up to an aggregate of 50,000,000 shares of preferred stock in one or more
series. The board of directors has previously designated (1) 2,965,375 shares
of preferred stock as Series A Preferred Stock, all of which are issued and
outstanding; (2) 4,437,403 shares of preferred stock as Series B Preferred
Stock, all of which are issued and outstanding and (3) 3,074,280 shares of
preferred stock as Series C Preferred Stock, all of which are issued and
outstanding.
The board of directors, without approval of our stockholders, may issue
shares of preferred stock with voting and conversion rights that could
adversely affect the voting power of the common stock.
Please refer to the section entitled "Certain Relationships and Related
Transactions" for more information about our issued and outstanding shares of
preferred stock which will all convert to common stock on a one-to-one basis
upon the closing of this offering.
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Registration Rights
The holders of shares of common stock issued upon conversion of the Series
A Preferred Stock, the Series B Preferred Stock and Series C Preferred Stock
are entitled to rights with respect to the registration of such shares under
the Securities Act described under "Certain Relationships and Related
Transactions."
Delaware Law, Certificate of Incorporation and Bylaw Provisions
Special Meetings of Stockholders; Stockholder Action by Written
Consent. Our bylaws provide that special meetings of our stockholders may be
called by the president or the board of directors and that the stockholders are
not entitled to act by written consent in lieu of a meeting.
Delaware Anti-Takeover Law. We are a Delaware corporation subject to
Section 203 of the Delaware General Corporation Law. Under Section 203, certain
"business combinations" between a Delaware corporation whose stock generally is
publicly traded or held of record by more than 2,000 stockholders and an
"interested stockholder" are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless:
. the corporation has elected in its certificate of incorporation not to
be governed by Section 203. We have not made such an election;
. the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder was approved by the
board of directors of the corporation before such stockholder became an
interested stockholder;
. upon consummation of the transaction that made such stockholder an
interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the commencement
of the transaction excluding voting stock owned by directors who are
also officers or held in employee benefit plans in which the employees
do not have a confidential right to tender stock held by the plan in a
tender or exchange offer; or
. the business combination is approved by the board of directors of the
corporation and authorized at a meeting by two-thirds of the voting
stock which the interested stockholder did not own.
The three-year prohibition also does not apply to some business
combinations proposed by an interested stockholder following the announcement
or notification of an extraordinary transaction involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority
of the corporations directors. The term "business combination" is defined
generally to include mergers or consolidations between a Delaware corporation
and an interested stockholder, transactions with an interested stockholder
involving the assets or stock of the corporation or its majority-owned
subsidiaries, and transactions which increase an interested stockholders
percentage ownership of stock. The term "interested stockholder"
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is defined generally as those stockholders who become beneficial owners of 15%
or more of a Delaware corporations voting stock, together with the affiliates
or associates of that stockholder.
Limitation of Personal Liability of Directors and Indemnification
Arrangements. Our Amended and Restated Certificate of Incorporation limits the
liability of our directors to the maximum extent permitted by Delaware law.
Delaware law provides that directors will not be personally liable for monetary
damages for beach of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
These provisions have no effect on any non-monetary remedies that may be
available to us or our stockholders, nor does it relieve us or our officers of
directors from compliance with federal or state securities law. Our certificate
also generally provides that we shall indemnify, to the fullest extent
permitted by law, any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit, investigation,
administrative hearing or any other proceeding by reason of the fact that he is
or was a director or officer of ours, or is or was serving at our request as a
director, officer, employee or agent of another entity, against expenses
incurred by him in connection with such proceeding. An officer or director
shall not be entitled to indemnification by us if:
. the officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests; or
. with respect to any criminal action or proceeding, the officer or
director had reasonable cause to believe his conduct was unlawful.
In addition to the above, we have agreed to indemnify each of our executive
officers to the fullest extent permitted by law. In the event that we are not
able to indemnify our directors and executive officers, other than for
circumstances under which they are not entitled to indemnification by us, we
have also agreed to contribute to the amount of expenses, judgments, fines and
settlement amounts paid or to be paid by any of our directors or executive
officers if we are liable along with such person.
These statutory and contractual provisions may have the effect of delaying,
deterring or preventing a change of control of Z-Tel.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
76
<PAGE>
UNDERWRITING
Under the terms and conditions in an agreement among the underwriters and
us, each of the underwriters named below, through their representatives, Thomas
Weisel Partners LLC, Credit Suisse First Boston Corporation, J.C. Bradford &
Co. and Stephens Inc. has severally agreed to purchase from us the number of
shares of common stock opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Thomas Weisel Partners LLC.....................................
Credit Suisse First Boston Corporation.........................
J.C. Bradford & Co.............................................
Stephens Inc. .................................................
---------
Total......................................................... 5,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are conditioned upon a number of factors, including approval of
legal matters by counsel. The nature of the underwriters obligations commits
them to purchase and pay for all of the shares of common stock listed above if
any are purchased.
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act of 1933, or will contribute to payments that the underwriters
may be required to make relating to these liabilities.
Over-Allotment Option
We have granted a 30-day over-allotment option to the underwriters to
purchase up to 825,000 additional shares of common stock at the public offering
price less the underwriting discount and commissions as shown on the cover page
of this prospectus. If the underwriters exercise this option in whole or in
part, then each of the underwriters will be severally committed, provided the
conditions described in the underwriting agreement are satisfied, to purchase
the additional shares of common stock in proportion to their respective
purchase commitments shown in the above table.
Commissions and Discounts
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price shown on the cover page of this
prospectus, and at that price less a concession not in excess of $ per
share of common stock to other dealers specified in a master agreement among
underwriters that are members of the National Association of Securities
Dealers, Inc. The underwriters may allow, and those dealers may reallow,
concessions not in excess of $ per share of common stock to these other
dealers. After this offering, the offering price, concessions and other seller
terms may be changed by the underwriters. The common stock is offered upon
receipt and acceptance by the underwriters and to other conditions, including
the right to reject orders in whole or in part.
77
<PAGE>
This table summarizes the compensation to be paid to the underwriters by us
and the expenses payable by us:
<TABLE>
<CAPTION>
Total
------------------------
Without
Per Over- With
Share Allotment Over-Allotment
----- --------- --------------
<S> <C> <C> <C>
Underwriting discount and commissions
paid by us...........................
Expenses..............................
</TABLE>
The underwriters do not expect to confirm sales of common stock to any
accounts over which they exercise discretionary authority.
Persons associated with certain of the underwriters own approximately
50,050 shares of Series B Preferred Stock of Z-Tel which will convert into an
equal number of shares of Common Stock upon the closing of this offering.
Reserved Shares
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 275,000 shares of common stock to be sold in the
offering for sale to persons designated by us. The number of shares available
for sale to the general public will be reduced to the extent that any reserved
shares are purchased. Any reserved shares not purchased in this manner will be
offered by the underwriters on the same basis as the other shares offered in
the offering.
No Sales of Similar Securities
All of our officers and directors, and several of our stockholders and
option holders, have agreed that they will not offer, sell, agree to sell,
directly or indirectly, or otherwise dispose of any shares of common stock
without the prior written consent of Thomas Weisel Partners LLC and Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus we will not, without the prior written consent of Thomas Weisel
Partners LLC and Credit Suisse First Boston Corporation, offer, sell or
otherwise dispose of any shares of our capital stock, except for the shares of
common stock being offered and the shares of common stock issuable upon the
exercise of options and warrants outstanding on the date of this prospectus.
Information Regarding Thomas Weisel Partners LLC
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead-manager or
co-manager on 88 filed public offerings of equity securities, of which 68 have
been completed, and has acted as a syndicate member in an additional 46 public
offerings of equity securities. Thomas Weisel
78
<PAGE>
Partners LLC does not have any material relationship with us or any of our
officers, directors or controlling persons, except with respect to its
contractual relationship with us under the underwriting agreement entered into
in connection with this offering.
Nasdaq National Market Listing
Prior to this offering, there has been no public market for our common
stock. The initial offering price will be determined by negotiations between us
and the representatives of the underwriters. Some of the factors to be
considered in these negotiations will be our results of operations in recent
periods, estimates of our prospects and the industry in which we compete, an
assessment of our management, the general state of the securities markets at
the time of this offering and the prices of similar securities of generally
comparable companies. We have applied for approval for quotation of our common
stock on the Nasdaq National Market under the symbol "ZTEL." We cannot assure
you, however, that an active or orderly trading market will develop for the
common stock or that the common stock will trade in the public market
subsequent to this offering at or above the initial offering price.
Market Stabilization, Short Positions and Penalty Bids
To facilitate this offering, persons participating in the offering may
engage in transactions that stabilize, maintain or otherwise affect the price
of the common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we have
sold to them. The underwriters may elect to cover any short position by
purchasing shares of common stock in the open market or by exercising the over-
allotment option granted to the underwriters. In addition, the underwriters may
stabilize or maintain the price of the common stock by bidding for or
purchasing shares of common stock in the open market and may impose penalty
bids. Under these penalty bids, selling concessions that are allowed by
syndicate members or other broker-dealers participating in this offering are
reclaimed if shares of common stock previously distributed in this offering are
repurchased, usually to stabilize the market. The effect of these transactions
may be to stabilize or maintain the market price at a level above that which
might otherwise prevail in the open market. No representation is made as to the
magnitude or effect of any stabilization or other transactions. These
transactions may be affected on the Nasdaq National Market or otherwise and may
be discontinued at any time after they are commenced.
LEGAL MATTERS
Latham & Watkins, New York, New York will give opinions on the legality of
the offering of the common stock for us. Skadden, Arps, Slate, Meagher & Flom
LLP, New York, New York will give opinions on selected legal matters in
connection with offering of the common stock for the underwriters.
79
<PAGE>
EXPERTS
The financial statements as of December 31, 1998 and September 30, 1999,
and for the period January 15, 1998 (date of inception) through December 31,
1998 and for the nine months ended September 30, 1999, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., 20549, a registration statement on Form S-1 under the Securities Act of
1933, as amended, with respect to the common stock offered under this
prospectus.
This prospectus does not contain all of the information contained in the
registration statement and the exhibits and schedules to the registration
statement. Some items are omitted in accordance with the rules and regulations
of the Securities and Exchange Commission. For further information about us and
the common stock offered under this prospectus, you should review the
registration statement and the exhibits and schedules filed as a part of the
registration statement. If a contract or document has been filed as an exhibit
to the registration statement, you should review that contract or document. You
should be aware that when we discuss these contracts or documents in the
prospectus we are assuming that you will read the exhibits to the registration
statement for a more complete understanding of the contract or document.
The registration statement and its exhibits and schedules may be inspected
without charge at the public reference facilities maintained by the Securities
and Exchange Commission in Room 1024, 450 Fifth Street, N.W, Washington, D.C.,
20549, and the Securities and Exchange Commission's regional offices located at
500 West Madison Street, Suite 1400, Chicago, Illinois, 60661 and Seven World
Trade Center, 13th Floor, New York, New York, 10048. Copies may be obtained
from the Securities and Exchange Commission after payment of fees prescribed by
the Securities and Exchange Commission. The Securities and Exchange Commission
also maintains a web site that contains reports, proxy and information
statements and other information regarding registrants, including us, that file
electronically with the Securities and Exchange Commission. The address of this
web site is http://www.sec.gov. You may also contact the Securities and
Exchange Commission by telephone at (800) 732-0330.
80
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent
Certified Public
Accountants............. F-1
Consolidated Financial
Statements:
Consolidated Balance
Sheets................ F-2
Consolidated Statements
of Operations......... F-3
Consolidated Statements
of Changes in
Stockholders' Equity
(Deficit)............. F-4
Consolidated Statements
of Cash Flows......... F-5
Notes to Consolidated
Financial Statements.. F-6
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
Z-Tel Technologies, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the
financial position of Z-Tel Technologies, Inc. and Subsidiaries (the Company)
at September 30, 1999 and December 31, 1998, and the results of their
operations and their cash flows for the nine-months ended September 30, 1999
and the period January 15, 1998 (date of inception) through December 31, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Tampa, Florida
November 14, 1999, except for Note 1(B),
as to which the date is November 19, 1999
F-1
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September
30, 1999
(Pro Forma)
December September (Unaudited)
31, 1998 30, 1999 (Note 2)
-------- ----------- -----------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ 7,973,000 $ 2,682,000 $ 1,518,000
Accounts receivable, net of allowance
for doubtful accounts of
approximately $54,000 at December 31,
1998 and $80,000 at September 30,
1999................................. 15,000 607,000 607,000
Prepaid expenses and other current
assets............................... 423,000 773,000 773,000
----------- ----------- -----------
Total current assets................ 8,411,000 4,062,000 2,898,000
Property and equipment, net........... 11,710,000 19,626,000 19,626,000
Other................................. 153,000 1,270,000 1,270,000
----------- ----------- -----------
Total assets........................ $20,274,000 $24,958,000 $23,794,000
=========== =========== ===========
Liabilities, Mandatorily Convertible
Redeemable Preferred Stock and
Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued
liabilities.......................... $ 4,402,000 $ 9,166,000 $ 9,166,000
Current portion of long-term debt and
capital lease obligations............ 681,000 2,992,000 2,992,000
----------- ----------- -----------
Total current liabilities........... 5,083,000 12,158,000 12,158,000
Long-term debt and capital lease
obligations............................ 43,000 9,717,000 9,717,000
----------- ----------- -----------
Total liabilities................... 5,126,000 21,875,000 21,875,000
----------- ----------- -----------
Mandatorily convertible redeemable
preferred stock (aggregate liquidation
value of approximately $15,154,000 at
December 31, 1998 and $26,128,000 at
September 30, 1999).................... 15,154,000 26,128,000 --
----------- ----------- -----------
Commitments and contingencies (Notes 6
and 7)
Stockholders' equity (deficit):
Common stock, $.01 par value;
30,000,000 shares authorized;
14,411,100 shares issued and
outstanding; 21,813,878 shares issued
and outstanding pro forma............ 144,000 144,000 218,000
Notes receivable for common stock..... (3,329,000) (3,011,000) (3,011,000)
Deferred stock compensation........... (192,000) (203,000) (203,000)
Additional paid-in capital............ 16,493,000 17,112,000 42,002,000
Accumulated deficit................... (13,122,000) (36,769,000) (36,769,000)
Treasury stock, 279,675 shares, at
cost................................. -- (318,000) (318,000)
----------- ----------- -----------
Total stockholders' equity
(deficit).......................... (6,000) (23,045,000) 1,919,000
----------- ----------- -----------
Total liabilities, mandatorily
convertible redeemable preferred
stock and stockholders' equity
(deficit).......................... $20,274,000 $24,958,000 $23,794,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period January 15, 1998
(date of inception) through
------------------------------ Nine Months
September 30, Ended
December 31, 1998 September 30,
1998 (Unaudited) 1999
-------------- -------------- -------------
<S> <C> <C> <C>
Revenue.......................... $ 140,000 $ -- $ 2,170,000
-------------- ------------- ------------
Operating expenses:
Network operations............. 382,000 43,000 4,588,000
Sales and marketing............ 2,201,000 489,000 3,620,000
Research and development....... 4,728,000 2,735,000 3,469,000
General and administrative..... 4,718,000 3,036,000 8,924,000
Depreciation and
amortization................. 1,283,000 634,000 2,749,000
-------------- ------------- ------------
Total operating expenses.... 13,312,000 6,937,000 23,350,000
-------------- ------------- ------------
Operating loss.............. (13,172,000) (6,937,000) (21,180,000)
-------------- ------------- ------------
Nonoperating income (expense):
Interest income................ 228,000 64,000 319,000
Interest expense............... (178,000) (298,000) (2,786,000)
-------------- ------------- ------------
Total nonoperating income
(expense)................. 50,000 (234,000) (2,467,000)
-------------- ------------- ------------
Net loss.................... (13,122,000) (7,171,000) (23,647,000)
Less mandatorily convertible
redeemable preferred stock
dividends.................... (190,000) -- (974,000)
-------------- ------------- ------------
Net loss attributable to
common stockholders.......... $ (13,312,000) $ (7,171,000) $(24,621,000)
============== ============= ============
Weighted average common shares
outstanding.................... 6,554,699 3,753,191 14,383,338
============== ============= ============
Basic and diluted net
earnings/(loss) per share...... $ (2.03) $ (1.91) $ (1.71)
============== ============= ============
Shares used in pro forma basic
and diluted net
earnings/(loss) per share
calculation (unaudited)...... 10,992,102 21,786,116
============== ============
Pro forma basic and diluted
net earnings/(loss) per
share (unaudited)............ $ (1.19) $ (1.09)
============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
-------------------
Notes Receivable Deferred Additional Total
Par from Stock Paid-in Accumulated Treasury Stockholders'
Shares Value Stockholders Compensation Capital Deficit Stock Equity (Deficit)
---------- -------- ---------------- ------------ ----------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
January 15,
1998
(date of
inception)..... -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock... 9,703,000 97,000 (3,329,000) 10,929,000 7,697,000
Conversion of
note payable
and accrued
interest to
common stock... 4,708,000 47,000 5,473,000 5,520,000
Grant of stock
options below
intrinsic
value.......... (281,000) 281,000 --
Vesting of stock
options granted
below intrinsic
value.......... 89,000 89,000
Accrued dividend
on mandatorily
convertible
redeemable
preferred
stock.......... (190,000) (190,000)
Net loss........ (13,122,000) (13,122,000)
---------- -------- ----------- --------- ----------- ------------ --------- ------------
Balances,
December 31,
1998........... 14,411,000 144,000 (3,329,000) (192,000) 16,493,000 (13,122,000) -- (6,000)
Grant of stock
options below
intrinsic value
and warrants at
fair value..... (82,000) 1,593,000 1,511,000
Vesting of stock
options granted
below intrinsic
value.......... 71,000 -- 71,000
Accrued dividend
on mandatorily
convertible
redeemable
preferred
stock.......... (974,000) (974,000)
Treasury stock
received upon
cancellation of
notes
receivable from
stockholder.... 318,000 (318,000) --
Net loss........ (23,647,000) -- (23,647,000)
---------- -------- ----------- --------- ----------- ------------ --------- ------------
Balances,
September 30,
1999........... 14,411,000 $144,000 $(3,011,000) $(203,000) $17,112,000 $(36,769,000) $(318,000) $(23,045,000)
========== ======== =========== ========= =========== ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period January 15, 1998
(date of inception)
through Nine Months
--------------------------- Ended
December 31, September 30, September 30,
1998 1998 1999
------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(13,122,000) $(7,171,000) $(23,647,000)
------------ ----------- ------------
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization of
fixed assets...................... 1,283,000 634,000 2,749,000
Amortization of commitment fee..... -- -- 2,192,000
Provision for bad debts............ 54,000 -- 859,000
Expense charged for granting of
stock options..................... 89,000 61,000 102,000
Interest expense converted to comon
stock............................. 170,000 170,000 --
Change in operating assets and
liabilities:
Increase in accounts receivable... (69,000) (267,000) (1,452,000)
Increase in prepaid expenses and
other current assets............. (423,000) (168,000) (350,000)
Increase decrease in other
assets........................... (153,000) (141,000) (1,117,000)
Increase in accounts payable and
accrued liabilities.............. 4,402,000 7,491,000 4,764,000
------------ ----------- ------------
Total adjustments................ 5,353,000 7,780,000 7,747,000
------------ ----------- ------------
Net cash provided by (used in)
operating activities............ (7,769,000) 609,000 (15,900,000)
------------ ----------- ------------
Cash flows from investing activities:
Purchases of property and
equipment.......................... (11,393,000) (8,287,000) (10,665,000)
Proceeds from sale and leaseback
transaction........................ -- -- 13,768,000
------------ ----------- ------------
Net cash provided by (used in)
investing activities............ (11,393,000) (8,287,000) 3,103,000
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of notes
payable............................ 5,350,000 5,350,000 --
Proceeds from issuance of
mandatorily convertible redeemable
preferred stock.................... 14,964,000 -- 10,000,000
Proceeds from issuance of common
stock.............................. 7,697,000 3,775,000 --
Payments on long-term debt
obligations........................ (852,000) (399,000) (565,000)
Payments on capital lease
obligations........................ (24,000) (17,000) (1,929,000)
------------ ----------- ------------
Net cash provided by financing
activities...................... 27,135,000 8,709,000 7,506,000
------------ ----------- ------------
Net increase (decrease) in cash and
cash equivalents.................... 7,973,000 1,031,000 (5,291,000)
Cash and cash equivalents, beginning
of period........................... -- -- 7,973,000
------------ ----------- ------------
Cash and cash equivalents, end of
period.............................. $ 7,973,000 $ 1,031,000 $ 2,682,000
============ =========== ============
Supplemental disclosure of cash flow
information:
Cash paid for interest.............. $ 8,000 $ 6,000 $ 1,287,000
============ =========== ============
Non-cash investing and financing
activities:
Property and equipment acquired
under capital lease obligations.... $ 95,000 $ 95,000 $ --
Property and equipment acquired with
long-term debt..................... $ 1,505,000 $ 1,505,000 $ --
Conversion of note payable and
accrued interest to common stock... $ 5,520,000 $ 5,520,000 $ --
Increase in additional paid-in
capital for stock options granted.. $ 281,000 $ 253,000 $ 1,593,000
Net increase (decrease) in deferred
stock compensation for stock
options granted.................... $ 192,000 $ 192,000 $ (11,000)
Accrued dividends on mandatorily
convertible redeemable preferred
stock.............................. $ 190,000 $ -- $ 974,000
Notes receivable issued for common
stock.............................. $ 3,329,000 $ 3,329,000 $ --
Stock subscriptions receivable for
issuance of common stock........... $ -- $ 3,922,000 $ --
Treasury stock received upon
cancellation of notes receivable
common stock....................... $ -- $ -- $ 318,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
A) 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 six 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., and Z-Tel Network
Services, Inc. Z-Tel Technologies, Inc. is the parent company, and has no other
operations. Z-Tel Communications, Inc. is the operating entity. The remaining
subsidiaries have no significant operations.
Z-Tel is an emerging integrated communications provider. The Company offers
local and long distance telephone service and Internet access integrated with a
full array of conventional and Internet-based enhanced communication services,
primarily to consumers and small businesses.
The Company has incurred operating losses to date and, at September 30,
1999, had an accumulated deficit of $36.8 million. The Company's activities
have been primarily financed through private placements of equity securities
and debt instruments. The Company may need to raise additional capital through
the issuance of debt or equity securities. Such financing may not be available
on terms satisfactory to the Company, if at all. Accordingly, the Company has
arranged for financing from a related party to be available as needed to ensure
its continued operation through November 2000. This arrangement expires upon
the successful completion of an initial public offering.
B) Recapitalization
The Board of Directors authorized an 11 for 10 stock split on November 19,
1999 which was effected in the form of a 10% stock dividend. All common share
amounts have been adjusted retroactively to give effect to this split.
2. Summary of Significant Accounting Policies
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity
dates of three months or less to be cash equivalents.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist primarily of prepaid
maintenance and support contracts and advances to suppliers.
F-6
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are recorded at historical cost. Maintenance and
repairs are expensed as incurred, while renewals and betterments are
capitalized. Upon the sale or other disposition of property, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is recognized in operations. Depreciation is provided on the straight-line
basis over the estimated useful lives of the property and equipment.
Amortization of capitalized leases is provided on the straight-line basis over
the lesser of the estimated useful lives or lease term.
The following summarizes the lives being used:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Switching equipment................................................ 5
Computer equipment................................................. 5
Software........................................................... 3
Furniture and office equipment..................................... 5-10
Leasehold improvements............................................. 3
</TABLE>
During 1998, the Company expensed costs related to software developed for
internal use and capitalized software purchased from third parties. Effective
January 1, 1999, the Company adopted Statement of Position (SOP) 98-1
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires computer software costs related to internal
software that are incurred in the preliminary project stage to be expensed as
incurred. Once the capitalization criteria of SOP 98-1 have been met, costs of
developing or obtaining internal-use computer software are capitalized. During
the nine month period ended September 30, 1999, the Company capitalized
approximately $2,196,000 of internally developed software. The adoption of SOP
98-1 did not impact the amount of development costs expensed in 1998 as the
1998 costs did not meet the criteria for capitalization as defined in SOP 98-1.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred income taxes are recorded to reflect
the tax consequences on future years of differences between the tax basis of
assets and liabilities and their financial reported amounts at each year-end
based on enacted laws and statutory rates applicable to the periods in which
differences are expected to affect taxable income. A valuation allowance is
provided against the future benefits of deferred assets if it is determined
that it is more likely than not that the future tax benefits associated with
the deferred tax asset will not be realized.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
F-7
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net undiscounted cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the discounted cash flows. No impairment losses
have been recognized by the Company.
Stock-Based Compensation
The Company accounts for the issuance of stock options in accordance with
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Under SFAS No. 123, entities recognize as expense, over the vesting period, the
fair value of all stock-based awards on the date of the grant. For incentive
stock options granted to employees, SFAS No. 123 allows entities to continue to
apply the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and provide pro forma net income
and earnings per share disclosures for grants made as if the fair value method
defined in SFAS No. 123 had been applied. The Corporation has elected to apply
the provisions of APB Opinion No. 25 and consequently recognizes compensation
expense over the vesting period for grants made to employees only if the market
price of the underlying stock exceeds the exercise price. For stock options
granted to non-employees, SFAS No. 123 requires entities to recognize as an
expense, over the vesting period, the fair value of the options.
Revenue Recognition
Revenue related to long distance service charges are billed monthly in
arrears and the associated revenues are recognized in the month of service.
Revenue consists of fixed monthly fees and usage charges generally based on per
minute rates. In late June 1999, the Company began offering local telephone and
Internet access service (Z-Line Home Edition) to consumers and small
businesses. Charges for this service are billed in advance on a monthly basis.
The Company recognizes revenues for this service ratably over the service
period, which management believes approximates the actual provision of
services.
Advertising
Advertising costs are expensed as incurred. Included in sales and marketing
expenses are advertising costs of approximately $1,164,000 and $592,000 for the
nine-months ended September 30, 1999 and the period January 15, 1998 (date of
inception) through December 31, 1998, respectively.
Costs of Start-Up Activities
The Company expenses the costs of start-up activities as incurred.
F-8
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its cash and cash equivalents in
financial institutions considered by management to be high quality. The Company
maintains cash balances at financial institutions in excess of the $100,000
insured by the Federal Deposit Insurance Corporation. The Company has not
experienced any losses in these accounts and believes it is not exposed to any
significant credit risk on cash balances. During the normal course of business,
the Company extends credit to customers conducting business in the United
States.
Segment Reporting
The Company operated during the nine-months ended September 30, 1999 and
the period January 15, 1998 (date of inception) through December 31, 1998 in a
single segment when applying the management approach defined in SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information."
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Data
The accompanying financial statements for the period from January 15, 1998
(date of inception) through September 30, 1998 are unaudited. In the opinion of
management, these interim statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for the fair presentation of the
results of the interim periods. The financial and other data disclosed in these
notes to the financial statements for this period are unaudited. The results of
operations for this interim period are not necessarily indicative of the
results to be expected for any future periods.
Computation of Net Earnings/(Loss) Per Share
SFAS No. 128 "Earnings per Share" requires the presentation of basic and
diluted earnings/(loss) per share. Basic earnings/(loss) per share is computed
by dividing income (loss) available to common stockholders by the weighted
average number of common shares
F-9
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
outstanding for the period. Diluted earnings/(loss) per share is computed by
giving effect to all dilutive potential common shares that were outstanding
during the period.
Unaudited Pro Forma Data
The unaudited pro forma balance sheet as of September 30, 1999 reflects the
payment of cumulative dividends of approximately $1,164,000 on mandatorily
convertible redeemable preferred stock and the conversion of the Series A and
Series B mandatorily convertible redeemable preferred stock into 7,402,778
shares of common stock (after the 11 for 10 recapitalization as described in
Note 13(F).
Pro forma net earnings/(loss) per share has been computed as described
above and also gives effect, under the Securities and Exchange Commission
guidance, to the conversion of the mandatorily convertible redeemable preferred
stock (using the as-if-converted method).
Reclassification
Certain amounts in the December 31, 1998 financial statements have been
reclassified to conform with the September 30, 1999 presentation. These
reclassifications have no effect on the total assets, shareholders' equity, net
income or total cash flows previously reported by the Company.
3. Property and Equipment
At the respective dates, property and equipment approximates the following:
<TABLE>
<CAPTION>
December September
31, 1998 30, 1999
----------- -----------
<S> <C> <C>
Switching equipment.............................. $ 6,672,000 $ 8,697,000
Computer equipment............................... 2,898,000 6,759,000
Software......................................... 2,984,000 6,841,000
Furniture and office equipment................... 254,000 382,000
Leasehold improvements........................... 185,000 979,000
----------- -----------
12,993,000 23,658,000
Less accumulated depreciation and amortization... 1,283,000 4,032,000
----------- -----------
$11,710,000 $19,626,000
=========== ===========
</TABLE>
Depreciation expense and amortization expense related to property and
equipment amounted to approximately $15,000 and $2,734,000, respectively, for
the nine-months ended September 30, 1999 and approximately $686,000 and
$597,000, respectively, for the period January 15, 1998 (date of inception)
through December 31, 1998.
F-10
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
3. Property and Equipment (continued)
At the respective dates, assets acquired under capital leases, included in
property and equipment, approximates the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Switching equipment.......................... $ -- $ 8,577,000
Computer equipment........................... -- 4,868,000
Furniture and office equipment............... 95,000 298,000
------- -----------
95,000 13,743,000
Less accumulated depreciation and
amortization................................ 8,000 2,385,000
------- -----------
$87,000 $11,358,000
======= ===========
</TABLE>
In March 1999, the Company entered into an agreement with CMB Capital,
L.L.C. (a wholly owned entity of a shareholder of the Company) to sell and
lease-back certain equipment. This agreement allows for a sale and lease-back
of up to $35.2 million of certain equipment with revolving terms of 48 months
and approximate effective interest rates ranging from 10.0% to 19.5%. Included
in this agreement is a stock warrant to purchase 521,832 shares of common stock
at $3.37 per share. The Company accounted for the warrant granted in accordance
with SFAS No. 123, recognizing costs associated with the grant equal to the
fair value of the warrant. The Company has recorded the fair value of the
warrant as a commitment fee associated with the capital lease obligation and
included it as part of minimum lease payments.
The agreement and warrant expire in March 2001 and March 2009,
respectively. During the nine-month period ended September 30, 1999, the
Company sold and leased-back certain equipment, receiving proceeds under this
agreement of approximately $13.8 million. No gain or loss was recognized on the
sale of these assets. At September 30, 1999, the Company has approximately
$21.4 million available under this agreement for future sale and lease-back
transactions. These leases are collateralized by the assets of the Company.
Included in the Company's accounts is amortization expense related to
property and equipment held under capital leases of approximately $1,691,000
and $8,000, for the nine-months ended September 30, 1999 and for the period
January 15, 1998 (date of inception) through December 31, 1998, respectively.
F-11
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
4. Other Assets
At the respective dates, other assets approximates the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Certificate of deposit, restricted............. $ -- $ 500,000
Interest receivable from stockholders.......... 85,000 248,000
Deposits....................................... 68,000 342,000
Other.......................................... -- 180,000
--------- ----------
$ 153,000 $1,270,000
========= ==========
</TABLE>
The certificate of deposit is pledged as collateral on an outstanding
letter of credit in the amount of $500,000 related to lease obligations on one
of the Company's office spaces.
5. Accounts Payable and Accrued Liabilities
At the respective dates, accounts payable and accrued liabilities
approximates the following:
<TABLE>
<CAPTION>
December September 30,
31, 1998 1999
---------- -------------
<S> <C> <C>
Trade accounts payable $4,263,000 $7,349,000
Accrued payroll 106,000 170,000
Accrued other 33,000 1,647,000
---------- ----------
$4,402,000 $9,166,000
========== ==========
</TABLE>
6. Long-Term Debt and Leases
Long-Term Debt
During 1998, the Company financed the purchase of certain assets with a
note payable. At September 30, 1999 and December 31, 1998, the balance of this
note was approximately $88,000 and $653,000, respectively. The note bears
interest at approximately 10.0% and is payable through the year 1999. The note
is collateralized by the assets purchased.
Operating Leases
The Company has entered into various non-cancelable operating leases for
equipment and office space with monthly payments through the year 2009.
Included in general and administrative expense is rental expense relating to
operating leases of approximately $1,149,000 and $198,000 for the nine-months
ended September 30, 1999 and the period January 15, 1998 (date of inception)
through December 31, 1998, respectively.
F-12
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
6. Long-Term Debt and Leases (continued)
Capital Leases
The Company has entered into various capital lease obligations, effective
interest rates ranging from 10.0% to 19.5%, with monthly payments through the
year 2003.
Future minimum lease payments under non-cancelable operating and capital
leases and long-term debt as of September 30, 1999 are approximately as
follows:
<TABLE>
<CAPTION>
Capital Long-
Operating Lease Term
Year Ending September 30, Leases Obligations Debt
- ------------------------- ---------- ----------- -------
<S> <C> <C> <C>
2000........................................... $1,188,000 $ 5,110,000 $88,000
2001........................................... 1,359,000 5,101,000 --
2002........................................... 902,000 5,072,000 --
2003........................................... 897,000 2,569,000 --
2004........................................... 923,000 -- --
---------- ----------- -------
5,269,000 17,852,000 88,000
Less amount representing estimated executory
costs (taxes, etc.), including profit thereon,
included in total minimum lease payments......... -- 1,094,000 --
---------- ----------- -------
Net minimum payments............................. $5,269,000 16,758,000 $88,000
========== =======
Less amount representing interest on obligations
under capital lease.............................. 4,137,000
-----------
Present value of minimum lease payments
(including approximately $2,904,000 due within
one year)........................................ $12,621,000
===========
</TABLE>
7. Commitments and Contingencies
The Company has entered into agreements with various long distance carriers
to provide transmission and termination services for the Company's long
distance traffic. The agreements contain minimum value commitments. At
September 30, 1999, the Company had met these minimum commitments, which
approximated $331,000. These agreements expire at various times through
November 2001.
The Company is involved in certain legal actions and claims arising in the
ordinary course of its business. It is the opinion of management (based on
advice of legal counsel) 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 from
a third party 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.
F-13
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
8. Income Taxes
For the nine-months ended September 30, 1999 and the period January 15,
1998 (date of inception) through December 31, 1998, no benefit for federal or
state income taxes has been recorded due to the full valuation allowance
recorded against the deferred tax asset.
As of September 30, 1999 and December 31, 1998, the Company had a net
operating loss of approximately $36,000,000 and $12,700,000, respectively,
available to reduce future federal income taxes. This net operating loss
carryforward will begin to expire in 2018 and is subject to limitation in any
given year in the event of certain changes in ownership, as set forth in the
Internal Revenue Code Section 382 and related Treasury Regulations.
The tax effect of the temporary differences that gave rise to the deferred
tax balances at the respective dates were approximately the following:
<TABLE>
<CAPTION>
December September
31, 1998 30, 1999
----------- ------------
<S> <C> <C>
Current deferred tax assets:
Accounts receivable............................. $ 20,000 $ 29,000
----------- ------------
Noncurrent deferred tax assets:
Net operating loss.............................. 4,827,000 12,957,000
Fixed assets.................................... 70,000 94,000
Deferred compensation........................... 34,000 72,000
Other........................................... 22,000 18,000
----------- ------------
4,953,000 13,141,000
----------- ------------
Deferred tax assets........................... 4,973,000 13,170,000
----------- ------------
Valuation allowance........................... (4,973,000) (13,170,000)
----------- ------------
Net deferred tax asset...................... $ -- $ --
=========== ============
</TABLE>
The Company provides a valuation allowance against net deferred tax assets
if, based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. The net deferred
tax asset at September 30, 1999 and December 31, 1998 has been offset by the
establishment of a valuation allowance for the full amount of the deferred tax
asset.
F-14
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
8. Income Taxes (continued)
The following table summarizes, at the respective dates, the approximate
differences between the actual tax provision and amounts obtained by applying
the statutory U.S. federal income tax rate of 35% to the income (loss) before
income taxes.
<TABLE>
<CAPTION>
December September 30,
31, 1998 1999
----------- -------------
<S> <C> <C>
Statutory provision/(benefit).................... $(4,592 000) $(7,566,000)
State taxes net of federal provision/(benefit)... (381,000) (631,000)
----------- -----------
(4,973,000) (8,197,000)
Change in valuation allowance.................. 4,973,000 8,197,000
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
9. Mandatorily Convertible Redeemable Preferred Stock
During 1998, the Company amended its articles of incorporation to authorize
the issuance of up to 5,930,749 shares of Series A mandatorily convertible
redeemable preferred stock (Series A Preferred) and 1,338,208 shares of Series
B mandatorily convertible redeemable preferred stock (Series B Preferred), both
with a $.01 par value.
In November 1998, the Company conducted a private placement of 2,695,795
shares of Series A Preferred and 1,338,208 shares of Series B Preferred,
receiving aggregate net proceeds of approximately $15 million.
During 1999, the Company amended its articles of incorporation to reduce
the authorized shares of its Series A from 5,930,749 to 2,695,795 and increase
the authorized shares of its Series B from 1,338,208 to 4,034,003. In September
1999, the Company closed a private placement of 2,695,795 shares of Series B
mandatorily convertible redeemable preferred stock. The Company received
aggregate net proceeds of approximately $10 million from this placement.
Preferred stockholders have the option to convert their shares into shares
of common stock at a one-for-one ratio. The conversion rate on a particular
series of preferred stock is subject to adjustment in the event that any
additional common stock, or other shares convertible into common stock, are
issued for a per share price less than the particular series conversion price.
The preferred stock will automatically convert into shares of common stock
upon the closing of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, covering the offer and
sale of securities of the Company to the public with gross proceeds that equal
or exceed $20 million at a per share price of at least $12, and whereby the
aggregate value of the shares of common stock issuable on conversion is at
least two times the conversion rate.
F-15
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
9. Mandatorily Convertible Redeemable Preferred Stock (continued)
Prior to conversion, preferred stockholders have the right to elect two
members to the board of directors of the Company and are entitled to
preferential rights to corporate assets in the event of liquidation. The
preferred stock issues yield 8% cumulative dividends, which amounted to
approximately $974,000 and $190,000 for the nine-months ended September 30,
1999 and the period January 15, 1998 (date of inception) through December 31,
1998, respectively, and are included in mandatorily convertible redeemable
preferred stock at September 30, 1999 and December 31, 1998. No dividends on
common stock have been declared by the board of directors since the Company's
inception (January 15, 1998).
The Company entered into put agreements with the Series A and B Preferred
stockholders, which require the Company to repurchase shares at the greater of
fair market value or the original purchase price for certain violations of the
private placement agreement. The put terminates upon the seventh anniversary
date of the agreement or upon conversion of the preferred shares into common
shares. The Company did not comply with certain provisions of the Series A
Preferred private placement agreement relating to the issuance of financial
statements to the stockholders within a certain time frame. The Company has
obtained a waiver from the stockholders related to these provisions.
10. Related Party Transactions
During 1998, various executives of the Company issued full recourse
promissory notes, totaling approximately $3.3 million to the Company in
connection with the purchase of 2,929,575 shares of common stock. The principal
balance of the notes and the related accrued interest (8% per annum) are due
December 31, 2001. The notes are collateralized by the shares of common stock
acquired with the notes, and those shares are held in escrow by the Company. In
September 1999, the Company cancelled approximately $318,000 of these notes and
reacquired 279,675 shares of common stock at $1.14 per share. At September 30,
1999, these shares are presented as treasury shares, at cost.
During 1998, an executive loaned the Company approximately $5.35 million
with interest at a rate of 8% per year until paid. In August 1998, the Company
issued 4,708,000 shares of common stock to the executive in exchange for the
debt and accrued interest payable.
11. Stock-Based Compensation
Effective October 30, 1998, the Company adopted the 1998 Equity
Participation Plan (the Plan) available for grant to eligible employees and
eligible participants to purchase up to 1,261,000 shares of the Company's
common stock. During September, the board of directors (the Board) increased
the shares available for grant under the Plan to 6,000,000. The Plan is
administered by a committee appointed by the Board, or by the Board. The Board
or the appointed committee shall administer the Plan, select the eligible
employees and eligible
F-16
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
11. Stock-Based Compensation (continued)
participants to whom options will be granted, the price to be paid, the
exercise period and the number of shares subject to any such options and
interpret, construe and implement the provisions of the Plan. During the nine-
months ended September 30, 1999 and the period January 15, 1998 (date of
inception) through December 31, 1998, respectively, the Company awarded options
under the Plan totaling 2,078,941 and 201,850 shares of common stock,
respectively, at a weighted average option price per share of $4.16 and $3.64.
The vesting periods on these options range from immediately to four years and
have a maximum contractual life of ten years.
Prior to the adoption of the Plan, the Board issued stock options (the
Initial Plan) totaling 3,878,000 shares to various parties. The vesting periods
on these options range from immediately to three years and range in price from
$1.14 to $3.64. These options have a maximum contractual life of ten years.
A summary of the stock option activity for the nine-months ended September
30, 1999 and the period January 15, 1998 (date of inception) through December
31, 1998 is presented below:
<TABLE>
<CAPTION>
1998 Equity
Initial Plan Participation Plan Total
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 15,
1998
(date of inception)... -- $ -- -- $ -- -- $ --
Options granted....... 3,878,050 2.83 201,850 3.64 4,079,900 2.86
Forfeited............. (58,850) 2.46 -- -- (58,850) 2.46
--------- ----- --------- ----- --------- -----
Outstanding, December
31, 1998............... 3,819,200 2.79 201,850 3.64 4,021,050 2.83
Options granted....... -- -- 2,418,232 4.06 2,418,232 4.06
Forfeited............. (331,973) 3.43 (55,220) 3.64 (387,193) 3.46
--------- ----- --------- ----- --------- -----
Outstanding, September
30, 1999 .............. 3,487,227 $2.77 2,564,862 $3.75 6,052,089 $3.18
========= ===== ========= ===== ========= =====
</TABLE>
No options were exercised during the nine-months ended September 30, 1999
or the period January 15, 1998 (date of inception) through December 31, 1998.
F-17
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
11. Stock-Based Compensation (continued)
Had compensation cost for the Company's stock options granted been
determined based on the fair value at the date of grant, consistent with the
provisions of SFAS No. 123, the Company's net loss and loss per share of common
stock for the nine-months ended September 30, 1999 and the period January 15,
1998 (date of inception) through December 31, 1998 would have been increased to
the pro forma amounts shown below.
<TABLE>
<CAPTION>
Period
January 15, 1998 Nine Months
(date of inception) Ended
through December 31, September
1998 30, 1999
-------------------- ------------
<S> <C> <C>
Net Loss
As presented.............................. $(13,122,000) $(23,647,000)
As adjusted............................... (13,161,000) (23,857,000)
Basic and Diluted Loss Per Common Share
As presented.............................. $ (2.03) $ (1.71)
As adjusted............................... (2.04) (1.71)
</TABLE>
These adjusted amounts were determined using the minimum value method with
the following key assumptions (a) a discount rate ranging from approximately 5%
to 6%, (b) an average expected option life of 5 years; (c) there have been no
options that have expired; and (d) no payment of dividends on common stock.
During the nine-months ended September 30, 1999 and the period January 15,
1998 (date of inception) through December 31, 1998, respectively, included in
the options granted by the Company are 218,291 and 113,300 options to non-
employees and recorded costs for the same periods, respectively, of
approximately $621,000 and $89,000 related to these non-employee options. These
non-employee stock options have been recorded in accordance with the provisions
of SFAS No. 123 through the use of the Black-Scholes method. The Black-Scholes
method utilizes the same assumptions as the minimum value method with the
addition of a volatility factor of 64.3%.
The following table summarizes information about stock options and warrants
outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Weighted Average
Remaining
Number Contractual Life Number
Exercise Prices Outstanding (In Years) Exercisable
--------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$1.14 877,800 8.6 413,238
2.27 599,500 8.5 286,751
3.37 521,832 9.5 521,832
3.64 3,823,607 9.0 950,960
5.45 229,350 10.0 --
--------- ---------
6,052,089 2,172,781
========= =========
</TABLE>
F-18
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
12. Computation of Net Loss Per Share
Basic net earnings/(loss) per share is computed by dividing earnings/(loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted net earnings/(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 of net earnings/(loss) per share as the inclusion of such
equivalents would be anti-dilutive.
Net earnings/(loss) per share is calculated as follows:
<TABLE>
<CAPTION>
Period Period
January 15, January 15, 1998
1998 (date (date of
of inception) inception) Nine Months
through through Ended
December 31, September 30, September
1998 1998 (Unaudited) 30, 1999
------------ ---------------- ------------
<S> <C> <C> <C>
Basic and diluted net
earnings/(loss) per share:
Income (loss) available to
common stockholders:
Net loss....................... $(13,122,000) $(7,171,000) $(23,647,000)
Less mandatorily convertible
redeemable preferred stock
dividends.................... (190,000) -- (974,000)
------------ ----------- ------------
Income (loss) available to
common stockholders......... $(13,312,000) $(7,171,000) $(24,621,000)
============ =========== ============
Weighted average common shares
outstanding................. 6,554,699 3,753,191 14,383,338
============ =========== ============
Basis and diluted net
earnings/(loss) per share... $ (2.03) $ (1.91) $ (1.71)
============ =========== ============
</TABLE>
For each of the periods presented, basic and diluted net earnings/(loss)
per share are the same. Unexercised options to purchase 5,712,797, 4,021,051
and 6,052,089 shares of common stock and unexercised mandatorily convertible
redeemable preferred stock convertible into 0, 4,437,403 and 7,402,778 shares
of common stock for the period January 15, 1998 (date of inception) through
September 30, 1998 and through December 31,
F-19
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
12. Computation of Net Loss Per Share (continued)
1998 and the nine-month period ended September 30, 1999, respectively, which
could potentially dilute basic earnings per share in the future were not
included in the computation of diluted net earnings/(loss) per share for these
periods because to do so would have been antidilutive in each case.
Unaudited pro forma net earnings/(loss) per share is calculated as follows:
<TABLE>
<CAPTION>
Period
January 15,
1998 (date
of
inception) Nine Months
through Ended
December 31, September
1998 30, 1999
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Unaudited pro forma basic and diluted net
earnings/(loss) per share:
Income (loss) available to common stockholders:
Net loss......................................... $(13,122,000) $(23,647,000)
============ ============
Weighted average common shares outstanding...... 6,554,699 14,383,338
Effect of convertible securities:
Mandatorily convertible redeemable preferred
stock....................................... 4,437,403 7,402,778
------------ ------------
Shares used in pro forma basic and diluted
net earnings/(loss) per share calculation.. 10,992,102 21,786,116
============ ============
Unaudited pro forma basic and diluted net
earnings/(loss) per share..................... $ (1.19) $ (1.09)
============ ============
</TABLE>
13. Subsequent Events
A)During October 1999, the Company purchased assets worth approximately
$122,000 for approximately $75,000 cash and 11,000 shares of the Company's
common stock.
B)Also in October 1999, the Company completed a private placement of
2,794,800 shares of its Series C mandatorily convertible redeemable preferred
stock, par value $.01, for net proceeds of approximately $15 million.
C)Additionally, in October 1999, the Company's board of directors approved
an amendment to increase the number of shares of $.01 par value common stock to
150,000,000 and to increase the aggregate number authorized shares for all
classes of preferred stock to 50,000,000 shares. This approval is pending
stockholder authorization.
D)Also during October 1999, the Company issued 55,000 shares of common
stock to a third party software vendor for services.
F-20
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
13. Subsequent Events (continued)
E)In October and November 1999, the Company granted 862,070 options to
employees to purchase common stock at a weighted average exercise price of
$6.18 per share.
Events (Unaudited) Subsequent to Date of Accountants' Report
In November 1999 the Company entered into an agreement with CMB Capital,
LLC to restructure the terms of the leasing facility to allow for the early
payment of the facility in the event of an initial public offering. The Company
granted warrants for 115,500 shares of common stock at $7.27 per share.
F-21
<PAGE>
[Z-Tel Logo]
<PAGE>
PROSPECTUS , 1999
[LOGO OF Z-TEL COMMUNICATIONS, INC.]
5,500,000 Shares
Common Stock
Thomas Weisel Partners LLC
Credit Suisse First Boston
J.C. Bradford & Co.
Stephens Inc.
- --------------------------------------------------------------------------------
You may rely on the information contained in this prospectus. Neither we nor
any of the underwriters have authorized anyone to provide information different
from that contained in this prospectus. When you make a decision about whether
to invest in our common stock, you should not rely upon any information other
than the information in this prospectus. Neither the delivery of this
prospectus nor sale of common stock means that information contained in this
prospectus is correct after the date of this prospectus. This prospectus is not
an offer to sell or solicitation of an offer to buy these shares of the common
stock in any circumstances under which the offer or solicitation is unlawful.
Until , 1999, (25 days after the commencement of this offering), all
dealers that buy sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers obligation to deliver a prospectus when acting as
underwriters with respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of common stock registered
hereby, all of which expenses, except for the Securities and Exchange
Commission registration fee, the National Association of Securities Dealers,
Inc. filing fee, and the Nasdaq National Market listing application fee, are
estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................... $34,750
National Association of Securities Dealers, Inc. filing fee............ 13,000
Nasdaq National Market listing application fee......................... **
Printing and engraving fees and expenses*.............................. **
Legal fees and expenses*............................................... **
Accountants' fees and expenses*........................................ **
Blue Sky fees and expenses*............................................ **
Transfer Agent and Registrar fees and expenses*........................ **
Miscellaneous expenses*................................................ **
-------
Total*............................................................... $
=======
</TABLE>
- --------
* Estimated
** To be provided supplementally
Item 14. Indemnification of Directors and Officers
Z-Tel is a Delaware corporation. Section 145 of the General Corporation Law
of the State of Delaware ("GCL") provides that a Delaware corporation has the
power to indemnify its officers and directors in certain circumstances. Z-Tel's
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws provide for such indemnification by Z-Tel to the fullest extent
permitted by the GCL. In addition, Z-Tel has agreed to indemnify its directors
and executive officers to the fullest extent permitted by the GCL. Z-Tel has
also agreed that, in the event Z-Tel is not able to indemnify its directors and
executive officers (other than for circumstances under which such persons are
not entitled to indemnification by Z-Tel), Z-Tel shall contribute to the amount
of expenses (including attorneys' fees), judgments, fines and settlement
amounts paid or to be paid by any of its directors or executive officers if Z-
Tel and such person are jointly liable.
Subsection (a) of Section 145 of the GCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director or officer acted in good faith
in a manner reasonably
II-1
<PAGE>
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, provided that such director
or officer had not reasonable cause to believe his or her conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit
provided that such director or officer acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect to any
claim, issue or matter as to which such director or officer shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action was brought shall determine
that despite the adjudication of liability such director or officer is fairly
and reasonably entitled to indemnity for such expenses which the court shall
deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or
proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall
not be deemed exclusive of any other rights to which the indemnified party may
be entitled; and empowers the corporation to purchase and maintain insurance on
behalf of a director or officer of the corporation against any liability
asserted against him or her or incurred by him or her in any such capacity or
arising out of his or her status as such whether or not the corporation would
have the power to indemnify him or her against such liabilities under Section
145.
Z-Tel has in effect insurance policies in the amount of $5,000,000 for
general officer's and directors' liability insurance covering aggregate losses
of Z-Tel's directors and officers in certain circumstances where by law they
may not be indemnified by Z-Tel.
Item 15. Recent Sales of Unregistered Securities
During the three years preceding the filing of this registration statement,
Z-Tel sold shares of its common stock in the amounts, at the times, and for the
aggregate amounts of consideration listed below without registration under the
Securities Act of 1933. Exemption from registration under the Securities Act
for each of the following sales is claimed under Section 4(2) of the Securities
Act because such transactions were by an issuer and did not involve a public
offering:
On January 15, 1998, Z-Tel issued, in the aggregate, 753,500 shares to
seven individuals.
II-2
<PAGE>
On September 1, 1998, Z-Tel issued, in the aggregate, 10,102,400 shares of
common stock to D. Gregory Smith, James A. Kitchen, Russell T. Alba, Charles
W. McDonough and J. Bryan Bunting for an aggregate consideration of $11.5
million.
On November 4, 1998, Z-Tel issued, in the aggregate, 2,695,795 shares of
Series A Preferred Stock to BA Capital Company, L.P. (formerly NationsBanc
Capital Corporation) and Sewanee Partners II, L.P. for an aggregate
consideration of $10 million.
On November 4, 1998, Z-Tel issued, in the aggregate, 1,338,208 shares of
Series B Preferred Stock to 53 persons for an aggregate consideration of $5
million.
On March 15, 1999, Z-Tel issued a warrant to purchase 521,832 shares of
Common Stock to CMB Capital, LLC.
On September 22, 1999, Z-Tel issued, in the aggregate, 2,695,795 shares of
Series B Preferred Stock to 53 persons for an aggregate consideration of $10.0
million.
On October 8, 1999, Z-Tel issued 2,794,800 shares of Series C Preferred
Stock to Gramercy Z-Tel, LLC for an aggregate consideration of $15 million.
On October 13, 1999, Z-Tel issued 11,000 shares of common stock to Telebot
Corporation.
On October 13, 1999, Z-Tel issued 55,000 shares of common stock to
Telutions LLC.
On October 13, 1999, Z-Tel granted a warrant to purchase 115,500 shares of
common stock to CMB Capital LLC.
Item 16. Exhibits
The following exhibits are filed herewith or incorporated herein by
reference.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
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 Registration Statement for
provisions of the Amended and Restated Certificate of
Incorporation and the Bylaws of Z-Tel defining rights of
security holders
5.1 Opinion of Latham & Watkins*
10.1.1 Stockholder's 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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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 Stock Option Plan
11 Statement regarding computation of per share earnings*
21 List of subsidiaries
23.1 Consent of Latham & Watkins (included in the opinion filed as
Exhibit 5.1 hereto)*
23.2 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney (included in II-5)
27 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by the director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent,
II-4
<PAGE>
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida
on the 22nd day of November, 1999.
Z-TEL TECHNOLOGIES, INC.
By: /s/ D. Gregory Smith
----------------------------------
Name: D. Gregory Smith
Title: President, Chief
Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
By his signature below, Laurence S. Grafstein, solely in his capacity as a
director of Z-Tel, hereby severally constitutes and appoints D. Gregory Smith
and John M. Hutchens, and each of them severally, as attorney-in-fact for the
undersigned, in any and all capacities, with full power of substitution, to
sign (i) any amendments to this Registration Statement (including post-
effective amendments), and (ii) Registration Statements, and any and all
amendments thereto (including post-effective amendments), relating to the
offering contemplated pursuant to Rule 462(b) under the Securities Act of 1933,
and to file the same with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ D. Gregory Smith President, Chief Executive November 22, 1999
______________________________________ Officer, Chairman of the
D. Gregory Smith Board and Director
(Principal executive
officer)
* Chief Financial Officer November 22, 1999
______________________________________ (Principal financial and
John M. Hutchens accounting officer)
* Director November 22, 1999
______________________________________
Douglas C. Williamson
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director November 22, 1999
______________________________________
Jeffrey A. Bowden
* Director November 22, 1999
______________________________________
Eduard J. Mayer
* Director November 22, 1999
______________________________________
Buford H. Ortale
/s/ Laurence S. Grafstein Director November 22, 1999
______________________________________
Laurence S. Grafstein
</TABLE>
* By D. Gregory Smith, Attorney-in-Fact
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
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 Registration Statement for provisions
of the Amended and Restated Certificate of Incorporation and the
Bylaws of Z-Tel defining rights of security holders
5.1 Opinion of Latham & Watkins*
10.1.1 Stockholder's Agreement, dated October 8, 1999, between and among the
Company, BA Capital Corporation, Sewanee Partners II, L.P., Gramercy
Z-Tel LLC and the other parties set forth therein
10.1.2 Employment Agreement, dated July 1998, between the Company and D.
Gregory Smith*
10.1.3 Employment Agreement, dated September 1999, between the Company and
John Hutchens*
10.1.4 Employment Agreement, dated August 1998, between the Company and
Charles W. McDonough*
10.1.5 Employment Agreement, dated August 1998, between the Company and J.
Bryan Bunting*
10.1.6 Employment Agreement, dated July 1998, between the Company and James
A. Kitchen*
10.1.7 Investment Agreement, dated March 15, 1999 between the Company and CMB
Capital LLC
10.2 1998 Stock Option Plan
11 Statement regarding computation of per share earnings*
21 List of subsidiaries
23.1 Consent of Latham & Watkins (included in the opinion filed as Exhibit
5.1 hereto)*
23.2 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney (included in II-5)
27 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 1.1
_______________ Shares
Z-TEL TECHNOLOGIES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
Dated December __, 1999
<PAGE>
December __, 1999
Thomas Weisel Partners LLC
Credit Suisse First Boston Corporation
J.C. Bradford & Co.
Stephens Inc.
As Representatives of the several Underwriters
c/o Thomas Weisel Partners LLC
One Montgomery Street, Suite 3700
San Francisco, California 94104
Ladies and Gentlemen:
Introduction. Z-Tel Technologies, Inc., a Delaware corporation (the
------------
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A hereto (the "Underwriters"), an aggregate of ____________ shares of
- ----------
the common stock, par value $0.01 per share, of the Company (the "Firm Shares").
The Company also proposes to issue and sell to the several Underwriters not
more than an additional ____________ shares of its common stock, par value $0.01
per share (the "Additional Shares"), if and to the extent that you shall have
determined to exercise, on behalf of the Underwriters, the right to purchase
such shares of common stock granted to the Underwriters in Section 2 hereof.
The Firm Shares and the Additional Shares are hereinafter collectively referred
to as the "Shares". The shares of common stock, par value $0.01 per share, of
the Company to be outstanding after giving effect to the sales contemplated
hereby are hereinafter referred to as the "Common Stock". Thomas Weisel
Partners LLC , J.C. Bradford & Co. and Stephens Inc. have agreed to act as
representatives of the several Underwriters (in such capacity, the
"Representatives"), in connection with the offering and sale of the Shares.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File no. 333-89063),
including a prospectus, relating to the Shares. The registration statement as
amended at the time it becomes effective, including the information (if any)
deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under the Securities Act of 1933, as amended (the
"Securities Act"), is hereinafter referred to as the "Registration Statement";
the prospectus in the form first used to confirm sales of Shares is hereinafter
referred to as the "Prospectus". If the Company has filed a registration
statement to register additional shares of Common Stock pursuant to Rule 462(b)
under the Securities Act (the "Rule 462 Registration Statement"), then any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462 Registration Statement. All references in this Agreement to the
Registration Statement, the Rule 462 Registration Statement, a preliminary
prospectus, the Prospectus, or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
[As part of the offering contemplated by this Agreement, Thomas Weisel
Partners has agreed to reserve out of the Shares set forth opposite its name on
Schedule A to this Agreement, up to ______________ shares, for sale to the
- ----------
Company's employees, officers, and directors and other parties associated with
the Company (collectively, "Participants"), as set forth in the Prospectus under
the heading "Underwriting" (the "Directed Share Program"). The Shares to be
sold by Thomas Weisel Partners pursuant to the Directed Share Program (the
"Directed Shares")
1
<PAGE>
will be sold by Thomas Weisel Partners pursuant to this Agreement at the public
offering price. Any Directed Shares not orally confirmed for purchase by any
Participants by the end of the first business day after the date on which this
Agreement is executed will be offered to the public by Thomas Weisel Partners as
set forth in the Prospectus.]
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to and agrees with each of the Underwriters that:
1.1. Effective Registration Statement. The Registration Statement has
--------------------------------
become effective; no stop order suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for such purpose are pending before
or threatened by the Commission.
1.2. Contents of Registration Statement. (i) The Registration
----------------------------------
Statement, when it became effective, did not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, (ii) the Registration Statement
and the Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Securities Act and the applicable rules
and regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
1.3. Due Incorporation. The Company has been duly incorporated, is
-----------------
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
1.4. Subsidiaries. Each subsidiary of the Company has been duly
------------
incorporated, is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole. All of the
issued shares of capital stock of each subsidiary of the Company have been duly
and validly authorized and issued, are fully paid and non-assessable and are
owned directly by the Company, free and clear of all liens, encumbrances,
equities or claims.
1.5. Underwriting Agreement. This Agreement has been duly authorized,
----------------------
executed and delivered by the Company, and is a valid and binding agreement of
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
2
<PAGE>
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
1.6. Description of Capital Stock. The authorized capital stock of
----------------------------
the Company conforms as to legal matters to the description thereof contained in
the Prospectus.
1.7. Authorized Stock. The shares of Common Stock outstanding prior
----------------
to the issuance of the Shares to be sold by the Company have been duly
authorized and are validly issued, fully paid and non-assessable.
1.8. Validly Issued Shares. The Shares to be sold by the Company
---------------------
have been duly authorized and, when issued and delivered in accordance with the
terms of this Agreement, will be validly issued, fully paid and non-assessable,
and the issuance of such Shares will not be subject to any preemptive or similar
rights.
1.9. No Conflict. The execution and delivery by the Company of, and
-----------
the performance by the Company of its obligations under, this Agreement will not
contravene any provision of applicable law or the certificate of incorporation
or by-laws of the Company or any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or any
subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except such
as may be required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
1.10. No Material Adverse Change. There has not occurred any
--------------------------
material adverse change, or any development involving a prospective material
adverse change, in the condition, financial or otherwise, or in the earnings,
business or operations of the Company and its subsidiaries, taken as a whole,
from that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
1.11. Legal Proceedings; Exhibits. There are no legal or
---------------------------
governmental proceedings pending or threatened to which the Company or any of
its subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
1.12. Compliance with Securities Act. Each preliminary prospectus
------------------------------
filed as part of the registration statement as originally filed or as part of
any amendment thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
1.13. Not an Investment Company. The Company is not and, after
-------------------------
giving effect to the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus,
3
<PAGE>
will not be an "investment company" as such term is defined in the Investment
Company Act of 1940, as amended.
1.14. No Registration Rights. There are no contracts, agreements or
----------------------
understandings between the Company and any person granting such person the right
to require the Company to file a registration statement under the Securities Act
with respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the Registration
Statement other than as described in the Registration Statement and as have been
waived in writing in connection with the offering contemplated hereby.
1.15. Cuban Business Statute. The Company has complied with all
----------------------
provisions of Section 517.075, Florida Statutes relating to doing business with
the Government of Cuba or with any person or affiliate located in Cuba.
1.16. Absence of Material Charges. Subsequent to the respective
---------------------------
dates as of which information is given in the Registration Statement and the
Prospectus, (1) the Company and its subsidiaries have not incurred any material
liability or obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (2) the Company has not
purchased any of its outstanding capital stock, nor declared, paid or otherwise
made any dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (3) there has not been any material change
in the capital stock, short-term debt or long-term debt of the Company and its
subsidiaries, except in each case as described in the Prospectus.
1.17. Good Title to Properties. The Company and its subsidiaries
------------------------
have good and marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is material to the
business of the Company and its subsidiaries, in each case free and clear of all
liens, encumbrances and defects except as described in the Prospectus or as do
not materially affect the value of such property and do not interfere with the
use and proposed use of such property by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use and
proposed use of such property and buildings by the Company and its subsidiaries.
1.18. Intellectual Property Rights. The Company and its
----------------------------
subsidiaries own or possess, or can acquire on reasonable terms, all material
patents, patent rights, licenses, inventions, copyrights, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names currently employed by them in connection with the business now
operated by them, and neither the Company nor any of its subsidiaries has
received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing which, individually or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse affect on the Company and its subsidiaries, taken as a
whole.
1.19. No Labor Disputes. No material labor dispute with the
-----------------
employees of the Company or any of its subsidiaries exists, or, to the knowledge
of the Company, is imminent; and the Company is not aware of any existing,
threatened or imminent labor disturbance by the employees of any of its
principal
4
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suppliers, manufacturers or contractors that could have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
1.20. Insurance. The Company and its subsidiaries are insured by
---------
the insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; and neither the Company nor any of its subsidiaries has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
1.21. Governmental Permits. The Company and its subsidiaries
--------------------
possess all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective business, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, individually or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the Company and its subsidiaries, taken as a
whole.
1.22. Accounting Controls. The Company and each of its subsidiaries
-------------------
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability;
(3) access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
1.23. Year 2000 Compliance. The Company has reviewed its operations
--------------------
and that of its subsidiaries and any third parties with which the Company or any
of its subsidiaries has a material relationship to evaluate the extent to which
the business or operations of the Company or its subsidiaries will be affected
by the Year 2000 Problem. As a result of such review, the Company has no reason
to believe, and does not believe, that the Year 2000 Problem will have a
material adverse effect on the Company and its subsidiaries, taken as a whole,
or result in any material loss or interference with the Company's business or
operations. The "Year 2000 Problem" as used herein means any significant risk
that computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems of
any kind will not, in the case of dates or time periods occurring after December
31, 1999, function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000.
[0.1. Directed Share Program. The Company represents and warrants
----------------------
to Thomas Weisel Partners that (i) the Registration Statement, the Prospectus
and any preliminary prospectus comply, and any further amendments or supplements
thereto will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as amended
or supplemented, if applicable, are distributed in connection with the Directed
Share Program, and that (ii) no authorization, approval, consent, license,
order, registration or qualification of or with any government,
5
<PAGE>
governmental instrumentality or court, other than such as have been obtained, is
necessary under the securities laws and regulations of foreign jurisdictions in
which the Directed Shares are offered outside the United States.]
2. Purchase and Sale Agreements.
----------------------------
2.1. Firm Shares. The Company hereby agrees to sell to the several
-----------
Underwriters, and each Underwriter, upon the basis of the representations and
warranties herein contained, but subject to the conditions hereinafter stated,
agrees, severally and not jointly, to purchase from the Company at $______ a
share (the "Purchase Price") the number of Firm Shares set forth in Schedule A
----------
hereto opposite the name of each such Underwriter.
2.2. Additional Shares. On the basis of the representations and
-----------------
warranties contained in this Agreement, and subject to its terms and conditions,
the Company agrees to sell to the Underwriters the Additional Shares, and the
Underwriters shall have a one-time right to purchase, severally and not jointly,
up to _______________ Additional Shares at the Purchase Price. If you, on behalf
of the Underwriters, elect to exercise such option, you shall so notify the
Company in writing not later than thirty (30) days after the date of this
Agreement, which notice shall specify the number of Additional Shares to be
purchased by the Underwriters and the date on which such shares are to be
purchased. Such date may be the same as the Closing Date (as defined below) but
not earlier than the Closing Date nor later than ten (10) business days after
the date of such notice. Additional Shares may be purchased as provided in
Section 3 hereof solely for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares. If any Additional Shares are to
be purchased, each Underwriter agrees, severally and not jointly, to purchase
the number of Additional Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
total number of Additional Shares to be purchased as the number of Firm Shares
set forth in Schedule A hereto opposite the name of such Underwriter bears to
----------
the total number of Firm Shares.
2.3. Market Standoff Provision. The Company hereby agrees that,
-------------------------
without the prior written consent of Thomas Weisel Partners, it will not, during
the period ending 180 days after the date of the Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Shares to be sold hereunder, or (B) the issuance by the Company of shares of
Common Stock upon the exercise of options or warrants or the conversion of a
security outstanding on the date hereof of which the Underwriters have been
advised in writing and which is described in the Prospectus.
2.4. Terms of Public Offering. The Company is advised by you that
------------------------
the Underwriters propose to make a public offering of the Shares as soon after
the Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Company is further advised by you that the Shares are
to be offered to the public according to the terms set forth in the Prospectus.
6
<PAGE>
3. Payment and Delivery.
--------------------
3.1. Firm Shares. Payment for the Firm Shares to be sold shall be
-----------
made to the Company in immediately available funds against delivery of such Firm
Shares for the respective accounts of the several Underwriters at 10:00 a.m.,
New York City time, on ____________, 1999, or at such other time on the same or
such other date, not later than _________, 1999, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "Closing Date".
3.2. Additional Shares. Payment for any Additional Shares shall be
-----------------
made to the Company in immediately available funds in New York City against
delivery of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2.2 or at such other time on the same or on such
other date, in any event not later than _______, 1999, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "Option Closing Date".
3.3. Delivery of Certificates. Certificates for the Firm Shares and
------------------------
Additional Shares shall be in definitive form and registered in such names and
in such denominations as you shall request in writing not later than one (1)
full business day prior to the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and Additional Shares
shall be delivered to you on the Closing Date or the Option Closing Date, as the
case may be, for the respective accounts of the several Underwriters, with any
transfer taxes payable in connection with the transfer of the Shares to the
Underwriters duly paid, against payment of the Purchase Price therefor.
4. Covenants of the Company. In further consideration of the
------------------------
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
4.1. Furnish Copies of Registration Statement and Prospectus. To
-------------------------------------------------------
furnish to you, without charge, 5 (five) signed copies of the Registration
Statement (including exhibits thereto) and for delivery to each other
Underwriter a conformed copy of the Registration Statement (without exhibits
thereto) and to furnish to you in New York City, without charge, prior to 10:00
a.m. New York City time on the business day next succeeding the date of this
Agreement and during the period mentioned in Section 4.3 below, as many copies
of the Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
4.2. Notification of Amendments or Supplements. Before amending or
-----------------------------------------
supplementing the Registration Statement or the Prospectus, to furnish to you a
copy of each such proposed amendment or supplement and not to file any such
proposed amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule 424(b) under
the Securities Act any prospectus required to be filed pursuant to such rule.
4.3. Filings of Amendments or Supplements. If, during such period
------------------------------------
after the first date of the public offering of the Shares as in the opinion of
counsel for the Underwriters the Prospectus is required by law to be delivered
in connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), any event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
7
<PAGE>
Underwriters, it is necessary to amend or supplement the Prospectus to comply
with applicable law, forthwith to prepare, file with the Commission and furnish,
at its own expense, to the Underwriters and to the dealers (whose names and
addresses you will furnish to the Company) to which Shares may have been sold by
you on behalf of the Underwriters and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
4.4. Blue Sky Laws. To endeavor to qualify the Shares for offer and
-------------
sale under the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
4.5. Earnings Statement. To make generally available to its
------------------
securityholders as soon as practicable, but in any event not later than eighteen
(18) months after the effective date of the Registration Statement (as defined
in Rule 158(c) under the Securities Act), an earnings statement of the Company
and its subsidiaries (which need not be audited) complying with Section 11(a) of
the Securities Act and the rules and regulations thereunder (including, at the
option of the Company, Rule 158).
4.6. Use of Proceeds. The Company shall apply the net proceeds from
---------------
the sale of the Shares sold by it in the manner described under the caption "Use
of Proceeds" in the Prospectus.
4.7. Transfer Agent. The Company shall engage and maintain, at its
--------------
expense, a registrar and transfer agent for the Common Stock.
4.8. Periodic Reporting Obligations. During the Prospectus Delivery
------------------------------
Period, the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act. Additionally, the Company shall file with the Commission such
information on Form 10-Q or Form 10-K as may be required by Rule 463 under the
Securities Act.
[0.2. Directed Share Program. That in connection with the Directed
----------------------
Share Program, the Company will ensure that the Directed Shares will be
restricted to the extent required by the National Association of Securities
Dealers, Inc. (the "NASD") or the NASD rules from any sale, transfer,
assignment, pledge or hypothecation for a period of three (3) months following
the date of the effectiveness of the Registration Statement. Thomas Weisel
Partners will notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer agent to place stop transfer
restrictions upon such securities for such period of time. Furthermore, the
Company covenants with Thomas Weisel Partners that the Company will comply with
all applicable securities and other applicable laws, rules and regulations in
each foreign jurisdiction in which the Directed Shares are offered in connection
with the Directed Share Program.]
4.9. Exchange Act Compliance. During the Prospectus Delivery Period,
-----------------------
the Company will file all documents required to be filed with the Commission
pursuant to Section 13, 14 or 15 of the Exchange Act in the manner and within
the time periods required by the Exchange Act.
8
<PAGE>
5. Conditions to the Underwriters' Obligations. The obligations of
-------------------------------------------
the Company to sell the Shares to the several Underwriters and the several
obligations of the Underwriters to purchase and pay for the Shares on the
Closing Date are subject to the following conditions:
5.1. Effective Registration Statement. The Registration Statement
--------------------------------
shall have become effective not later than [__________] (New York City time) on
the date hereof.
5.2. Rule 462 Registration Statement. If the Company elects to rely
-------------------------------
upon Rule 462(b), the Company shall file a Rule 462 Registration Statement with
the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C.
time, on the date of this Agreement, and the Company shall at the time of filing
either pay to the Commission the filing fee for the Rule 462 Registration
Statement or give irrevocable instructions for the payment of such fee pursuant
to Rule 111(b) under the Securities Act.
5.3. Prospectus Filed with Commission. The Company shall have filed
--------------------------------
the Prospectus with the Commission (including the information required by Rule
430A under the Securities Act) in the manner and within the time period required
by Rule 424(b) under the Securities Act; or the Company shall have filed a post-
effective amendment to the Registration Statement containing the information
required by such Rule 430A, and such post-effective amendment shall have become
effective.
5.4. No Stop Order. No stop order suspending the effectiveness of
-------------
the Registration Statement, any Rule 462 Registration Statement, or any post-
effective amendment to the Registration Statement, shall be in effect and no
proceedings for such purpose shall have been instituted or threatened by the
Commission.
5.5. No NASD Objection. The NASD shall have raised no objection to
-----------------
the fairness and reasonableness of the underwriting terms and arrangements.
5.6. No Debt Downgrading. There shall not have occurred any
-------------------
downgrading, nor shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating organization," as
such term is defined for purposes of Rule 436(g)(2) under the Securities Act.
5.7. No Material Adverse Change. There shall not have occurred any
--------------------------
change, or any development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement) that, in your judgment, is material and adverse and that
makes it, in your judgment, impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus.
5.8. Officer's Certificate. The Underwriters shall have received on
---------------------
the Closing Date a certificate, dated the Closing Date and signed by the Chief
Executive Officer or President of the Company, to the effect set forth in
Sections 5.4 and 5.7 above and to the effect that the representations and
warranties of the Company contained in this Agreement are true and correct as of
the Closing Date
9
<PAGE>
and that the Company has complied with all of the agreements and satisfied all
of the conditions on its part to be performed or satisfied hereunder on or
before the Closing Date.
5.9. Opinion of Company Counsel. The Underwriters shall have
--------------------------
received on the Closing Date an opinion of Latham & Watkins, counsel for the
Company, dated the Closing Date, the form of which is attached hereto as Exhibit
-------
A. The opinion shall be rendered to the Underwriters at the request of the
- -
Company and shall so state therein.
5.10. Opinion of Underwriters Counsel. The Underwriters shall have
received on the Closing Date an opinion of Skadden, Arps, Slate, Meagher & Flom
LLP, counsel for the Underwriters, dated the Closing Date, as to the matters
referred to in paragraphs 1, 4, 6 (solely as to pre-emptive rights arising under
the Delaware General Corporate Law or under the certificate of incorporation or
by-laws of the Company), 7 and 12 of Exhibit A hereunder. With respect to
---------
paragraph 12 of Exhibit A, such counsel may state that their opinion and belief
---------
are based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and review
and discussion of the contents thereof, but are without independent check or
verification, except as specified.
5.11. Accountant's Comfort Letter. The Underwriters shall have
---------------------------
received, on each of the date hereof and the Closing Date, a letter dated the
date hereof or the Closing Date, as the case may be, in form and substance
satisfactory to the Underwriters, from PricewaterhouseCoopers LLC, independent
public accountants, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus; provided that the letter delivered on
the Closing Date shall use a "cut-off date" not earlier than the date hereof.
5.12. Lock-Up Agreements. The "lock-up" agreements, each
------------------
substantially in the form of Exhibit B hereto, between you and certain
---------
shareholders, officers and directors of the Company, delivered to you on or
before the date hereof, shall be in full force and effect on the Closing Date.
5.13. Additional Documents. On the Closing Date, the Representatives
--------------------
and counsel for the Underwriters shall have received such information, documents
and opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties, or
the satisfaction of any of the conditions or agreements, herein contained.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction of each of the above conditions
on or prior to the Option Closing Date and to the delivery to you on the Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of the
Additional Shares and other matters related to the issuance of the Additional
Shares.
6. Expenses. Whether or not the transactions contemplated in this
--------
Agreement are consummated or this Agreement is terminated, the Company agree to
pay or cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel and the Company's accountants in connection
with the
10
<PAGE>
registration and delivery of the Shares under the Securities Act and all other
fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof to the
Underwriters and dealers, in the quantities hereinabove specified, (ii) all
costs and expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
cost of printing or producing any Blue Sky or legal investment memorandum in
connection with the offer and sale of the Shares under state securities laws and
all expenses in connection with the qualification of the Shares for offer and
sale under state securities laws as contemplated by Section 4.4 hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection with such qualification and in connection with
the Blue Sky or legal investment memorandum, (iv) all filing fees and the
reasonable fees and disbursements of counsel to the Underwriters incurred in
connection with the review and qualification of the offering of the Shares by
the NASD, (v) all fees and expenses in connection with the preparation and
filing of the registration statement on Form 8-A relating to the Common Stock
and all costs and expenses incident to listing the Shares on the Nasdaq National
Market, (vi) the cost of printing certificates representing the Shares, (vii)
the costs and charges of any transfer agent, registrar or depositary, (viii) the
costs and expenses of the Company relating to investor presentations on any
"road show" undertaken in connection with the marketing of the offering of the
Shares, including, without limitation, expenses associated with the production
of road show slides and graphics, fees and expenses of any consultants engaged
in connection with the road show presentations with the prior approval of the
Company, travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and the cost of any aircraft chartered in
connection with the road show, [(ix) all reasonable fees and disbursements of
counsel incurred by the Underwriters in connection with the Directed Share
Program and stamp duties, similar taxes or duties or other taxes, if any,
incurred by the Underwriters in connection with the Directed Share Program] and
(x) all other costs and expenses incident to the performance of the obligations
of the Company hereunder for which provision is not otherwise made in this
Section. It is understood, however, that except as provided in this Section,
Section 7 entitled "Indemnity and Contribution", and the last paragraph of
Section 10 below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel and any advertising expenses
connected with any offers they may make.
7. Indemnity and Contribution.
--------------------------
7.1. Indemnification of the Underwriters. The Company agrees to
-----------------------------------
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the Prospectus
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
11
<PAGE>
7.2. Indemnification by the Underwriters. Each Underwriter agrees,
-----------------------------------
severally and not jointly, to indemnify and hold harmless the Company, the
directors of the Company, the officers of the Company who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act
from and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment thereof, any preliminary prospectus
or the Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only with
reference to information relating to such Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendments or
supplements thereto.
7.3. Indemnification Procedures. In case any proceeding (including
--------------------------
any governmental investigation) shall be instituted involving any person in
respect of which indemnity may be sought pursuant to this Section 7, such person
(the "indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (i) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Underwriters and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, and (ii) the fees and expenses
of more than one separate firm (in addition to any local counsel) for the
Company, its directors, its officers who sign the Registration Statement and
each person, if any, who controls the Company within the meaning of either such
Section, and that all such fees and expenses shall be reimbursed as they are
incurred. In the case of any such separate firm for the Underwriters and such
control persons of any Underwriters, such firm shall be designated in writing by
Thomas Weisel Partners. In the case of any such separate firm for the Company,
and such directors, officers and control persons of the Company, such firm shall
be designated in writing by the Company. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the
12
<PAGE>
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
[Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 7.3 hereof in respect of such action
or proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate firm (in addition to any local counsel)
for Thomas Weisel Partners for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons, if any,
who control Thomas Weisel Partners within the meaning of either Section 15 of
the Act or Section 20 of the Exchange Act.]
[0.3. Indemnification for Directed Share Program. The Company agrees
------------------------------------------
to indemnify and hold harmless Thomas Weisel Partners and each person, if any,
who controls Thomas Weisel Partners within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act ("Thomas Weisel Partners
Entities"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) (i)
caused by any untrue statement or alleged untrue statement of a material fact
contained in the prospectus wrapper material prepared by or with the consent of
the Company for distribution in foreign jurisdictions in connection with the
Directed Share Program attached to the Prospectus or any preliminary prospectus,
or caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement therein, when
considered in conjunction with the Prospectus or any applicable preliminary
prospectus, not misleading; (ii) caused by the failure of any Participant to pay
for and accept delivery of the shares which, immediately following the
effectiveness of the Registration Statement, were subject to a properly
confirmed agreement to purchase; or (iii) related to, arising out of, or in
connection with the Directed Share Program, provided that, the Company shall not
be responsible under this subparagraph (iii) for any losses, claim, damages or
liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith or gross negligence of Thomas
Weisel Partners Entities.]
7.4. Contribution Agreement. To the extent the indemnification
----------------------
provided for in this Section 7 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the one hand
and the indemnified party or parties on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the indemnifying party or parties on the one hand and of the indemnified party
or parties on the other hand in
13
<PAGE>
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other hand in connection with the offering of the
Shares shall be deemed to be in the same respective proportions as the net
proceeds from the offering of the Shares (before deducting expenses) received by
the Company and the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover of the
Prospectus, bear to the aggregate Public Offering Price of the Shares. The
relative fault of the Company on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Underwriters' respective obligations to contribute pursuant to this Section
7 are several in proportion to the respective number of Shares they have
purchased hereunder, and not joint.
7.5. Contribution Amounts. The Company and the Underwriters agree
--------------------
that it would not be just or equitable if contribution pursuant to this Section
7 were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in Section 7.5. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 7 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
7.6. Survival of Provisions. The indemnity and contribution
----------------------
provisions contained in this Section 7 and the representations, warranties and
other statements of the Company contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any termination of this
Agreement, (ii) any investigation made by or on behalf of any Underwriter or any
person controlling any Underwriter, or the Company, its officers or directors or
any person controlling the Company and (iii) acceptance of and payment for any
of the Shares.
8. Effectiveness. This Agreement shall become effective upon the
-------------
execution and delivery hereof by the parties hereto.
9. Termination. This Agreement shall be subject to termination by
-----------
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities
14
<PAGE>
Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange or the Chicago Board of Trade, (ii) trading of any securities of the
Company shall have been suspended on any exchange or in any over-the-counter
market, (iii) a general moratorium on commercial banking activities in New York,
Delaware or California shall have been declared by either federal or New York,
Delaware or California state authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse, or (v) in
the judgment of the Representatives, there shall have occurred any material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, taken as a whole, and (b) in the case of any of the events
specified in clauses 10(a)(i) through 10(a)(v), such event, individually or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
10. Defaulting Underwriters. If, on the Closing Date or the Option
-----------------------
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares that it has or they have agreed to purchase
hereunder on such date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the aggregate number of the Shares to be purchased on such
date, the other Underwriters shall be obligated severally in the proportions
that the number of Firm Shares set forth opposite their respective names in
Schedule A bears to the aggregate number of Firm Shares set forth opposite the
- ----------
names of all such non-defaulting Underwriters, or in such other proportions as
you may specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 10 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven (7) days, in
order that the required changes, if any, in the Registration Statement and in
the Prospectus or in any other documents or arrangements may be effected. If, on
the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional Shares
that such non-defaulting Underwriters would have been obligated to purchase in
the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
15
<PAGE>
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in counterparts,
------------
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
12. Headings; Table of Contents. The headings of the sections of
---------------------------
this Agreement and the table of contents have been inserted for convenience of
reference only and shall not be deemed a part of this Agreement.
13. Notices. All communications hereunder shall be in writing and
-------
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
Thomas Weisel Partners LLC
One Montgomery Street, Suite 3700
San Francisco, California 94104
Facsimile: (415) 364-2694
Attention: _____________________
with a copy to:
Thomas Weisel Partners LLC
One Montgomery Street, Suite 3700
San Francisco, California 94104
Facsimile: (415) 364-2694
Attention: David A. Baylor, Esq.
If to the Company:
Z-Tel Technologies, Inc.
One Harbour Place, Suite 990
770 South Harbour Island Boulevard
Tampa, Florida 33602
Facsimile: (813) 273-6861
Attention: [____________]
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
14. Successors. This Agreement will inure to the benefit of and be
----------
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 10 hereof, and to the benefit of the officers and directors and
controlling persons referred to in Section 7, and in each case their
16
<PAGE>
respective successors, and no other person will have any right or obligation
hereunder. The term "successors" shall not include any purchaser of the Shares
as such from any of the Underwriters merely by reason of such purchase.
15. Partial Unenforceability. The invalidity or unenforceability of
------------------------
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
17. Entire Agreement. This Agreement constitutes the entire
----------------
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof.
18. Amendments. This Agreement may only be amended or modified in
----------
writing, signed by all of the parties hereto, and no condition herein (express
or implied) may be waived unless waived in writing by each party whom the
condition is meant to benefit.
19. Sophisticated Parties. Each of the parties hereto acknowledges
---------------------
that it is a sophisticated business person who was adequately represented by
counsel during negotiations regarding the provisions hereof, including, without
limitation, the indemnification and contribution provisions of Section 7, and is
fully informed regarding said provisions. Each of the parties hereto further
acknowledges that the provisions of Section 7 hereto fairly allocate the risks
in light of the ability of the parties to investigate the Company, its affairs
and its business in order to assure that adequate disclosure has been made in
the Registration Statement, any preliminary prospectus and the Prospectus (and
any amendments and supplements thereto), as required by the Securities Act and
the Exchange Act.
[Remainder of page intentionally left blank]
17
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
Z-Tel Technologies, Inc.
By: ____________________________
Name:
Title:
Accepted as of the date hereof
Thomas Weisel Partners LLC
Credit Suisse First Boston Corporation
J.C. Bradford & Co.
Stephens Inc.
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule A hereto.
By: /s/ Thomas Weisel Partners LLC
By: _______________________________
Name:
Title:
18
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
Z-TEL TECHNOLOGIES, INC.
Z-Tel Technologies, Inc., a corporation existing under the laws of the
State of Delaware, does hereby certify as follows:
1. The name of the corporation is Z-Tel Technologies, Inc. The original
Certificate of Incorporation was filed with the Secretary of State of Delaware
on March 19, 1998.
2. This Restated Certificate of Incorporation restates and integrates
and also further amends the Certificate of Incorporation of the Corporation.
This Amended and Restated Certificate of Incorporation was proposed by the
board of directors and duly adopted by the stockholders of the Corporation in
the manner and by the vote prescribed by Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware (as the same exists or may
hereafter be amended). The text of the Certificate of Incorporation is hereby
amended and restated to read in its entirety as follows:
ARTICLE I
Name
The name of the corporation is Z-Tel Technologies, Inc.
ARTICLE 11
Registered Office; Registered Agent
The address of the corporation's registered office in the State of Delaware
is: Corporation Trust Center, 1209 Orange Street in the City of Wilmington,
County of New Castle. The name of the corporation's registered agent at such
address is: The Corporation Trust Company.
ARTICLE III
Purposes and Powers
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
<PAGE>
ARTICLE IV
Capital Stock
The total number of shares of stock which the corporation shall have authority
to issue is 50,000,000, of which 30,000,000 shall be shares of common stock,
$.01 par value per share (the "Common Shares"), and 20,000,000 shall be shares
of preferred stock, $.01 par value per share (the "Preferred Shares"). The
designations, voting powers and relative rights and preferences of the two
classes of shares of stock shall be as set forth below.
A. Common Shares
1. Powers, Rights and Preferences. The Common Shares shall be without
distinction as to powers, rights and preferences, and shall have one vote per
share on all matters on which shareholders are generally entitled to vote.
2. Dividends. After the requirements regarding preferential dividends on
the Preferred Shares (fixed in accordance with the provisions of paragraph B of
this Article IV), if any, have been met and after the corporation has complied
with all of the requirements, if any, regarding the setting aside of sums as
sinking funds or redemption or purchase accounts (fixed in accordance with the
provisions of paragraph B of this Article IV) and subject further to any other
conditions which may be fixed in accordance with the provisions of paragraph B
of this Article IV, then but not otherwise, the holders of Common Shares shall
be entitled to receive such dividends, if any, as may be declared from time to
time by the board of directors.
3. Distributions. After distribution in full of the preferential amount
(as may be fixed in accordance with the provisions of paragraph B of this
Article IV), if any, to be distributed to the holders of Preferred Shares, and
subject to any further rights of the holders of Preferred Shares (as may be
fixed in accordance with the provisions of paragraph B of this Article IV) to
further participate in a liquidation, distribution or sale or assets,
dissolution or winding-up of the corporation, all its remaining assets, tangible
and intangible, of whatever kind available for distribution to the shareholders,
ratably in proportion to the number of Common Shares held by each.
B. Preferred Shares
1. Issuance by Board Resolution; Series. The board of directors of the
corporation shall have the authority by resolution to issue from time to time
Preferred Shares on such terms as it may determine and for such consideration as
fixed by the board of directors. The Preferred Shares may be issued in one or
more series as may be determined from time to time by the board of directors.
Each series shall be distinctly designated by number, letter or title. All
Preferred Shares of any one series shall be alike in every particular, except
that there may be different dates from which dividends thereon, if any, shall be
cumulative, if made cumulative. The powers, preferences and relative,
participating, optional and other rights of each such series,
2
<PAGE>
and the qualifications, limitations or restrictions thereof, if any, may differ
from those of any and all other series at any time outstanding.
2. Preferences and Rights. Subject to the provisions of subparagraph 3 of
this paragraph B of Article IV, the board of directors of the corporation is
hereby expressly granted authority to fix by resolution or resolutions adopted
prior to the issuance of any Preferred Shares of each particular series, the
designation, powers, preferences and relative, participating, optional and other
rights, and the qualifications, limitations and restrictions thereof, if any, of
such series.
3. Issuance of Preferred Shares. The relative powers, preferences and
rights of each series of Preferred Shares in relation to the powers, preferences
and rights of other series of Preferred Shares shall, in each case, be as fixed
from time to time by the board of directors in resolutions adopted pursuant to
authority granted in this paragraph B of Article IV, and the consent by series
vote or otherwise, of the holders of such of the series of Preferred Shares as
are from time to time outstanding shall not be required for the issuance by the
board of directors of any other series of Preferred Shares, whether or not the
powers, preferences and rights of such other series shall be fixed by the board
of directors as senior to, or on a parity with, the powers, preferences and
rights of such outstanding series, or any of them; provided, however, that the
board of directors may provide in such resolutions regarding any series of
Preferred Shares that the consent of the holders of a certain percentage, as
fixed therein by the board of directors, of the outstanding Preferred Shares of
such series shall be required for the issuance of any other series of Preferred
Shares.
ARTICLE V
-Incorporator
The name and mailing address of the incorporator is:
Laura Vitalo
The Corporation Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
ARTICLE VI
Directors
A. Number of Directors. The affairs of the corporation shall be managed and
conducted by a board of directors, and unless otherwise provided in the by-laws,
the election of directors need not be by written ballot. The number of directors
which shall constitute the whole board of directors shall be fixed by, or in the
manner provided in, the by-laws of the corporation.
3
<PAGE>
B. Power and Authority of the Board of Directors: The board of directors
shall have such powers as are conferred on the board of directors by the laws of
the State of Delaware. In furtherance of such powers, the board of directors is
expressly authorized to adopt, amend or repeal the by-laws of the corporation
without the consent or vote of the stockholders.
ARTICLE VII
Indemnification of Directors and Officers
Each person who is or was a director or officer of the corporation and
each person who serves or served at the request of the corporation as a
director, officer or partner of another enterprise shall be indemnified by the
corporation in accordance with, and to the fullest extent authorized by, the
General Corporation Law of the State of Delaware as the same now exists or may
be hereafter amended. No amendment to or repeal of this Article VII shall apply
to or have any effect on the rights of any individual referred to in this
Article VII for or with respect to acts or omissions of such individual
occurring prior to such amendment or repeal.
ARTICLE VIII
Elimination of Certain Liability of Directors
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same now exists or may be hereafter amended, a director
of the corporation shall not be liable to the corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. No amendment to
or repeal of this Article VIII shall apply to or have any effect on the
liability or alleged liability of any director of the corporation for or with
respect to any acts or omissions of such director occurring prior to the
effective date of such amendment or repeal.
4
<PAGE>
ARTICLE IX
Reservation of Powers
The corporation reserves the right to amend, alter or repeal any provision
contained in this certificate of incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon the stockholders herein are
granted subject to this reservation.
The undersigned, being the Secretary of the corporation does hereby certify
that the corporation has amended and restated its Certificate of Incorporation
as set forth above, does hereby certify that such amendment and restatement has
been duly adopted in accordance with the applicable provisions of Sections 242
and 245 of the General Corporation Law of the State of Delaware, and does hereby
make and file this Amended and Restated Certificate of Incorporation.
Dated: October 20, 1998
/s/
__________________________
Russell T. Alba, Secretary
5
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS
OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
AND
SERIES B CONVERTIBLE PREFERRED STOCK
OF
Z-TEL TECHNOLOGIES, INC.
----------
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
----------
Z-Tel Technologies, Inc., a Delaware corporation (the "Corporation")
certifies that pursuant to the authority contained in Article FOURTH of its
Certificate of Incorporation (the "Certificate of Incorporation") and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors of the Corporation at a Special
Meeting held on October 30, 1998, adopted the following resolution which
resolution remains in full force and effect on the date hereof.
RESOLVED, that there are hereby established (i) a series of authorized
preferred stock, having a par value of $0.01 per share, which series be
designated as "Series A Convertible Preferred Stock" (the "Series A Preferred"),
shall consist of 5,930,749 shares and shall have the voting powers, preferences
and relative, participating, optional and other special rights, and
qualifications, limitations and restrictions thereof as set forth herein and
(ii) a series of authorized preferred stock, having a par value of $0.01 per
share, which series be designated as "Series B Convertible Preferred Stock" (the
"Series B Preferred"), shall consist of 1,338,208 shares and shall have the
voting powers, preferences and relative, participating, optional and other
special rights, and qualifications, limitations and restrictions thereof as set
forth herein:
1. Certain Definitions. Unless the context otherwise requires, the terms
defined in this Section 1 shall have, for all purposes of this resolution, the
meanings herein specified (with terms defined in the singular having comparable
meanings when used in the plural).
(a) "Stock Purchase Agreement" shall mean the Stock Purchase
Agreement, dated as of November 4, 1998, by and among the Corporation,
NationsBanc Capital Corporation ("NBCC"), and the other parties signatory
thereto.
<PAGE>
(b) "Stockholders' Agreement" shall mean the Stockholders' Agreement,
dated as of November 4, 1998, by and among the Corporation, NBCC and the
other parties signatory thereto.
(c) "Senior Bridge Financing" shall have the meaning given such term
in the Stock Purchase Agreement.
2. Dividends and Distributions.
(a) Series A Dividends. The holders of record of shares of Series A
Preferred shall be entitled to receive dividends at a rate of eight percent
(8%) of the Conversion Value (as defined in Section 4(a) below) per annum
per share of Series A Preferred (the "Series A Dividend"), which shall be
fully cumulative, prior and in preference to any declaration or payment of
any dividend or other distribution on any other class or series of
Preferred Stock (other than as set forth herein) or the Common Stock (and
excluding any stock splits and subdivisions for which an adjustment is made
under Section 4(d)(vi)(1) below). The foregoing dividend on the Series A
Preferred shall accrue from the date of issuance of each share until the
earlier of (i) the conversion of the Series A Preferred to Common Stock,
(ii) the liquidation, distribution or winding up of the Corporation, or
(iii) the consummation of the Put pursuant to Section 7 of the
Stockholders' Agreement. Such dividend shall be payable annually on
December 31 of each year (each a "Series A Annual Dividend Date")
commencing on December 31, 1999, except that if any such date is a
Saturday, Sunday or legal holiday (a "Non-Business Day") then such dividend
shall be payable on the next day that is not a Saturday, Sunday or legal
holiday on which banks in the State of Delaware are permitted to be closed
(a "Business Day") to holders of record as they appear on the stock books
of the Corporation on the applicable record date, which shall be not more
than sixty (60) nor less than ten (10) days preceding the payment date for
such dividends, as fixed by the Board of Directors (the "Series A Record
Date"). The dividends shall be payable only when, as and if declared by the
Board of Directors out of funds legally available therefor. The dividends
shall either (i) accrue, (ii) be payable in cash, or (iii) be payable in
shares of Common Stock, as provided in the next paragraph. The dividends
shall automatically accrue in the absence of an election by the Board of
Directors within sixty (60) days after each Series A Annual Dividend Date
to pay the dividends in cash or in shares of Common Stock, as provided in
the next paragraph. The amount of dividends payable for any period that is
shorter or longer than a full annual dividend shall be computed on the
basis of a 360-day year and the actual number of days elapsed (including
the first day but excluding the last day) occurring in the period for which
such amount is payable. All accrued but unpaid dividends (whether declared
or undeclared) shall accrue interest at a rate of eight percent (8%) per
annum computed on the basis of a 360-day year and the actual number of days
elapsed (including the first day but excluding the last day) occurring in
the period for which such amount is payable, but with interest on such
dividend compounded on a quarterly basis (on each March 31, June 30,
September 30 and December 31) for the year during which such dividend was
payable, and thereafter until paid. Notwithstanding anything else contained
herein to the contrary, the Series A Dividend shall be pari passu with the
Series B Dividend (as defined herein). If the Series A Dividend and the
Series B Dividend cannot be paid in full, dividends shall be paid, to the
maximum possible extent, to the holders of the Series A Preferred and the
Series B Preferred on a pari passu basis, on the basis of the amount of
accrued and unpaid dividends outstanding on each share. No dividend shall
be paid to holders of Series A Preferred or Series B Preferred unless
dividends are paid to all holders of Series A Preferred and Series B
Preferred pursuant to the terms of this resolution.
2
<PAGE>
The Board of Directors of the Corporation may, within sixty (60) days
after each Series A Annual Dividend Date, elect (the "Series A Dividend
Election") to pay the annual cash dividends payable for such year on such
Series A Annual Dividend Date in shares of Common Stock (each a "Series A
Payment-in-Kind" or more than one the "Series A Payments-in-Kind") rather
than cash. If such an election is made, the Corporation shall promptly
notify the holders of record of the Series A Preferred entitled to such
annual dividend of the election to make the Series A Payments-in-Kind in
lieu of cash dividends for such Series A Annual Dividend Date. A Series A
Dividend Election for any particular Series A Annual Dividend Date shall
operate only for such Series A Annual Dividend Date. Series A
Payments-in-Kind shall be payable as of the Series A Annual Dividend Date
of each year for which the election is made, except that if such date is a
Non-Business Day then such Series A Payment-in-Kind shall be payable as of
the next Business Day to holders of record as they appear on the stock
books of the Corporation on the applicable Record Date. Each Series A
Payment-in-Kind shall be equal in amount to that number of shares of Common
Stock that is equal in number to the aggregate cash dividend payable on any
such dividend date (including accrued interest compounded on a quarterly
basis as indicated above) divided by the fair market valuation for such
Common Stock determined by the Board of Directors at such time in good
faith, and shall be allocated on a pro rata basis to each holder entitled
to receive such dividend. The holders of at least fifty percent (50%) of
the outstanding Series A Preferred shall have the right to challenge any
determination by the Board of Directors of fair market value pursuant to
this Section 2(a), in which case the determination of fair market value
shall be made by an independent appraiser or investment banker, mutually
acceptable to the Board of Directors and the challenging parties, who is
qualified in the fair market appraisal of companies, the cost of such
appraisal to be borne (a) by the challenging parties, if the fair market
value as determined by such appraisal does not exceed the determination of
fair market value by the Board of Directors by more than ten percent (10%)
and (b) by the Corporation, if the fair market value as determined by such
appraisal exceeds the determination of fair market value by the Board of
Directors by more than ten percent (10%). Certificates representing the
shares of Common Stock issuable on payment of any Series A Payment-in-Kind
shall be delivered to each holder entitled to receive such Series A
Payment-in-Kind (in appropriate denominations) on or before the ninetieth
(90th) day following the Series A Annual Dividend Date for which such
Series A Payment-in-Kind is elected to be made hereunder (or such later
date as the independent determination of fair market value has been made).
Notwithstanding anything else contained herein to the contrary, if, in
respect of any Series A Dividend (I) a Series A Dividend Election is made
by the Corporation and such Series A Dividend is paid by a Series A
Payment-in-Kind, then the Corporation shall make a Series B Dividend
Election (as defined herein) with respect to the corresponding Series B
Dividend and such Series B Dividend shall be paid by a Series B
Payment-in-Kind (as defined herein) and (II) such Series A Dividend is
accrued or paid in cash, then the corresponding Series B Dividend shall
also be accrued or paid in cash, as the case may be, in order that the
holders of Series A Preferred and Series B Preferred receive the same type
of consideration with respect to each Series A Dividend and each Series B
Dividend.
(b) Series B Dividends. The holders of record of shares of Series B
Preferred shall be entitled to receive dividends at a rate of eight percent
(8%) of the Conversion Value per annum per share of Series B Preferred (the
"Series B Dividend"), which shall be fully cumulative, prior and in
preference to any declaration or payment of any dividend or other
distribution on any other class or series of Preferred Stock (other than as
set forth herein) or the Common Stock (and excluding any stock splits and
subdivisions for which an adjustment is made under Section
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4(d)(vi)(1) below). The foregoing dividend on the Series B Preferred shall
accrue from the date of issuance of each share until the earlier of (i) the
conversion of the Series B Preferred to Common Stock, (ii) the liquidation,
distribution or winding up of the Corporation, or (iii) the consummation of
the Put pursuant to Section 7 of the Stockholders' Agreement. Such dividend
shall be payable annually on December 31 of each year (each a "Series B
Annual Dividend Date") commencing on December 31, 1999, except that if any
such date is a Non-Business Day then such dividend shall be payable on the
next day that is a Business Day to holders of record as they appear on the
stock books of the Corporation on the applicable record date, which shall
be not more than sixty (60) nor less than ten (10) days preceding the
payment date for such dividends, as fixed by the Board of Directors (the
"Series B Record Date"). The dividends shall be payable only when, as and
if declared by the Board of Directors out of funds legally available
therefor. The dividends shall either (i) accrue, (ii) be payable in cash,
or (iii) be payable in shares of Common Stock, as provided in the next
paragraph. The dividends shall automatically accrue in the absence of an
election by the Board of Directors within sixty (60) days after each Series
B Annual Dividend Date to pay the dividends in cash or in shares of Common
Stock, as provided in the next paragraph. The amount of dividends payable
for any period that is shorter or longer than a full annual dividend shall
be computed on the basis of a 360-day year and the actual number of days
elapsed (including the first day but excluding the last day) occurring in
the period for which such amount is payable. All accrued but unpaid
dividends (whether declared or undeclared) shall accrue interest at a rate
of eight percent (8%) per annum computed on the basis of a 360-day year and
the actual number of days elapsed (including the first day but excluding
the last day) occurring in the period for which such amount is payable, but
with interest on such dividend compounded on a quarterly basis (on each
March 31, June 30, September 30 and December 31) for the year during which
such dividend was payable, and thereafter until paid. Notwithstanding
anything else contained herein to the contrary, the Series B Dividend shall
be pari passu with the Series A Dividend. If the Series A Dividend and the
Series B Dividend cannot be paid in full, dividends shall be paid, to the
maximum possible extent, to the holders of the Series A Preferred and the
Series B Preferred on a pari passu basis, on the basis of the amount of
accrued and unpaid dividends outstanding on each share. No dividend shall
be paid to holders of Series A Preferred or Series B Preferred unless
dividends are paid to all holders of Series A Preferred and Series B
Preferred pursuant to the terms of this resolution.
The Board of Directors of the Corporation may, within sixty (60) days
after each Series B Annual Dividend Date, elect (the "Series B Dividend
Election") to pay the annual cash dividends payable for such year on such
Series B Annual Dividend Date in shares of Common Stock (each a "Series B
Payment-in-Kind" or more than one the "Series B Payments-in-Kind") rather
than cash. If such an election is made, the Corporation shall promptly
notify the holders of record of the Series B Preferred entitled to such
annual dividend of the election to make the Series B Payments-in-Kind in
lieu of cash dividends for such Series B Annual Dividend Date. A Series B
Dividend Election for any particular Series B Annual Dividend Date shall
operate only for such Series B Annual Dividend Date. Series B
Payments-in-Kind shall be payable as of the Series B Annual Dividend Date
of each year for which the election is made, except that if such date is a
Non-Business Day then such Series B Payment-in-Kind shall be payable as of
the next Business Day to holders of record as they appear on the stock
books of the Corporation on the applicable Record Date. Each Series B
Payment-in-Kind shall be equal in amount to that number of shares of Common
Stock that is equal in number to the aggregate cash dividend payable on any
such dividend date (including accrued interest compounded on a quarterly
basis as indicated above) divided by the fair market valuation for such
Common Stock determined by the Board of Directors at such time in good
faith, and shall
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be allocated on a pro rata basis to each holder entitled to receive such
dividend. Certificates representing the shares of Common Stock issuable on
payment of any Series B Payment-in-Kind shall be delivered to each holder
entitled to receive such Series B Payment-in-Kind (in appropriate
denominations) on or before the ninetieth (90th) day following the Series B
Annual Dividend Date for which such Series B Payment-in-Kind is elected to
be made hereunder (or such later date as the independent determination of
fair market value has been made). Notwithstanding anything else contained
herein to the contrary, if, in respect of any Series B Dividend (1) a
Series A Dividend Election is made by the Corporation and such Series A
Dividend is paid by a Series A Payment-in-Kind, then the Corporation shall
make a Series B Dividend Election with respect to the corresponding Series
B Dividend and such Series B Dividend shall be paid by a Series B
Payment-in-Kind and (II) such Series A Dividend is accrued or paid in cash,
then the corresponding Series B Dividend shall also be accrued or paid in
cash, as the case may be, in order that the holders of Series B Preferred
and Series A Preferred receive the same type of consideration with respect
to each Series B Dividend and each Series A Dividend.
(c) Other Permitted Distributions. Notwithstanding Section 2(a) and
2(b) hereof, the Corporation may at any time, out of funds legally
available therefor, repurchase shares of Common Stock of the Corporation
issued to or held by any person subject to the Corporation's right of first
refusal to purchase such shares contained in the Stockholders' Agreement,
and pursuant to the terms of the Stockholders' Agreement, whether or not
dividends on the Series A Preferred or Series B Preferred shall have been
declared and paid or funds set aside therefor, in each event subject to any
other contractual restrictions entered into by the Corporation.
3. Liquidation Rights. In the event of any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary (a
"Liquidation"), distributions shall be made to the holders of Series A Preferred
and Series B Preferred in respect of such Series A Preferred and Series B
Preferred before any amount shall be paid to the holders of any other class or
series of capital stock of the Corporation in the following manner:
(a) liquidation Amount. The holders of the Series A Preferred and
Series B Preferred, subject to the other terms contained herein, shall be
entitled to be paid first out of the assets of the Corporation available
for distribution to holders of its capital stock an amount equal to (i) the
Conversion Value, as appropriately adjusted to reflect any stock split,
stock dividend, combination, recapitalization and the like (collectively a
"Recapitalization"), plus (ii) all accrued but unpaid dividends (whether
declared or undeclared, including any interest accrued thereon calculated
through the date of liquidation), prior to any distribution to the holders
of any other Preferred or Common Stock. If the proceeds from a Liquidation
are not sufficient to pay to the holders of Series A Preferred and Series B
Preferred the full preference amount set forth above, then such holders
shall instead be entitled to receive the entire assets and funds of the
Corporation legally available for distribution to the holders of capital
stock, which assets and funds shall be distributed ratably among the
holders of the Series A Preferred and Series B Preferred. Notwithstanding
anything else contained herein to the contrary, the holders of Series A
Preferred and the holders of Series B Preferred shall be treated pari passu
with respect to distributions to be made as a result of a Liquidation, on
the basis of the amounts per share to be paid to each.
(b) Events Deemed a Liquidation. For purposes of this Section 3, the
holders of greater than fifty percent (50%) of the Series A Preferred then
outstanding (which such holders
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must include NationsBanc Capital Corporation and, at such time as they
become holders of Series A Preferred, Saskatchewan Telecommunications
Holding Corporation), may elect to have treated as a Liquidation the
consolidation or merger of the Corporation with or into any other
corporation or the sale or other transfer in a single transaction or a
series of related transactions of all or substantially all of the assets of
the Corporation, or any other reorganization of the Corporation. If such
election is made by such requisite holders of Series A Preferred, then and
only then, the holders of Series B Preferred may elect to have such events
treated as a Liquidation.
(c) Valuation of Securities and Property. In the event the Corporation
proposes to distribute assets other than cash in connection with any
Liquidation, the value of the assets to be distributed to the holders of
shares of Series A Preferred and Series B Preferred shall be determined in
good faith by the Board of Directors. Any securities not subject to an
investment letter or similar restrictions on free marketability shall be
valued as follows:
(i) if traded on a national securities exchange or the NASDAQ
National Market System ("NASDAQ"), the value shall be deemed to be the
average of the security's closing prices on such exchange or NASDAQ
over the thirty (30) trading day period ending three (3) days prior to
the distribution;
(ii) if actively traded over-the-counter (other than NASDAQ), the
value shall be deemed to be the average of the closing bid prices over
the thirty (30) day period ending three (3) days prior to the
distribution; or
(iii) if there is no active public market, the value shall be the
fair market value thereof as determined in good faith by the Board of
Directors.
The method of valuation of securities subject to an investment letter or
other restrictions on free marketability shall be adjusted to make an
appropriate discount from the market value determined as above in clauses
(i), (ii) or (iii) to reflect the fair market value thereof as determined
in good faith by the Board of Directors. The holders of at least fifty
percent (50%) of the outstanding Series A Preferred shall have the right to
challenge any determination by the Board of Directors of fair market value
pursuant to this Section 3(c), in which case the determination of fair
market value shall be made by an independent appraiser or investment banker
selected jointly by the Board of Directors and the challenging parties, the
cost of such appraisal to be borne (a) by the challenging parties, if the
fair market value as determined by such appraisal does not exceed the
determination of fair market value by the Board of Directors by more than
ten percent (10%) and (b) by the Corporation, if the fair market value as
determined by such appraisal exceeds the determination of fair market value
by the Board of Directors by more than ten percent (10%).
4. Conversion. The holders of Series A Preferred and Series B Preferred
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred and Series B
Preferred shall initially be convertible, at the option of the holder
thereof, at any time on or after the date of issuance thereof, into the
number of fully paid and nonassessable shares of Common Stock which results
from dividing the Conversion Price (as hereinafter specified) per share in
effect at the time of conversion into the per share Conversion Value in
effect at the time of conversion. The initial
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Conversion Price of the Series A Preferred and Series B Preferred shall be
$3.7094803 per share, and the Conversion Value of the Series A Preferred
and Series B Preferred shall be $3.7094803 per share ("Conversion Value").
The initial Conversion Price of the Series A Preferred and Series B
Preferred shall be subject to adjustment from time to time as provided in
Section 4(d) hereof. The Conversion Value shall not be subject to
adjustment. Upon conversion, all accrued or declared but unpaid dividends
(including any interest accrued thereon calculated as of the date of
conversion) on the Series A Preferred and Series B Preferred so converted
shall be paid in cash or Common Stock, at the option of the Corporation,
and in the case of cash, to the extent permitted by applicable law (and if
not then permitted by applicable law, at such time as the Corporation is
permitted by applicable law to pay any such dividends).
(b) Automatic Conversion. Each share of Series A Preferred and Series
B Preferred shall automatically be converted into shares of Common Stock
upon the closing of a firm commitment underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of securities for the account of the
Corporation to the public: (i) the gross proceeds of which equal or exceed
$20,000,000 at a per share price of at least $12; and (ii) whereby the
aggregate value of the shares of Common Stock issuable on conversion of
each share of Series A Preferred and Series B Preferred (utilizing the
offering price in such underwriting) is at least two (2) times the
Conversion Value. Upon conversion, all accrued but unpaid dividends
(whether declared or undeclared) on the Series A Preferred and Series B
Preferred shall be paid in cash, to the extent permitted by applicable law
(and if not then permitted by applicable law, at such time as the
Corporation is permitted by applicable law to pay any such dividends).
(c) Mechanics of Conversion. Before any holder of Series A Preferred
or Series B Preferred shall be entitled to convert the same into shares of
Common Stock and to receive certificates therefor, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the
principal office of the Corporation or of any transfer agent for the Series
A Preferred and Series B Preferred, and shall give written notice to the
Corporation at such office that such holder elects to convert the same;
provided, however, that in the event of an automatic conversion pursuant to
Section 4(b) hereof, the outstanding shares of Series A Preferred and
Series B Preferred shall be converted automatically without any further
action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Corporation or its transfer
agent; and provided further that the Corporation shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon such
automatic conversion unless and until the certificates evidencing such
shares of Series A Preferred and Series B Preferred are either delivered to
the Corporation or its transfer agent as provided above, or the holder
notifies the Corporation or its transfer agent that such certificates have
been lost, stolen or destroyed and executes an agreement reasonably
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates. The Corporation shall
as soon as practicable after such delivery, or after such agreement and
indemnification, issue and deliver at such office to such holder of Series
A Preferred or Series B Preferred, a certificate or certificates for the
number of shares of Common Stock to which it, he or she shall be entitled
as aforesaid and a check payable to the holder in the amount of any accrued
or declared but unpaid dividends (including any interest accrued thereon
calculated as of the date of conversion) payable pursuant to Section 2
hereof, if any. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of
the shares of Series A Preferred or Series B Preferred to be converted, or,
in the
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<PAGE>
case of automatic conversion, simultaneously upon the occurrence of the
event leading to such automatic conversion, and the person or persons
entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. If the Corporation
fails to pay all such dividends (and interest thereon) within twenty (20)
days of the date of conversion, the holder entitled to such dividends (and
interest thereon) may elect to have the Corporation issue to such holder,
in lieu of such cash payment, additional shares of Common Stock calculated
by dividing the total amount payable on such date by the Conversion Price.
(d) Adjustments to Conversion Price.
(i) Special Definitions. For purposes of this Section 4(d), the
following definitions shall apply:
(1) "Options" shall mean rights, options or warrants to subscribe
for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(2) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities convertible into or
exchangeable for Common Stock.
(3) "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued (or, pursuant to Section 4(d)(iii), deemed to be
issued) by the Corporation after the Original Issue Date, other than
shares of Common Stock issued or issuable:
(A) upon conversion of shares of Series A Preferred or
shares of Series B Preferred;
(B) pursuant to a stock grant, option plan or purchase plan,
other employee stock incentive program or agreement that in the
aggregate does not exceed 1,261,000 shares (as adjusted for
recapitalizations, stock splits, stock dividends and the like)
(the "Option Pool"), or other options and warrants in existence
on the Original Issue Date and set forth in Schedule 2.5 of the
Stock Purchase Agreement;
(C) as a dividend or distribution on shares of Series A
Preferred or shares of Series B Preferred;
(D) pursuant to Options or Convertible Securities issued in
conjunction with the Senior Bridge Financing that upon exercise
or conversion in the aggregate do not exceed 856,757 shares (as
adjusted for recapitalizations, stock splits, stock dividends and
the like, the "Senior Bridge Warrants");
(E) in a transaction described in Section 4(d)(vi);
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(F) by way of dividend or other distribution on shares of
Common Stock excluded from the definition of Additional Shares of
Common by the foregoing clauses (A), (B), (C), (D), (E) or this
clause (F).
(4) "Original Issue Date" shall mean the date on which the first
share of Series A Preferred was issued.
(ii) No Adjustment of Conversion Price. Subject to the provisions
of Section 4(d)(iv), no adjustment in the Conversion Price of the
Series A Preferred or Series B Preferred shall be made in respect of
the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued
or deemed to be issued by the Corporation is less than the Conversion
Price for the Series A Preferred or Series B Preferred in effect on
the date of, and immediately prior to, such issue.
(iii) Deemed Issue of Additional Shares of Common Stock. In the
event the Corporation at any time or from time to time after the
Original Issue Date shall issue any Options (other than the issuance
of Options pursuant to the Option Pool or Senior Bridge Warrants) or
Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities then the maximum
number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options
therefor, the exercise of such Options and conversion or exchange of
such Convertible Securities shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue or, in case such a
record date shall have been fixed, as of the close of business on such
record date, provided that Additional Shares of Common Stock shall not
be deemed to have been issued, subject to the provisions of Section
4(d)(iv), unless the consideration per share (determined pursuant to
Section 4(d)(v) hereof) of such Additional Shares of Common Stock
would be less than the Conversion Price for the Series A Preferred or
Series B Preferred in effect on the date of and immediately prior to
such issue, or such record date, as the case may be, and provided
further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(1) except as provided in Section 4(d)(iii)(2), no further
adjustment in the Conversion Price shall be made upon the subsequent
issue of Convertible Securities or shares of Common Stock upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(2) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any change in the
consideration payable to the Corporation, or change in the number of
shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof (other than under or by reason of provisions designed
to protect against dilution), the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with
respect thereto) and any subsequent adjustments based thereon, shall,
upon any such increase or decrease becoming effective, be recomputed
to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities; and
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(3) no readjustment pursuant to clause (2) above shall have the
effect of increasing the Conversion Price to an amount which exceeds
the lower of (A) the Conversion Price on the original adjustment date
or (B) the Conversion Price that would have resulted from any issuance
of Additional Shares of Common Stock between the original adjustment
date and such readjustment date.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
Shares of Common Stock. In the event the Corporation shall issue
Additional Shares of Common Stock (including Additional Shares of
Common Stock deemed to be issued pursuant to Section 4(d)(iii)), then
and in each such event the Conversion Price of the Series A Preferred
and Series B Preferred shall be reduced to a price (calculated to the
nearest cent) determined as follows:
(1) if any such Additional Shares of Common Stock are issued
on or prior to six (6) months subsequent to the Original Issue
Date, regardless of the consideration received by the Corporation
for the issuance of such Additional Shares of Common Stock, then
the Conversion Price of the Series A Preferred and/or the number
of shares of fully paid and nonassessable shares of Common Stock
into which the Series A Preferred is exercisable shall be
adjusted so that the number of shares of fully paid and
nonassessable shares of Common Stock into which the total number
of shares of Series A Preferred are convertible in the aggregate
shall at all times equal 23.51% of the fully diluted Common Stock
of the Corporation (such percentage shall be increased or
decreased, as applicable, to account for the total proceeds from
sales of Series A Preferred pursuant to the Stock Purchase
Agreement being greater than or less than $22,000,000 by
multiplying such percentage by a fraction, the numerator of which
is the total proceeds from the sales of Series A Preferred
pursuant to the Stock Purchase Agreement and the denominator of
which is $22,000,000) (notwithstanding anything else contained
herein, there shall be no adjustment to the Conversion Price of
the Series A Preferred or the Series B Preferred upon the
issuance of the Senior Bridge Warrants or upon their exercise or
conversion); and
(2) if any such Additional Shares of Common Stock are issued
on or prior to six (6) months subsequent to the Original Issue
Date, regardless of the consideration received by the Company for
the issuance of such Additional Shares of Common Stock, then the
Conversion Price of the Series B Preferred and/or the number of
shares of fully paid and nonassessable shares of Common Stock
into which the Series B Preferred is exercisable shall be
adjusted so that the number of shares of fully paid and
nonassessable shares of Common Stock into which the total number
of shares of Series B Preferred are convertible in the aggregate
shall at all times equal 5.305% of the fully diluted Common Stock
of the Corporation (such percentage shall be increased or
decreased, as applicable, to account for the total proceeds from
sales of Series B Preferred being greater than or less than
$4,964,200 by multiplying such percentage by a fraction, the
numerator of which is the total proceeds from the sales of Series
B Preferred and the denominator of which is $4,964,200)
(notwithstanding anything else contained herein, there shall be
no adjustment to the Conversion Price of the Series A Preferred
or the Series B
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Preferred upon the issuance of the Senior Bridge Warrants or upon
their exercise or conversion); and
(3) if any such Additional Shares of Common Stock are issued
after six (6) months subsequent to the Original Issue Date, then
the Conversion Price of Series A Preferred and Series B Preferred
shall be reduced to the consideration per share received by the
Corporation for the issuance of such Additional Shares of Common
Stock; provided, however, that such reduction shall never result
in a Conversion Price of less than $2.00, subject to the
adjustment as set forth in Section 4(d)(vi) below.
(v) Determination of Consideration. For purposes of this Section 4(d),
the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration shall be computed as
follows:
(A) insofar as it consists of cash, such consideration shall
be computed at the aggregate amount of cash received by the
Corporation;
(B) insofar as it consists of property other than cash, such
consideration shall be computed at the fair value thereof at the
time of such issue, as determined by the Board of Directors in
the good faith exercise of its reasonable business judgment; and
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets
of the Corporation for consideration which covers both, such
consideration shall be the proportion of such consideration so
received, computed as provided in clauses (A) and (B) above, as
determined by the Board of Directors in the good faith exercise
of its reasonable business judgment.
(2) Options and Convertible Securities. The consideration per
share received by the Corporation for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 4(d)(iii),
relating to Options and Convertible Securities, shall be determined by
dividing
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in
the case of Options for Convertible Securities, the exercise of
such Options for
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Convertible Securities and the conversion or exchange of such
Convertible Securities, by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(vi) Other Adjustments.
(1) Subdivisions, Combinations or Consolidate of Common Stock. In
the event the outstanding shares of Common Stock shall be subdivided,
combined or consolidated, by stock split, stock dividend, combination
or like event, into a greater or lesser number of shares of Common
Stock, the Conversion Price of the Series A Preferred and Series B
Preferred in effect immediately prior to such subdivision,
combination, consolidation or stock dividend shall, concurrently with
the effectiveness of such subdivision, combination or consolidation,
be proportionately adjusted.
(2) Reclassifications. In the case, at any time after the date
hereof, of any capital reorganization or any reclassification of the
stock of the Corporation (other than as a result of a stock dividend
or subdivision, split-up or combination of shares), or the
consolidation or merger of the Corporation with or into another person
(other than a consolidation or merger (A) in which the Corporation is
the continuing entity and which does not result in any change in the
Common Stock or (B) which is treated as a Liquidation pursuant to
Section 3(b) above), the shares of Series A Preferred and Series B
Preferred shall, after such reorganization, reclassification,
consolidation or merger be convertible into the kind and number of
shares of stock or other securities or property of the Corporation or
otherwise to which such holder would have been entitled if immediately
prior to such reorganization, reclassification, consolidation or
merger such holder had converted his shares of Series A Preferred or
Series B Preferred into Common Stock. The provisions of this Section
4(d)(vi)(2) shall similarly apply to successive reorganizations,
reclassifications, consolidations or mergers.
(e) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price of the Series A
Preferred or Series B Preferred pursuant to this Section 4, the Corporation
at its expense shall promptly thereafter compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder
of Series A Preferred and Series B Preferred a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Series A Preferred or Series B
Preferred, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, if any,
(ii) the Conversion Price of the Series A Preferred and Series B Preferred
at the time in effect, and (iii) the number of shares of Common Stock and
the amount, if any, of other property which at the time would be received
upon the conversion of the Series A Preferred or Series B Preferred.
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(f) Status of Converted Stock. In case any shares of Series A
Preferred or Series B Preferred shall be converted pursuant to Section 4
hereof, the shares so converted shall be canceled, shall not be reissuable
and shall cease to be a part of the authorized capital stock of the
Corporation.
(g) Fractional Shares. In lieu of any fractional shares in the
aggregate to which the holder of Series A Preferred or Series B Preferred
would otherwise be entitled upon conversion, the Corporation shall pay cash
equal to such fraction multiplied by the fair market value of one share of
Common Stock as determined by the Board of Directors in the good faith
exercise of its reasonable business judgment.
(h) Miscellaneous.
(i) All calculations under this Section 4 shall be made to the
nearest cent or to the nearest one hundredth (1/100) of a share, as
the case may be.
(ii) The holders of at least fifty percent (50%) of the
outstanding Series A Preferred shall have the right to challenge any
determination by the Board of Directors of fair market value pursuant
to this Section 4, in which case such determination of fair market
value shall be made by an independent appraiser selected jointly by
the Board of Directors and the challenging parties, the cost of such
appraisal to be borne (a) by the challenging parties, if the fair
market value as determined by such appraisal does not exceed the
determination of fair market value by the Board of Directors by more
than ten percent (10%) and (b) by the Corporation, if the fair market
value as determined by such appraisal exceeds the determination of
fair market value by the Board of Directors by more than ten percent
(10%).
(iii) No adjustment in the Conversion Price of the Series A
Preferred or Series B Preferred will be made if such adjustment would
result in a change in such Conversion Price of less than $0.01. Any
adjustment of less than $0.01 which is not made shall be carried
forward and shall be made at the time of and together with any
subsequent adjustment which, on a cumulative basis, amounts to an
adjustment of $0.01 or more in such Conversion Price.
(i) No Impairment. The Corporation will not through any
reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of
this Section 4 and in the taking of all action as may be necessary or
appropriate in order to protect the conversion rights of the holders of
Series A Preferred and Series B Preferred against impairment.
(j) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series A Preferred and Series B Preferred, such
number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Series A
Preferred and Series B Preferred. If at any
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<PAGE>
time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of
Series A Preferred or Series B Preferred, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number
of shares as shall be sufficient for such purpose.
5. Voting Rights.
(a) General. (i) Except as otherwise required by law, by Section 5(b)
hereof or by Section 8 hereof, the holder of each share of Series A
Preferred will be entitled to vote on all matters with the Common Stock as
a single class, and not as a separate class or series. Each share of Series
A Preferred will entitle the holder to the number of votes per share equal
to the full number of shares of Common Stock into which each share of
Series A Preferred is convertible on the record date for such vote. The
holders of Series A Preferred shall receive notice of and shall be entitled
to attend in person or by proxy any meeting of the holders of Common Stock,
(ii) Except as otherwise required by law, the holder of each share of
Series B Preferred will be entitled to vote on all matters with the Common
Stock as a single class, and not as a separate class or series. Each share
of Series B Preferred will entitle the holder to the number of votes per
share equal to the full number of shares of Common Stock into which each
share of Series B Preferred is convertible on the record date for such
vote. The holders of Series B Preferred shall receive notice of and shall
be entitled to attend in person or by proxy any meeting of the holders of
Common Stock. If the holders of preferred stock are required to vote as a
class for any reason, then the holders of Series B Preferred shall vote as
a single class with the holders of Series A Preferred, and not as a
separate class or series.
(b) Election of Directors. For so long as there are any shares of
Series A Preferred outstanding, the holders of a majority of the Series A
Preferred shall be entitled to nominate and elect two (2) directors, and
the holders of the Series A Preferred shall otherwise also be entitled to
vote in the election of directors pursuant to the terms of Section 5(a)
above. Notwithstanding the foregoing sentence, if (i) the Corporation shall
breach any of its obligations and/or agreements under Section 4 of the
Stock Purchase Agreement, (ii) the Corporation shall breach its payment
obligations pursuant to the terms of the Senior Bridge Financing, or (iii)
a Put is initiated pursuant to Section 7 of the Stockholders' Agreement,
and such breach under (i) or (ii) above shall remain uncured for a period
of one hundred and eighty (180) days after written notice of such breach by
any holder of Series A Preferred or until the Put is consummated, then in
any such event, the holders of the Series A Preferred shall be entitled
then and thereafter to nominate and elect one (1) additional director,
until such time as the later of (x) twelve (12) months from the election of
such director or (y) such time that the applicable breach has been cured
(with respect to the election of an additional director as a result of
clauses (i) and (ii) above), or until the Put is consummated. Any vacancy
on the Board occurring because of the death, resignation or removal of a
director elected by the holders of the Series A Preferred, shall be filled
by the vote or written consent of the holders of a majority of the Series A
Preferred; provided, however, that any designee of a particular holder of
Series A Preferred shall be replaced by the designee of such holder.
6. Notices of Record Date. In the event of any taking by the Corporation of
a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive
14
<PAGE>
any other right, the Corporation shall mail to each holder of Series A Preferred
and Series B Preferred, at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the anticipated
amount and character of such dividend, distribution or right.
7. Notices. Any notice required by the provisions of this Certificate to be
given to the holders of Series A Preferred or Series B Preferred shall be deemed
given when deposited in the United States mail, postage prepaid, and addressed
to each holder of record at such holder's address appearing on the books of the
Corporation.
8. Approval of Certain Transactions While Any Series A Preferred is
Outstanding. So long as any shares of Series A Preferred are outstanding, the
Corporation shall not, without first obtaining the written approval of the
holders of greater than fifty percent (50%) of the Series A Preferred then
outstanding (which such holders must include NationsBanc Capital Corporation, a
Texas corporation ("NBCC"), and, at such time as they become a holder of Series
A Preferred, 589531 Saskatchewan, Ltd., a Saskatchewan corporation ("SaskTel");
provided, however, that such group need not include NBCC or SaskTel,
respectively, at such time as NBCC or SaskTel or their respective Affiliates
fail to own at least fifty percent (50%) of the Series A Preferred purchased by
them pursuant to the Stock Purchase Agreement) voting as a separate class:
(a) alter the rights, preferences or privileges of the Series A
Preferred or Series B Preferred;
(b) increase or decrease the authorized number of shares of Series A
Preferred or Series B Preferred;
(c) create any new class or series of shares, or issue any such shares
or Options or Convertible Securities exercisable or convertible into such
shares, that have a preference over or are on a parity with the Series A
Preferred with respect to voting, dividends or liquidation preferences
(other than the Series B Preferred being on a parity with the Series A
Preferred with respect to dividends and liquidation preferences, and except
that the Corporation may grant voting rights to shares of a series of
preferred stock which have the right to vote with holders of Common Stock
on an as-converted basis, but in any event not in preference to shares of
Series A Preferred);
(d) reclassify stock into shares having a preference over or parity
with the Series A Preferred with respect to voting, dividends or
liquidation preferences (except that the Corporation may grant voting
rights to shares of a series of preferred stock which have the right to
vote with holders of Common Stock on an as-converted basis, but in any
event not in preference to shares of Series A Preferred);
(e) authorize any dividend or other distribution (other than a stock
dividend) with respect to the Preferred Stock or the Common Stock (other
than the cash dividends payable to the holders of Series A Preferred); or
(f) repurchase, redeem or retire any shares of capital stock of the
Corporation other than pursuant to contractual rights to repurchase shares
of Common Stock held by employees, directors or consultants of the
Corporation or its subsidiaries upon termination of their employment
15
<PAGE>
or services or pursuant to the exercise of a contractual right of first
refusal held by the Corporation and as otherwise permitted by the Stock
Purchase Agreement.
9. Headings of Subdivisions. The headings of the various subdivisions
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
10. Severability of Provisions. If any voting powers, preferences and
relative, participating, optional and other special rights of the Series A
Preferred or Series B Preferred and qualifications, limitations and restrictions
thereof set forth in this resolution (as such resolution may be amended from
time to time) are invalid, unlawful or incapable of being enforced by reason of
any rule of law or public policy, all other voting powers, preferences and
relative, participating, optional and other special rights of Series A Preferred
or Series B Preferred and qualifications, limitations and restrictions thereof
set forth in this resolution (as so amended) which can be given effect without
the invalid, unlawful or unenforceable voting powers, preferences and relative,
participating, optional and other special rights of Series A Preferred or Series
B Preferred and qualifications, limitations and restrictions thereof shall,
nevertheless, remain in full force and effect, and no voting powers, preferences
and relative, participating, optional or other special rights of Series A
Preferred or Series B Preferred and qualifications, limitations and restrictions
thereof herein set forth shall be deemed dependent upon any other such voting
powers, preferences and relative, participating, optional or other special
rights of Series A Preferred or Series B Preferred and qualifications,
limitations and restrictions thereof unless so expressed herein.
16
<PAGE>
IN WITNESS WHEREOF, Z-TEL TECHNOLOGIES, INC. has caused this Certificate of
Designations, Preferences and Relative Rights, Qualifications, Limitations and
Restrictions of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock to be signed this 4th day of November, 1998.
Z-TEL TECHNOLOGIES, INC.
By: /s/ Russell T. Alba
------------------------------
Name: Russell T. Alba
Title: Senior Vice President, Secretary
17
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATIONS, PREFERENCES,
AND RELATIVE RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS
OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
AND
SERIES B CONVERTIBLE PREFERRED STOCK
OF
Z-TEL TECHNOLOGIES, INC.
Z-Tel Technologies, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at a meeting duly
held on September 9, 1999, duly adopted a resolution amending the Certificate of
Designations, Preferences and Relative Rights, Qualifications, Limitations and
Restrictions of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock of the Corporation (the "Certificate of
Designations") to change the number of authorized shares of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock and directing its
officers to obtain the written approval of the holders of greater than 50% of
the outstanding Series A Convertible Preferred Stock, no other approval of
stockholders being required. The resolution setting forth the proposed Amendment
to the Certificate of Designations tiled with the Secretary of State on November
4, 1998 read as follows:
"WHEREAS, the Board of Directors of this Corporation adopted on October 30,
1998 a Certificate of Designations, Preferences and Relative Rights,
Qualifications, Limitations and Restrictions of the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock of this Corporation
designating 5,930,749 shares of Series A Convertible Preferred Stock and
1,338,208 shares of Series B Convertible Preferred Stock;
WHEREAS, only 2,695,795 shares of Series A Convertible Preferred Stock have
been issued and the Corporation desires to reduce the number of authorized
shares Series A Convertible Preferred Stock; and
<PAGE>
WHEREAS, all 1,338,208 shares of Series B Convertible Preferred Stock have
been issued and the Corporation desires to increase the number of authorized
shares of Series B Convertible Preferred Stock.
RESOLVED, that the number of authorized shares of preferred stock, having a
par value of $0.01 per share, which are designated as "Series A Convertible
Preferred Stock" shall be 2,695,795 shares and the number of authorized shares
of preferred stock, having a par value of $0.01 per share, which are designated
as "Series B Convertible Preferred Stock" shall be 4,034,003 shares.
RESOLVED FURTHER, that the officers of this Corporation are hereby
authorized and directed to obtain the approval of the holders of the Series A
Convertible Preferred Stock to the foregoing changes in authorized preferred
stock.
RESOLVED FURTHER, that upon obtaining the approval of the Series A
Convertible Preferred Stock, the officers of this Corporation are hereby
authorized and directed to file a Certificate of Amendment of Certificate of
Designations with the Delaware Secretary of State.
RESOLVED FURTHER, that the officers of this Corporation are hereby
authorized and directed to take such actions and execute such documents as they
shall deem necessary or desirable to carry out the purposes and intent of the
foregoing resolutions."
SECOND: That, thereafter by written consent holders of more than 50% of the
outstanding Series A Convertible Preferred Stock approved the amendment.
THIRD: That said amendment of the Certificate of Designations was duly
adopted in accordance with the Certificate of Designations and the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Z-TEL TECHNOLOGIES, INC. has caused this Certificate of
Amendment to Certificate of Designation to be signed this 20th day of September,
1999.
Z-TEL TECHNOLOGIES, INC.
By /s/ Mark H. Johnson
------------------------------
Mark H. Johnson
Secretary
<PAGE>
EXHIBIT 3.1(b)
AMENDED
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS
OF THE
SERIES A CONVERTIBLE PREFERRED STOCK,
SERIES B CONVERTIBLE PREFERRED STOCK
AND
SERIES C CONVERTIBLE PREFERRED STOCK
OF
Z-TEL TECHNOLOGIES, INC.
----------
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
----------
Z-Tel Technologies, Inc., a Delaware corporation (the "Corporation"),
certifies that pursuant to the authority contained in Article FOURTH of its
Certificate of Incorporation (the "Certificate of Incorporation") and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors of the Corporation, at a Special
Meeting held on September 9, 1999, adopted the following resolution which
resolution remains in full force and effect on the date hereof:
WHEREAS, at a Special Meeting on October 30, 1998, the Board of Directors
of the Corporation adopted (i) a series of preferred stock, having a par value
of $0.01 per share, which series was designated as "Series A Convertible
Preferred Stock" (the "Series A Preferred"), consisting of 5,930,749 shares and
(ii) a series of preferred stock, having a par value of $0.01 per share, which
series was designated as "Series B Convertible Preferred Stock" (the "Series B
Preferred'), consisting of 1,338,208 shares, with the Series A Preferred and the
Series B Preferred having the powers, designations, preferences and relative,
participating, optional and other rights, and qualifications, limitations and
restrictions set forth in a Certificate of Designations, Preferences and
Relative Rights, Qualifications, Limitations and Restrictions filed with the
Secretary of State of the State of Delaware on November 4, 1998 (the "Original
<PAGE>
WHEREAS, at a Special Meeting on September 9, 1999, the Board of Directors
of the Corporation declared the advisability of and approved an amendment to the
Original Certificate, subject to attaining the approval of the holders of a
majority of the outstanding shares of the Series A Preferred, to reduce the
authorized number of shares of Series A Preferred to 2,695,795 and increase the
authorized number of shares of Series B Preferred to 4,034,003 (the "Amended
Certificate");
WHEREAS, at a Special Meeting on September 9, 1999, the Board of Directors
of the Corporation determined it to be in the best interests of the Corporation
and its stockholders to effect a recapitalization of the Corporation involving
the issuance of a new series of preferred stock; and
WHEREAS, the Board of Directors of the Corporation, together with the
holders of a majority of the outstanding shares of each of the Series A
Preferred and the Series B Preferred, have adopted the following amendments to
the Original Certificate and the Amended Certificate.
NOW, THEREFORE, BE IT RESOLVED, that the Original Certificate and the
Amended Certificate shall be amended and restated in its entirety (the "Amended
and Restated Certificate") (i) to establish a new series of authorized preferred
stock, having a par value of $0.01 per share, which series shall be designated
as "Series C Convertible Preferred Stock" (the "Series C Preferred"), shall
consist of 2,794,800 shares and shall have the powers, designations, preferences
and relative, participating, optional and other special rights, and
qualifications, limitations and restrictions as set forth herein and (ii) to
amend and restate the powers, designations, preferences and relative,
participating, optional and other special rights and qualifications, limitations
and restrictions of the Series A Preferred and the Series B Preferred as set
forth herein.
1. Certain Definitions. Unless the context otherwise requires, in addition
to the terms defined elsewhere herein, the terms defined in this Section 1 shall
have, for all purposes of this resolution, the meanings herein specified when
used herein with initial capital letters (with terms defined in the singular
having comparable meanings when used in the plural).
"Stock Purchase Agreement" shall mean (i) in the case of the Series A
Preferred, the Stock Purchase Agreement, dated as of November 4, 1998, by and
among the Corporation, BA Capital Partners, L.P. (formerly known as NationsBanc
Capital Corporation, a Texas corporation ("BACC")). and the other parties
signatory thereto and (ii) in the case of the Series C Preferred, the Amended
and Restated Stock Purchase Agreement, dated as of September 30, 1999, by and
between the Corporation and Gramercy Z-Tel LLC, a Delaware limited liability
company ("Gramercy").
"Stockholders' Agreement" shall mean the Amended and Restated Stockholders'
Agreement, dated as of the Original Issue Date of the Series C Preferred, by and
among the Corporation, BACC, Gramercy and the other parties signatory thereto.
2
<PAGE>
2. Dividends and Distributions. (a) Series A Dividends. The holders of
record of shares of Series A Preferred shall be entitled to receive dividends at
a rate of eight percent (8%) of the Conversion Value (as defined herein) per
annum per share of Series A Preferred (the "Series A Dividend"), which shall be
fully cumulative, prior and in preference to any declaration or payment of any
dividend or other distribution on any other class or series of Preferred Stock
(other than as set forth herein) or the Common Stock (and excluding any stock
splits and subdivisions for which an adjustment is made under Section
4(d)(vi)(1) below). The foregoing dividend on the Series A Preferred shall
accrue from the date of issuance of each share until the earlier of (i) the
conversion of such share of Series A Preferred to Common Stock, (ii) a
Liquidation (as defined herein), or (iii) the repurchase or redemption of such
share of Series A Preferred (including pursuant to Section 7 of the
Stockholders' Agreement). Such dividend shall be payable annually on December 31
of each year (each a "Series A Annual Dividend Date") commencing on December 31,
1999, except that if any such date is a Saturday, Sunday or legal holiday (a
"Non-Business Day") then such dividend shall be payable on the next day that is
not a Saturday, Sunday or legal holiday on which banks in the State of Delaware
are permitted to be closed (a "Business Day") to holders of record as they
appear on the stock ledger of the Corporation on the applicable record date,
which shall be not more than sixty (60) nor less than ten (10) days preceding
the payment date for such dividends, as fixed by the Board of Directors (the
"Series A Record Date") the dividends shall be payable only when, as and if
declared by the Board of Directors out of funds legally available therefor. The
dividends shall either (i) accrue, (ii) be payable in cash, or (iii) be payable
in shares of Common Stock, as provided in the next paragraph. The dividends
shall automatically accrue in the absence of an election by the Board of
Directors within sixty (60) days after each Series A Annual Dividend Date to pay
the dividends in cash or in shares of Common Stock, as provided in the next
paragraph. The amount of dividends payable for any period that is shorter or
longer than a full annual dividend shall be computed on the basis of a 360-day
year and the actual number of days elapsed (including the first day but
excluding the last day) occurring in the period for which such amount is
payable. All accrued but unpaid dividends (whether declared or undeclared) shall
accrue interest at a rate of eight percent (8%) per annum computed on the basis
of a 360-day year and the actual number of days elapsed (including the first day
but excluding the last day) occurring in the period for which such amount is
payable, but with interest on such dividend compounded on a quarterly basis (on
each March 31, June 30, September 30 and December 31) for the year during which
such dividend was payable, and thereafter until paid. Notwithstanding anything
else contained herein to the contrary, the Series A Dividend shall be pari passu
with the Series B Dividend (as defined herein) and the Series C Dividend (as
defined herein). If the Series A Dividend, the Series B Dividend and the Series
C Dividend cannot be paid in full, dividends shall be paid, to the maximum
possible extent, to the holders of the Series A Preferred, the Series B
Preferred and the Series C Preferred on a pari passu basis, on the basis of the
amount of accrued and unpaid dividends outstanding on each share. No dividend
shall be paid to holders of Series A Preferred, Series B Preferred or Series C
Preferred unless dividends are paid to all holders of Series A Preferred, Series
B Preferred and Series C Preferred pursuant to the terms hereof.
The Board of Directors of the Corporation may, within sixty (60) days after
each Series A Annual Dividend Date, elect (the "Series A Dividend Election") to
pay the annual cash dividends payable for such year on such Series A Annual
Dividend Date in shares of Common Stock (each, a "Series A Payment-in-Kind", or
more than one, the "Series A Payments-in-Kind") rather than cash. If such an
election is made, the Corporation shall promptly notify the holders of record of
the Series A Preferred entitled to such annual dividend of the election to make
the Series A
3
<PAGE>
Payments-in-Kind in lieu of cash dividends for such Series A Annual Dividend
Date. A Series A Dividend Election for any particular Series A Annual Dividend
Date shall operate only for such Series A Annual Dividend Date. Series A
Payments-in-Kind shall be payable as of the Series A Annual Dividend Date of
each year for which the election is made. Each Series A Payment-in-Kind shall be
equal in amount to that number of shares of Common Stock that is equal in number
to the aggregate cash dividend payable on any such dividend date divided by the
fair market valuation for such Common Stock determined by the Board of Directors
at such time in good faith, and shall be allocated on a pro rata basis to each
holder entitled to receive such dividend. Certificates representing the shares
of Common Stock issuable on payment of any Series A Payment-in-Kind (together
with dividends, if any, on such shares of Common Stock with a record date on or
after the Series A Annual Dividend Date and a payment date prior to the date
such certificates have been delivered to the holder entitled to receive such
Series A Payment-in-Kind) shall be delivered or paid, as the case may be, to
each holder entitled to receive such Series A Payment-in-Kind (in appropriate
denominations) on or before the ninetieth (90th) day following the Series A
Annual Dividend Date for which such Series A Payment-in-Kind is elected to be
made hereunder (or such later date as the independent determination of fair
market value has been made pursuant to Section 2(d)). Notwithstanding anything
else contained herein to the contrary, if, in respect of any Series A Dividend
(I) a Series A Dividend Election is made by the Board of Directors of the
Corporation and such Series A Dividend is paid by a Series A Payment-in-Kind,
then the Corporation shall make a Series B Dividend Election (as defined herein)
and Series C Dividend Election (as defined herein) with respect to the
corresponding Series B Dividend and Series C Dividend and such Series B Dividend
and Series C Dividend shall be paid by a Series B Payment-in-Kind (as defined
herein) and a Series C Payment-in-Kind (as defined herein), as the case may be,
and (II) such Series A Dividend is accrued or paid in cash, then the
corresponding Series B Dividend and Series C Dividend shall also be accrued or
paid in cash, as the case may be, in order that the holders of Series A
Preferred, Series B Preferred and Series C Preferred receive the same type of
consideration with respect to each Series A Dividend, Series B Dividend and
Series C Dividend, as the case may be.
(b) Series B Dividends. The holders of record of shares of Series B
Preferred shall be entitled to receive dividends at a rate of eight percent (8%)
of the Conversion Value per annum per share of Series B Preferred (the "Series B
Dividend"), which shall be fully cumulative, prior and in preference to any
declaration or payment of any dividend or other distribution on any other class
or series of Preferred Stock (other than as set forth herein) or the Common
Stock (and excluding any stock splits and subdivisions for which an adjustment
is made under Section 4(d)(vi)(1) below). The foregoing dividend on the Series B
Preferred shall accrue from the date of issuance of each share until the earlier
of (i) the conversion of such share of Series B Preferred to Common Stock, (ii)
a Liquidation, or (iii) the repurchase or redemption of such share of Series B
Preferred (including pursuant to Section 7 of the Stockholders' Agreement). Such
dividend shall be payable annually on December 31 of each year (each a "Series B
Annual Dividend Date") commencing on December 3l, 1999, except that if any such
date is a Non-Business Day then such dividend shall be payable on the next day
that is a Business Day to holders of record as they appear on the stock ledger
of the Corporation on the applicable record date, which shall be not more than
sixty (60) nor less than ten (10) days preceding the payment date for such
dividends, as fixed by the Board of Directors (the "Series B Record Date"). The
dividends shall be payable only when, as and if declared by the Board of
Directors out of funds legally available therefor. The dividends shall either
(i) accrue, (ii) be payable in cash, or (iii) be payable in shares
4
<PAGE>
of Common Stock, as provided in the next paragraph. The dividends shall
automatically accrue in the absence of an election by the Board of Directors
within sixty (60) days after each Series B Annual Dividend Date to pay the
dividends in cash or in shares of Common Stock, as provided in the next
paragraph. The amount of dividends payable for any period that is shorter or
longer than a full annual dividend shall be computed on the basis of a 360-day
year and the actual number of days elapsed (including the first day but
excluding the last day) occurring in the period for which such amount is
payable. All accrued but unpaid dividends (whether declared or undeclared) shall
accrue interest at a rate of eight percent (8%) per annum computed on the basis
of a 360-day year and the actual number of days elapsed (including the first day
but excluding the last day) occurring in the period for which such amount is
payable, but with interest on such dividend compounded on a quarterly basis (on
each March 31, June 30, September 30 and December 31) for the year during which
such dividend was payable, and thereafter until paid. Notwithstanding anything
else contained herein to the contrary, the Series B Dividend shall be pari passu
with the Series A Dividend and the Series C Dividend. If the Series A Dividend,
the Series B Dividend and the Series C Dividend cannot be paid in full,
dividends shall be paid, to the maximum possible extent, to the holders of the
Series A Preferred, the Series B Preferred and the Series C Preferred on a pari
passu basis, on the basis of the amount of accrued and unpaid dividends
outstanding on each share. No dividend shall be paid to holders of Series A
Preferred, Series B Preferred or Series C Preferred unless dividends are paid to
all holders of Series A Preferred, Series B Preferred and Series C Preferred
pursuant to the terms hereof.
The Board of Directors of the Corporation may, within sixty (6O) days after
each Series B Annual Dividend Date, elect (the "Series B Dividend Election") to
pay the annual cash dividends payable for such year on such Series B Annual
Dividend Date in shares of Common Stock (each, a "Series B Payment-in-Kind", or
more than one, the "Series B Payments-in-Kind") rather than cash. If such an
election is made, the Corporation shall promptly notify the holders of record of
the Series B Preferred entitled to such annual dividend of the election to make
the Series B Payments-in-Kind in lieu of cash dividends for such Series B Annual
Dividend Date. A Series B Dividend Election for any particular Series B Annual
Dividend Date shall operate only for such Series B Annual Dividend Date. Series
B Payments-in-Kind shall be payable as of the Series B Annual Dividend Date of
each year for which the election is made. Each Series B Payment-in-Kind shall be
equal in amount to that number of shares of Common Stock that is equal in number
to the aggregate cash dividend payable on any such dividend date divided by the
fair market valuation for such Common Stock determined by the Board of Directors
at such time in good faith, and shall be allocated on a pro rata basis to each
holder entitled to receive such dividend. Certificates representing the shares
of Common Stock issuable on payment of any Series B Payment-in-Kind (together
with dividends, if any, on such shares of Common Stock with a record date on or
after the Series B Annual Dividend Date and a payment date prior to the date
such certificates have been delivered to the holder entitled to receive such
Series B Payment-in-Kind) shall be delivered or paid, as the case may be, to
each holder entitled to receive such Series B Payment-in-Kind (in appropriate
denominations) on or before the ninetieth (90th) day following the Series B
Annual Dividend Date for which such Series B Payment-in-Kind is elected to be
made hereunder (or such later date as the independent determination of fair
market value has been made pursuant to Section 2(d)). Notwithstanding anything
else contained herein to the contrary, if, in respect of any Series B Dividend
(I) a Series B Dividend Election is made by the Board of Directors of the
Corporation and such Series B Dividend is paid by a Series B Payment-in-Kind,
then the Corporation shall make a Series A Dividend Election and Series C
Dividend Election with respect to the corresponding Series A
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Dividend and Series C Dividend and such Series A Dividend and Series C Dividend
shall be paid by a Series A Payment-in-Kind and a Series C Payment-in-Kind, as
the case may be, and (II) such Series B Dividend is accrued or paid in cash,
then the corresponding Series A Dividend and Series C Dividend shall also be
accrued or paid in cash, as the case may be, in order that the holders of Series
B Preferred, Series A Preferred and Series C Preferred receive the same type of
consideration with respect to each Series B Dividend. Series A Dividend and
Series C Dividend, as the case may be.
(c) Series C Dividends. The holders of record of shares of Series C
Preferred shall be entitled to receive dividends at a rate of eight percent (8%)
of the Conversion Value per annum per share of Series C Preferred (the "Series C
Dividend"), which shall be fully cumulative, prior and in preference to any
declaration or payment of any dividend or other distribution on any other class
or series of Preferred Stock (other than as set forth herein) or the Common
Stock (and excluding any stock splits and subdivisions for which an adjustment
is made under Section 4(d)(vi)(l) below). The foregoing dividend on the Series C
Preferred shall accrue from the date of issuance of each share until the earlier
of (i) the conversion of such share of Series C Preferred to Common Stock, (ii)
a Liquidation, or (iii) the repurchase or redemption of such share of Series C
Preferred (including pursuant to Section 7 of the Stockholders' Agreement). Such
dividend shall be payable annually on December 31 of each year (each a "Series C
Annual Dividend Date") commencing on December 31, 1999, except that if any such
date is a Non-Business Day then such dividend shall be payable on the next day
that is a Business Day to holders of record as they appear on the stock ledger
of the Corporation on the applicable record date, which shall be not more than
sixty (60) nor less than ten (10) days preceding the payment date for such
dividends, as fixed by the Board of Directors (the "Series C Record Date"). The
dividends shall be payable only when, as and if declared by the Board of
Directors out of funds legally available therefor. The dividends shall either
(i) accrue, (ii) be payable in cash, or (iii) be payable in shares of Common
Stock, as provided in the next paragraph. The dividends shall automatically
accrue in the absence of an election by the Board of Directors within sixty (60)
days after each Series C Annual Dividend Date to pay the dividends in cash or in
shares of Common Stock, as provided in the next paragraph. The amount of
dividends payable for any period that is shorter or longer than a full annual
dividend shall be computed on the basis of a 360 day year and the actual number
of days elapsed (including the first day but excluding the last day) occurring
in the period for which such amount is payable. All accrued but unpaid dividends
(whether declared or undeclared) shall accrue interest at a rate of eight
percent (8%) per annum computed on the basis of a 360-day year and the actual
number of days elapsed (including the first day but excluding the last day)
occurring in the period for which such amount is payable, but with interest on
such dividend compounded on a quarterly basis (on each March 31, June 30,
September 30 and December 31) for the year during which such dividend was
payable, and thereafter until paid. Notwithstanding anything else contained
herein to the contrary, the Series C Dividend shall be pari passu with the
Series A Dividend and the Series B Dividend. If the Series A Dividend, the
Series B Dividend and the Series C Dividend cannot be paid in full, dividends
shall be paid to the maximum possible extent, to the holders of the Series A
Preferred the Series B Preferred and the Series C Preferred on a pari passu
basis, on the basis of the amount of accrued and overpaid dividends outstanding
on each share. No dividend shall be paid to holders of Series A Preferred,
Series B Preferred or Series C Preferred unless dividends are paid to all
holders of Series A Preferred, Series B Preferred and Series C Preferred
pursuant to the terms hereof
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The Board of Directors of the Corporation may, within sixty (60) days after
each Series C Annual Dividend Date, elect (the "Series C Dividend Election") to
pay the annual cash dividends payable for such year on such Series C Annual
Dividend Date in shares of Common Stock (each, a "Series C Payment-in-Kind", or
more than one, the "Series C Payments-in-Kind") rather than cash. If such an
election is made, the Corporation shall promptly notify the holders of record of
the Series C Preferred entitled to such annual dividend of the election to make
the Series C Payments-in-Kind in lieu of cash dividends for such Series C Annual
Dividend Date. A Series C Dividend Election for any particular Series C Annual
Dividend Date shall operate only for such Series C Annual Dividend Date. Series
C Payments-in-Kind shall be payable as of the Series C Annual Dividend Date of
each year for which the election is made. Each Series C Payment-in-Kind shall be
equal in amount to that number of shares of Common Stock that is equal in number
to the aggregate cash dividend payable on any such dividend date divided by the
fair market valuation for such Common Stock determined by the Board of Directors
at such time in good faith, and shall be allocated on a pro rata basis to each
holder entitled to receive such dividend. Certificates representing the shares
of Common Stock issuable on payment of any Series C Payment-in-Kind (together
with dividends, if any, on such shares of Common Stock with a record date on or
after the Series C Annual Dividend Date and a payment date prior to the date
such certificates have been delivered to the holder entitled to receive such
Series C Payment-in-Kind) shall be delivered, or paid, as the case may be, to
each holder entitled to receive such Series C Payment-in-Kind (in appropriate
denominations) on or before the ninetieth (90th) day following the Series C
Annual Dividend Date for which such Series C Payment-in-Kind is elected to be
made hereunder (or such later date as the independent determination of fair
market value has been made pursuant to Section 2(d)). Notwithstanding anything
else contained herein to the contrary, if, in respect of any Series C Dividend
(I) a Series C Dividend Election is made by the Board of Directors of the
Corporation and such Series C Dividend is paid by a Series C Payment-in-Kind,
then the Corporation shall make a Series A Dividend Election and Series B
Dividend Election with respect to the corresponding Series A Dividend and Series
B Dividend and such Series A Dividend and Series B Dividend shall be paid by a
Series A Payment-in-Kind and a Series B Payment-in-Kind, as the case may be, and
(II) such Series C Dividend is accrued or paid in cash, then the corresponding
Series C Dividend and Series B Dividend shall also be accrued or paid in cash,
as the case may be, in order that the holders of Series C Preferred, Series A
Preferred and Series B Preferred receive the same type of consideration with
respect to each Series C Dividend, Series A Dividend and Series B Dividend, as
the case may be.
(d) Determination of Fair Market Value of Common Stock. Notwithstanding
anything else to the contrary in this Section 2, the holders of at least a
majority of the outstanding shares of the Series A Preferred or the holders of
at least a majority of the outstanding shares of the Series C Preferred shall
have the right to challenge any determination by the Board of Directors of fair
market value of the Common Stock pursuant to this Section 2, in which case the
determination of fair market value of the Common Stock shall be made by an
independent appraiser or investment banker, mutually acceptable to the Board of
Directors and the challenging parties, who is qualified in the fair market
appraisal of companies, the cost of such appraisal to be borne (i) by the
challenging parties, if the fair market value as determined by such appraisal
does not exceed the determination of fair market value by the Board of Directors
by more than ten percent (10%) and (ii) by the Corporation, if the fair market
value as determined by such appraisal exceeds the determination of fair market
value by the Board of Directors by more than ten percent (10%).
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(e) Other Permitted Distributions. Notwithstanding Section 2(a), 2(b) and
2(c) hereof, the Corporation may at any time, out of funds legally available
therefor, repurchase shares of Common Stock of the Corporation issued to or held
by any person pursuant to the Corporation's right of first refusal to purchase
such shares contained in the Stockholders' Agreement, whether or not dividends
on the Series A Preferred, Series B Preferred or Series C Preferred shall have
been declared and paid or funds set aside therefor, in each event subject to any
other contractual restrictions entered into by the Corporation and the terms of
this Amended and Restated Certificate.
(f) Fractional Shares. In lieu of any fractional shares in the aggregate to
which the holder of Series A Preferred, Series B Preferred or Series C Preferred
would otherwise be entitled upon payment of Series A Payment-in-Kind, Series B
Payment-in-Kind or Series C Payment-in-Kind, the Corporation shall pay cash
equal to such fraction multiplied by the fair market value of one share of
Common Stock as determined by the Board of Directors in the good faith exercise
of its reasonable business judgment or pursuant to Section 2(d), if applicable.
3. Liquidation Rights. In the event of any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary (a
"Liquidation"), distributions shall be made to the holders of Series A
Preferred, Series B Preferred and Series C Preferred in respect of such Series A
Preferred, Series B Preferred and Series C Preferred before any amount shall be
paid to the holders of any other class or series of capital stock of the
Corporation in the following manner:
(a) Liquidation Amount. The holders of the Series A Preferred, Series B
Preferred and Series C Preferred, subject to the other terms contained herein,
shall be entitled to be paid first out of the assets of the Corporation
available for distribution to holders of its capital stock an amount (the
"Liquidation Value") equal to (i) the applicable Conversion Value, plus (ii) all
accrued but unpaid dividends (whether declared or undeclared including any
interest accrued thereon calculated through the date of Liquidation), prior to
any distribution to the holders of any other Preferred or Common Stock. If the
proceeds from a Liquidation are not sufficient to pay to the holders of Series A
Preferred, Series B Preferred and Series C Preferred the full preference amount
set forth above, then such holders shall instead be entitled to receive the
entire assets and funds of the Corporation legally available for distribution to
the holders of capital stock, which assets and funds shall be distributed pro
rata among the holders of the Series A Preferred, Series Preferred and Series C
Preferred on the basis of the amounts per share to be paid to each.
(b) Events Deemed a Liquidation. For purposes of this Section 3, the
holders of a majority of the outstanding shares of the Series A Preferred (which
must include BACC so long as it holds any Series A Preferred) or the holders of
a majority of the outstanding shares of the Series C Preferred (which must
include Gramercy so long as it holds any Series C Preferred) may elect to have
treated as a Liquidation the consolidation or merger of the Corporation with or
into any other corporation or the sale or other transfer in a single transaction
or a series of related transactions of all or substantially all of the assets of
the Corporation, or any other reorganization or business combination of the
Corporation. If such election is made by such requisite holders of Series A
Preferred or Series C Preferred, then and only then the holders of Series B
Preferred may elect to have such events treated as a Liquidation.
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<PAGE>
(c) Valuation of Securities and Property. In the event the Corporation
proposes to distribute assets other than cash in connection with any
Liquidation, the value of the assets to be distributed to the holders of shares
of Series A Preferred, Series B Preferred and Series C Preferred shall be
determined in good faith by the Board of Directors. Any securities not subject
to an investment letter or similar restrictions or free marketability shall be
valued as follows:
(i) if traded on a national securities exchange or the NASDAQ National
Market System ("NASDAQ"), the value shall be deemed to be the average of
the security's closing prices on such exchange or NASDAQ over the thirty
(30) trading day period ending three (3) days prior to the distribution;
(ii) if actively traded over-the-counter (other than NASDAQ), the
value shall be deemed to be the average of the closing bid prices over the
thirty (30) day period ending three (3) days prior to the distribution; or
(iii) if there is no active public market, the value shall be the fair
market value thereof as determined in good faith by the Board of Directors.
The method of valuation of securities subject to an investment letter or other
restrictions on free marketability shall be adjusted to make an appropriate
discount from the market value determined as above in clauses (i), (ii) or (iii)
to reflect the fair market value thereof as determined in good faith by the
Board of Directors. The holders of a majority of the outstanding shares of the
Series A Preferred or the holders of a majority of the outstanding shares of the
Series C Preferred shall have the right to challenge any determination by the
Board of Directors of fair market value pursuant to this Section 3(c), in which
case the determination of fair market value shall be made by an independent
appraiser or investment banker selected jointly by the Board of Directors and
the challenging parties, the cost of such appraisal to be borne (I) by the
challenging parties, if the fair market value as determined by such appraisal
does not exceed the determination of fair market value by the Board of Directors
by more than ten percent (10%) and (II) by the Corporation, if the fair market
value as determined by such appraisal exceeds the determination of fair market
value by the Board of Directors by more than ten percent (10%).
4. Conversion. The holders of Series A Preferred, Series B Preferred and
Series C Preferred have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred, Series B Preferred
and Series C Preferred shall initially be convertible, at the option of the
holder thereof, at any time on or after the date of issuance thereof, into the
number of fully paid and nonassessable shares of Common Stock which results from
dividing the applicable Conversion Price (as hereinafter specified) per share in
effect at the time of conversion into the applicable per share Conversion Value
in effect at the time of conversion. The initial Conversion Price of the Series
A Preferred and Series B Preferred shall be $3.7094803 per share, and the
Conversion Value of the Series A Preferred and Series B Preferred shall be
$3.7094803 per share. The initial Conversion Price of the Series C Preferred
shall be $5.3671104 per share, and the Conversion Value of the Series C
Preferred shall be $5.3671104 per share. The initial Conversion Price of the
Series A Preferred, Series B Preferred and Series C Preferred shall be subject
to adjustment from time to time as provided in Section 4(d) hereof. The
Conversion Value shall not be subject to adjustment. Upon conversion, all
accrued or declared but unpaid dividends (including any interest accrued thereon
calculated as
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<PAGE>
of the date of conversion) on the Series A Preferred, Series B Preferred and
Series C Preferred so converted shall be paid in cash or Common Stock at the
option of the Corporation, and in the case of cash, to the extent permitted by
applicable law (and if not then permitted by applicable law, at such time as the
Corporation is permitted by applicable law to pay any such dividends).
(b) Automatic Conversion. Each share of Series A Preferred, Series B
Preferred and Series C Preferred shall automatically be converted into shares of
Common Stock upon the closing of a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of securities for the account of
the Corporation to the public: (i) the gross proceeds of which equal or exceed
$20,000,000 at a per share price of at least $12; and (ii) in the case of the
Series A Preferred and the Series B Preferred whereby the aggregate value of the
shares of Common Stock issuable on conversion of each share of Series A
Preferred and Series B Preferred (utilizing the offering price in such
underwriting) is at least two (2) times the Conversion Value of the Series A
Preferred and Series B Preferred and (iii) in the case of the Series C Preferred
whereby the aggregate value of the shares of Common Stock issuable on conversion
of each share of Series C Preferred (utilizing the offering price in such
underwriting) is at least two (2) times the Conversion Value of the Series C
Preferred (in each case, such event, as applicable, a "Qualified Public
Offerring"). Upon conversion, all accrued but unpaid dividends (whether declared
or undeclared) on the Series A Preferred, Series B Preferred and Series C
Preferred shall be paid in cash, to the extent permitted by applicable law (and
if not then permitted by applicable law, at such time as the Corporation is
permitted by applicable law to pay any such dividends).
(c) Mechanics of Conversion. Before any holder of Series A Preferred,
Series B Preferred or Series C Preferred shall be entitled to convert the same
into shares of Common Stock and to receive certificates therefore, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
principal office of the Corporation or of any transfer agent for the Series A
Preferred, Series B Preferred and Series C Preferred and shall give written
notice to the Corporation at such office that such holder elects to convert the
same; provided, however, that in the event of an automatic conversion pursuant
to Section 4(b) hereof, the outstanding shares of Series A Preferred, Series B
Preferred and Series C Preferred, as applicable, shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; and provided further, that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless and until the certificates
evidencing such shares of Series A Preferred, Series B Preferred and Series C
Preferred, as appropriate, are either delivered to the Corporation or its
transfer agent as provided above, or the holder notifies the Corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement reasonably satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection with such
certificates. The Corporation shall as soon as practicable after such delivery,
or after such agreement and indemnification, issue and deliver at such office to
such holder of Series A Preferred, Series B Preferred or Series C Preferred, as
appropriate, a certificate or certificates for the number of shares of Common
Stock to which it, he or she shall be entitled as aforesaid and a check payable
to the holder in the amount of any accrued or declared but unpaid dividends
(including any interest accrued thereon calculated as of the date of conversion)
payable pursuant to Section 2 hereof, if any. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of
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Series A Preferred, Series B Preferred or Series C Preferred to be converted,
or, in the case of automatic conversion, simultaneously upon the occurrence of
the event leading to such automatic conversion, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date. If the Corporation fails to pay all such dividends
(and interest thereon) within twenty (20) days of the date of conversion, the
holder entitled to such dividends (and interest thereon) may elect to have the
Corporation issue to such holder, in lieu of such cash payment, additional
shares of Common Stock calculated by dividing the total amount payable on such
date by the applicable Conversion Price.
(d) Adjustments to Conversion Price.
(i) Special Definitions. For purposes of this Section 4(d), the
following definitions shall apply:
(1) "Options" shall mean rights, options or warrants to subscribe for,
purchase or otherwise acquire either Common Stock or Convertible
Securities.
(2) "Convertible Securities" shall mean any evidences of indebtedness,
shares or other securities convertible into or exchangeable for Common
Stock.
(3) "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued (or, pursuant to Section 4(d)(iii), deemed to be
issued) by the Corporation after the Original Issue Date of the Series C
Preferred, other than shares of Common Stock issued or issuable:
(A) upon conversion of shares of Series A Preferred, Series B
Preferred or Series C Preferred;
(B) pursuant to a stock grant, option plan or purchase plan,
other employee stock incentive program or agreement that in the
aggregate does not exceed 218,659 shares (as adjusted for
revitalizations, stock splits, stock dividends and the like and
cancellations of options that have not otherwise expired) (the "Option
Pool"), or other options in existence on the Original Issue Date and
set forth in Schedule 2.5 of the Series C Preferred Stock Purchase
Agreement, other than the warrant set forth in clause (C) below;
(C) pursuant to a Warrant dated March 15, 1999 issued to CMB
Capital, LLC in existence on the Original Issue Date, not to exceed
474,393 shares of Common Stock (as adjusted to reflect any stock
split, stock dividend, combination or recapitalization after the
Original Issue Date of the Series C Preferred);
(D) as a dividend or distribution on shares of Series A
Preferred, Series B Preferred or Series C Preferred;
(E) in a transaction described in Section 4(d)(vi); or
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(F) by way of dividend or other distribution on shares of Common
Stock excluded from the definition of Additional Shares of Common
Stock by the foregoing clauses (A), (B), (C), (D), (E) or this clause
(F).
(4) "Original Issue Date" shall mean October 8, 1999.
(ii) No Adjustment of Conversion Price. Subject to the provisions of
Section 4(d)(iv), no adjustment in the applicable Conversion Price of the
Series A Preferred, Series B Preferred or Series C Preferred shall be made
in respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or
deemed to be issued by the Corporation is less than the applicable
Conversion Price for the Series A Preferred, Series B Preferred or Series C
Preferred, as the case may be, in effect on the date of, and immediately
prior to, such issue.
(iii) Deemed Tissue of Additional Shares of Common Stock. In the event
the Corporation at any time or from time to time after the Original Issue
Date of the Series C Preferred shall issue any Options (other than the
issuance of Options pursuant to the Option Pool) or Convertible Securities
or shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities,
then the maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for a
subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and
Options therefor, the exercise of such Options and conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue or, in case such a record
date shall have been fixed, as of the close of business on such record
date, provided that Additional Shares of Common Stock shall not be deemed
to have been issued, subject to the provisions of Section 4(d)(iv), unless
the consideration per share (determined pursuant to Section 4(d)(v) hereof)
of such Additional Shares of Common Stock would be less than the applicable
Conversion Price for the Series A Preferred, Series B Preferred or Series C
Preferred, as the case may be, in effect on the date of and immediately
prior to such issue, or such record date, as the case may be, and provided
further that in any such case in which Additional Shares of Common Stock
are deemed to be issued:
(1) except as provided in Section 4(d)(iii)(2), no further adjustment
in the Conversion Price shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock upon the exercise of such
Options or conversion or exchange of such Convertible Securities;
(2) if such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any change in the consideration
payable to the Corporation, or change in the number of shares of Common
Stock issuable, upon the exercise, conversion or exchange thereof (other
than under or by reason of provisions designed to protect against
dilution), the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto) and any
subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or
decrease insofar as it
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affects such Options or the rights of conversion or exchange under such
Convertible Securities; and
(3) no readjustment pursuant to clause (2) above shall have the effect
of increasing the Conversion Price to an amount which exceeds the lower of
(A) the Conversion Price on the original adjustment date or (B) the
Conversion Price that would have resulted from any issuance of Additional
Shares of Common Stock between the original adjustment date and such
readjustment date.
(iv) Adjustment of Conversion Price Upon Issuance of Additional Shares
of Common Stock. In the event the Corporation shall issue Additional Shares
of Common Stock (including Additional Shares of Common Stock deemed to be
issued pursuant to Section 4(d)(iii)), then and in each such event the
applicable Conversion Price of the Series A Preferred, Series B Preferred
and Series C Preferred as the case may be, shall be recomputed by
multiplying the applicable Conversion Price then in effect by a fraction:
(1) the numerator of which will be the sum of (A) the aggregate number
of shares of Common Stock issued and outstanding on the date of issuance of
the Additional Shares of Common Stock (assuming the conversion on such date
of all of the outstanding shares of Series A Preferred, Series B Preferred
and Series C Preferred) plus (B) the quotient of the aggregate
consideration received by the Corporation for the issuance of such
Additional Shares of Common Stock divided by the then applicable Conversion
Price; and
(2) the denominator of which will be the sum of (A) the aggregate
number of shares of Common Stock issued and outstanding on the date of
issuance of the Additional Shares of Common Stock (assuming the conversion
on such date of all of the outstanding shares of Series A Preferred, Series
B Preferred and Series C Preferred) plus (B) the aggregate number of such
Additional Shares of Common Stock.
(v) Determination of Consideration. For purposes of this Section 4(d),
the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration shell be computed as
follows:
(A) insofar as it consists of cash, such consideration sill be
computed at the aggregate amount of cash received by the Corporation;
(B) insofar as it consists of property other than cash, such
consideration shall be computed at the fair value thereof at the time
of such issue, as determined by the Board of Directors in the good
faith exercise of its reasonable business judgment; and
(C) in the event Additional Shares of Common Stock are issued
together with other shares or securities or other assets of the
Corporation for consideration which covers both, such consideration
shall be the
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proportion of such consideration so received, computed as provided in
clauses (A) and (B) above, as determined by the Board of Directors in
the good faith exercise of its reasonable business judgment.
(2) Options and Convertible Securities. The consideration per share
received by the Corporation for Additional Shares of Common Stock deemed to
have been issued pursuant to Section 4(d)(iii), relating to Options and
Convertible Securities, shall be determined by dividing
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration) payable to the
Corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible
Securities, by
(B) the maximum number of shares of Common Stock (as set forth in
the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of
such Convertible Securities.
(vi) Other Adjustments
(1) Subdivisions, Combinations, or Consolidations of Common Stock. In
the event that, with respect to the Series C Preferred, at any time after
the Original Issue Date of the Series C Preferred, or with respect to the
Series A Preferred and the Series B Preferred, at any time after their
respective applicable original issue dates, the outstanding shares of
Common Stock shall be subdivided, combined or consolidated, by stock split,
stock dividend, combination or like event, into a greater or lesser number
of shares of Common Stock, the applicable Conversion Price of the Series A
Preferred, Series B Preferred and Series C Preferred in effect immediately
prior to such subdivision, combination, consolidation or stock dividend
shall, concurrently with the effectiveness of such subdivision combination
or consolidation, be proportionately adjusted.
(2) Reclassifications. In the case, at any time after the Original
Issue Date of the Series C Preferred, of any capital reorganization or any
reclassification of the stock of the Corporation (other than as a result of
a stock dividend or subdivision, split-up or combination of shares), or the
consolidation or merger of the Corporation with or into another person
(other than a consolidation or merger (A) in which the Corporation is the
continuing entity and which does not result in any change in the Common
Stock or (B) which is treated as a Liquidation pursuant to Section 3(b)
above), the shares of Series A Preferred, Series B Preferred and Series C
Preferred shall, after such reorganization, reclassification, consolidation
or merger, be convertible into the kind and number of
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shares of stock or other securities or property of the Corporation or
otherwise to which such holder would have been entitled if immediately
prior to such reorganization, reclassification, consolidation or merger
such holder had converted his shares of Series A Preferred, Series B
Preferred or Series C Preferred into Common Stock. The provisions of this
Section 4(d)(vi)(2) shall similarly apply to successive reorganizations,
reclassifications, consolidations or mergers.
(e) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the applicable Conversion Price of the Series A Preferred,
Series B Preferred or Series C Preferred pursuant to this Section 4, the
Corporation at its expense shall promptly thereafter compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series A Preferred, Series B Preferred and Series C Preferred a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time of any holder of Series A Preferred, Series B
Preferred or Series C Preferred, furnish or cause to be furnished to such holder
a like certificate setting forth (i) such adjustments and readjustments, if any,
(ii) the applicable Conversion Price of the Series A Preferred, Series B
Preferred and Series C Preferred at the time in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of the Series A Preferred, Series B
Preferred or Series C Preferred.
(f) Status of Converted Stock. In case any shares of Series A Preferred,
Series B Preferred or Series C Preferred shall be converted pursuant to Section
4 hereof, the shares so converted shall be canceled, shall not be reissuable and
shall cease to be a part of the authorized capital stock of the Corporation.
(g) Fractional Shares. In lieu of any fractional shares in the aggregate to
which the holder of Series A Preferred, Series B Preferred or Series C Preferred
would otherwise be entitled upon conversion, the Corporation shall pay cash
equal to such fraction multiplied by the fair market value of one share of
Common Stock as determined by the Board of Directors in the good faith exercise
of its reasonable business judgment or pursuant to Section 4(h)(ii), if
applicable.
(h) Miscellaneous.
(i) All calculations under this Section 4 shall be made to the nearest
cent or to the nearest one hundredth (1/100) of a share, as the case may
be.
(ii) The holders of a majority of the outstanding shares of Series A
Preferred or the holders of a majority of the outstanding shares of Series
C Preferred, as the case may be, shall have the right to challenge any
determination by the Board of Directors of fair market value pursuant to
this Section 4, in which case such determination of fair market value shall
be made by an independent appraiser selected jointly by the Board of
Directors and the challenging parties, the cost of such appraisal to be
borne (I) by the challenging parties, if the fair market value as
determined by such appraisal does not exceed the determination of fair
market value by the Board of Directors by more than ten percent (10%) and
(II) by the Corporation, if the fair market
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<PAGE>
value as determined by such appraisal exceeds the determination of fair
market value by the Board of Directors by more than ten percent (10%).
(iii) No adjustment in the applicable Conversion Price of the Series A
Preferred, Series B Preferred or Series C Preferred will be made if such
adjustment would result in a change in such Conversion Price of less than
$0.01. Any adjustment of less than $0.01 which is not made shall be earned
forward and shall be made at the time of and together with any subsequent
adjustment which, on a cumulative basis, amounts to an adjustment of $0.01
or more in such Conversion Price.
(i) No Impairment. The Corporation will not through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
action as may be necessary or appropriate in order to protect the conversion
rights of the holders of Series A Preferred, Series B Preferred and Series C
Preferred against impairment.
(j) Reservation of Stock Issuable Upon Conversion. The Corporation shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock, solely for the purpose of effecting the conversion of the
shares of Series A Preferred, Series B Preferred and Series C Preferred, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of Series A Preferred, Series B
Preferred and Series C Preferred. If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of Series A Preferred, Series B Preferred or
Series C Preferred, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
5. Voting Rights. (a) General. (i) Except as otherwise required by law, by
Section 5(b) hereof or by Section 8 hereof, the holder of each share of Series A
Preferred will be entitled to vote on all matters with the holders of the Common
Stock as a single class, and not as a separate class or series. Each share of
Series A Preferred will entitle the holder to the number of votes per share
equal to the full number of shares of Common Stock into which each share of
Series A Preferred is convertible on the record date for such vote. The holders
of Series A Preferred shall receive notice of and shall be entitled to attend in
person or by proxy any meeting of the holders of Common Stock.
(ii) Except as otherwise required by law, the holder of each share of
Series B Preferred will be entitled to vote on all matters with the Common Stock
as a single class, and not as a separate class or series. Each share of Series B
Preferred will entitle the holder to the number of votes per share equal to the
full number of shares of Common Stock into which each share of Series B
Preferred is convertible on the record date for such vote. The holders of Series
B Preferred shall receive notice of and shall be entitled to attend in person or
by proxy any meeting of the holders of Common Stock. If the holders of preferred
stock are required to vote as a class for any reason, then the holders of Series
B Preferred shall vote as a single class with the holders of Series A Preferred
and Series C Preferred, and not as a separate class or series, and the holders
16
<PAGE>
of Series B Preferred shall be entitled to one vote for each share of Series B
Preferred held by them and the holders of Series A Preferred and the holders of
Series C Preferred shall be entitled to five (5) votes for each share of Series
A Preferred and Series C Preferred held by them, as applicable, in connection
with any such vote.
(iii) Except as otherwise required by law, by Section 5(c) hereof or by
Section 8 hereof; the holder of each share of Series C Preferred will be
entitled to vote on all matters with the Common Stock as a single class, and not
as a separate class or series. Each share of Series C Preferred will entitle the
holder to the number of votes per share equal to the full number of shares of
Common Stock into which each share of Series C Preferred is convertible on the
record date for such vote. The holders of Series C Preferred shall receive
notice of and shall be entitled to attend in person or by proxy any meeting of
the holders of Common Stock.
(b) Election of Directors by Series A Preferred. For so long as there are
any shares of Series A Preferred outstanding, the holders of a majority of the
outstanding shares of Series A Preferred shall be entitled to nominate and elect
as a single class separately from all other classes and series of capital stock
of the Corporation, by a majority vote of such class, two (2) directors to the
Board of Directors of the Corporation, and the holders of the Series A Preferred
shall otherwise also be entitled to vote in the election of directors pursuant
to the terms of Section 5(a) above. Notwithstanding the foregoing, for so long
as there are any shares of Series A Preferred outstanding, if (i) the
Corporation shall breach any of its obligations and/or agreements under Section
4 of the Stock Purchase Agreement relating to the Series A Preferred and such
breach shall remain uncured for a period of one hundred and eighty (180) days
after written notice of such breach by any holder of Series A Preferred, (ii) a
Put is initiated pursuant to Section 7 of the Stockholders' Agreement, or (iii)
the Corporation shall not have closed a Qualified Public Offering on or prior to
the second anniversary of the Original Issue Date of the Series C Preferred,
then in any such event, the holders of the Series A Preferred shall be entitled
then and thereafter to nominate and elect as a single class separately from all
other classes and series of capital stock, by a majority vote of such class at a
special meeting called by the holders of at least 10% of the outstanding shares
of the Series A Preferred, one (1) additional director to the Board of Directors
of the Corporation. If a special meeting is called by the holders of the Series
C Preferred pursuant to the provisions of Section 5(c), then the holders of
Series A Preferred shall be entitled to nominate and elect any additional
director at such meeting without the necessity of calling another special
meeting. The term of office of such additional director shall immediately
terminate upon the later of (w) twelve (12) months from the election of such
director, (x) such time that the applicable breach has been cured, (y) if a Put
Notice has been delivered pursuant to the Stockholders' Agreement, the date all
of the shares subject to the Put have been repurchased for cash, or (z) the
closing of the Qualified Public Offering. Any vacancy on the Board of Directors
of the Corporation occurring because of the death, resignation or removal of a
director elected by the holders of the Series A Preferred shall be filled by the
vote or written consent of the holders of a majority of the outstanding shares
of the Series A Preferred.
(c) Election of Directors by Series C Preferred. For so long as there are
any shares of Series C Preferred outstanding, the holders of a majority of the
outstanding shares of the Series C Preferred shall be entitled to nominate and
elect as a single class separately from all other classes and series of capital
stock of the Corporation, by a majority vote of such class, one (1) director to
the Board of Directors of the Corporation, and the holders of the Series C
Preferred shall otherwise also be entitled to vote in the election of directors
pursuant to the terms of Section 5(a)
17
<PAGE>
above. Notwithstanding the foregoing, for so long as there are any shares of
Series C Preferred outstanding, if (i) the Corporation shall breach any of its
obligations and/or agreements under Section 4 of the Stock Purchase Agreement
relating to the Series C Preferred and such breach shall remain uncured for a
period of one hundred and eighty (180) days after written notice of such breach
by any holder of Series C Preferred, (ii) a Put is initiated pursuant to Section
7 of the Stockholders' Agreement, or (iii) the Corporation shall not have closed
a Qualified Public Offering on or prior to the second anniversary of the
Original Issue Date of the Series C Preferred, then in any such event, the
holders of the Series C Preferred shall be entitled then and thereafter to
nominate and elect as a single class separately from all other classes and
series of capital stock, by a majority vote of such class at a special meeting
called by the holders of at least 10% of the outstanding shares of the Series C
Preferred, one (1) additional director to the Board of Directors of the
Corporation. If a special meeting is called by the holders of the Series A
Preferred pursuant to the provisions of Section 5(b), then the holders of Series
C Preferred shall be entitled to nominate and elect an additional director at
such meeting without the necessity of calling another special meeting. The term
of office of such additional director shall immediately terminate upon the later
of (w) twelve (12) months from the election of such director, (x) such time that
the applicable breach has been cured, (y) if a Put Notice has been delivered
pursuant to the Stockholders' Agreement, the date all of the shares subject to
the Put have been repurchased for cash, or (z) the closing of the Qualified
Public Offerring. Any vacancy on the Board of Directors of the Corporation
occurring because of the death, resignation or removal of a director elected by
the holders of the Series C Preferred shall be filled by the vote or written
consent of the holders of a majority of the outstanding shares of the Series C
Preferred.
6. Notices of Record Date. In the event of any taking by the Corporation of
a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Corporation shall mail to each holder of Series A
Preferred, Series B Preferred and Series C Preferred, at least twenty (20) days
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and the anticipated amount and character of such dividend, distribution
or right.
7. Notices. Any notice required by the provisions of this Amended or
Restated Certificate to be given to the holders of Series A Preferred, Series B
Preferred or Series C Preferred shall be deemed given (i) when made, if made by
hand delivery, (ii) upon confirmation, if made by fax, or (iii) one business day
after being deposited with a reputable next-day courier, postage prepaid, and in
each case, addressed to each holder of record at such holder's address or fax
number appearing on the books of the Corporation.
8. Approval of Certain Transactions While Any Series A Preferred or Series
C Preferred is Outstanding. So long as any shares of Series A Preferred or
Series C Preferred are outstanding, the Corporation shall not, without first
obtaining the written approval of (a) the holders of a majority of the
outstanding shares of Series A Preferred (which must include BACC, until such
time as BACC or its Affiliates fail to own at least fifty percent (50%) of the
Series A Preferred purchased by it pursuant to the Stock Purchase Agreement
relating to the Series A Preferred), voting as a separate class, and (b) the
holders of a majority of the outstanding shares of Series C Preferred (which
must include Gramercy, until such time as Gramercy or its
18
<PAGE>
Affiliates fail to own at least fifty percent (50%) of the Series C Preferred
purchased by them pursuant to the Stock Purchase Agreement relating to the
Series C Preferred), voting as a separate class:
(i) amend this Amended and Restated Certificate, or the Certificate of
Incorporation or bylaws of the Corporation or take any other action so as
to alter or adversely affect the rights, preferences or privileges of the
Series A Preferred, Series B Preferred or Series C Preferred, including by
merger, consolidation or otherwise;
(ii) increase or decrease the authorized number of shares of Series A
Preferred, Series B Preferred, Series C Preferred or Common Stock,
including by merger, consolidation or otherwise;
(iii) create any new class or series of shares, or issue any such
shares or Options or Convertible Securities exercisable or convertible into
such shares, that have a preference over or are on a parity with the Series
A Preferred or Series C Preferred with respect to voting, dividends or
liquidation preferences (other than the Series B Preferred being on parity
with the Series A Preferred and the Series C Preferred with respect to
dividends and liquidation preferences, and except that the Corporation may
grant voting rights to shares of a series of preferred stock which have the
right to vote with holders of Common Stock on an as-converted basis, but in
any event not in preference to shares of Series A Preferred or Series C
Preferred);
(iv) reclassify stock into shares of capital stock of the Corporation
having a preference over or parity with the Series A Preferred or Series C
Preferred with respect to voting, dividends or liquidation preferences
(except that the Corporation may grant voting nights to shares of a series
of preferred stock which have the right to vote with holders of Common
Stock on an as converted basis, but in any event not in preference to
shares of Series A Preferred or Series C Preferred);
(v) authorize any dividend or other distribution with respect to the
Preferred Stock or the Common Stock (other than dividends payable to the
holders of Series A Preferred, Series B Preferred and Series C Preferred
and stock dividends for which an adjustment is made pursuant to Section
4(d)(vi)(1));
(vi) repurchase, redeem or retire any shares of capital stock of the
Corporation, other than pursuant to contractual rights to repurchase shares
of Common Stock held by employees, directors or consultants of the
Corporation or its subsidiaries upon termination of their employment or
services (which purchase has been approved by the Board) or pursuant to the
exercise of the Put pursuant to Section 7 of the Stockholders' Agreement;
or
(vii) merge or consolidate with any other corporation or entity or
sell or exchange all or substantially all of its assets or authorize or
effect any reorganization, dissolution, liquidation or winding up of the
Corporation.
9. Headings of Subdivisions. The headings of the various subdivisions
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
19
<PAGE>
10. Severability of Provisions. If any voting powers, preferences and
relative, participating, optional and other special rights of the Series A
Preferred, Series B Preferred or Series C Perfected and qualifications,
limitations and restrictions thereof set forth in this resolution (as such
resolution may be amended from time to time) are invalid, unlawful or incapable
of being enforced by reason of any rule of law or public policy, all other
voting powers, preferences and relative, participating, optional and other
special rights of the Series A Preferred, Series B Preferred or Series C
Preferred and qualifications, limitations and restrictions thereof set forth in
this resolution (as so amended) which can be given effect without the invalid,
unlawful or unenforceable voting powers, preferences and relative,
participating, optional and other special rights of the Series A Preferred,
Series B Preferred or Series C Preferred and qualifications, limitations and
restrictions thereof shall, nevertheless, remain in full force and effect, and
no voting powers, preferences and relative, participating, optional or other
special rights of the Series A Preferred, Series B Preferred or Series C
Preferred and qualifications, limitations and restrictions thereof herein set
forth shall be deemed dependent upon any other such young powers, preferences
and relative, participating, optional or other special rights of the Series A
Preferred, Series B Preferred or Series C Preferred and qualifications,
limitations and restrictions thereof unless so expressed herein.
20
<PAGE>
IN WITNESS WHEREOF, Z-TEL TECHNOLOGIES, INC. has caused this Amended and
Restated Certificate to be signed this 8th day of October, 1999.
Z-TEL TECHNOLOGIES, INC.
By /s/ ILLEGIBLE
-------------------------------
Name:
Title:
21
<PAGE>
Exhibit 3.2
Amended and Restated By-laws
of
Z-Tel Technologies, Inc.
a Delaware Corporation
ARTICLE I
Offices
-------
Section 1.1 The corporation shall maintain a registered office in the
State of Delaware as required by law. The corporation may also have such other
offices, either within or without the State of Delaware, as the business of the
corporation may require.
ARTICLE II
Stockholders
------------
Section 2.1 ANNUAL MEETINGS. Annual meetings of the stockholders for the
election of directors and for such other business as may be stated in the notice
of the meeting, shall be held at such place, either within or without the State
of Delaware, and at such time and date as the Board of Directors by resolution,
shall determine and as set forth in the notice of the meeting. In the event the
Board of Directors fails to so determine the time, date and place of meeting,
the annual meeting of stockholder shall be held at the principal office of the
Corporation, in Tampa, Florida, within three months of the end of the fiscal
year.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall be held on the next succeeding business day. At each annual
meeting, the stockholders entitled to vote shall elect the appropriate class or
classes of the Board of Directors and may transact such other corporate business
as shall be stated in the notice of the meeting.
Section 2.2 DEFERRED MEETING FOR ELECTION OF DIRECTORS, ETC. If the
annual meeting of stockholders for the election of the appropriate class or
classes of the directors and the transaction of other business is not held
within the time specified in Section 2.1, the Board of Directors shall call a
meeting of stockholders for the election of the appropriate directors and the
transaction of other business as soon thereafter as convenience.
Section 2.3 OTHER SPECIAL MEETINGS. A special meeting of the stockholders,
unless otherwise prescribed by statute, may be called at any time but only by
the Chairman of the Board or by the President of the Corporation or by a
majority of the whole Board of Directors, to be held on the date, at the time
and place within or without the State of Delaware as the Chairman of the Board
of Directors or the President or the Board of Directors, whichever has called
the meeting, shall direct. At any special meeting of stockholders only such
business shall be conducted as is brought before such meeting pursuant to the
notice thereof given pursuant to Section 2.5 of the Amended and Restated By-laws
("By-laws") or in any waiver of notice thereof given pursuant to Section 2.6 of
the By-laws.
<PAGE>
Amended and Restated By-laws of Z-Tel Technologies, Inc.
October 28, 1999
Page -2-
Section 2.4 FIXING RECORD DATE. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or for the purpose of determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock, or for the purpose of any other lawful action, the Board
of Directors may fix, in advance, a date as of the record date for any such
determination of stockholders. Such date shall not be more than sixty nor less
than ten days before the date of such meeting, more than sixty days prior to any
other action. If no such records date is fixed:
2.4.1 The record date for the determination of stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if not
notice is given, or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held;
2.4.2 The records date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the Board of directors is necessary, shall be the day on which the first
written consent is expressed; and
2.4.3 The record date for determining stockholders for any purpose other
than those specified in Sections 2.4.1 and 2.4.2 shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.
When a determination of stockholders entitled to notice of or to vote at any
meeting of stockholders has been made as provided in this Section 2.4, such
determination shall apply to any adjournment thereof, unless the Board of
Directors fixes a new record date for the adjourned meeting.
Section 2.5 NOTICE OF MEETING OF STOCKHOLDERS. At any meeting of the
stockholders, only such business (including the nomination of persons for
election as directors as described below) shall be conducted as shall have been
properly brought before the meeting. To be properly brought before a meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before a meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. In the case of an annual meeting, to be
timely, a stockholder's notice shall be delivered to and received by the
Secretary of the Corporation at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received no later than the
close of business on the tenth day following the
<PAGE>
Amended and Restated By-laws of Z-Tel Technologies, Inc.
October 28, 1999
Page -3-
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. In the case of a special meeting, to be timely, a
stockholder's notice must be delivered not more than ninety days prior to the
special meeting and not later than the later of sixty days prior to the special
meeting and ten days following the day on which public announcement of the
meeting is first made by the Corporation.
A stockholder's notice to the Secretary shall set forth as to each matter
the stockholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's books, of the stockholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the stockholder and (d) any material interest of the
stockholder in such business. Notwithstanding anything in the By-laws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 2.5.
In the case of nominations of persons for election as directors, only
persons who are nominated in accordance with the following procedures shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the Corporation may be made at a meeting of stockholders
(i) by or at the direction of the Board of Directors, (ii) by any nominating
committee or person appointed to make such nominations by the Board of
Directors, or (iii) by any stockholder of the Corporation entitled to vote for
the election of directors at the meeting who complies with the notice procedures
set forth in this Section 2.5. Such nominations, if made by a stockholder of
the Corporation as such, shall be made pursuant to timely notice (as described
in the first paragraph of this Section 2.5) in writing addressed to the
Secretary of the Corporation. Such stockholder's notice shall set forth: (a) as
to each person whom the stockholder proposes to nominate for election or re-
election as a director (s) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class and number of shares of stock of the Corporation which
are beneficially owned by the person and (iv) any other information relating to
the person that would be required to be disclosed in solicitations for proxies
for the election of directors pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, or any successor thereto, and (b) as to the
stockholder giving the notice (i) the name and record address of the stockholder
and (ii) the class and number of shares of the Corporation which are
beneficially owned by the stockholder. The Corporation may require any proposed
nominee to furnish such other information as may reasonably be required by the
Corporation to determine the eligibility of such proposed nominee to serve as a
director of the Corporation. No person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the procedures
set forth herein.
The presiding officer of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business or a nomination of a director
was not property brought before the
<PAGE>
Amended and Restated By-laws of Z-Tel Technologies, Inc.
October 28, 1999
Page -4-
meeting in accordance with this Section 2.5, and if the presiding officer should
so determine, the presiding officer shall so declare to the meeting and say such
business not properly brought before the meeting shall not be transacted or that
the defective nomination shall be disregarded.
Section 2.6 WAIVERS OF NOTICE. Whenever notice is required to be given to
the stockholders under any provision of the General Corporation Law of the State
of Delaware (the "GCL") or the Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") or the By-laws, a written waiver thereof,
signed by a stockholder entitled to notice, whether before or after the time
stated therein, shall be deemed equivalent to notice. Attendance of a
stockholder at a meeting shall constitute a waiver of notice of such meeting,
except when the stockholder attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice.
Section 2.7 LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
or cause to be prepared and made, at least ten days before every meeting of
stockholders, a complete list of stockholders entitles to vote at the meeting,
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified, or at the place where the meeting is to
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
Section 2.8 QUORUM OF STOCKHOLDERS; ADJOURNMENT. The holders of a
majority of the shares of stock entitled to vote at any meeting of stockholders,
present in person or represented by proxy, shall be necessary and sufficient to
constitute a quorum for the transaction of any business at such meeting; except
where otherwise provided by the GCL. When a quorum is once present to organize
a meeting of stockholders, it is not broken by the subsequent withdrawal of any
stockholder. The holders of a majority of the shares of stock present in person
or represented by proxy at any meeting of stockholders, including an adjournment
meeting, whether or not a quorum is present, may adjourn such meeting to another
time and place.
Section 2.9 VOTING; PROXIES. Unless otherwise provided in the Certificate
of Incorporation, every stockholder of records shall be entitled at every
meeting of stockholders to one vote for each share of capital stock standing in
his name on the record of stockholders determined in accordance with Section 2.4
of the By-laws. If the Certificate of Incorporation provides for more or less
than one vote for any shares on any matter, every reference in the By-laws or
the GCL to a majority or other proportion of stock shall refer to such majority
to other
<PAGE>
Amended and Restated By-laws of Z-Tel Technologies, Inc.
October 28, 1999
Page -5-
proportion of the votes of such stock. The provisions of Sections 212 and 217 of
the GCL shall apply in determining whether any shares of capital stock may be
voted and the persons, if any, entitled to vote such shares; but the Corporation
shall be protected in treating the persons in whose names shares of capital
stock stand on the record of stockholders as owners thereof for all purposes.
Directors shall be chosen by a plurality of the votes cast at the election and
each other matter, except as otherwise provided by law or by the Certificate of
Incorporation or by the By-laws, shall be decided by a majority of the votes
cast on such matter. All elections of directors shall be by written ballot
unless otherwise provided in the Certificate of Incorporation. In voting on any
other question on which a vote by ballot is required by law or is demanded by
any stockholder entitled to vote, the voting shall be by ballot. Each ballot
shall be signed by the stockholder voting or by his proxy, and shall state the
number of shares voted. ON all other questions, the voting may be by voice vote.
Every stockholder entitled to vote at a meeting of stockholders or to express
consent or dissent to corporate action in writing without a meeting, may
authorize another person or persons to act for him by proxy. The validity and
enforceability of any proxy shall be determined in accordance with Section 212
of the GCL.
Section 2.10 SELECTION AND DUTIES OF INSPECTORS AT MEETING OF
STOCKHOLDERS. The Board of Directors, in advance of any meeting of
stockholders, may appoint one or more inspectors to act at the meeting or any
adjournment thereof. If inspectors are not so appointed, the person presiding
at such meeting may, and on the request of any stockholder entitled to vote
thereat shall, appoint one or more inspectors. In case any person appointed
fails to appear or act, the vacancy may be filled by appointment made by the
Board of Directors in advance of the meeting or at the meeting by the person
presiding thereat. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability. The inspector or inspectors shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, count and tabulate all votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, determine the result, and shall do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting or any stockholder entitles to vote thereat,
the inspector or inspectors shall make a report in writing of any challenge,
question or matter determined by him or them and execute a certificate of any
fact found by him or them. Any report or certificate made by the inspector or
inspectors shall be prima facie evidence of the facts stated and of the vote as
certified by him or them.
Section 2.11 ORGANIZATION. At every meeting of stockholders, the
President, or in the absence of the President, a Vice President, and in case
more than one Vice President shall be present, that a Vice President designated
by the Board of Directors (or in the absence of any such designation, the most
senior Vice President, based on age, present), shall act as chairman of the
meeting. At every meeting of stockholders, the Secretary, or in the absence of
the Secretary, an
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Assistant Secretary, shall act as secretary of the meeting. In case none of the
officers above designated to act as chairman or secretary of the meeting,
respectively, shall be present, a chairman or a secretary of the meeting, as the
case may be, may be chosen by a majority of the votes cast at such meeting by
the holders of shares present in person or represented by proxy and entitled to
vote at the meeting.
Section 2.12 ORDER OF BUSINESS. The order of business at all meetings of
stockholders shall be as determined by the chairman of the meeting, but, the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
ARTICLE III
Directors
---------
Section 3.1 GENERAL POWERS. The business of the corporation shall be
managed by or under the direction of its board of directors, except as otherwise
provided in the certificate of incorporation.
Section 3.2 NUMBER AND QUALIFICATIONS. The number of directors of the
corporation shall be eight (8) or such other number as may be determined from
time to time by the board of directors of the corporation at a duly held meeting
thereof. Directors need not be stockholders of the corporation, citizens of the
United States or residents of the State of Delaware.
Section 3.3 ELECTION AND TERM. The board of directors shall be elected at
the annual meeting of the stockholders of the corporation and shall hold office
until their successors are elected and qualified or until their earlier death,
resignation or removal. Any director may resign at any time upon written notice
to the corporation. Thereafter, directors who are elected at an annual meeting
of stockholders, and directors who are elected in the interim to fill vacancies
and newly created directorships, shall hold office until the next annual meeting
of stockholders and until their successors are elected and qualified or until
their earlier death, resignation or removal. In the interim between annual
meetings of stockholders or of special meetings of stockholders called for the
election of directors and/or for the removal of one or more directors and for
the filling of any vacancy in that connection, newly created directorships and
any vacancies in the board of directors, including vacancies resulting from the
removal of directors, may be fled by the vote of a majority of the remaining
directors then in office, although less than a quorum, or by the sole remaining
director.
Section 3.4 REGULAR MEETINGS. A regular meeting of the board of directors
shall be held without other notice than this by-law, immediately after, and at
the same place as, the annual meeting of stockholders. Meetings of the board of
directors may be held either within or
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without the State of Delaware. The board of directors may provide, by
resolution, the time and place for the holding of additional regular meetings
without other notice than such resolution.
Section 3.5 SPECIAL MEETINGS. Special meetings of the board of directors
may be called by or at the request of the President or any director. The person
or persons calling such special meeting of the board of directors shall fix a
place, either within or without the State of Delaware, as the place for holding
such special meeting of the board of directors.
Section 3.6 NOTICE. Notice of any special meeting stating the time and
place of such meeting shall be given at least forty-eight (48) hours previous
thereto by telephone, if followed by either of facsimile confirmation within
twenty-four (24) hours or by written notice delivered by facsimile, personally
or sent by mail or overnight express service to each director at his business
address. Such notice shall be deemed to be delivered when, as applicable, the
sender receives confirmation of facsimile transmission, the notice is deposited
in the United States mail or given to such overnight express service so
addressed, with postage thereon prepaid. Notice need not be given to any
director who submits a written waiver of notice signed by him either before or
after any meeting. The attendance of a director at any meeting shall constitute
a waiver of notice of such meeting, except where a director attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the board of directors need be specified in the
notice or waiver of such meeting.
Section 3.7 QUORUM. A majority of the directors (or of the members of any
committee in the case of a meeting of a committee of the board of directors)
shall constitute a quorum for the transaction of business at any meeting of the
board of directors or of such committee, provided, however, that if less than a
majority of such number of directors are present at said meeting, a majority of
the directors present may adjourn the meeting from time to time without further
notice. Interested directors may be counted in determining the presence of a
quorum at a meeting of the board of directors or of a committee thereof
Section 3.8 MANNER OF ACTING. The vote of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors or of a committee of the board, as the case may be.
Section 3.9 ACTION WITHOUT A MEETING. Any action required or permitted to
be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting if all the members of the board or committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the board or committee.
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Section 3.10 COMPENSATION. The board of directors shall have authority to
establish reasonable compensation of all directors for services to the
corporation as directors, officers or otherwise.
Section 3.11 LIABILITY FOR UNLAWFUL PAYMENT OF DIVIDEND. In case of any
willful or negligent violation of the provisions of sections 160 or 173 of the
Delaware General Corporation Law regarding the payment of dividends, any
director who may have been absent when the same was done, or who may have
dissented from the act or resolution by which the same was done, may exonerate
himself from such liability by causing his dissent to be entered on the books
containing the minutes of the proceedings of the directors at the time the same
was done, or immediately after he has notice of the same.
Section 3.12 TELEPHONE MEETINGS. Members of the board of directors or of
any committee thereof may participate in a meeting of the board by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at the meeting.
Section 3.13 REMOVAL. Subject to the corporation's certificate of
incorporation, any director or the entire board of directors may be removed with
or without cause by the holders of a majority of the shares then entitled to
vote at an election of directors.
Section 3.14 COMMITTEES. The board of directors may, by resolution passed
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. Any
such committee, to the extent provided in the resolution of the board of
directors, shall have and may exercise all the powers and authority of the board
of directors in the management of the business and affairs of the corporation,
to the extent permitted under the Delaware General Corporation Law.
ARTICLE IV
Officers
--------
Section 4.1 NUMBER. The officers of the corporation shall be a President,
a Treasurer, a Secretary, and such Vice Presidents, Assistant Treasurers,
Assistant Secretaries or other officers as may be elected by the board of
directors. Any two or more offices may be held by the same person.
Section 4.2 ELECTION AND TERM OF OFFICE. The officers of the corporation
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of stockholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as convenient. New offices may be created and filled at
any meeting of the board of directors. Each officer shall hold office until his
successor is elected and has qualified or until his earlier death, resignation
or removal. Any officer may
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resign at any time upon written notice to the corporation. Election of an
officer shall not of itself create contract rights.
Section 4.3 REMOVAL. Any officer elected by the board of directors may be
removed by the board of directors whenever in its judgment the best interests of
the corporation would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
Section 4.4 VACANCIES. A vacancy in any office occurring because of death,
resignation, removal or otherwise, may be filled by the board of directors.
Section 4.5 THE PRESIDENT. The President shall be the chief executive
officer of the corporation and, subject only to the board of directors, shall
have general authority over, and general management and control of, the
property, business and affairs of the corporation. The President shall preside
at all meetings of the stockholders and of the board of directors. The President
shall have authority to vote all shares of stock of any other corporation
standing in the name of the corporation, at any meeting of the stockholders of
such other corporation or by written consent of the stockholders of such other
corporation, and may, on behalf of the corporation, waive any notice of the
calling of any such meeting, and may give a written proxy in the name of the
corporation to vote any or all shares of stock of such other corporation owned
by the corporation at any such meeting. The President shall perform such other
duties as may be prescribed by the board of directors from time to time.
Section 4.6 THE VICE PRESIDENTS. Each of the Vice Presidents, if any,
shall report to the President or such other officer as may be determined by the
board of directors. Each Vice President shall have such duties and
responsibilities as from time to time may be assigned to him by the President or
the board of directors.
Section 4.7 THE TREASURER. The Treasurer shall: (a) have charge and
custody of and be responsible for all funds and securities of the corporation;
receive and give receipts for moneys due and payable to the corporation from any
source whatsoever, and deposit all such moneys in the name of the corporation in
such banks, trust companies or other depositories as shall be selected in
accordance with the provisions of Article V of these By-laws; (b) in general,
perform all the duties incident to the office of the treasurer and such other
duties as may from time to time be assigned to him by the President or the board
of directors. In the absence of the Treasurer, or in the event of his incapacity
or refusal to act, or at the direction of the Treasurer, any Assistant Treasurer
may perform the duties of the Treasurer.
Section 4.8 THE SECRETARY. The Secretary shall: (a) record all the
proceedings of the meetings of the stockholders and board of directors in one or
more books kept for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these By-laws or as required by law; (c) be
custodian of the corporate records and of the seal of the corporation
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and see that the seal of the corporation is affixed to all certificates for
shares of stock, instruments and all other documents, the execution of which on
behalf of the corporation under its seal is duly authorized in accordance with
the provisions of these By-laws; (d) keep a register of the post office address
of each stockholder which shall be furnished to the Secretary by such
stockholder; (e) have general charge of the stock transfer books of the
corporation and, in general, perform all duties incident to the office of
secretary and such other duties as from time to time may be assigned to him by
the President or the board of directors. In the absence of the Secretary, or in
the event of his incapacity or refusal to act, or at the direction of the
Secretary, any Assistant Secretary may perform the duties of Secretary.
ARTICLE V
Contracts, Loans
Checks and Deposits
-------------------
Section 5.1 CONTRACTS. Except as otherwise determined by the board of
directors or provided in these By-laws, all deeds and mortgages made by the
corporation and all other written contracts and agreements to which the
corporation shall be a party shall be executed in its name by the President or
any Vice President.
Section 5.2 LOANS. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the board of directors. Such authority may be
general or confined to specific instances.
Section 5.3 CHECKS AND DRAFTS. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation, shall be signed by such officer or officers, agent or agents of
the corporation and in such manner as shall from time to time be determined by
resolution of the board of directors.
Section 5.4 DEPOSITS. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositories as the board of directors may
select.
ARTICLE VI
Certificates for Shares of
Stock and Their Transfer
------------------------
Section 6.1 CERTIFICATES FOR SHARES OF STOCK. Certificates representing
shares of stock of the corporation shall be in such form as may be determined by
the board of directors. Such certificates shall be signed by the President or
any Vice President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary. If any such certificate is manually
countersigned by a transfer agent other than the corporation or its employee,
any other signature on the certificate may be a facsimile. In case any officer,
transfer
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agent or registrar who has signed or whose facsimile signature has been placed
upon such certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it my be issued by the corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of issue. The name of the person to whom the shares represented thereby
are issued, with the number of shares and date of issue, shall be entered on the
books of the corporation. All certificates surrendered to the corporation for
transfer shall be canceled and no new certificates shall be issued until the
former certificate for a like number of shares shall have been surrendered and
canceled, except that in case of a lost, destroyed or mutilated certificate, a
new certificate may be issued therefor upon such terms, indemnity and surety to
the corporation as the board of directors may prescribe.
Section 6.2 TRANSFER OF SHARES OF STOCK. Transfers of shares of stock of
the corporation shall be made on the books of the corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary of the corporation, and on
surrender for cancellation of the certificate for such shares. The person in
whose name shares of stock stand on the books of the corporation shall be deemed
the owner thereof for all purposes as regards the corporation.
Section 6.3 TRANSFER AGENTS AND REGISTRARS. The board of directors may
appoint one or more transfer agents or assistant transfer agents and one or more
registrars of transfers, and may require all certificates for shares of stock of
the corporation to bear the signature of a transfer agent or assistant transfer
agent and a registrar of transfers. The board of directors may at any time
terminate the appointment of any transfer agent or any assistant transfer agent
or any registrar of transfers.
ARTICLE VII
Indemnification
---------------
Section 7.1 DIRECTORS AND OFFICERS. (a) The corporation shall indemnify
any person who was or is a party or is threatened to be made party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director or
officer of the corporation, or is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in
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a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director or officer of the corporation,
or is or was serving at the request of the corporation as a director or officer
of another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of the State of Delaware
or such other court shall deem proper.
(c) To the extent that any person referred to in paragraphs (a) and (b) of
this Section 7.1 has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to therein or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
(d) Any indemnification under paragraphs (a) and (b) of this section 7.1
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director
or officer is proper in the circumstances because he has met the applicable
standard of conduct set forth in paragraphs (a) and (b) of this Section 7.1.
Such determination shall be made (i) by the board of directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding or (ii) if such quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by the stockholders.
(e) Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of the director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
provided in this section 7.1.
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(f) The indemnification and advancement of expenses provided by or granted
pursuant to this section 7.1 shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any statute, by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
(g) The corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this section 7.1.
(h) For purposes of this section 7.1, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(i) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(j) Unless otherwise determined by the board of directors, references in
this section to "the corporation" shall include in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this section
with respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had continued.
Section 7.2 EMPLOYEES AND AGENTS. The board of directors may, by
resolution, extend the indemnification provisions of the foregoing section 7.1
to any person who was or is a
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Page -14-
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that he is or was an
employee or agent of the corporation, or is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
ARTICLE VIII
Fiscal Year
-----------
Section 8.1 The fiscal year of the corporation shall end on December 31 or
on such other date as the board of directors may from time to time determine by
resolution.
ARTICLE IX
Dividends
---------
Section 9.1 The board of directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares of stock in the manner
and upon the terms and conditions provided by law and its certificate of
incorporation.
ARTICLE X
Seal
----
Section 10.1 The corporate seal of the corporation shall be in the form of
a circle and shall have the name of the corporation and the words "Corporate
Seal, Delaware" written therein or inscribed thereon.
ARTICLE XI
Waiver of Notice
----------------
Section 11.1 Whenever any notice whatever is required to be given under
any provision of these By-laws or of the certificate of incorporation or of the
Delaware General Corporation Law, a written waiver thereof, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transactions of any business because the meeting is not lawfully called
or convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders or directors or of a committee of
the board of directors need be specified in any written waiver of notice.
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ARTICLE XII
Amendments
----------
Section 12.1 These By-laws may be altered, amended or repealed and new By-
laws may be adopted by the board of directors or by the stockholders, subject to
the corporation's certificate of incorporation or any contractual provision by
which the Corporation is bound.
<PAGE>
EXHIBIT 10.1.1
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
THIS AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (the "Agreement") is made
---------
as of this __ day of October, 1999, by and among Z-Tel Technologies, Inc., a
Delaware corporation (the "Company"), D. Gregory Smith, James A. Kitchen,
-------
Charles W. McDonough, and J. Bryan Bunting (each a "Management Stockholder" and
----------------------
together, the "Management Stockholders"), BA Capital Company, L.P., a Texas
-----------------------
limited partnership (formerly known as NationsBanc Capital Corporation, a Texas
corporation ("BACC")), Sewanee Partners II, L.P., a Tennessee limited
----
partnership ("SW II"), and Gramercy Z-Tel LLC, a Delaware limited liability
-----
company ("Gramercy," and together with BACC and SW II, collectively, the
--------
"Investors" and each individually, an "Investor") and the other stockholders
- ---------- --------
listed on the signature pages hereto (each Stockholder that is not a Management
Stockholder or an Investor, collectively, the "Other Stockholders" and
------------------
collectively with the Management Stockholders and the Investors, the
"Stockholders" and each individually, a "Stockholder").
- ------------- -----------
W I T N E S S E T H:
-------------------
WHEREAS, each of the Stockholders now or may hereafter own equity
securities of the Company (including, without limitation, shares of the
Company's common stock, $0.01 par value per share (the "Common Stock")), any
------------
class or series of preferred stock (including, without limitation, shares of the
Company's Series A Preferred Stock, $0.01 par value per share (the "Series A
--------
Preferred"), Series B Preferred Stock, $0.01 par value per share (the "Series B
- --------- --------
Preferred"), and Series C Preferred Stock, $0.01 par value per share (the
- ---------
"Series C Preferred" and, together with Series A Preferred and the Series B
- -------------------
Preferred, the "Preferred Stock")), options, warrants, instruments convertible
---------------
or exchangeable into such securities or rights to acquire such securities
(collectively, the "Securities");
----------
WHEREAS, Gramercy and the Company are parties to that certain Amended and
Restated Stock Purchase Agreement, dated as of September 30, 1999 (the "Series C
--------
Purchase Agreement");
- ------------------
WHEREAS, the obligations of Gramercy under the Series C Purchase Agreement
are conditioned, among other things, upon the execution and delivery of this
Agreement by BACC, SW II, the Management Stockholders, the Other Stockholders
and the Company;
WHEREAS, BACC, SW II, the Management Stockholders, certain of the Other
Stockholders and the Company are parties to a Stockholders' Agreement, dated as
of November 4, 1998 (the "Prior Stockholders' Agreement"); and
-----------------------------
WHEREAS, in order to induce Gramercy to invest funds in the Company
pursuant to the Series C Purchase Agreement, the parties to the Prior
Stockholders' Agreement hereby amend and restate the Prior Stockholders'
Agreement on the terms herein provided.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned parties hereto
agree as follows:
<PAGE>
1. Definitions.
-----------
(a) All capitalized terms used and not otherwise defined herein shall
have the meanings given them in the Amended and Restated Certificate of
Designations of the Company filed with the Secretary of State of Delaware on
October __, 1999 (the "Certificate").
-----------
(b) An "Affiliate" shall mean, with respect to any corporation,
---------
limited liability company, partnership, limited partnership, joint venture,
joint stock company, firm, company, syndicate, trust, estate, association,
governmental authority, business, organization or any other incorporated or
unincorporated entity (each a "Person"), any other Person that, directly or
------
indirectly, through one or more intermediaries, controls or is controlled by, or
is under common control with, such Person.
(c) "Control" (including the terms "controlling", "controlled by" and
------- ----------- -------------
"under common control with") means the possession, direct or indirect, of the
-------------------------
power to direct or cause the direction of the management, policies or activities
of a Person whether through the ownership of securities, by contract or agency
or otherwise; provided, however, that none of the Investors will be deemed to
"control" the Company.
(d) A "Co-Sale Pro Rata Share" shall mean the ratio that (i) the sum
----------------------
of the number of shares of Common Stock then held by the Eligible Seller (as
defined herein) and the number of shares of Common Stock issuable upon exercise
of any options, warrants or convertible securities (including, without
limitation, the Preferred Stock) then held by such Eligible Seller bears to (ii)
the sum of the total number of shares of Common Stock then held by all Eligible
Sellers and the number of shares of Common Stock issuable upon exercise of any
options, warrants or convertible securities (including, without limitation, the
Preferred Stock) held by all Eligible Sellers plus the number of shares of
Common Stock then held by the Stockholder proposing to sell his or its shares of
Common Stock.
(e) "Independent Third Party" shall mean any person who, immediately
-----------------------
prior to the contemplated transaction, is not an Affiliate of a Stockholder.
(f) The "Majority Investors" shall mean both (i) the holders of a
------------------
majority of the outstanding shares of the Series A Preferred for so long as such
holders and their respective Affiliates own at least fifty percent (50%) of the
Securities (counted on an as-converted basis) owned by them on the date hereof
and (ii) the holders of a majority of the outstanding shares of the Series C
Preferred for so long as such holders and their respective Affiliates own at
least fifty percent (50%) of the Securities (counted on an as-converted basis)
owned by them on the date hereof.
(g) "New Securities" shall mean (i) any shares of capital stock of the
--------------
Company, including Common Stock, Preferred Stock and any other series or class
of common stock, preferred stock or other capital stock, whether now authorized
or not, (ii) rights, options or warrants to purchase said shares of capital
stock, and (iii) securities of any type whatsoever that are, or may become,
convertible into, exchangeable, or exercisable for said shares of capital stock;
provided, however, that for purposes hereunder, "New Securities" shall not
- -------- ------- --------------
include (i) the
2
<PAGE>
Common Stock, Preferred Stock and other securities of the Company issued prior
to the date hereof and set forth in Schedule 2.5 of the Series C Purchase
Agreement, (ii) the Securities of the Company issued pursuant to the Series C
Purchase Agreement, (iii) the Securities of the Company issued upon conversion
of the Preferred Stock (the "Preferred Conversion Shares"), (iv) the Series A
---------------------------
Payments-in-Kind, (v) the Series B Payments-in-Kind, (vi) the Series C Payments-
in-Kind, (vii) any Common Stock offered to the public generally pursuant to a
registration statement under the Securities Act in connection with a Qualified
Public Offering, (viii) securities granted, issued or sold in connection with
the Option Pool ("Option Securities"), (ix) securities issued upon exercise of
-----------------
the securities in existence on the date hereof and set forth in Schedule 2.5 of
the Series C Purchase Agreement, including without limitation, the Option
Securities, and (x) stock issued in connection with any stock split, stock
dividend or recapitalization by the Company.
(h) A "Permitted Transferee" shall mean (i) in the case of a
--------------------
Stockholder that is a natural person, such Stockholder's spouse, siblings, heirs
(whether by will or operation of law) and descendants (whether natural or
adopted), any trust for the benefit of such person or persons or any of the
foregoing or any charitable organization and (ii) in the case of any Stockholder
that is not a natural person, any Affiliate of such Stockholder, provided in
each case that such person has entered into an Assumption Agreement in the form
attached hereto as Exhibit A, whereby such person has agreed to be bound by the
---------
terms of this Agreement and to be treated as an "Other Stockholder" for purposes
of this Agreement or, if such person is an Affiliate of an Investor, an
"Investor" for purposes of this Agreement or, if such person is the spouse,
sibling, heir, descendent or trust for the benefit of any of the foregoing of a
Management Stockholder, as a "Management Stockholder" for purposes of this
Agreement.
(i) "Pro Rata Share" shall mean the ratio that (i) the sum of the
--------------
total number of shares of Common Stock which are then held by a Stockholder and
those which the Stockholder has the right to obtain pursuant to exercise or
conversion of any option, warrant, right or convertible security (including,
without limitation, the Preferred Stock) bears to (ii) the sum of the total
number of shares of Common Stock then outstanding and which are issuable
pursuant to exercise or conversion of any then outstanding options, warrants,
rights or convertible securities (including, without limitation, the Preferred
Stock).
(j) "Put Securities" shall mean the Series A Preferred, Series B
--------------
Preferred, Series C Preferred, the Preferred Conversion Shares, Series A
Payments-in-Kind, Series B Payments-in-Kind or Series C Payments-in-Kind held by
an Investor or holder of shares of Series B Preferred exercising the Put on a
Put Date.
(k) A "Remaining Pro Rata Share" shall mean the ratio that (a) the sum
------------------------
of the number of shares of Common Stock then held by the Eligible Offeree (as
defined herein) and the number of shares of Common Stock issuable upon exercise
of any options, warrants or convertible securities (including, without
limitation, the Preferred Stock) then held by such Eligible Offeree bears to (b)
the sum of the total number of shares of Common Stock then held by all Eligible
Offerees and the number of shares of Common Stock issuable upon exercise of any
options, warrants or convertible securities (including, without limitation, the
Preferred Stock) then held by all Eligible Offerees.
3
<PAGE>
(l) "Requisite Holders" shall mean Persons holding in the aggregate
-----------------
shares of the capital stock of the Company representing at least forty percent
(40%) of the votes eligible to be cast in an election for the directors of the
Company, which group must include (i) BACC for so long as BACC and its
Affiliates collectively own at least fifty percent (50%) of the Securities
(counted on an as-converted basis) owned by them on the date hereof and (ii)
Gramercy for so long as Gramercy and its Affiliates collectively own at least
fifty percent (50%) of the Securities (counted on an as-converted basis) owned
by them on the date hereof.
(m) A "Sale of the Company" shall mean the sale of the Company to an
-------------------
Independent Third Party or group of Independent Third Parties pursuant to which
such party or parties acquire (i) capital stock of the Company possessing the
voting power under normal circumstances to elect a majority of the Company's
board of directors (whether by merger, consolidation or sale or Transfer of the
Company's capital stock or otherwise) or (ii) all or substantially all of the
Company's assets determined on a consolidated basis.
(n) "Series A Purchase Agreement" shall mean the Stock Purchase
---------------------------
Agreement, dated November 4, 1998, by and among the Company, BACC and SW II.
(o) "Transfer" (including al correlative meanings) shall mean any
--------
transfer of Securities, whether by sale, assignment, pledge, encumbrance, gift,
bequest, appointment or otherwise.
2. Right of First Refusal.
----------------------
(a) In the event that (i) a Management Stockholder or (ii) any Other
Stockholder that, together with such Other Stockholders' Affiliates,
collectively own in the aggregate more than one percent (1%) of the fully
diluted Common Stock of the Company, proposes to Transfer any of his or its
Securities (other than in a Qualified Public Offering (subject to the
Stockholders' piggyback registration rights set forth in Exhibit B) or as
---------
permitted pursuant to Section 8 hereof), such Stockholder shall give the Board
of Directors of the Company written notice of the price, terms and conditions of
the proposed transfer. Subject to any required approval of the holders of the
Series A Preferred and the Series C Preferred pursuant to the Certificate, the
Company shall have thirty (30) days from the date of receipt of any such notice
to agree to purchase up to all of such Securities, for the price and upon the
terms and conditions specified in the notice, by delivering written notice to
such Stockholder stating therein the quantity of Securities to be purchased up
to all of such Securities.
(b) In the event that the Company does not receive the requisite
approval from the holders of Series A Preferred and Series C Preferred or the
Company determines that it shall not purchase all of the Securities that such
Stockholder proposes to Transfer within the thirty (30) day period specified in
Section 2(a) hereof, such Stockholder shall then give the Investors
(collectively, the "Eligible Offerees") written notice of the price, terms and
-----------------
conditions of the proposed Transfer (which shall be the same price, terms and
conditions specified in the notice to the Company pursuant to Section 2(a)
above). Each Eligible Offeree shall have thirty (30) days from the date of
receipt of any such notice to agree to purchase up to its Remaining Pro Rata
4
<PAGE>
Share of such Securities, for the price and upon the terms and conditions
specified in the notice, by giving written notice to the Transferring
Stockholder stating therein the quantity of securities to be purchased up to
such person's Remaining Pro Rata Share. If any Eligible Offeree fails to agree
to purchase its full Remaining Pro Rata Share within such thirty (30) day
period, the Stockholder Transferring such Securities will give the Eligible
Offerees who did so agree (the "Electing Offerees") notice of the number of
-----------------
Securities which were not subscribed for. Such notice may be by telephone if
followed by written confirmation within two (2) days. The Electing Offerees
shall have fifteen (15) days from the date of such second notice (which 15-day
period shall be measured from the date of the telephonic notice, if so made,
provided that written confirmation is supplied in accordance with the previous
sentence) to purchase their Remaining Pro Rata Share (or such greater amount as
such Electing Offerees agree upon) of all or any part of the Securities not
purchased by such other Eligible Offerees. For purposes of the second election
under this Section 2(b), shares held by Eligible Offerees other than Electing
Offerees shall be excluded from clause (b) for the definition of a "Remaining
Pro Rata Share."
(c) Notwithstanding anything to the contrary in this Section 2, the
Company, the Eligible Offerees and the Electing Offerees may not in the
aggregate purchase less than all of the Securities proposed to be Transferred
pursuant to the notice to the Company pursuant to Section 2(a) above.
(d) Subject to the provisions of Section 3, in the event the Company,
the Eligible Offerees and the Electing Offerees fail to agree to purchase all of
the Securities proposed to be Transferred within the specified thirty (30) day
period in the case of the Company, plus the then specified thirty (30) day
period in the case of the Eligible Offerees, plus the then specified fifteen
(15) day period in the case of the Electing Offerees, respectively, such
Stockholder shall have ninety (90) days thereafter to Transfer the Securities
proposed to be Transferred at the cash price and upon the terms and conditions
no more favorable to the purchasers of such securities than specified in the
notice to the Company pursuant to Section 2(a) above. In the event such
Stockholder has not Transferred the Securities within such ninety (90) day
period, such Stockholder shall not thereafter Transfer any of his or its
Securities without first offering such Securities in the manner provided in this
Section 2.
(e) For the avoidance of doubt, Transfers by any of the Investors
shall not be subject to this Section 2.
3. Tag Along; Drag Along Provisions.
--------------------------------
(a) Notwithstanding the foregoing Section 2(d), no Management
Stockholder may Transfer any of his Securities (other than in a Qualified Public
Offering (subject to the Stockholders' piggyback registration rights set forth
in Exhibit B) or as permitted pursuant to Section 8 hereof) pursuant to Section
---------
2(d) until the remaining Stockholders (the "Eligible Sellers") shall have been
----------------
given the opportunity, exercisable within thirty (30) days from the date of
notice to the Eligible Sellers by such Management Stockholder, to Transfer to
the proposed transferee or transferees, upon the same terms and conditions
offered to the Transferring Management Stockholder, its Co-Sale Pro Rata Share
of the Securities proposed to be Transferred. If an Eligible Seller fails to
notify the Transferring Management Stockholder within
5
<PAGE>
thirty (30) days after the notice given pursuant hereto, it shall be deemed to
have waived its right under this Section 3. Any Transfer made pursuant to this
Section 3 shall be consummated within one hundred and twenty (120) days of the
date of the notice given pursuant to Section 2(a) above and shall be conditioned
upon the agreement of the proposed transferee or transferees that such proposed
transferee or transferees will purchase each Eligible Sellers' Co-Sale Pro Rata
Share of the Securities proposed to be Transferred.
(b) If the Requisite Holders approve a Sale of the Company (an
"Approved Sale"), each Stockholder shall vote for, consent to and raise no
- --------------
objections against such Approved Sale. If the Approved Sale is structured as a
(i) merger or consolidation, each Stockholder shall waive any dissenters rights,
appraisal rights or similar rights in connection with such merger or
consolidation or (ii) sale of stock, each Stockholder shall agree to sell all of
his Securities and rights to acquire shares of Common Stock on the same terms
and conditions applicable to the Requisite Holders. Each Stockholder shall take
all necessary or desirable actions in connection with the consummation of the
Approved Sale and the distribution of the aggregate consideration from such
Approved Sale as requested by the Company.
4. Registration Rights. Each of the Stockholders shall have the
-------------------
registration rights specified in Exhibit B, which Exhibit is a part of this
---------
Agreement for all purposes hereunder.
5. Voting Agreements. The parties hereto agree as follows with respect
-----------------
to all of the voting of the Securities held by them:
(a) Voting of Capital Stock. Prior to a Qualified Public Offering,
-----------------------
each Stockholder (other than a Management Stockholder or an Investor) agrees to
vote all shares of Series B Preferred owned or controlled by them as designated
by the holders of 75% of the issued and outstanding shares of Series A Preferred
and Series C Preferred, voting together as a single class.
(b) Board of Directors. Each Stockholder hereby covenants and agrees
------------------
that, except as required by the Certificate, he or it shall take no action to
change the number of members on the Board of Directors from eight (8).
(c) Common Stockholder Nominees. For so long as the Investors and the
---------------------------
Investors' Permitted Transferees own any shares of Series A Preferred, Series C
Preferred or Common Stock of the Company, the Company agrees to nominate to, and
the Stockholders and their Permitted Transferees agree to cause to be elected
to, the Company's Board of Directors, the nominees designated by the holders of
a majority of the issued and outstanding shares of Common Stock pursuant to that
certain Agreement among the Company and the Investors of even date herewith (the
"Director Agreement").
------------------
6. Preemptive Rights.
-----------------
(a) Grant of Right. The Company hereby grants to the Investors the
--------------
right of first refusal to purchase their Pro Rata Share of New Securities which
the Company may, from time to time, propose to issue and sell.
6
<PAGE>
(b) Notice. In the event the Company proposes to undertake an
------
issuance or sale of New Securities it shall give the Investors written notice of
its intention, describing the amount and type of New Securities and the cash
price and terms upon which the Company proposes to issue the same. Each Investor
shall have thirty (30) days from the date of receipt of any such notice to agree
to purchase up to its respective Pro Rata Share of such New Securities for the
cash price and upon the terms specified in the notice by giving written notice
to the Company and stating therein the quantity of New Securities to be
purchased. Subject to the previous sentence, the closing of the purchase of the
New Securities to be issued and sold to an Investor shall occur at the same time
as the closing of the sale of New Securities not elected or eligible to be
purchased by the Investors shall occur.
(c) Eligible Sales to Third Parties. After giving the notice and
-------------------------------
opportunity for the Investors to participate as required under Section 6(b)
above, the Company shall have ninety (90) days thereafter to issue and sell the
New Securities not elected nor eligible to be purchased by the Investors at the
cash price and upon the terms no more favorable to the purchasers of such
securities than specified in the Company's notice under Section 6(b). In the
event the Company has not sold such New Securities within said ninety (90) day
period, the Company shall not thereafter issue or sell any New Securities
without first offering such securities in the manner provided above.
(d) Waiver of Preemptive Rights. Notwithstanding anything in this
---------------------------
Article 6 to the contrary, SW II hereby waives its right of first refusal to
purchase its Pro Rata Share of New Securities that represent the next $21
million in gross proceeds to the Company from the sale of New Securities after
the date hereof. This Section 6(d) shall no longer apply when Gramercy shall
have been offered the opportunity to purchase at least $15 million in New
Securities that the Company proposes to issue and issues after the date hereof.
After Gramercy shall have been offered the opportunity to purchase at least $15
million in New Securities that the Company proposes to issue and issues after
the date hereof, regardless of whether Gramercy has elected to so purchase such
New Securities all of its rights under this Section 6(d) shall terminate.
7. Put Provisions.
--------------
(a) Put. Prior to initiation of a transaction which the Company
---
expects to result in a Qualified Public Offering (provided that the Company
shall give written notice of its intent to initiate such a transaction at least
thirty (30) days prior to such initiation), at any time and from time to time
after the earlier of either (i) November 4, 2005 or (ii) the date upon which the
holders of either (x) a majority of the outstanding shares of Series A Preferred
(which must include BACC as long as it holds any Series A Preferred) or (y) a
majority of the outstanding shares of Series C Preferred (which must include
Gramercy as long as it holds any Series C Preferred) give the Company written
notice that the Company has violated any material provision of the Series A
Purchase Agreement (in the case of the Series A Preferred stockholders) or the
Series C Purchase Agreement (in the case of the Series C Preferred
stockholders), this Agreement, the Certificate or the Director Agreement, which
violation or breach is not cured within thirty (30) days after delivery of such
written notice, the Investors and
7
<PAGE>
the Stockholders holding Series B Preferred ("Series B Preferred Stockholders")
-------------------------------
shall have the right thereafter to cause the Company to repurchase ("Put") their
---
respective Put Securities pursuant to the terms set forth herein. The Company
agrees to give each other Investor and the Series B Preferred Stockholders
notice of any event in clause (ii) above.
(b) Put Date. In the event an Investor or Series B Preferred
--------
Stockholder wishes to exercise the right to Put its Put Securities, such
Investor or Series B Preferred Stockholder shall notify the Company at least
sixty (60) days prior to the effective Put Date of its intention to exercise the
Put right and the effective Put Date, which Put must cover all of such
Investor's or Series B Preferred Stockholder's Put Securities; provided,
--------
however, that if a "fair market value" determination made pursuant to Section
- -------
7(c) below extends beyond the effective Put Date as specified in the notice
above, then such effective Put Date shall be ten (10) days after such "fair
market value" determination. The Company shall give all other Investors and
Series B Preferred Stockholders notice of the Put Date and the opportunity to
Put their Put Securities on such Put Date; provided that the Company shall not
--------
be required to give such notice more than once during any 90-day period.
(c) Put Price. The purchase price per share (the "Put Price") of the
--------- ---------
Put Securities shall be the greater of (i) the "fair market value" (plus all
accrued but unpaid dividends, whether declared or not declared, payable on the
Put Securities) of each of such Put Securities or (ii) the then Conversion Price
per Series A Preferred, Series B Preferred or Series C Preferred share, as
applicable (as adjusted pursuant to the Certificate) (plus all accrued but
unpaid dividends, whether declared or not declared, payable on the Put
Securities calculated in the manner set forth in the Certificate). For purposes
of this Section 7, the term "fair market value" shall mean the fair market value
-----------------
of such Put Securities on the Put Date, determined as follows:
(I) By written agreement of the Company and the Majority
Investors;
(II) If the Company and the Majority Investors fail to reach a
written agreement within thirty (30) days after the notice given by the
Investor(s) and the Series B Preferred Stockholders pursuant to Section 7(b)
above, the Company and the Majority Investors shall together appoint an
independent appraiser (which may be an investment banker) to determine the "fair
market value" of the Put Securities, which shall be binding on the parties; or
(III) If the Company and the Majority Investors are unable to
agree upon the choice of an independent appraiser under (II) hereof within forty
(40) days after the notice given by the Investor(s) pursuant to Section 7(b),
then the Company, on the one hand, and the Majority Investors, on the other
hand, shall each appoint, within ten (10) days following the expiration of such
40-day period, an independent appraiser, and the two appraisers together shall
determine the "fair market value." If only one appraiser is appointed during
the 10-day period referred to above, then such appraiser shall alone determine
the "fair market value," which determination shall be binding on the Company and
all Stockholders. If both appraisers are appointed within such 10-day period,
and within thirty (30) days after the appointment of the second of the two
appraisers, they cannot agree on the "fair market value" of the Put Securities,
then each appraiser shall prepare a separate appraisal report of the fair market
value ("FMV") of
---
8
<PAGE>
the Company and the "fair market value" of the Put Securities within sixty (60)
days after the appointment of the second of the two appraisers, and if the lower
of the two FMVs of the Company is equal to at least 85% of the higher FMV of the
Company, then the "fair market value" of the Put Securities shall be the average
of the "fair market value" of the Put Securities as determined by the two
appraisers. If only one of the appraisers submits an appraisal report on or
before such 60th day, then the "fair market value" of the Put Securities shall
be the "fair market value" of the Put Securities as determined by such report;
or
(IV) If neither of the appraisers submits an appraisal report on or
before such 60th day, or if both appraisers submit an appraisal report but the
averaging requirements set forth in (III) above are not met, then the two
appraisers shall promptly appoint a third appraiser who shall determine the
"fair market value" of the Put Securities. If the two appraisers fail to
appoint a third appraiser as required hereunder, either party shall have the
right to submit the determination to arbitration under the rules and procedures
of the American Arbitration Association.
(V) The appraisers and arbitrators shall have access to all books and
records of the Company and shall have the right to examine all of its accounts,
books and assets of the Company and do all things fully and completely to enable
them to arrive at the FMV of the Company and the "fair market value" of the Put
Securities. The cost of any appraisal proceedings shall be paid one-half ( 1/2)
by the Company and one-half ( 1/2) by the Investor(s) and the Series B Preferred
Stockholders exercising the Put.
(VI) An appraiser making an appraisal pursuant to this Agreement shall
assume: (x) no discounts for minority interests; (y) that the restrictions on
Transfer specified in this Agreement, any applicable securityholder agreement
and/or any applicable federal or state securities law restrictions on Transfer
are not applicable to such Put Securities; and (z) that no restricted stock
discount or publicly traded stock premium is applicable to such Put Securities.
All appraisers appointed shall be experienced and knowledgeable in the industry
or industries in which the Company does business.
(VII) The "fair market value" determination pursuant to clause (c)
hereof, shall be binding on the Company and all Stockholders for purposes of
this Section 7.
(d) Continuing Obligation. If the Company is unable to purchase all
---------------------
Put Securities required to be purchased on a Put Date due to state law
restrictions, Put Securities shall be repurchased (on a pro rata basis from the
holders of the Put Securities based upon the relative "fair market values" of
the aggregate number of Put Securities to be purchased) from time to time, to
the extent the Company is legally permitted to do so, and the Put obligations of
the Company under this Section 7 will be a continuing obligation until the
Company's repurchase of all such Put Securities. Dividends shall continue to
accrue on any Put Securities that have not been repurchased by the Company.
(e) Procedures at Closing(s). On each Put Date (including any
------------------------
subsequent purchase closing date if multiple purchases result from the
application of Section 7(d)) the Put closing shall occur at the Company's
principal office. At the Put closing, to the extent applicable,
9
<PAGE>
each Investor and Series B Preferred Stockholder exercising the Put shall
deliver the Put Securities being sold, duly endorsed in blank, accompanied by
such supporting documents as may be necessary to pass to the Company good title
to the Put Securities, free and clear of all liens or other encumbrances (other
than restrictions under applicable securities laws, this Agreement and/or any
securityholder agreement). In consideration therefor, the Company shall deliver
to such Investor and Series B Preferred Stockholder, at the Company's option,
(i) immediately available funds equal to the aggregate Put Price, based upon the
number of Put Securities being sold by each Investor and Series B Preferred
Stockholder or (ii) a full recourse promissory note or notes evidencing the
aggregate Put Price (the "Put Notes") for the Put Securities being sold by each
---------
Investor and Series B Preferred Stockholder, provided that the Company must
elect the same payment method for each participating Investor and Series B
Preferred Stockholder. Each Put Note shall be secured by a pledge from the
Company of the Put Securities for which the Put Note is executed, and the
Company hereby agrees to take all actions and execute all documents (in form
reasonably satisfactory to the Investors) necessary or appropriate to properly
and fully secure each Put Note with the Put Securities Transferred in exchange
therefor. In addition, each Put Note shall be in form reasonably satisfactory to
such Investor and Series B Preferred Stockholder and shall in any case, unless
otherwise agreed to by the Company and the Majority Investors (I) have a term of
three (3) years, (II) provide for repayment of the aggregate Put Price at a rate
no less than one-third per year, with principal and interest payable in equal
quarterly installments, (III) provide that the unpaid balance of the Put Note
shall accrue interest at the rate of 8% per annum, compounded on a quarterly
basis, from the date of issuance until full payment of the aggregate Put Price
is made, and (IV) provide that all amounts due under such Put Note may be
accelerated and declared immediately payable upon a default in any payment by
the Company under such Put Note, which is not cured within ninety (90) days,
upon the first such default, and sixty (60) days upon any subsequent default.
(f) Right to Withdraw Put. At any time prior to the effective Put
---------------------
Date specified in the notice given pursuant to Section 7(b) any such Investor or
Series B Preferred Stockholder may withdraw the Put, without impairing its right
to exercise its rights pursuant to this Section 7 at a later date. Any costs for
appraisals shall be paid by the parties as contemplated by Section 7(c)(V).
8. Permitted Transferees. Each Stockholder may Transfer any Securities
---------------------
free of the provisions of Sections 2 and 3 of this Agreement to a Permitted
Transferee provided that such Permitted Transferee has entered into an
Assumption Agreement, in the form attached hereto as Exhibit A, whereby such
---------
person has agreed to be bound by this Agreement in the same manner applicable to
such Permitted Transferee's transferor.
9. Changes in Stock. If, from time to time during the term of this
----------------
Agreement:
(a) There is a dividend of any security, stock split or other change
in the character or amount of any of the outstanding securities of the Company,
or
(b) There is any consolidation, merger, recapitalization or other
business combination immediately following which stockholders of the Company
hold more than 50% of the voting equity securities of the surviving corporation,
10
<PAGE>
then, in such event, any and all new, substituted or additional securities or
other property to which any Stockholder is entitled by reason of his ownership
of the Securities shall be immediately subject to the provisions of this
Agreement and be included in the word "Securities" for all purposes of this
Agreement with the same force and effect as the Securities presently subject to
this Agreement and with respect to which such securities or property were
distributed.
10. Legends. All certificates of the Stockholders representing any
-------
Securities subject to the provisions of this Agreement shall have endorsed
thereon a legend to substantially the following effect:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO AN AMENDED AND RESTATED STOCKHOLDERS'
AGREEMENT, DATED AS OF OCTOBER __, 1999,
RESTRICTING THE TRANSFER, PLEDGE AND ENCUMBRANCE
OF SHARES. ANY TRANSFER OR ACQUISITION IN
VIOLATION OF THAT AGREEMENT IS NULL AND VOID. THE
COMPANY WILL FURNISH ANY OF ITS STOCKHOLDERS A
COPY OF THE AGREEMENT UPON REQUEST AND WITHOUT
CHARGE."
11. Transfer of Stock. The Company shall not: (a) permit any Transfer on
-----------------
its books of any Securities which shall have been sold or Transferred in
violation of any of the provisions set forth in this Agreement or (b) treat as
an owner of such Securities or accord the right to vote as an owner or to pay
dividends to any transferee to whom such Securities shall have been sold,
Transferred, pledged or hypothecated in violation of any of the provisions set
forth in this Agreement.
12. Termination. Sections 2, 3, 5, 6 and 7 of this Agreement shall
-----------
terminate upon the earliest to occur of:
(a) An agreement in writing by the Company, Management Stockholders
holding greater than fifty percent (50%) of the Securities then held by such
Management Stockholders (counted on an as-converted basis and which Management
Stockholders must include D. Gregory Smith), Other Stockholders holding greater
than fifty percent (50%) of the Securities then held by the Other Stockholders
(counted on an as-converted basis), and the Majority Investors;
(b) The consummation of a Qualified Public Offering; or
(c) The consolidation, merger, recapitalization or other business
combination (but only with respect to a consolidation, merger, recapitalization
or other business combination pursuant to which stockholders of the Company
(determined prior to such transaction) hold less than 50% of the voting equity
of the surviving corporation) or sale of all or substantially all of the assets
of the Company, in each case approved pursuant to Article 8 of the Certificate.
11
<PAGE>
13. Transfer of Rights. The rights set forth in this Agreement (other
------------------
than the rights set forth in Section 7) (the "Rights") are assignable or
------
transferable by each Stockholder to any party in connection with the sale of
such Securities to such party pursuant to the terms of this Agreement, so long
as the sale of such Securities otherwise complies with the terms of this
Agreement and the Transferee has entered into an Assumption Agreement, in the
form attached hereto as Exhibit A, whereby such person agrees to be bound by the
---------
terms of this Agreement to the same extent as such Transferee's Transferor.
14. Amendments; Waivers.
-------------------
(a) Any provision of this Agreement may be amended only with the
written consent of the Company, Management Stockholders holding greater than
fifty percent (50%) of the Securities then held by such Management Stockholders
(counted on an as-converted basis and which Management Stockholders must include
D. Gregory Smith), Other Stockholders holding greater than fifty percent (50%)
of the Securities then held by the Other Stockholders (counted on an as-
converted basis), and the Majority Investors. Any amendment effected in
accordance with this Section 14 shall be binding upon each Stockholder, each
Permitted Transferee and the Company.
(b) Any provision of this Agreement may be waived (either generally or
in a particular instance) only with the written consent of the party against
whom such waiver is sought to be enforced. No failure or delay by any party in
exercising any right, power or privilege hereunder will operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided will be cumulative and not exclusive of
any rights or remedies provided by law.
15. Governing Law. This Agreement and the legal relations between the
-------------
parties arising hereunder shall be governed by and interpreted in accordance
with the laws of the State of Delaware.
16. Entire Agreement. This Agreement, the Series A Purchase Agreement,
----------------
the Series C Purchase Agreement, including all exhibits, schedules and
attachments thereto, the Certificate and all other agreements executed in
connection therewith, constitute the full and entire understanding and agreement
between the parties regarding the matters set forth herein and therein. Except
as otherwise expressly provided herein, the provisions hereof shall inure to the
benefit of, and be binding upon the successors, assigns, heirs, executors and
administrators of the parties hereto.
17. Notices, Etc. Except as otherwise specifically provided herein, all
------------
notices and other communications required or permitted hereunder shall be in
writing and shall be deemed effectively given (i) upon personal delivery to the
party to be notified, (ii) upon confirmation of receipt or delivery, if made by
fax, or (iii) one business day after being deposited with a reputable next-day
courier, postage prepaid, in each case if addressed (a) if to any Investors, at
the applicable Investor's address as set forth on the signature page hereto, or
at such other address as such Investor shall have furnished to the Company in
writing in accordance with this Section 17; (b) if to any other holder of the
Series A Preferred, the Series B Preferred, the Series C Preferred
12
<PAGE>
and the Common Stock issued upon conversion thereof to whom the Rights have been
Transferred in accordance with Section 17 hereof, at such address as such holder
shall have furnished the Company in writing in accordance with this Section 17,
or, until any such holder so furnishes an address to the Company, then to and at
the address of the last holder thereof who has so furnished an address to the
Company; (c) if to a Management Stockholder, at such address as such Management
Stockholder shall have last furnished the Company and the Stockholders in
writing; (d) if to any Other Stockholder, at such address as such Other
Stockholder shall have last furnished the Company and the Stockholders in
writing; or (e) if to the Company, at its principal office.
18. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
19. Specific Performance. The Company and the Stockholders agree that the
--------------------
rights created by this Agreement are unique, and that the loss of any such right
is not susceptible to monetary quantification. Consequently, the parties agree
that an action for specific performance (including for temporary and/or
permanent injunctive relief) of the obligations created by this Agreement is a
proper remedy for the breach of the provisions of this Agreement, without the
necessity of proving actual damages. If the parties hereto are forced to
institute legal proceedings to enforce their rights in accordance with the
provisions of this Agreement, the prevailing party shall be entitled to recover
its reasonable expenses, including attorneys' fees, in connection with any such
action.
20. Severability. If any provision of this Agreement or the application
------------
of any such provision is invalid, illegal or unenforceable in any jurisdiction,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement or invalidate or render unenforceable such provision
in any other jurisdiction. To the extent permitted by applicable law, the
parties waive any provision of law that renders any provision of this Agreement
invalid, illegal or unenforceable in any respect. The parties shall, to the
extent lawful and practicable, use their reasonable good faith efforts to enter
into arrangements to reinstate the intended benefits, net of the intended
burdens, of any such provision held invalid, illegal or unenforceable. In the
event that any provision of this Agreement shall be finally determined by a
court of competent jurisdiction to be unenforceable such court shall have
jurisdiction to reform this Agreement so that it is enforceable to the maximum
extent permitted by applicable law and the parties shall abide by such court's
determination. If such provision cannot be reformed, such provision shall be
deemed to be severed from this Agreement, but every other provision of this
Agreement shall remain in full force and effect.
21. Corporate Opportunities.
-----------------------
(a) The Stockholders and the Company recognize that the Investors,
their Affiliates and the directors elected or appointed to the Board of
Directors of the Company by the Investors (i) have participated, directly or
indirectly, and will continue to participate in venture capital and other direct
investments in corporations, partnerships, joint ventures, limited liability
companies and other entities and other similar transactions, (ii) may have
interests in, participate with, aid and maintain seats on the board of directors
of other such entities and (iii) may develop
13
<PAGE>
opportunities for such entities. Specifically, such directors may be directors
or employees of a management company for the Investors, directors or employees
of the Investors or their Affiliates, or directors or advisors of entities in
which the Investors or their Affiliates have invested or may invest
(collectively, the "Positions"). In such Positions, such directors elected or
---------
appointed by the Investors may encounter business opportunities that the Company
or its Stockholders may desire to pursue. The Stockholders and the Company
recognize that such opportunities may include, but shall not be limited to,
identifying, pursuing and investing in entities, engaging investment banking
firms or other underwriters for access to public and private securities markets,
and obtaining investment funds from institutional and private investors or
others.
(b) Therefore, the Stockholders and the Company agree that the
Investors and the directors elected or appointed by the Investors shall have no
obligation to the Company, the Stockholders or to any other person or entity to
present any such business opportunity to the Company before presenting and
allowing time to develop such opportunity to any other entities other than such
opportunities presented to him or her solely in, and as a direct result of, his
or her capacity as a director of the Company; provided, that the preceding shall
--------
in no way allow a natural person or director to usurp a corporate opportunity
solely for his or her personal benefit without first presenting and allowing
time to develop such opportunity to the entities set forth above.
Notwithstanding the preceding sentence, if an opportunity is separately
presented to and developed by any such other entity, including the Investors,
such entity shall be free to pursue such opportunity even if it came to the
director's attention solely as a result of and in his or her capacity as a
director of the Company.
(c) The Stockholders and the Company acknowledge that, in any such
case, to the extent a court might hold that the conduct of such activity is a
breach of a duty to the Company, the Stockholders and the Company hereby waive
any and all claims and causes of action that the Stockholders or the Company may
have for such activities. The Stockholders and the Company further agree that
the waivers and agreements in this Agreement identify certain types and
categories of activities which do not violate the director's duty of loyalty to
the Company, and such types and categories are not manifestly unreasonable. The
waivers and agreements in this Agreement apply equally to activities conducted
in the future and that have been conducted in the past.
22. Jurisdiction; Consent to Service of Process. (a) Each party hereby
-------------------------------------------
irrevocably and unconditionally agrees to submit, for itself and its property,
to the jurisdiction of the New York state court located in the Borough of
Manhattan, City of New York or the United States District for the Southern
District of New York (as applicable, a "New York Court"), and any appellate
--------------
court from any such court, in any suit, action or proceeding arising out of or
relating to this Agreement, or for recognition or enforcement of any judgment
resulting from any such suit, action or proceeding, and each party hereby
irrevocably and unconditionally agrees that all claims in respect of any such
suit, action or proceeding may be heard and determined in the New York Court.
(b) No party may move to (i) transfer any such suit, action or proceeding
from the New York Court to another jurisdiction, (ii) consolidate any such suit,
action or proceeding brought in
14
<PAGE>
the New York Court with a suit, action or proceeding in another jurisdiction, or
(iii) dismiss any such suit, action or proceeding brought in the New York Court
for the purpose of bringing the same in another jurisdiction.
(c) Each party hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, (i) any objection which it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in the New York Court,
(ii) the defense of an inconvenient forum to the maintenance of such suit,
action or proceeding in any such court, and (iii) the right to object, with
respect to such suit, action or proceeding, that such court does not have
jurisdiction over such party.
(d) Each party irrevocably consents to service of process in any manner
permitted by law.
23. Waiver by Series A Stockholders. By their execution hereof, the
-------------------------------
Series A Stockholders hereby waive the provision of Section 4.1 of Stock
Purchase Agreement, dated November 4, 1998 relating to the delivery of
consolidated financial statements for the fiscal year ended December 31, 1998.
The Company acknowledges and agree to deliver such audited consolidated
financial statements no later than October 31, 1999.
24. Consents. The Company hereby confirms that its has obtained all of
--------
the consents necessary to amend and restate the Stockholders' Agreement, dated
November 4, 1998, by and among the Company, the Management Stockholders, the
Investors and the Other Stockholders (each as defined in such Stockholders'
Agreement), in accordance with the terms of such Stockholders' Agreement,
including, without limitation, its terms regarding amendments.
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
Z-TEL TECHNOLOGIES, INC.
By:
----------------------------------------
Name:
Title:
INVESTORS:
GRAMERCY Z-TEL LLC
By:
----------------------------------------
Name:
Title:
Notice Address:
----------------------------
--------------------------------------------
--------------------------------------------
Attention:
---------------------------------
Fax No.:
---------------------------------
BA CAPITAL COMPANY, L.P.
By: BA SBIC Management, LLC
Its General Partner
By: BA Equity Management, L.P.,
Its Sole Member
By: BA Equity Management GP, LLC
Its General Partner
By:
----------------------------------------
Douglas C. Williamson
Member
Notice Address:
----------------------------
--------------------------------------------
--------------------------------------------
Attention:
---------------------------------
Fax No.:
---------------------------------
16
<PAGE>
SEWANEE PARTNERS II, L.P.
By:
----------------------------------------
Name:
Title:
Notice Address:
----------------------------
--------------------------------------------
--------------------------------------------
Attention:
---------------------------------
Fax No.:
---------------------------------
MANAGEMENT STOCKHOLDERS:
--------------------------------------------
D. Gregory Smith
--------------------------------------------
James A. Kitchen
--------------------------------------------
Charles W. McDonough
--------------------------------------------
J. Bryan Bunting
SERIES B PREFERRED STOCKHOLDERS:
--------------------------------------------
Abdoney Enterprises, Ltd.
--------------------------------------------
Allerton, Richard, Jr.
--------------------------------------------
Armes, Paul W.
17
<PAGE>
--------------------------------------------
Barden, James C., Jr.
--------------------------------------------
Barker, Jacob J.
--------------------------------------------
Bayer, Christoph
--------------------------------------------
Bentley, Larry A.
--------------------------------------------
Biddinger, Clay M.
--------------------------------------------
Brenner, Henry L., Jr.
--------------------------------------------
Chapoton, John E., Jr.
--------------------------------------------
Collens, Jonathan L., Sr.
--------------------------------------------
Collins, LeRoy
--------------------------------------------
Cowden, Michael
--------------------------------------------
Duggan, Malcolm R., Jr.
--------------------------------------------
Elcan, Patricia Frist
18
<PAGE>
--------------------------------------------
Fisher, Robert L. and Elizabeth M.
--------------------------------------------
Fowler, Troy
--------------------------------------------
Frey, Louis, Jr. et al
--------------------------------------------
Frey, Louis, Jr., retirement account
--------------------------------------------
Garner, Mary Ann MacKay
--------------------------------------------
Hall, William Hamilton
--------------------------------------------
Hill, Herbert L.
--------------------------------------------
Hyman, Charles D.
--------------------------------------------
Johnson, Mark
--------------------------------------------
Kaylor, B. N. and Donna J.
--------------------------------------------
Kelly, Stephen B.
--------------------------------------------
Kreher, Eric and Catherine Ziegler
19
<PAGE>
--------------------------------------------
Landsberg, Mortimer Z.
--------------------------------------------
Larizaden, Mahmoud
--------------------------------------------
MacKay, Alfred F.
--------------------------------------------
MacKay, K. H. (Buddy), Jr.
--------------------------------------------
MacKay, David L.
--------------------------------------------
MacKay, David R.
--------------------------------------------
MacKay, Douglas K.
--------------------------------------------
MacKay, George A.
--------------------------------------------
MacKay, George L.
--------------------------------------------
MacKay, Ken
--------------------------------------------
Mincey, Charles F. and Marie
--------------------------------------------
Morris, Michael
--------------------------------------------
O'Neill, Bernard C., Jr.
20
<PAGE>
--------------------------------------------
Ortale, Buddy
--------------------------------------------
Patrick, Thomas W.
--------------------------------------------
Perrone, Carolyn
--------------------------------------------
Pinckney, Charles M.
--------------------------------------------
Reese, Gilbert H.
--------------------------------------------
Seidenberg, David G.
--------------------------------------------
Shaw, Frederick W.
--------------------------------------------
Stefanelli, Robert L., Jr.
--------------------------------------------
Stevens, Robert ("Randy") and Sara
--------------------------------------------
Taylor, Alexander
--------------------------------------------
Tolan, Martin
--------------------------------------------
Turner, William A.
21
<PAGE>
--------------------------------------------
Viator, Ward J.
--------------------------------------------
Williams, Joe
--------------------------------------------
Allerton, Jr., Richard
--------------------------------------------
Ammerman, Michael
--------------------------------------------
Angell, Chad E.
--------------------------------------------
Aurell, John K.
--------------------------------------------
Barker, Jacob J.
--------------------------------------------
Bell, Timothy C.
--------------------------------------------
Binkley, Joe
--------------------------------------------
Oakwest Corporation
--------------------------------------------
Blackmore, Jason R
--------------------------------------------
Bolen, Bob
22
<PAGE>
--------------------------------------------
Brenner, Jr., Henry L.
--------------------------------------------
Byrne, Richard J.
--------------------------------------------
Thomas W. Cardy Family Trust
--------------------------------------------
Carubba, Sam and Mary
--------------------------------------------
Cipolla, Anthony J. and Merry Jo
--------------------------------------------
Jonathan L. Collens, Sr.
--------------------------------------------
Collins, Jr., LeRoy
--------------------------------------------
Conner, Mungo
--------------------------------------------
Cordell, Ian
--------------------------------------------
Daniel, Douglas W.
--------------------------------------------
DeBarba, Edmund
--------------------------------------------
Denittis, Leonard A.
23
<PAGE>
--------------------------------------------
Edwards, Christi A. S.
--------------------------------------------
Enoch, Jr., Paul
--------------------------------------------
Ethridge, George W. & Lisa O.
--------------------------------------------
Freishtat, Gregg
--------------------------------------------
Frey, Louis
--------------------------------------------
Hesse, Bob
--------------------------------------------
Gahan, Bill
--------------------------------------------
Gahan, Thomas J.
--------------------------------------------
Garber, Dennis C. & Linda S.
--------------------------------------------
Garvey, James P.
--------------------------------------------
Gay, Forest S. III and Mary Carolyn, Joint
Tenants with rights of survivorship
--------------------------------------------
Gay, Mary Priscilla
24
<PAGE>
--------------------------------------------
GEA Fund LLP
--------------------------------------------
Gerdsen, James & Cynthia Clegg
--------------------------------------------
Hogan, Lawrence J.
--------------------------------------------
Houser, Charles
--------------------------------------------
Kent, Christopher
--------------------------------------------
Koenig, Robert
--------------------------------------------
Linch, David E.
--------------------------------------------
Lykes, Diane C.
--------------------------------------------
Martin, Jr., Charlie N.
--------------------------------------------
McKell, Mark D.
--------------------------------------------
McKinney, Larry
--------------------------------------------
Misthopoulos, Noel
25
<PAGE>
--------------------------------------------
Moore, Robert O.
--------------------------------------------
Nadeau, Michael D.
--------------------------------------------
Northrop, George
--------------------------------------------
Oken, Glen
--------------------------------------------
Ortale, William P.
--------------------------------------------
Ortale, Buddy
--------------------------------------------
Perrone, Gregory
--------------------------------------------
Pinckney, Charles M.
--------------------------------------------
Renchan, Steven J.
--------------------------------------------
Roberts, Rich
--------------------------------------------
Stevenson, Nick
--------------------------------------------
Todd, Jr., James A.
26
<PAGE>
--------------------------------------------
Valdes, Sarah Ann
--------------------------------------------
Viator, Ward
--------------------------------------------
Viator, Mary
--------------------------------------------
Waugh, Alexander
--------------------------------------------
Wegner, William
--------------------------------------------
ABI Companies, Inc.
--------------------------------------------
Liberty Ventures LLC
--------------------------------------------
Dewey Mills, Inc.
--------------------------------------------
Dominion Financial Group International LDC
--------------------------------------------
ZT Partners, Ltd.
--------------------------------------------
Fulmead Ventures Limited
--------------------------------------------
Stevens Revocable Trust
27
<PAGE>
--------------------------------------------
Stevens Revocable Trust
--------------------------------------------
Reed Family Partnership
--------------------------------------------
Troy Prop Group LLC
--------------------------------------------
Alexandra R. Taylor Revocable Trust
--------------------------------------------
CS First Boston
--------------------------------------------
Harbour Town Investments Z-414, LLC
28
<PAGE>
Exhibit 10.1.7
INVESTMENT AGREEMENT
for a
$35,200,000 EQUIPMENT LEASE
by
CMB CAPITAL, LLC
to
Z-TEL COMMUNICATIONS, INC.
and for a
WARRANT FOR 474,393 SHARES
issued by
Z-TEL TECHNOLOGIES, INC.
to
CMB CAPITAL, LLC
Dated this 15th day of March, 1999
<PAGE>
TABLE OF CONTENTS
Page No.
--------
ARTICLE I
LEASE OF EQUIPMENT
1.1 Sale-Leaseback ...................................................... 1
1.2 Additional Equipment Leases ......................................... 1
1.3 Commitment .......................................................... 1
1.4 Rental Rate ......................................................... 2
1.5 Lease Term .......................................................... 2
1.6 Expenses ............................................................ 2
1.7 Commitment Fee ...................................................... 2
1.8 Additional Collateral ............................................... 2
ARTICLE II
ISSUANCE OF WARRANT
2.1 Issuance of Warrant ................................................. 3
2.2 Adjustment of Shares Issuable under the Warrant .................... 3
2.3 Definition of Securities ....................... .................... 3
ARTICLE III
THE CLOSING
ARTICLE IV
CONDITIONS OF CLOSING
4.1 Conditions of Closing ............................................... 3
4.2 Conditions to Each Lease of Additional Equipment .................... 5
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Existence and Rights ................................................ 6
5.2 Agreement Authorized ................................................ 6
5.3 Capitalization ...................................................... 7
5.4 Subsidiaries, Other Investments ..................................... 8
5.5 Litigation .......................................................... 8
5.6 Financial Statements ................................................ 8
5.7 Title and Related Matters ........................................... 8
5.8 Real Estate ......................................................... 9
5.9 Intellectual Property ............................................... 9
i
<PAGE>
5.10 Absence of Changes .................................................. 11
5.11 No Materially Adverse or Other Contracts, Etc. ...................... 12
5.12 Compliance with Laws, Instruments, Etc. ............................. 12
5.13 Securities Laws ..................................................... 12
5.14 Brokers ............................................................. 13
5.15 Taxes ............................................................... 13
5.16 Insurance ........................................................... 13
5.17 Related Transactions ................................................ 14
5.18 Minute Books and Stock Record Books ................................. 14
5.19 Labor Matters ....................................................... 14
5.20 Profit Payments ..................................................... 15
5.21 Survival of Representations and Warranties: Full Disclosure ......... 15
5.22 Disclosure .......................................................... 15
ARTICLE VI
AFFIRMATIVE COVENANTS
6.1 Compliance with Lease ............................................... 16
6.2 Taxes ............................................................... 16
6.3 Maintain Corporate Rights and Facilities ............................ 16
6.4 Financial Statements ................................................ 16
6.5 Financial Covenant .................................................. 16
6.6 Insurance ........................................................... 17
6.7 Inspection .......................................................... 17
6.8 Maintain Properties ................................................. 17
6.9 Divisibility of Warrant ............................................. 17
6.10 Notices Concerning Governmental Authorities; Responses to
Threatened Litigation ............................................... 17
6.11 Compliance with Instruments, Laws, Etc. ............................. 18
6.12 Disclosure of Offers ................................................ 18
6.13 Maintenance of Business ............................................. 18
6.14 Landlord's Waivers .................................................. 18
6.15 Source Code ......................................................... 18
ARTICLE VII
COMPANY'S NEGATIVE COVENANTS
7.1 Stock Redemption .... ............................................... 19
7.2 Investments, Loans and Advances ..................................... 19
7.3 Acquisition or Sale of Business: Merger or Consolidation ............ 19
7.4 Change Capital Structure ............................................ 19
7.5 Officers' Salaries and Loans ........................................ 20
7.6 Amend, Violate Charter, Etc. ........................................ 20
7.7 Dealings with Insiders .............................................. 20
7.8 Dividends ........................................................... 20
ii
<PAGE>
7.9 Management .......................................................... 21
7.10 Pension and Profit Sharing Plan or Arrangements ..................... 21
7.11 Permitted Indebtedness .............................................. 21
7.12 Liens ............................................................... 21
7.13 Capital Expenditures ................................................ 22
ARTICLE VIII
TRANSFERABILITY
8.1 Transferability ..................................................... 22
8.2 Restrictive Legends ................................................. 22
8.3 Restriction on Transfer ............................................. 23
ARTICLE IX
REGISTRATION RIGHTS
ARTICLE X
ADDITIONAL PROVISIONS
10.1 Expenses; Indemnity.................................................. 23
10.2 Successors and Assigns .............................................. 24
10.3 Notices ............................................................. 24
10.4 No Waiver, Remedies Cumulative ...................................... 25
10.5 Amendments and Waivers .............................................. 25
10.6 Integration ......................................................... 25
10.7 Separability ........................................................ 25
10.8 Headings ............................................................ 26
10.9 Governing Law........................................................ 27
Exhibits
- --------
A Master Lease Agreement
B Lease Order
C Security Agreement
D Warrant
E Bill of Sale
F Perfection Certificate
G Equipment Disclaimer
H Registration Rights
iii
<PAGE>
Schedules
- ---------
Schedule 1.1 Leaseback Equipment
Schedule 5.5 Litigation or Other Proceedings
Schedule 5.9 Relevant Intellectual Property
Schedule 5.10 Absence of Changes
Schedule 5.11 Contracts or Agreements
Schedule 5.12 Compliance With Laws
Schedule 5.15 Taxes
Schedule 5.16 Insurance
Schedule 5.17 Related Transactions
Schedule 5.20 Profit Payments
iv
<PAGE>
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT is made and entered into as of this 15th day of
March, 1999, by and among Z-TEL TECHNOLOGIES, INC., a Delaware corporation (the
"Company") Z-TEL COMMUNICATIONS, INC., a Delaware corporation ("Subsidiary") and
CMB CAPITAL, LLC, a Florida limited liability company ("Investor").
RECITALS
WHEREAS, the Investor has agreed to purchase from and lease to Subsidiary
certain equipment in a sale-lease back transaction and to purchase for and lease
to Subsidiary certain other equipment from time to time, subject to the terms
and conditions set forth in this Agreement; and
WHEREAS, in order to induce Investor to lease such equipment to Subsidiary,
the Company has agreed to issue to Investor a warrant to purchase 474,393
shares of the Company's common stock, subject to the terms and conditions set
forth in this Agreement.
NOW THEREFORE, in consideration of the mutual covenants contained in this
Agreement, the parties hereto agree as follows:
ARTICLE I
LEASE OF EQUIPMENT
1.1 Sale-Leaseback. On the Closing Date (as hereinafter defined), Subsidiary
--------------
shall sell to Investor, and Investor shall purchase from Subsidiary, the
equipment listed on Schedule 1.1 to this Agreement (the "Leaseback Equipment").
Simultaneously therewith, Investor shall lease to Subsidiary, and Subsidiary
shall lease from Investor, the Leaseback Equipment, on the terms and conditions
set forth in the Master Lease Agreement attached hereto as Exhibit A (the
"Lease").
1.2 Additional Equipment Leases. From time to time during the period that is
---------------------------
twenty-four months from the Closing Date, after receipt of a Lease Order in the
form of Exhibit B to this Agreement (a "Lease Order") for one or more of the
items of equipment (the "Additional Equipment"), Investor shall purchase the
Additional Equipment specified in the Lease Order from its vendor and
simultaneously lease such Additional Equipment to Subsidiary. All leases of
Additional Equipment under this Section 1.2 shall be pursuant to the terms and
conditions of the Lease. Schedule 1.2 sets forth the dates on which the purchase
and lease of Additional Equipment shall occur and the name of the vendor of the
Additional Equipment.
1.3 Commitment. Investor shall have no obligation to purchase and lease
----------
Additional Equipment under Section 1.2 if the Acquisition Cost (as defined in
Section 1.4 hereof) of the aggregate amount of Additional Equipment leased to
Subsidiary under the
<PAGE>
Lease, including the Additional Equipment which is the subject of a Lease Order,
would exceed $25,200,000. Investor shall have no obligation to purchase and
lease Additional Equipment in advance of the applicable dates set forth in
Schedule 1.2 or after March 15 2001.
1.4 Rental Rate. As consideration for the lease of the Leaseback Equipment
-----------
and the Additional Equipment, Subsidiary shall pay to Investor monthly rental
payments ("Rent") as set forth in each applicable Lease Order, calculated on
the basis of a lease rate factor equal to 0.02556 and based on the Acquisition
Cost of such leased equipment. For purposes hereof, "Acquisition Cost" shall
mean, as to any item(s) of equipment, an amount equal to the sum of (i) the
purchase price of such item of equipment to be paid by Investor, plus (ii) any
excise, sales and use taxes on or with respect to such item(s) of equipment,
plus (iii) any reasonable costs, expenses and fees paid or incurred by Investor
in obtaining or delivering such item(s) of equipment to Subsidiary and any
expenses of installation of such item(s) of equipment paid by Investor.
1.5 Lease Term. The term of each Lease as to the Leaseback Equipment and any
----------
Additional Equipment shall commence on the Installation Date (as defined in the
Lease) for each item of such equipment and shall continue for an initial period
ending forty-eight (48) months from the Commencement Date (as defined in the
Lease) for such item of equipment.
1.6 Expenses. Subsidiary shall reimburse Investor for the costs and expenses
--------
incurred by Investor in connection with the transactions contemplated by this
Agreement, including without limitation costs relating to lien searches, the
recordation of liens and preparation of loan documentation, including reasonable
attorneys' fees. Notwithstanding the foregoing, the costs and expenses to be
reimbursed by Subsidiary under this Section 1.6 shall not exceed $20,000.
1.7 Commitment Fee. At the Closing, Subsidiary shall pay Lessor a commitment
--------------
fee in the amount of $704,000 (the "Commitment Fee") which shall be deemed fully
earned upon payment by Subsidiary and non-refundable. Notwithstanding the
foregoing, in the event that Subsidiary is not in default under the Lease or any
other document executed in connection with the transactions contemplated by this
Agreement, and Investor fails to make any purchase and lease of Additional
Equipment as contemplated by this Agreement, the Commitment Fee shall be reduced
pro rata by the amount by which the scheduled cost of such Additional Equipment
which is not purchased and leased bears to $35,200,000, and Investor shall pay
to Subsidiary the difference between the Commitment Fee paid by Subsidiary and
the reduced Commitment Fee.
1.8 Additional Collateral. As additional security for the performance of
Subsidiary's obligations under the Lease each Lease Order and this Investment
Agreement, Subsidiary shall grant to Investor a security interest in all of
Subsidiary's assets, including wihtout limitation accounts receivable,
inventory, general intangibles, equipment, cash and
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cash equivalents and instruments, all as more fully described in the Security
Agreement attached as Exhibit C to this Agreement.
ARTICLE II
ISSUANCE OF WARRANT
2.1 Issuance of Warrant. Subject to the terms and conditions of this
-------------------
Agreement, on the Closing Date, the Company shall issue to the Investor an
immediately exercisable warrant to purchase 474,393 shares of the common stock
of the Company (the "Warrant") at an exercise price of $3.71 per share. The
Warrant shall be in the form and subject to the terms and conditions of the
Warrant attached hereto as Exhibit D to this Agreement.
2.2 Adjustment of Shares Issuable under the Warrant. If the investor fails to
-----------------------------------------------
comply with its obligation to purchase and lease the Additional Equipment after
receipt of a Lease Order from Subsidiary as set forth herein, and Subsidiary is
not in default under the Lease or any other document executed in connection with
the transactions contemplated by this Agreement, the number of shares issuable
under the Warrant shall be reduced pro rata by the amount by which the scheduled
cost of such Additional Equipment which is not purchased and leased under this
Agreement bears to $35,200,000. Notwithstanding the foregoing, if the failure of
the Investor to purchase and lease any Additional Equipment is a result of an
increase in the cost of such Additional Equipment over the cost set forth in
Schedule 1.2, the number of shares issuable under the Warrant shall not be
adjusted.
2.3 Definition of Securities. The term "Securities" as used in this Agreement
------------------------
shall mean both the Warrant and the shares of Common Stock issued under the
Warrant.
ARTICLE III
THE CLOSING
Subject to the conditions hereof, the transactions described herein will be
closed (the "Closing") on March 15, 1999 at 10:00 A.M. at Suite 2900, Tower
Place, 3340 Peachtree Road, N.E., Atlanta, Georgia 30326, or at such other time
and place, and on such date (the "Closing Date") as all the parties hereto may
agree.
ARTICLE IV
CONDITIONS TO CLOSING
4.1 Conditions to Closing. All of the obligations of the Investor to purchase
---------------------
and lease the Leaseback Equipment and the Additional Equipment and to purchase
the Warrant as provided in this Investment Agreement are subject to the accuracy
in all material respects, on the Closing Date, of all the representations and
warranties by the Company and Subsidiary contained herein and to the performance
by the Company and the Subsidiary of all the terms, covenants and conditions on
their part to be performed hereunder on or prior to the Closing Date and to the
satisfaction of the following additional conditions precedent.
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(a) Bill of Sale. Subsidiary shall have executed and delivered to
------------
Investor a Bill of Sale in the form of Exhibit E to this Agreement transferring
to Investor the Leaseback Equipment free and clear of all liens, charges, claims
and encumbrances of any nature whatsoever.
(b) Master Lease and Lease Order. Subsidiary shall have executed and
----------------------------
delivered to Investor the Lease and a Lease Order for the Leaseback Equipment.
(c) Security Agreement. Subsidiary shall have executed and delivered a
------------------
Security Agreement in the form attached hereto as Exhibit C.
(d) Issuance of Securities. The Company shall have issued the Warrant.
----------------------
(e) Due Diligence. Investor shall have completed its due diligence
-------------
review of the Company, Subsidiary and their respective financial conditions and
concluded in Investor's sole discretion to enter into the transactions
contemplated by this Agreement.
(f) Certificate of Incorporation, Bylaws and Good Standing. Each of the
-----------------------------------------------------
Company and Subsidiary shall have delivered to Investor copies of its
Certificate of Incorporation certified by the Delaware Secretary of State, its
Bylaws certified by the Secretary of the Company and Subsidiary, respectively,
and a good standing certificates issued by the Delaware Secretary of State and
the Florida Secretary of State.
(g) Corporate Resolutions. Incumbency certificate and certified copies
---------------------
of the resolutions adopted by the Company's and Subsidiary's Boards of Directors
authorizing and approving (i) the execution, performance and delivery of this
Investment Agreement, (ii) the issuance of the Securities to be issued
hereunder, and (iii) the other transactions contemplated hereby, shall have been
delivered to the Investor.
(h) Officer's Certificate. Each of the Company and Subsidiary shall have
---------------------
delivered to the Investor a Certificate signed by its respective CEO, to the
following effect: that all of the representations and warranties of the Company
and Subsidiary contained in this Investment Agreement are true, correct and
complete in all material respects as of the Closing Date; (ii) that the Company
and Subsidiary have complied with and performed all of the terms, covenants and
agreements contained in the Investment Agreement which are to be complied with
or performed by the Company and Subsidiary on or before the Closing Date; and
(iii) that, to the knowledge of the Company and Subsidiary there does not exist
any state of facts which would constitute non-compliance under this Investment
Agreement or, with notice or lapse of time as provided herein, or both, would
constitute non-compliance.
(i) UCC Searches. Each of the Company and Subsidiary shall have
delivered to Investor UCC-11 searches and other Lien searches showing no
existing security interests in or Liens on the assets of the Company and
Subsidiary other than Permitted Liens.
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(j) Perfection Certificate. Each of the Company and Subsidiary shall
----------------------
have delivered to Investor a Perfection Certificate in the form of Exhibit F
hereto.
(k) Evidence of Insurance. Each of the Company and Subsidiary shall have
---------------------
delivered to Investor satisfactory evidence of insurance meeting the
requirements of Section 6.6.
(l) Landlord's Waivers. Subsidiary shall have delivered to Investor
------------------
evidence reasonably satisfactory to Investor and its counsel that Subsidiary has
prepaid all amounts due for the six month period following the Closing Date
under each of its collocation agreements or similar agreements for all of the
locations at which any of the Leaseback Equipment, the Additional Equipment or
any equipment of Subsidiary constituting part of the additional collateral
described in Section 1,8 hereof is located.
(m) Opinion of Counsel. The Investor shall have received from Russell T.
------------------
Alba, Esq., Chief Legal Officer for the Company and Subsidiary, a favorable
opinion, dated the date hereof, addressed to the Investor, in a form acceptable
to Investor.
(n) Proceedings and Documents. All proceedings taken or to be taken in
-------------------------
connection with the transactions contemplated by this Investment Agreement to be
consummated at, or prior to, the execution and Closing hereof and all other
documents, schedules, exhibits, opinions and certificates in connection
therewith shall each be satisfactory in form and substance to the Investor, and
the Investor shall have received copies of all such documents and all other
documents which the Investor has requested in connection with said transactions
and of all corporate proceedings in connection therewith, in form and substance
satisfactory to the Investor.
(o) Perfection of Liens. UCC-1 financing statements executed by
-------------------
Subsidiary covering all of the assets of Subsidiary shall have been duly
recorded or filed in the manner and places required by law to establish,
preserve, protect and perfect the interests and rights created or intended to be
created by the Security Agreement; and all taxes, fees and other charges in
connection with the execution, delivery and filing of the Security Agreement and
the financing statements shall duly have been paid.
(p) Additional Documents. Each of the Company and Subsidiary shall have
--------------------
delivered to Investor all additional opinions, documents, certificates and other
assurances that Investor or its counsel may reasonably require.
4.2 Conditions to Each Lease of Additional Equipment. The following
------------------------------------------------
conditions, in addition to any other requirements set forth in this Agreement or
the Lease, shall have been met or performed by the Company and Subsidiary prior
to each purchase and lease of Additional Equipment hereunder:
(a) Lease Order. Subsidiary shall have executed and delivered to Investor
-----------
a Lease Order for such item of Additional Equipment.
5
<PAGE>
(b) No Default. No Event of Default (as defined in the Lease) shall have
----------
occurred and be continuing or could occur upon the lease of the Additional
Equipment in question.
(c) Correctness of Representations. All representations and warranties
------------------------------
made by the Company and Subsidiary herein or otherwise in writing in connection
herewith shall be true and correct in all material respects with the same effect
as though the representations and warranties had been made on and as of the
proposed Installation Date.
(d) Limitations Not Exceeded. The proposed lease of such Additional
------------------------
Equipment shall not cause the aggregate Acquisition Cost of all leases of
Additional Equipment hereunder to exceed $25,200,000.
(e) Additional Equipment Documents. Subsidiary shall have delivered to
------------------------------
Investor the documents referenced in Sections 4(h), 4(k), 4(1) and 4(p) with
respect to the Additional Equipment and all additional opinions, documents,
certificates and other assurances that Investor or its counsel may require.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
In order to induce the Investor to purchase and lease the Leaseback
Equipment and the Additional Equipment and to purchase the Securiities and
notwithstanding any investigation made by or on behalf of the Investor, the
Company and Subsidiary, jointly and severally, make the following
representations and warranties, each of which is independently material and
relied upon by Investor:
5.1 Existence and Rights. Each of the Company and Subsidiary is a
--------------------
corporation duly organized and validly existing under the laws of the State of
Delaware. Each of the Company and Subsidiary has delivered to the Investor a
true, complete and correct copy of its Certificate of Incorporation and Bylaws,
including all amendments thereto, in effect or to be in effect as of the
Closing. The Company and Subsidiary each has all corporate power and adequate
authority, rights, licenses and franchises to own and operate its properties and
assets and carry on its business as now conducted and as proposed to be
conducted. Each of the Company and Subsidiary is duly qualified and in good
standing in the state of Florida and in each other state or other jurisdiction
where failure to so qualify would have a material impact on the conduct of its
business. Each of the Company and Subsidiary has the corporate power and
adequate authority to enter into and perform the transactions contemplated by
this Agreement.
5.2 Agreement Authorized. The execution and delivery of this Investment
--------------------
Agreement and the performance of each of the terms, covenants and agreements of
the Company and Subsidiary contained or referred to herein is not in
contravention of, or in conflict with, any law, ordinance or regulation known to
the Company or Subsidiary or any term or provision of the Company's or
Subsidiary's Certificate of Incorporation or Bylaws,
6
<PAGE>
and the execution and performance of this Investment Agreement is duly
authorized and does not require the consent or approval of any governmental body
or other regulatory authority. All action on the part of the Company and
Subsidiary, and all necessary or appropriate approvals and consents for the due
execution, delivery and performance of this Investment Agreement, including the
Lease and the creation, issuance and sale of the Securities, have been duly and
validly obtained or taken. No right of the Company or Subsidiary is impaired or
infringed upon by the execution and/or performance of this Investment Agreement.
This Investment Agreement and the Securities and all other documents,
instruments and agreements of the Company and Subsidiary in connection therewith
constitute, and on the Closing Date will constitute, the valid and binding
obligations of the Company and Subsidiary enforceable against the Company and
Subsidiary in accordance with their respective terms, except as enforcement may
be limited by bankruptcy, insolvency, moratorium and similar laws of general
application affecting creditors' rights, and except as enforcement may be
limited by general equitable principles.
5.3 Capitalization.
--------------
(a) Following issuance to the Investor of the Securities and
immediately after the Closing: (i) the entire authorized capital stock of the
Company will consist of 30,000,000 shares of common stock, par value $0.01
("Common Stock"), 20,000,000 shares of preferred stock, par value $0.01 per
share, 5,930,749 shares of which have been designated as Series A Convertible
Preferred Stock and 1,338,208 shares of which have been designated as Series B
Convertible Preferred Stock; and (ii) the Company's issued and outstanding
capital stock will consist solely of 13,179,000 shares of Common Stock,
2,695,795 shares of Series A Convertible Preferred Stock and 1,338,208 shares of
Series B Convertible Preferred Stock, options to purchase 3,836,000 shares of
Common Stock and the Warrant. An additional 925,000 shares are reserved for
issuance under the Company's Equity Participation Plan for employees
(b) Except for the Warrant, the options described in Section 5.3
(a) and the rights existing under the Stock Purchase Agreement (as defined
herein), the Company does not have, and on the Closing Date will not have, any
outstanding subscriptions, options, warrants or other rights for the issuance or
purchase of any stock or other securities, nor any securities convertible or
exchangeable for any stock or other securities, or any understandings or
commitments of any kind for the issuance of stock or securities convertible into
stock or other securities.
Upon Closing, the Company will not be a party to any shareholder
agreement, voting trust agreement or other agreement affecting the ownership,
transfer, or voting of the Common Stock or preferred stock, or management of the
Company, except as is provided in this Investment Agreement and except as
provided in the Stockholders' Agreement dated as of November 4,1998, by and
among the Company, D. Gregory Smith, Russell T. Alba, James A. Kitchen, Charles
W. McDonough, J. Bryan Bunting, NationsBanc Capital Corporation and Sewanee
Partners II, L.P. (the "Stockholders' Agreement") and the Stock Purchase
Agreement dated as of November 4, 1998 between the Company and
7
<PAGE>
NationsBanc Capital Corporation and Sewanee Partners II, L.P. (the "Stock
Purchase Agreement").
(c) Assuming the payment by the Investor of the consideration for
the shares of Common Stock to be issued to it pursuant to the Warrant, the
shares of Common Stock issued upon exercise of the Warrant will be, when issued,
duly and validly issued, fully paid and nonassessable.
5.4 Subsidiaries, Other Investments. The Company has no subsidiaries, or
-------------------------------
other investment in any other business or corporation other than the Subsidiary,
Z-Tel Business Networks, Inc., Z-Tel Network Services, Inc., Z-Tel Holdings,
Inc., Z-Tel Communications of Virginia and Z-Tel, Inc. For the purpose of this
Investment Agreement the term "subsidiary" or "subsidiaries" means any
corporation or other entity of which the securities having a majority of the
voting power in electing the Board of Directors are owned by the Company either
directly or by another subsidiary.
The Company owns all of the outstanding capital stock of Subsidiary
free and clear of all liens, charges, encumbrances or claims of any kind by
others and Subsidiary does not have any outstanding subscriptions, options,
warrants or other rights for the issuance or purchase of any stock or other
securities, nor any securities convertible or exchangeable for any stock or
other securities, or any understandings or commitments of any kind for the
issuance of stock or securities convertible into stock or other securities.
5.5 Litigation. Except as described in Schedule 5.5, there is no
----------
litigation or other proceeding (including administrative or government
proceedings or investigation) pending or, to the knowledge of the Company or
Subsidiary, threatened against or affecting the Company or Subsidiary or their
respective assets, (i) as to which the Company or Subsidiary is not likely to
prevail, and (ii) which if determined adversely, would have a material adverse
effect on the financial condition or business of the Company or Subsidiary and
neither the Company nor Subsidiary is in default with respect to any order,
writ, injunction, decree or demand of any court or other governmental or
regulatory authority. To the Company's knowledge there is no basis for any of
the foregoing.
5.6 Financial Statements. The Company has previously delivered complete
--------------------
and correct copy of the unaudited consolidated balance sheet, statement of
operations and statement of cash flow of the Company and Subsidiary as of and
for the fiscal year ending December 31, 1998; such financial statements were
prepared in accordance with generally accepted accounting principles
consistently applied from prior periods, and fairly and accurately present the
financial condition and results of operation of the Company as of the date
thereof and for the periods then ended. The balance sheet as of December 31,
1998 is referred to as the "Balance Sheet."
5.7 Title and Related Matters.
-------------------------
(a) Each of the Company and Subsidiary has good title to all of the
properties and assets owned or used by it or In its possession free and clear of
all
8
<PAGE>
mortgages, liens, pledges, charges or encumbrances of any kind or character. The
Company has not violated, and is not in violation of, any zoning, building,
health or safety laws, statutes, ordinances or regulations relating to such
properties or assets. All properties and assets material to the operations of
the Company are reflected in the Balance Sheet in the manner and to the extent
required by generally accepted accounting principles, applied on a consistent
basis with prior periods.
(b) All of the tangible properties and assets owned by the Company and
Subsidiary or used in their respective business, or in which the Company or
Subsidiary has an interest, are in good operating condition and repair, normal
wear and tear excepted, free from defects (except such minor defects as do not
interfere with the continued use thereof in the conduct of normal operations),
are sufficient to carry on its business as conducted during the preceding twelve
(12) months and as contemplated to be conducted following the Closing, and
conform with all applicable governmental regulations, including, without
limitation, those governing the discharge of materials into the environment or
the storage or disposition of hazardous or toxic wastes.
5.8 Real Estate. Neither the Company nor Subsidiary owns or holds title to
-----------
any real property. All facilities located on the real property leased or
otherwise used by the Company or Subsidiary or in their respective operations
are suitable for the purpose for which they are being used.
There have been no acts or omissions occurring on or with respect to any
real estate leased or otherwise used by the Company or Subsidiary which violate
or have violated federal, state and local environmental laws, including but not
limited to, the Clean Water Act, the Toxic Substances Control Act, the
Comprehensive Environmental Response, Compensation and Liability Act and their
state and local law counterparts, all rules and regulations promulgated
thereunder and all other legal requirements in connection with the ownership and
use of real estate and real estate interests.
5.9 Intellectual Property.
---------------------
(a) For the purposes of this section, the term "Technology" shall
include processes, formulae, manufacturing techniques, machines, devices,
compositions of matter, computer software and programs, data and information
(irrespective of whether in human or machine readable form), designs, drawings,
inventions (whether or not patentable), works of authorship, printed circuits,
mask works, and products.
(b) For the purposes of this section, the term "Intellectual Property"
shall include trade secrets and confidential business information; know-how;
proprietary processes; patents and patent applications; copyrights, copyright
registrations and applications therefor; trademarks, service marks, brand names
and trade names, the goodwill associated therewith, and registrations and
applications for registrations thereof; design registrations; franchises; and
licenses of the foregoing.
9
<PAGE>
(c) For the purposes of this section, the term "Relevant Intellectual
Property" means Intellectual Property owned, licensed or used by the Company or
Subsidiary.
(d) Schedule 5.9 sets forth all Relevant Intellectual Property (other
than trade secrets and confidential business information) and there is no other
Intellectual Property (other than trade secrets and confidential information)
owned, licensed or used by the Company or Subsidiary. Expiration dates, if
applicable, are also set forth in Schedule 5.9.
(e) The Relevant Intellectual Property is free of any liens or
encumbrances. All patents and trademark, copyright and mask work registrations
comprising Relevant Intellectual Property have been maintained and are in force.
(f) Except as set forth in Schedule 5.9, neither the Company nor
Subsidiary has granted any licenses or sublicenses respecting Relevant
Intellectual Property.
(g) There are no others infringing any Intellectual Property right of
the Company or Subsidiary.
(h) No proceedings have been instituted, are pending or threatened which
challenge the Company's or Subsidiary's rights in Relevant Intellectual Property
or the validity thereof except as described in Schedule 5.5.
(i) Neither the Company nor Subsidiary has received notice of any
interference or opposition proceeding respecting Relevant Intellectual Property.
(j) Neither the Company nor Subsidiary is infringing or otherwise
violating the Intellectual Property rights of others.
(k) Each of the Company and Subsidiary has the right to use all
Technology and Intellectual Property which it uses in the conduct of its
business, and owns and possesses all Intellectual Property rights with respect
to (or is expressly or impliedly licensed to use) all such Technology and
Intellectual Property. The Company's and Subsidiary's rights in such Technology
and Intellectual Property are adequate for the conduct of their respective
business.
(l) No director, officer or employee of the Company owns, directly or
indirectly, in whole or in part, any Intellectual Property rights which the
Company or Subsidiary has used or the use of which is necessary for the business
of the Company or Subsidiary as now conducted, or which relate to Technology
which the Company or Subsidiary has used or the use of which is necessary for
the business of the Company or Subsidiary as now conducted.
10
<PAGE>
(m) Except as set forth in Schedule 5.9, there are no agreements
relating to or affecting Relevant Intellectual Property or the use or ownership
of Technology or Intellectual Property by the Company or Subsidiary, including,
for example, confidentiality and non-disclosure agreements, assignments or
agreements to assign, development agreements, settlement agreements, and the
like.
5.10 Absence of Changes. Except as set forth on Schedule 5.10, since the date
------------------
of the Balance Sheet, each of the Company and Subsidiary has been developed and
operated in the ordinary course thereof consistent with past practices, and
there has not been:
(a) Any material adverse change in the assets of the Company or
Subsidiary, the condition (financial or otherwise) of the Company or Subsidiary
or their respective business, or, to the best of the Company's knowledge, the
prospects of the Company, Subsidiary or their respective business;
(b) Any material damage, destruction or loss (whether or not covered by
insurance) affecting the business or assets of the Company or Subsidiary;
(c) Any obligation or liability (whether absolute, accrued, contingent or
otherwise and whether due or to become due), including any account payable,
incurred in connection with the Company or Subsidiary, other than those incurred
in the ordinary course of business and consistent with past practices;
(d) Any payment, discharge or satisfaction of any claim, lien,
encumbrance or liability of the Company or Subsidiary (whether absolute,
accrued, contingent or otherwise and whether due or to become due), other than
in the ordinary course of business and consistent with past practices;
(e) Any declaration, setting aside or payment of any dividend or other
distribution in respect of any equity security of the Company or Subsidiary, or
any direct or indirect redemption, purchase or other acquisition of any equity
security of the Company or Subsidiary;
(f) Any statute, rule or regulation adopted which materially and
adversely affects the business or assets of the Company or Subsidiary;
(g) Any sale, transfer, pledge, mortgage, or other disposition of any
material tangible or intangible asset of the Company or Subsidiary, nor has the
Company or Subsidiary subjected any such asset to any lien, security interest,
charge or encumbrance;
(h) Any increase in the compensation paid or payable to any officer,
employee, consultant or agent of the Company or Subsidiary (including, without
limitation, any increase pursuant to any bonus, pension, profit sharing or other
plan or commitment);
(i) Any material capital expenditure or commitment for additions to
property, plant or equipment,
11
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(j) Any forward purchase commitments;
(k) Any change in the accounting methods or practices followed by the
Company or Subsidiary, or any change in depreciation, cost recovery or
amortization policies or rates theretofore adopted;
(l) Any agreement, whether in writing or otherwise, to take any of the
actions specified above in subsections (a) through (k) above.
5.11 No Materially Adverse or Other Contracts, Etc. Neither the Company nor
---------------------------------------------
Subsidiary is obligated under any contract or agreement not disclosed on
Schedule 5.11 or under any law, regulation, or decree or subject to any
restriction in the Company's or Subsidiary's Certificate of Incorporation or
Bylaws, which materially and adversely affects the assets, condition (financial
or otherwise) or prospects of the Company or Subsidiary. Neither the execution
nor the delivery of this Investment Agreement, nor the consummation of the
transactions contemplated hereby, nor the fulfillment of the terms hereof, will
conflict with, or result in a breach of the terms, conditions or provisions of,
or constitute a default under, either the Certificate of Incorporation or Bylaws
of the Company or Subsidiary, any law or governmental regulation applicable to
the Company or Subsidiary, or of any agreement, instrument, lien, charge or
encumbrance under which the Company or Subsidiary or any of their respective
properties is bound or obligated except as disclosed an Schedule 5.11.
5.12 Compliance with Laws, Instruments, Etc. Except as set forth an
--------------------------------------
Schedule 5.12, neither the Company nor Subsidiary is in violation of its Article
of Incorporation or Bylaws, as amended, or any applicable law, statute or
regulation of any federal, state, municipal or other governmental or quasi-
governmental agency, board, bureau or body relating to the maintenance,
operation or use of the assets of the Company or Subsidiary, or in violation or
default in any material respect with respect to any order, license, regulation
or demand of any governmental agency, or in default in any material respect
under any indenture, mortgage, lease, agreement or other instrument under which
it is bound. Each of the Company and Subsidiary has complied with and performed
each and every material obligation required to be complied with and performed
pursuant to each contract, lease, license, mortgage, indenture, instrument and
other agreement to which it is bound or obligated, and there is no material
default under any such contract, lease, license, mortgage, indenture, instrument
or other agreement now existing or which would come into existence with the
passage of time, the giving of notice, or both, except only for such defaults,
if any, which would not result in the cancellation of any such contract, lease,
license, mortgage, indenture, Instrument or other agreement, or permit the
acceleration of any obligation owed by the Company or Subsidiary, and otherwise
not have a material adverse effect on the assets, condition (financial or
otherwise) or prospects of the Company or Subsidiary.
5.13 Securities Laws. The sale and delivery of the Securities issued to the
Investor are exempt from the requirement of registration under the Securities
Act of 1933, as
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amended ("Securities Act") and applicable state "Blue Sky" laws, and such
Securities Act and "Blue Sky" laws were not violated by the original issuance of
the Company's capital stock to its existing shareholders and will not be
violated by the execution of this Investment Agreement or the consummation of
the transactions contemplated hereby.
5.14 Brokers. The Company has not incurred any liability for any finders'
-------
fees, brokerage fees or similar fees or expenses in connection with entering
into this transaction with the Investor.
5.15 Taxes. Each of the Company and Subsidiary has timely filed, or
-----
obtained valid extensions of time for filing (which extensions have not
expired), all federal, state, local and other tax returns and reports required
to be filed by the Company and Subsidiary, respectively. All such tax returns
are true and correct. No claim has been made by any taxing authority in any
jurisdiction where the Company or Subsidiary did not file tax returns that the
Company or Subsidiary is or may be subject to taxation by that jurisdiction.
Except as disclosed in Schedule 5.15:
(a) Each of the Company and Subsidiary has paid all taxes (including
all deficiency assessments, additions to taxes, penalties and interest, of which
notice has been received) to the extent that such amounts have become due or are
claimed to be due from any federal, state, local or foreign taxing authorities.
(b) Adequate provisions have been made in the Balance Sheet for the
payment of all then accrued and unpaid federal, state, local and other taxes,
whether or not then due and payable and whether or not disputed.
(c) There are no tax liens (other than liens for taxes which are not
yet due and payable) on any property of the Company or Subsidiary.
(d) There are no pending or threatened tax return examinations against
the Company or Subsidiary.
(e) There are no tax deficiencies asserted by any jurisdiction against
the Company or Subsidiary.
(f) Neither the Company nor Subsidiary has granted any extensions of
limitation periods applicable to tax claims.
5.16 Insurance. The insurance carried by either the Company and/or
---------
Subsidiary is reasonably adequate in kind and amount to cover insurable risks
normally insured against by companies similarly situated, is subject to the
deductibles disclosed on Schedule 5.16, and all premiums thereon have been paid
as and when due. All such policies are in full force and effect. No notice of
cancellation or termination has been received with respect to any such policy.
Such policies are valid, outstanding and enforceable policies and will not in
any way be affected by, or terminate or lapse by reason of, the transactions
contemplated by this Investment Agreement or the Lease. 'The insurance policies
to which
13
<PAGE>
either the Company and/or Subsidiary is a party are sufficient for compliance
with all material requirements of law and of all material agreements to which
either the Company or Subsidiary is a party and provide adequate insurance
coverage for the assets and operations of the Company.
5.17 Related Transactions. Except as set forth on Schedule 5.17 or as
--------------------
described in notes to the Balance Sheet, and except for compensation to current
employees, no current or former director, officer, managerial employee or
shareholder of the Company or Subsidiary (or any person actually or
constructively related to such director, officer, managerial employee or
shareholder within the meaning of Section 267(a) of the Internal Revenue Code),
is presently, or during the last fiscal year has been:
(a) A party to any material transaction with the Company or
Subsidiary (including, but not limited to, any contract, agreement or other
arrangement providing for the furnishing of services by, or rental of real or
personal property from, or otherwise requiring payments to, any such director,
officer, employee or shareholder or such associate);
(b) The direct or indirect owner of any interest in any corporation,
firm, association or business organization which is a competitor or a potential
competitor or supplier of the Company or Subsidiary; or
(c) The recipient of income from any source other than the Company or
Subsidiary which relates to its business or which should properly accrue to the
Company or Subsidiary.
5.18 Minute Books and Stock Record Books. The minute books of the Company
-----------------------------------
and Subsidiary contain true, complete and correct records of all meetings and
other actions of the Company's and Subsidiary's shareholders and Board of
Directors. The stock record books of the Company and Subsidiary contain true,
complete and correct records of all transactions involving the Company's and
Subsidiary's stock.
5.19 Labor Matters.
-------------
(a) No employees of the Company or Subsidiary are currently
represented by any labor union, neither the Company nor Subsidiary is a party to
any collective bargaining agreement, and there is no organizational effort
presently being made or threatened by or on behalf of any labor unions with
respect to employees of the Company or Subsidiary;
(b) Each of the Company and Subsidiary is in compliance with the
Occupational Safety and Health Act, the regulations promulgated thereunder, and
all other applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, and neither the Company nor
Subsidiary is engaged in any unfair labor practice;
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(c) There is no unfair labor practice complaint against the Company
or Subsidiary pending before the National Labor Relations Board;
(d) There is no labor strike, dispute, slowdown, representation
campaign or work stoppage actually pending or threatened against or affecting
the Company or Subsidiary; and
(e) No grievance or arbitration proceeding is pending and no claim
therefor has been asserted against the Company or Subsidiary.
5.20 Profit Payments. Except as set forth in Schedule 5.20 hereto, neither
---------------
the Company nor Subsidiary is a party to any agreement (other than agreements
with salespersons-employees who are paid sales commissions and sales
representative agreements entered into in the ordinary course of business, which
sales representative agreements are described in Schedule 5.20) involving
payments to any person or entity based on the profits or gross revenues or sales
of the Company or Subsidiary.
5.21 Survival of Representations and Warranties: Full -Disclosure. All
------------------------------------------------------------
representations and warranties contained herein or made by or on behalf of the
Company or Subsidiary in writing in connection with the transactions
contemplated herein shall be true and correct as of the Closing and shall
survive the consummation of the transactions contemplated hereby for so long as
the Investor (or any of its transferees) hold the Warrant or Common Stock
acquired upon exercise of the Warrant. All statements contained in any
schedule, exhibit, certificate or other instrument attached hereto or required
to be delivered to the Investor pursuant hereto shall constitute representations
and warranties by the Company and Subsidiary hereunder. Information contained in
any schedule hereto is responsive only to the Section of this Agreement
referring to such schedule, and such information shall not be deemed to
have been disclosed with respect to any other section or for any other purpose.
5.22 Disclosure. Neither this Agreement nor any of the schedules,
----------
attachments, written statements, documents, certificates or other items required
hereby contain any untrue statement of a material fact or omit a material fact
necessary to make each such statement contained herein or therein not
misleading. There is no fact which the Company has not disclosed to the Investor
in writing and of which any of its officers, directors or executive employees is
aware, which could reasonably be anticipated to have a material adverse effect
upon the existing or expected financial condition, operating results, assets,
customer relations, employee relations or business prospects of the Company or
Subsidiary.
ARTICLE VI
AFFIRMATIVE COVENANTS
From and after the Closing Date and so long as any obligations of the Company
or Subsidiary to the Investor (or any of its transferees) under the Lease or any
Lease Order
15
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remain outstanding or the Investor has any commitment to lease Additional
Equipment to Subsidiary hereunder, the Company and Subsidiary shall comply with
each of the following actions unless the Investor waives such action in writing:
6.1 Compliance With Lease. Subsidiary shall duly comply with all of the terms
---------------------
and conditions of the Lease.
6.2 Taxes. The Company and Subsidiary shall accurately prepare all tax
-----
returns required by law to be filed. The Company and Subsidiary shall promptly
pay and discharge all taxes, assessments and governmental charges or levies
imposed by applicable law upon it or upon its income or profit, or upon its
properties, real, personal or mixed; provided, however, that the Company and
Subsidiary shall not be required to pay or cause to be paid any such tax,
assessment, charge or levy if the same shall not at the time be due and payable
or if the validity thereof shall be contested in good faith by appropriate
proceedings, if any, and it has established adequate reserves on its books with
respect to such tax, assessment, charge or levy; provided further, however, that
the Company and Subsidiary will pay all such taxes, assessments, charges or
levies forthwith whenever, as the result of proceedings to foreclose any lien
which attached as security therefor, foreclosure on such lien appears imminent,
or will obtain a surety bond or take such other steps as will prevent such
foreclosure.
6.3 Maintain Corporate Rights and Facilities. The Company and Subsidiary
----------------------------------------
shall maintain and preserve their respective corporate existence and all its
rights, franchises and qualifications adequate for the conduct of their
respective business and the ownership of their respective properties.
6.4 Financial Statements. Subsidiary shall furnish to Investor the financial
--------------------
and other information required to be furnished to NationsBanc Capital
Corporation and Sewanee Partners II, L.P. pursuant to Section 4.1 of the Stock
Purchase Agreement, in the same manner and at the same time as such information
is required to be furnished thereunder. The obligation to furnish such
information is incorporated herein by reference and shall survive the
termination of the Stock Purchase Agreement.
6.5 Financial Covenant. On and after January 1, 2000, Subsidiary shall
------------------
maintain at all times an aggregate amount of cash and Eligible Accounts equal to
or greater than 20% of the aggregate Acquisition Cost of all Leaseback Equipment
and Additional Equipment leased to Subsidiary under the Lease. Subsidiary shall
provide Investor each quarter, together with the financial statements required
to be provided to Investor pursuant to Section 6.4, a schedule of such cash and
Eligible Accounts certified by Subsidiary's chief financial officer. For
purposes of the foregoing, "Eligible Accounts" shall mean all accounts
receivable (valued net of any sales tax included in the invoiced amount, the
maximum amount of any discounts or other reductions) of Subsidiary payable not
more than 45 days after the date of invoice and as to which the Investor has a
first priority perfected security interest subject only to Permitted Liens,
excluding (A) accounts receivable outstanding for ninety days or more from the
date of invoice; (b) accounts receivable owing from any
16
<PAGE>
affiliate of Subsidiary; (c) accounts receivable which are in dispute or subject
to any counterclaim, contra-account or offset, (d) accounts receivable owing by
any account debtor which is insolvent or generally unable to pay its debts as
they become due; (e) accounts receivable owed by an account debtor outside the
United States; (f) accounts receivable evidenced by a note or other instrument,
or chattel paper or reduced to judgement; and (g) accounts receivable which, by
contract, subrogation, mechanic's lien laws or otherwise, are subject to claims
by Subsidiary's creditors or other third parties.
6.6 Insurance. The Company and Subsidiary shall maintain insurance against
---------
all such liabilities, hazards and risks (including without limitation product
liability claims), and in at least such amounts (which, in the case of property
casualty insurance, shall be at least replacement cost), as are usually carried
by persons engaged in the same or a similar business. All such insurance shall
be effected under valid and enforceable policies issued by insurers of
recognized responsibility, except that the Company and Subsidiary may effect
workmen's compensation or similar insurance in respect of operations in any
state or other jurisdiction through an insurance fund operated by such state or
other jurisdiction .
6.7 Inspection. The Investor shall have the right to visit and inspect any
----------
of the properties, books and records of the Company and Subsidiary (and to make
copies and take extracts therefrom) and to discuss the Company's and
Subsidiary's affairs, finances and accounts with, and be advised of the same by,
the directors, officers and independent accountants of the Company and
Subsidiary at such reasonable times and intervals, subject to reasonable notice
to the Company and Subsidiary, as the Investor may desire.
6.8 Maintain Properties. The Company and Subsidiary shall keep its
-------------------
properties in reasonable repair, working order and condition, ordinary wear and
tear excepted, and from time to time make all prudent, needful or proper
repairs, replacements, extensions, additional betterments and improvements
thereto, so that the business carried on by the Company and Subsidiary may be
properly conducted at all times in accordance with sound business management.
6.9 Divisibility of Warrant. The Warrant may be divided into multiple
-----------------------
warrants in such denominations as the Investor may request, upon surrender at
the principal office of the Company.
6.10 Notices Concerning Governmental Authorities; Responses to Threatened
---------------------------------------------------------------------
Litigation. At the time any notice, report, inquiry, answer, response or other
- ----------
communication or document, relating in any material way to the Company or
Subsidiary, is received by the Company or Subsidiary from any governmental or
regulatory authority or agency which relates to any material adverse
determination, investigation or proceeding, the Company promptly shall send a
copy thereof to the Investor. At the time the Company or Subsidiary receives
notice of, or becomes aware that, any material suit, action, proceeding or
investigation has been filed, instituted or threatened against the Company or
Subsidiary, the Company promptly shall notify the Investor concerning all
material details thereof and shall keep Investor informed with respect to such
matter.
17
<PAGE>
6.11 Compliance with Instruments, Laws, Etc. The Company and Subsidiary each
--------------------------------------
shall comply with the terms, requirements, restrictions and limitations
contained in this Investment Agreement and in its respective Certificate of
Incorporation and Bylaws, as amended, and the requirements, restrictions and
limitations of any applicable law, statute or regulation of any federal, state,
municipal or other governmental or quasi-governmental agency, board, bureau or
body materially relating to the conduct of its business and maintenance and
operation of its respective properties, to the extent non-compliance could have
a material adverse affect on the Company, Subsidiary or their respective
business, and shall further comply with and perform the terms, conditions and
covenants contained in any material contract, lease, license, mortgage,
indenture, instrument or other agreement under which the Company or Subsidiary
is obligated.
6.12 Disclosure of Offers. The Company shall disclose to the Investor all
--------------------
bona fide written offers or proposals of whatever kind (whether written or oral)
which it receives from any person concerning the possible sale of more than 50%
of the voting securities of the Company or Subsidiary, or more than 50% of the
assets of the Company or Subsidiary, merger of the Company or Subsidiary, or any
other acquisition of a material portion of the Company's or Subsidiary's
respective businesses. Promptly after any officer or director of the Company and
Subsidiary each becomes aware of any such offer or proposal made to any of its
shareholders, the Company shall advise the Investor of the same.
6.13 Maintenance of Business. The Company shall maintain its executive
-----------------------
offices and its principal place of business within the State of Florida.
6.14 Landlord's Waivers. Not later than 6 months after the Closing Date,
------------------
Subsidiary shall provide Investor with a release and waiver executed by each of
WorldCom Network Services, Inc. and R.E. Stafford (and any other landlord
licensors under collocate agreements with Subsidiary or Parent) of all liens and
claims whatsoever in the Leaseback Equipment, the Additional Equipment or any
other equipment which constitutes part of the additional collateral described in
Section 1.8 hereof. Such release and waiver shall be substantially in the form
of the Equipment Disclaimers attached as Exhibit G hereto.
6.15 Source Code. If requested by Investor, Subsidiary and Parent shall
-----------
deliver to Investor the source code for any computer software owned by
Subsidiary or Parent and used in Subsidiary's business under a customary escrow
arrangement reasonably satisfactory to Investor, Subsidiary and Parent.
ARTICLE VII
COMPANY'S NEGATIVE COVENANTS
From and after the Closing Date and so long as any obligations of the
Company or Subsidiary to the Investor (or any of its transferees) under the
Lease or any Lease Order remain outstanding or the Investor has any commitment
to lease Additional Equipment to Subsidiary hereunder, neither the Company nor
Subsidiary will do or take any of the following actions without the prior
written consent of the Investor ("Investor Approval"):
18
<PAGE>
7.1 Stock Redemption. Purchase or otherwise acquire, redeem or retire any
----------------
Common Stock or preferred stock or other securities of the Company or agree or
commit to do any of the foregoing except for purchases of up to $250,000 of such
securities in any fiscal year pursuant to the terms of the Company's Equity
Participation Plan for its employees as in effect on the date hereof.
7.2 Investments, Loans and Advances. Make or have outstanding any loans or
-------------------------------
advances to, or investments in (through the acquisition of securities or stock
or otherwise), any other person, firm, or corporation, except:
(a) Advances in the ordinary course of business to suppliers in
respect to the purchase of supplies or equipment;
(b) By endorsement of negotiable instruments for deposit or collection
in the ordinary course of business;
(c) Travel and other advances to employees in the ordinary course of;
business; or
(d) Bank deposits in federally insured financial institutions,
investments in direct government obligations of the United States of America and
commercial paper of a domestic issuer rated A-1 or better or P-1 by Standard
and Poor's Corporation or Moody's Investors Services, Inc., respectively,
maturing not more than three months from the date of acquisition.
7.3 Acquisition or Sale of Business: Merger or Consolidation. Purchase or
--------------------------------------------------------
otherwise acquire the stock, shares, or other securities, or the assets or
business, of any person or other entity; or liquidate, dissolve, merge,
consolidate, reorganize, recapitalize or otherwise alter its legal status or
commence any proceedings therefor; or sell, lease, transfer, or dispose of, in
any way, any personal or real property assets, except assets sold or leased in
the ordinary and normal course of the Company's or Subsidiary's business; or
assign or transfer any substantial part of its intangible business rights
necessary for the continuance of its business as now conducted or planned.
7.4 Change Capital Structure. Increase or decrease the number of its
------------------------
authorized shares, or vary or alter the terms, par value or rights of shares of
any class or type of stock, or issue or agree to issue any stock or other
securities of the Company or Subsidiary, or any options, warrants or other
rights to acquire such stock or other equity securities, or securities
convertible into stock or other equity securities of the Company or Subsidiary
except shares to be issued pursuant to existing obligations or existing stock
option plans; or, create any new class of stock of the Company or Subsidiary.
Notwithstanding the foregoing, an Investor Approval shall be required hereunder
only if such change in capital structure may be deemed to have a material
adverse impact on (i) Investsor's rights as Lessor under the Lease or any Lease
Order executed in connection therewith (ii) the condition, financial or
otherwise, of the Company or Subsidiary or (iii) either of the Company's or
Subsidiary's respective operations, assets, business or prospects.
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<PAGE>
7.5 Officers' Salaries and Loans. Increase compensation to any of its
----------------------------
officers or directors in an amount which is in excess of an amount which is
usual and customary in the industry. The term "compensation," for proposes of
this Section, shall include all remuneration for services rendered, whether such
payment be called salary, bonus, drawing account, profit sharing, withdrawals or
other form of recompense (but shall not include fringe benefits, such as health
and life insurance generally available to all salaried employees). No loans or
advances, either direct or indirect, shall be made by the Company or Subsidiary
to any officer, consultant, managerial employee, director or shareholder, or to
any person actually or constructively related to any of the foregoing within the
meaning of section 267(a) of the Internal Revenue Code; provided, however, that
the Company and Subsidiary may make reasonable advances to employees for
reimbursable travel and entertainment expenses to be incurred with respect to
business of the Company or Subsidiary.
7.6 Amend, Violate Charter, Etc, Amend or change its Certificate of
----------------------------
Incorporation or Bylaws, or violate or breach any of the provisions thereof.
Notwithstanding the foregoing, an Investor Approval shall be required hereunder
only if such amendment or change may be deemed to have a material adverse impact
on (i) Investor's rights as Lessee under the Lease or any Lease Order executed
in connection therewith (ii) the condition, financial or otherwise, of the
Company or Subsidiary or (iii) either of the Company's or Subsidiary's
respective operations, assets, business or prospects.
7.7 Dealings with Insiders. Allow or permit any director, officer,
----------------------
managerial employee, consultant or shareholder (other than the Investor), or
persons actually or constructively related to such director, officer, employee,
consultant or shareholder (within the meaning of section 267(c) of the Internal
Revenue Code) to have either directly or indirectly an interest in any
corporation, partnership, proprietorship, association or other person or entity
which furnishes or sells services or products to the Company or Subsidiary or in
any corporation, partnership, proprietorship, association or other person or
entity to which services or products are furnished or sold by the Company or
Subsidiary. For the purposes of this Section, there shall be disregarded any
interest which arises solely from the ownership of less than a five percent (5%)
equity interest in any corporation whose stock is regularly traded on any
national securities exchange or in the over-the-counter market and in which such
person has no management role.
7.8 Dividends. Declare or pay any dividends, or make other distributions, in
---------
cash, property or stock, with respect to the Common Stock or other equity
security of the Company; provided, however, in the event the Company elects to
be treated as a Subchapter S corporation for income tax purposes, the Company
May make distributions to its shareholders in an amount not greater than the
shareholders' personal income tax liability directly related to the Company's
status as a Subchapter S corporation. Notwithstanding the foregoing, no Investor
Approval shall be required for cash dividends paid solely out of retained
earnings provided that after payment of any such dividend neither Subsidiary nor
the Company will be in default under any covenant contained In this is
Agreement.
20
<PAGE>
7.9 Management. After the Company or Subsidiary has obtained knowledge
----------
thereof, fail to use its best efforts to preclude any management personnel of
the Company from organizing or becoming engaged in any business activity that is
in competition with the business of the Company or Subsidiary.
7.10 Pension and Profit Sharing Plan or Arrangements. Establish or make any
-----------------------------------------------
contribution to any employee pension benefit plan, or other pension or profit
sharing plan or arrangement, whereby the Company or Subsidiary is required to
make contributions on behalf of any of its employees or whereby any part of the
profits or earnings of the Company or Subsidiary is shared with any person, firm
or corporation.
7.11 Permitted Indebtedness. Create, incur, assume or suffer to exist any
----------------------
indebtedness, liability, guaranty or indemnity of any kind, whether accrued,
absolute, contingent or otherwise, except (i) current trade payables and
expenses incurred in the ordinary course of business; (ii) wages or other
compensation due to employees and agents of the Company or Subsidiary for
services actually performed; (iii) liabilities for customer deposits in
reasonable amounts obtained in the ordinary course of business; (iv) liabilities
for taxes not yet due; (v) purchase money indebtedness for capital expenditures
allowed by Section 7.13, provided any security therefor complies with section
7.12(c); and (vi) indebtedness fully subordinated to the Subsidiary's
obligations to Investor if the holder of such subordinated has executed and
delivered a subordination agreement in a form reasonably acceptable to Investor
and such other documents to evidence such subordination as Investor or its legal
counsel may reasonably request.
7.12 Liens. Create or suffer to exist, any claim, assessment, pledge,
-----
security interest, mortgage, encumbrance or other lien in favor of any person,
including the lien of a conditional seller, upon any of its properties or
assets, now owned or hereafter acquired, including treasury shares; provided,
however, that this restriction shall not be applicable to nor prevent the
following:
(a) Liens for taxes, assessments or governmental charges not delinquent
or being contested in good faith; undetermined liens and charges incident to
construction and not resulting from any delinquent obligation for the payment of
money on account of such construction; the lessor's rights in leasehold
property, and easements, restrictions, minor title irregularities and similar
matters which have no adverse effect as a practical matter upon the ownership
and use of the properties;
(b) Liens or deposits in connection with workmen's compensation or
other insurance or to secure customs duties, public or statutory obligations or
mechanics or materialmen's claims not delinquent; or to secure performance of
contracts or bids (other than contracts for the payment of money borrowed), or
deposits required by law or governmental regulations or by a court order,
decree, judgment or rule as a condition to the transaction of business or the
exercise of any right, privilege or license or other liens of a like nature made
in the ordinary course of business;
21
<PAGE>
(c) Purchase money mortgages or liens on any property acquired after
the date hereof to be used by the Company in the normal course of its business
and created or incurred simultaneously with the acquisition of such property, if
such mortgage or lien is limited to the property so acquired and (subject to the
limits of Section 7.13) the indebtedness secured by such mortgage or lien does
not exceed the lesser of $1,000,000 or ninety percent (90%) of the purchase
price of such property; and
(d) Liens in favor of the Investor.
7.13 Capital Expenditures. Make any expenditures for acquisition of fixed
--------------------
assets (including acquisitions under lease obligations required to be
capitalized under generally accepted accounting principles but excluding the
Leaseback Equipment and the Additional Equipment) in excess of $1,000,000 in the
aggregate within any twelve (12) month period.
ARTICLE VIII
TRANSFERABILITY
8.1 Transferability. Transfer of the Warrant and Common Stock acquired upon
---------------
exercise of the Warrant shall be made only an the books of the Company by the
holders of record thereof or by their legal representatives who shall furnish
proper evidence of authority to transfer, or by their attorney thereunto
authorized by power of attorney duly executed and filed with the secretary of
the Company, subject to the restrictions set forth in Sections 8.2 and 8.3
hereof. The holder(s) in whose name the Securities stand on the books of the
Company shall be deemed by the Company to be owner(s) thereof for all purposes.
8.2 Restrictive Legends. Unless and until otherwise permitted by this
-------------------
Section, each instrument evidencing Securities issued or to be issued under this
Agreement shall contain or otherwise be imprinted with a suitable legend in
substantially the following form:
This security has not been registered under the Securities Act of 1933
or any state securities act, and has been acquired for investment and
not with view to, or for sale in connection with, any distribution
thereof within the meaning of the Securities Act of 1933, as amended.
This security may be transferred only pursuant to an Investment
Agreement dated as of March 15, 1999 (the "Investment Agreement").
Notwithstanding any other provisions contained herein, no transfer of
this security shall be made unless the conditions specified in Article
IX of said Investment Agreement have been fulfilled. A copy of the
Investment Agreement is on file and available for inspection at the
principal offices of the Company.
22
<PAGE>
Each instrument evidencing Securities issued or to be issued under this
Agreement shall also contain the legend set forth in Section 10 of the
Stockholders' Agreement unless such Agreement has terminated in accordance with
its terms. The Company is hereby authorized to place "stop transfer"
instructions on its records or to instruct any transfer agent to prevent the
transfer of Securities except in conformity with this Investment Agreement.
8.3 Restriction on Transfer. No holder shall transfer any Securities until
-----------------------
it has first given written notice to the Company describing briefly the manner
of any such proposed transfer and until (i) the transferee has executed and
delivered to the Company the Stockholders' Agreement and (ii)(x) the Company has
received from the holder's counsel an opinion (reasonably satisfactory in form
and substance to the Company's counsel) that such transfer can be made without
compliance with the registration provisions of the Securities Act or any state
securities act and without the necessity of perfection of an exemption pursuant
to Regulation A adopted pursuant to said Securities Act, (y) the Company and the
holder shall have complied with Rule 144 (or comparable successor provisions)
promulgated under the said Securities Act (and in this connection, the Company
shall so comply, as hereinafter provided, upon request of the holder) and
applicable state securities act requirements, or (z) a registration statement
filed by the Company is declared effective by the SEC and governing state
securities act authorities or steps necessary to perfect exemptions from such
registration are completed.
ARTICLE IX
REGISTRATION RIGHTS
Investor shall have the rights described in Exhibit H to require the Company
to register, under the Securities Act of 1933, as amended, and relevant state
securities laws, Common Stock held by the Investor.
ARTICLE X
ADDITIONAL PROVISIONS
10.1 Expenses; Indemnity. The Company and Subsidiary, jointly and severally
-------------------
agree to indemnify the Investor against any and all losses, claims, damages,
liabilities and expenses, (including, without limitation, reasonable attorneys'
fees and expenses) incurred by the Investor arising out of, in any way connected
with, or as a result of (i) the negotiation, preparation, execution, delivery,
administration, and enforcement of this Investment Agreement, the Lease, any
Lease Order, and any other document required hereunder or thereunder, including
without limitation any amendment, supplement, modification or waiver of or to
any of the foregoing or the consummation or failure to consummate the
transactions contemplated hereby or thereby or the performance by the parties of
their obligations hereunder or thereunder, (ii) any and all recording and filing
fees and any and all stamp, excise, intangibles and other taxes, if any, other
than taxes levied upon the net income of the Investor by the federal government
or the State of Florida, which may be payable or determined to be payable in
connection with the
23
<PAGE>
negotiation, preparation, execution, delivery, administration or enforcement of
this Investment Agreement, the Lease, any Lease Order or any other document
required hereunder or thereunder or any amendment, supplement, modification or
waiver of or to any of the foregoing, or consummation of any of the transactions
contemplated hereby or thereby, including all costs and expenses incurred in
contesting the imposition of any such tax, and any and all liability with
respect to or resulting from any delay in paying the same, whether such taxes
are levied upon the Investor, the Company or otherwise, (iii) any claim,
litigation, investigation or proceedings related to any of the foregoing,
whether or not the Investor is a party thereto; provided, however, that such
indemnity shall not apply to any such losses, claims, damages, liabilities or
related expenses arising from (A) any unexcused breach by the Investor of its
obligations under this Investment Agreement or (B) any commitment made by the
Investor to a person other than the Company or Subsidiary which would be
breached by the performance of the Investor's obligations under this Investment
Agreement. Notwithstanding the foregoing, the indemnification obligation of the
Company and Subsidiary to the Investor for its attorneys' fees in connection
with the negotiation, preparation, execution and delivery of this Investment
Agreement, the Lease, the Lease Order and other documentation required hereunder
or thereunder shall be limited to $20,000 unless otherwise agreed by the Company
and Subsidiary.
(b) The foregoing agreements and indemnities shall remain operative and
in full force and effect regardless of termination of this Investment Agreement,
the consummation of or failure to consummate either the transactions
contemplated by this Investment Agreement or any amendment, supplement,
modification or waiver, the repayment of any loans made hereunder, the
invalidity or unenforceability of any term or provision of this Investment
Agreement or the Lease, or any other document required hereunder or thereunder,
any investigation made by or on behalf of the Investor, Subsidiary or the
Company or the content or accuracy of any representation or warranty made under
this Investment Agreement or any other document required hereunder or
thereunder.
10.2 Successors and Assigns. This Investment Agreement shall be binding upon
----------------------
and inure to the benefit of the Investor, the Company, Subsidiary and their
respective successors and assigns, and any subsequent holder of any Securities
issued hereunder.
10.3 Notices. All notices, demands, and communications provided for herein
-------
or made hereunder shall be delivered, or mailed first class with postage
prepaid, or telegraphed, addressed in each case as follows, until some other
address shall have been designated in a written notice given in like manner,
and shall be deemed to have been given or made when so delivered or mailed or
telegraphed:
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<PAGE>
(a) if to the Company Z-Tel Communications, Inc.
or Subsidiary: Suite 220
601 S. Harbour Island Blvd.
Tampa, FL 33602
Attn: Russell T. Alba, Esq.
Senior Vice President -
Business Development
(b) if to Investor: CMB Capital, LLC
2841 Cobblestone Drive
Palm Harbor, FL 34684
Attn: Clay M. Biddinger
Chairman & C.E.O.
with a copy to: Foley & Lardner
P.O. Box 240
Jacksonville, FL 32201-0240
Attn: Charles V. Hedrick
10.4 No Waiver, Remedies Cumulative. No delay on the part of the Investor in
------------------------------
exercising any right, power or privilege under this Investment Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege hereunder or thereunder preclude other or further
exercise thereof, or the exercise of any other right, power or privilege. The
rights and remedies provided in this Investment Agreement are cumulative and are
in addition to all rights or remedies which the Investor and such other holders
otherwise may have in law or in equity or by statute or otherwise. Without
limiting the generality of the foregoing, nothing in this Investment Agreement
shall be deemed to preclude or be in lieu of any right or remedy which the
Investor may have in law or in equity or by statute or otherwise against the
Company, Subsidiary or any other person based upon any fraud.
10.5 Amendments and Waivers. This Investment Agreement may not be changed or
----------------------
amended orally, and no waiver hereunder may be oral, but any change or amendment
hereto or any waiver hereunder must be in writing and signed by the party or
parties against whom such change, amendment or waiver is sought to be enforced.
10.6 Integration. This Investment Agreement, the appendices and exhibits
-----------
annexed hereto and documents, schedules and certificates referred to herein
contain the entire agreement between the Company, Subsidiary and the Investor
with respect to the transactions contemplated herein; and none of the parties
shall be bound by nor shall be deemed to have made any representations and/or
warranties except those contained herein and therein.
25
<PAGE>
10.7 Separability. If any provision of this Investment Agreement is
------------
held for any reason to be unenforceable by a court of competent jurisdiction,
the remainder of this Investment Agreement shall, nevertheless, remain in full
force and effect in such jurisdiction.
10.8 Headings. The headings in this Investment Agreement are intended
--------
solely for convenience of reference and shall be given no effect in the
construction or interpretation of this Agreement.
10.9 Governing Law. This Investment Agreement is made in the State of
-------------
Florida and shall be governed by and construed in accordance with the internal
laws of the State of Florida.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of
the date first above written.
Z-TEL TECHNOLOGIES, INC.
By /s/ Russell T. Alba
------------------------------------------
Russell T. Alba, Senior Vice President
("Company")
Z-TEL COMMUNICATIONS, INC.
By /s/ Russell T. Alba
------------------------------------------
Russell T. Alba, Senior Vice President
("Subsidiary")
26
<PAGE>
CMB CAPITAL, INC.
By /s/ Clay M. Biddinger, Chairman and CEO
("Investor")
STATE OF GEORGIA
COUNTY OF FULTON
The foregoing instrument was acknowledged before me this 15th day of March,
1999, by Russell T. Alba, the Senior Vice President of Z-Tel Technologies, Inc.,
a Delaware corporation, who acknowledged that he executed the foregoing
instrument in Fulton County, Georgia, on behalf of the corporation.
/s/
----------------------------------
Signature of Notary
[Notary seal must be affixed]
Daniel L. Foster
----------------------------------
Name of Notary [typed, printed or stamped]
My Commission Expires: Feb. 05, 2002
27
<PAGE>
STATE OF GEORGIA
COUNTY OF FULTON
The foregoing instrument was acknowledged before me this 15th day of March,
1999, by Russell T. Alba, the Senior Vice President of Z-Tel Communications,
Inc., a Delaware corporation, who acknowledged that he executed the foregoing
instrument in Fulton County, Georgia, on behalf of the corporation.
/s/ Daniel L. Foster
----------------------------------
Signature of Notary
[Notary seal must be affixed]
Daniel L. Foster
----------------------------------
Name of Notary [typed, printed or stamped]
My Commission Expires: Feb. 05, 2002
STATE OF GEORGIA
COUNTY OF FULTON
The foregoing instrument was acknowledged before me this 15th day of March,
1999, by Clay M. Biddinger, the Chairman and Chief Executive Officer of CMB
CAPITAL, LLC, a Florida limited liability company, who acknowledged that he
executed the foregoing instrument in Fulton County, Georgia, on behalf of the
corporation.
/s/ Daniel L. Foster
----------------------------------
Signature of Notary
[Notary seal must be affixed]
Daniel L. Foster
----------------------------------
Name of Notary [typed, printed or stamped]
My Commission Expires: Feb. 05, 2002
28
<PAGE>
EXHIBIT 10.2
THE 1998 EQUITY PARTICIPATION PLAN
OF
Z-TEL TECHNOLOGIES, INC.
AMENDED AND RESTATED OCTOBER 13,1999
Z-Tel Technologies, Inc., a Delaware corporation, has adopted The 1998
Equity Participation Plan of Z-Tel Technologies, Inc. (the "Plan"), effective
October 30, 1998, for the benefit of its eligible employees, consultants and
directors. The Plan consists of two plans, one for the benefit of key Employees
(as such term is defined below) and consultants and one for the benefit of
Independent Directors (as such term is defined below).
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees and
consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock and/or
rights which recognize such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of directors,
key Employees and consultants considered essential to the long range success of
the Company by offering them an opportunity to own stock in the Company and/or
rights which will reflect the growth, development and financial success of the
Company.
ARTICLE I.
DEFINITIONS
Section 1.1 General. Wherever the following terms are used in this Plan they
shall have the meanings specified below, unless the context clearly indicates
otherwise.
Section 1.2 Award Limit. "Award Limit" shall mean 500,000 shares of Common
Stock.
Section 1.3 Board. "Board" shall mean the Board of Directors of the Company.
Section 1.4 Change in Control. "Change in Control" shall mean a change in
ownership or control of the Company effected through either of the following
transactions:
(a) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange
Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities pursuant to a
tender or exchange offer made directly to the Company's stockholders which
the Board does not recommend such stockholders to accept; or
(b) there is a change in the composition of the Board over a period of
thirty-six (36) consecutive months (or less) such that a majority of the
Board members (rounded up to the nearest whole number) ceases, by reason of
one or more proxy contests for the election of Board members, to be
comprised of individuals who either (i) have been
<PAGE>
Board members continuously since the beginning of such period or (ii) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (i) who
were still in office at the time such election or nomination was approved
by the Board.
Section 1.5 Code.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.6 Committee.
"Committee" shall mean the Compensation Committee of the Board, or another
committee of the Board, appointed as provided in Section 9.1.
Section 1.7 Common Stock.
"Common Stock" shall mean the common stock of the Company, par value $0.01
per share, and any equity security of the Company issued or authorized to be
issued in the future, but excluding any preferred stock and any warrants,
options or other rights to purchase Common Stock. Debt securities of the Company
convertible into Common Stock shall be deemed equity securities of the Company.
Section 1.8. Company.
"Company" shall mean Z-Tel Technologies, Inc., a Delaware corporation.
Section 1.9. Corporate Transaction.
"Corporate Transaction" shall mean any of the following
stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated, form a holding
company or effect a similar reorganization as to form whereupon this Plan
and all Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to subsection (a), above; or
(c) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred or issued to a person or persons different from those who held
such securities immediately prior to such merger.
Section 1.10. Deferred Stock.
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"Deferred Stock" shall mean Common Stock awarded under Article VII of this
Plan.
Section 1.11. Director.
"Director" shall mean a member of the Board.
Section 1.12. Dividend Equivalent.
"Dividend Equivalent" shall mean a right to receive the equivalent value
(in cash or Common Stock) of dividends paid on Common Stock, awarded under
Article VII of this Plan.
Section 1.13. Employee.
"Employee" shall mean any officer or other employee (as defined in
accordance with Section 3401(c) of the Code) of the Company, or of any
corporation that is a Subsidiary.
Section 1.14. Exchange Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
Section 1.15. Fair Market Value.
"Fair Market Value" of a share of Common Stock as of a given date shall be
(i) the closing price of a share of Common Stock on the principal exchange on
which shares of Common Stock are then trading, if any (or as reported on any
composite index which includes such principal exchange), on the trading day
previous to such date, or if shares were not traded on the trading day previous
to such date, then on the next preceding date on which a trade occurred, or (ii)
if Common Stock is not traded on an exchange but is quoted on NASDAQ or a
successor quotation system, the mean between the closing representative bid and
asked prices for the Common Stock on the trading day previous to such date as
reported by NASDAQ or such successor quotation system; or (iii) if Common Stock
is not publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the Fair Market Value of a share of Common Stock as
established by the Committee (or the Board, in the case of Options granted to
Independent Directors) acting in good faith.
Section 1.16. Grantee.
"Grantee" shall mean an Employee or consultant granted a Performance Award,
Dividend Equivalent, Stock Payment or Stock Appreciation Right, or an award of
Deferred Stock, under this Plan.
Section 1.17. Incentive Stock Option.
"Incentive Stock Option" shall mean an option which conforms to the
applicable provisions of Section 422 of the Code and which is designated as an
Incentive Stock Option by the Committee.
Section 1.18. Independent Director.
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"Independent Director" shall mean a member of the Board who is not an
Employee of the Company.
Section 1.19. Non-Qualified Stock Option.
"Non-Qualified Stock Option" shall mean an Option that is not designated as
an Incentive Stock Option by the Committee.
Section 1.20. Option.
"Option" shall mean a stock option granted under Article III of this Plan.
An Option granted under this Plan shall, as determined by the Committee, be
either a Non-Qualified Stock Option or an Incentive Stock Option; provided,
however, that Options granted to Independent Directors and consultants shall be
Non-Qualified Stock Options.
Section 1.21. Optionee.
"Optionee" shall mean an Employee, consultant or Independent Director
granted an Option under this Plan.
Section 1.22. Performance Award.
"Performance Award" shall mean a cash bonus, stock bonus or other
performance or incentive award that is paid in cash, Common Stock or a
combination of both, awarded under Article VII of this Plan.
Section 1.23. Plan.
"Plan" shall mean The 1998 Equity Participation Plan of Z-Tel Technologies,
Inc.
Section 1.24. QDRO.
"QDRO" shall mean a qualified domestic relations order as defined by the
Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
Section 1.25. Restricted Stock.
"Restricted Stock" shall mean Common Stock awarded under Article VI of this
Plan.
Section 1.26. Restricted Stockholder.
"Restricted Stockholder" shall mean an Employee or consultant granted an
award of Restricted Stock under Article VI of this Plan.
Section 1.27. Rule 16b-3.
"Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as
such Rule may be amended from time to time.
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<PAGE>
Section 1.28. Section 162(m) Participant.
"Section 162(m) Participant" shall mean any key Employee designated by the
Committee as a key Employee whose compensation for the fiscal year in which the
key Employee is so designated or a future fiscal year may be subject to the
limit on deductible compensation imposed by Section 162(m) of the Code.
Section 1.29. Stock Appreciation Right.
"Stock Appreciation Right" shall mean a stock appreciation right granted
under Article VIII of this Plan.
Section 1.30. Stock Payment.
"Stock Payment" shall mean (i) a payment in the form of shares of Common
Stock, or (ii) an option or other right to purchase shares of Common Stock, as
part of a deferred compensation arrangement, made in lieu of all or any portion
of the compensation, including without limitation, salary, bonuses and
commissions, that would otherwise become payable to a key Employee or consultant
in cash, awarded under Article VII of this Plan.
Section 1.31. Subsidiary.
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50 percent
or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
Section 1.32. Termination of Consultancy.
"Termination of Consultancy" shall mean the time when the engagement of an
Optionee, Grantee or Restricted Stockholder as a consultant to the Company or a
Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, by resignation, discharge, death or retirement; but
excluding terminations where there is a simultaneous commencement of employment
with the Company or any Subsidiary. The Committee, in its sole discretion, shall
determine the effect of all matters and questions relating to Termination of
Consultancy, including, but not by way of limitation, the question of whether a
Termination of Consultancy resulted from a discharge for good cause, and all
questions of whether particular leaves of absence constitute Terminations of
Consultancy. Notwithstanding any other provision of this Plan, the Company or
any Subsidiary has an absolute and unrestricted right to terminate a
consultant's service at any time for any reason whatsoever, with or without
cause, except to the extent expressly provided otherwise in writing.
Section 1.33. Termination of Directorship.
"Termination of Directorship" shall mean the time when an Optionee who is
an Independent Director ceases to be a Director for any reason, including, but
not by way of limitation, a termination by resignation, failure to be elected,
death or retirement. The Board, in
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its sole discretion, shall determine the effect of all matters and questions
relating to Termination of Directorship with respect to Independent Directors.
Section 1.34. Termination of Employment.
"Termination of Employment" shall mean the time when the employee-employer
relationship between an Optionee, Grantee or Restricted Stockholder and the
Company or any Subsidiary is terminated for any reason, with or without cause,
including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) terminations where
there is a simultaneous reemployment or continuing employment of an Optionee,
Grantee or Restricted Stockholder by the Company or any Subsidiary, (ii) at the
discretion of the Committee, terminations which result in a temporary severance
of the employee-employer relationship, and (iii) at the discretion of the
Committee, terminations which are followed by the simultaneous establishment of
a consulting relationship by the Company or a Subsidiary with the former
employee. The Committee, in its sole discretion, shall determine the effect of
all matters and questions relating to Termination of Employment, including, but
not by way of limitation, the question of whether a Termination of Employment
resulted from a discharge for good cause, and all questions of whether
particular leaves of absence constitute Terminations of Employment; provided,
however, that, unless otherwise determined by the Committee in its discretion, a
leave of absence, change in status from an employee to an independent contractor
or other change in the employee-employer relationship shall constitute a
Termination of Employment if, and to the extent that, such leave of absence,
change in status or other change interrupts employment for the purposes of
Section 422(a)(2) of the Code and the then applicable regulations and revenue
rulings under said Section. Notwithstanding any other provision of this Plan,
the Company or any Subsidiary has an absolute and unrestricted right to
terminate an Employee's employment at any time for any reason whatsoever, with
or without cause, except to the extent expressly provided otherwise in writing.
ARTICLE II.
SHARES SUBJECT TO PLAN
Section 2.1. Shares Subject to Plan.
(a) The shares of stock subject to Options, awards of Restricted
Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock,
Stock Payments or Stock Appreciation Rights shall be Common Stock,
initially shares of the Company's Common Stock, par value $0.01 per share.
The aggregate number of such shares which may be issued upon exercise of
such options or rights or upon any such awards under the Plan shall not
exceed Seven Million Five Hundred Thousand (7,500,000). The shares of
Common Stock issuable upon exercise of such options or rights or upon any
such awards may be either previously authorized but unissued shares or
treasury shares.
(b) The maximum number of shares which may be subject to Options,
awards of Restricted Stock, Performance Awards, Dividend Equivalents,
awards of Deferred Stock, Stock Payments or Stock Appreciation Rights
granted under the Plan to any individual in any calendar year shall not
exceed the Award Limit. To the extent required by Section 162(m) of the
Code, shares subject to Options which are canceled continue to
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be counted against the Award Limit and if, after grant of an Option, the
price of shares subject to such Option is reduced, the transaction is
treated as a cancellation of the Option and a grant of a new Option and
both the Option deemed to be canceled and the Option deemed to be granted
are counted against the Award Limit. Furthermore, to the extent required by
Section 162(m) of the Code, if, after grant of a Stock Appreciation Right,
the base amount on which stock appreciation is calculated is reduced to
reflect a reduction in the Fair Market Value of the Company's Common Stock,
the transaction is treated as a cancellation of the Stock Appreciation
Right and a grant of a new Stock Appreciation Right and both the Stock
Appreciation Right deemed to be canceled and the Stock Appreciation Right
deemed to be granted are counted against the Award Limit.
Section 2.2. Add-back of Options and Other Rights.
If any Option, or other right to acquire shares of Common Stock under any
other award under this Plan, expires or is canceled without having been fully
exercised, or is exercised in whole or in part for cash as permitted by this
Plan, the number of shares subject to such Option or other right but as to which
such Option or other right was not exercised prior to its expiration,
cancellation or exercise may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. Furthermore, any shares subject to
Options or other awards which are adjusted pursuant to Section 10.3 and become
exercisable with respect to shares of stock of another corporation shall be
considered canceled and may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. Shares of Common Stock which are
delivered by the Optionee or Grantee or withheld by the Company upon the
exercise of any Option or other award under this Plan, in payment of the
exercise price thereof, may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. If any share of Restricted Stock is
forfeited by the Grantee or repurchased by the Company pursuant to Section 6.6
hereof, such share may again be optioned, granted or awarded hereunder, subject
to the limitations of Section 2.1. Notwithstanding the provisions of this
Section 2.2, no shares of Common Stock may again be optioned, granted or awarded
if such action would cause an Incentive Stock Option to fail to qualify as an
incentive stock option under Section 422 of the Code.
ARTICLE III.
GRANTING OF OPTIONS
Section 3.1. Eligibility.
Any Employee or consultant selected by the Committee pursuant to Section
3.4(a)(i) shall be eligible to be granted an Option. Each Independent Director
of the Company shall be eligible to be granted Options at the times and in the
manner set forth in Section 3.4(d).
Section 3.2. Disqualification for Stock Ownership.
No person may be granted an Incentive Stock Option under this Plan if such
person, at the time the Incentive Stock Option is granted, owns stock possessing
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any then existing
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Subsidiary or parent corporation (within the meaning of Section 422 of the Code)
unless such Incentive Stock Option conforms to the applicable provisions of
Section 422 of the Code.
Section 3.3. Qualification of Incentive Stock Options.
No Incentive Stock Option shall be granted to any person who is not an
Employee.
Section 3.4. Granting of Options
(a) The Committee shall from time to time, in its sole discretion, and
subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select from
among the key Employees or consultants (including Employees or
consultants who have previously received Options or other awards under
this Plan) such of them as in its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares
to be subject to such Options granted to the selected key Employees or
consultants;
(iii) Subject to Section 3.3, determine whether such Options are
to be Incentive Stock Options or Non-Qualified Stock Options and
whether such Options are to qualify as performance-based compensation
as described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and
conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall
include, but not be limited to, such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the
Code.
(b) Upon the selection of a key Employee or consultant to be granted
an Option, the Committee shall instruct the Secretary of the Company to
issue the Option and may impose such conditions on the grant of the Option
as it deems appropriate. Without limiting the generality of the preceding
sentence, the Committee may, in its discretion and on such terms as it
deems appropriate, require as a condition on the grant of an Option to an
Employee or consultant that the Employee or consultant surrender for
cancellation some or all of the unexercised Options, awards of Restricted
Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights,
Dividend Equivalents or Stock Payments or other rights which have been
previously granted to him under this Plan or otherwise. An Option, the
grant of which is conditioned upon such surrender, may have an option price
lower (or higher) than the exercise price of such surrendered Option or
other award, may cover the same (or a lesser or greater) number of shares
as such surrendered Option or other award, may contain such other terms as
the Committee deems appropriate, and shall be exercisable in accordance
with its terms, without regard
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to the number of shares, price, exercise period or any other term or
condition of such surrendered Option or other award.
(c) Any Incentive Stock Option granted under this Plan may be modified
by the Committee to disqualify such option from treatment as an "incentive
stock option" under Section 422 of the Code.
(d) During the term of the Plan, each person who is an Independent
Director as of the date of the consummation of the initial public offering
of Common Stock automatically shall be granted (i) an Option to purchase
One Thousand (1,000) shares of Common Stock (subject to adjustment as
provided in Section 10.3) on the date of such initial public offering and
(ii) an Option to purchase One Thousand (1,000) shares of Common Stock
(subject to adjustment as provided in Section 10.3) on the date of each
annual meeting of stockholders after such initial public offering at which
the Independent Director is reelected to the Board. During the term of the
Plan, a person who is initially elected to the Board after the consummation
of the initial public offering of Common Stock and who is an Independent
Director at the time of such initial election automatically shall be
granted (i) an Option to purchase One Thousand (1,000) shares of Common
Stock (subject to adjustment as provided in Section 10.3) on the date of
such initial election and (ii) an Option to purchase One Thousand (1,000)
shares of Common Stock (subject to adjustment as provided in Section 10.3)
on the date of each annual meeting of stockholders after such initial
election at which the Independent Director is reelected to the Board.
Members of the Board who are employees of the Company who subsequently
retire from the Company and remain on the Board will not receive an initial
Option grant pursuant to clause (i) of the preceding sentence, but to the
extent that they are otherwise eligible, will receive, after retirement
from employment with the Company, Options as described in clause (ii) of
the preceding sentence. All the foregoing Option grants authorized by this
Section 3.4(d) are subject to stockholder approval of the Plan.
ARTICLE IV.
TERMS OF OPTIONS
Section 4.1. Option Agreement.
Each Option shall be evidenced by a written Stock Option Agreement, which
shall be executed by the Optionee and an authorized officer of the Company and
which shall contain such terms and conditions as the Committee (or the Board, in
the case of Options granted to Independent Directors) shall determine,
consistent with this Plan. Stock Option Agreements evidencing Options intended
to qualify as performance-based compensation as described in Section 1
62(m)(4)(C) of the Code shall contain such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the Code. Stock
Option Agreements evidencing Incentive Stock Options shall contain such terms
and conditions as may be necessary to meet the applicable provisions of Section
422 of the Code.
Section 4.2. Option Price.
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The price per share of the shares subject to each Option shall be set by
the Committee; provided, however, that such price shall be no less than the par
value of a share of Common Stock, unless otherwise permitted by applicable state
law, and (i) in the case of Incentive Stock Options and Options intended to
qualify as performance-based compensation as described in Section 162(m)(4)(C)
of the Code, such price shall not be less than 100% of the Fair Market Value of
a share of Common Stock on the date the Option is granted; (ii) in the case of
Incentive Stock Options granted to an individual then owning (within the meaning
of Section 424(d) of the Code) more than 10% of the total combined voting power
of all classes of stock of the Company or any Subsidiary or parent corporation
thereof (within the meaning of Section 422 of the Code) such price shall not be
less than 110% of the Fair Market Value of a share of Common Stock on the date
the Option is granted; and (iii) in the case of Options granted to Independent
Directors, such price shall equal 100% of the Fair Market Value of a share of
Common Stock on the date the Option is granted; provided, however, that the
price of each share subject to each Option granted to Independent Directors on
the date of the initial public offering of Common Stock shall equal the initial
public offering price (net of underwriting discounts and commissions) per share
of Common Stock.
Section 4.3. Option Term.
The term of an Option shall be set by the Committee in its discretion;
provided, however, that, (i) in the case of Options granted to Independent
Directors, the term shall be ten (10) years from the date the Option is granted,
without variation or acceleration hereunder, but subject to Section 5.6, and
(ii) in the case of Incentive Stock Options, the term shall not be more than ten
(10) years from the date the Incentive Stock Option is granted, or five (5)
years from such date if the Incentive Stock Option is granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code). Except as limited by requirements of Section 422 of the Code and
regulations and rulings thereunder applicable to Incentive Stock Options, the
Committee may extend the term of any outstanding Option in connection with any
Termination of Employment or Termination of Consultancy of the Optionee, or
amend any other term or condition of such Option relating to such a termination.
Section 4.4. Option Vesting
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee and the
Committee may determine that an Option may not be exercised in whole or in
part for a specified period after it is granted; provided, however, that,
unless the Committee otherwise provides in the terms of the Option or
otherwise, no Option shall be exercisable by any Optionee who is then
subject to Section 16 of the Exchange Act within the period ending six
months and one day after the date the Option is granted; and provided,
further, that Options granted to Independent Directors shall become
exercisable in cumulative annual installments of 25% on each of the first,
second, third and fourth anniversaries of the date of Option grant, without
variation or acceleration hereunder except as provided in Section 10.3(b).
At any time after grant of an Option, the Committee may, in its sole
discretion and subject to
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whatever terms and conditions it selects, accelerate the period during
which an Option (except an Option granted to an Independent Director)
vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee in the case of Options granted to Employees or
consultants either in the Stock Option Agreement or by action of the
Committee following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year
(under the Plan and all other incentive stock option plans of the Company
and any Subsidiary) exceeds $100,000, such Options shall be treated as
Non-Qualified Options to the extent required by Section 422 of the Code.
The rule set forth in the preceding sentence shall be applied by taking
Options into account in the order in which they were granted. For purposes
of this Section 4.4(c), the Fair Market Value of stock shall be determined
as of the time the Option with respect to such stock is granted.
Section 4.5. Consideration.
In consideration of the granting of an Option, the Optionee shall agree, in
the written Stock Option Agreement, to remain in the employ of (or to consult
for or to serve as an Independent Director of, as applicable) the Company or any
Subsidiary for a period of at least one year (or such shorter period as may be
fixed in the Stock Option Agreement or by action of the Committee following
grant of the Option) after the Option is granted (or, in the case of an
Independent Director, until the next annual meeting of stockholders of the
Company). Nothing in this Plan or in any Stock Option Agreement hereunder shall
confer upon any Optionee any right to continue in the employ of, or as a
consultant for, the Company or any Subsidiary, or as a director of the Company,
or shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Optionee at
any time for any reason whatsoever, with or without good cause.
ARTICLE V.
EXERCISE OF OPTIONS
Section 5.1. Partial Exercise.
An exercisable Option may be exercised in whole or in part. However, an
Option shall not be exercisable with respect to fractional shares and the
Committee (or the Board, in the case of Options granted to Independent
Directors) may require that, by the terms of the Option, a partial exercise be
with respect to a minimum number of shares.
Section 5.2. Manner of Exercise.
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All or a portion of an exercisable Option shall be deemed exercised upon
delivery of all of the following to the Secretary of the Company or his office:
(a) A written notice complying with the applicable rules established
by the Committee (or the Board, in the case of Options granted to
Independent Directors) stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion;
(b) Such representations and documents as the Committee (or the Board,
in the case of Options granted to Independent Directors), in its sole
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any
other federal or state securities laws or regulations. The Committee or
Board may, in its sole discretion, also take whatever additional actions it
deems appropriate to effect such compliance including, without limitation,
placing legends on share certificates and issuing stop-transfer notices to
agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 10.1 by any person or persons other than the Optionee, appropriate
proof of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised.
However, the Committee (or the Board, in the case of Options granted to
Independent Directors), may in its discretion (i) allow a delay in payment
up to thirty (30) days from the date the Option, or portion thereof, is
exercised; (ii) allow payment, in whole or in part, through the delivery of
shares of Common Stock owned by the Optionee, duly endorsed for transfer to
the Company with a Fair Market Value on the date of delivery equal to the
aggregate exercise price of the Option or exercised portion thereof; (iii)
allow payment, in whole or in part, through the surrender of shares of
Common Stock then issuable upon exercise of the Option having a Fair Market
Value on the date of Option exercise equal to the aggregate exercise price
of the Option or exercised portion thereof; (iv) allow payment, in whole or
in part, through the delivery of property of any kind which constitutes
good and valuable consideration; (v) allow payment, in whole or in part,
through the delivery of a full recourse promissory note bearing interest
(at no less than such rate as shall then preclude the imputation of
interest under the Code) and payable upon such terms as may be prescribed
by the Committee or the Board; (vi) allow payment, in whole or in part,
through the delivery of a notice that the Optionee has placed a market sell
order with a broker with respect to shares of Common Stock then issuable
upon exercise of the Option, and that the broker has been directed to pay a
sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price; or (vii) allow payment through
any combination of the consideration provided in the foregoing
subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of a promissory
note, the Committee (or the Board, in the case of Options granted to
Independent Directors) may also prescribe the form of such note and the
security to be given for such note. The Option may not be exercised,
however, by delivery of a promissory note or by a loan from the Company
when or where such loan or other extension of credit is prohibited by law.
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Section 5.3. Conditions to Issuance of Stock Certificates.
The Company shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of any Option or
portion thereof prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body which the Committee or Board shall, in its sole discretion,
deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee (or Board, in the case of
Options granted to Independent Directors) shall, in its sole discretion,
determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise
of the Option as the Committee (or Board, in the case of Options granted to
Independent Directors) may establish from time to time for reasons of
administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
Section 5.4. Rights as Stockholders.
The holders of Options shall not be, nor have any of the rights or
privileges of, stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until certificates
representing such shares have been issued by the Company to such holders.
Section 5.5. Ownership and Transfer Restrictions.
The Committee (or Board, in the case of Options granted to Independent
Directors), in its sole discretion, may impose such restrictions on the
ownership and transferability of the shares purchasable upon the exercise of an
Option as it deems appropriate. Any such restriction shall be set forth in the
respective Stock Option Agreement and may be referred to on the certificates
evidencing such shares. The Committee may require the Employee to give the
Company prompt notice of any disposition of shares of Common Stock acquired by
exercise of an Incentive Stock Option within (i) two years from the date of
granting such Option to such Employee or (ii) one year after the transfer of
such shares to such Employee. The Committee may direct that the certificates
evidencing shares acquired by exercise of an Option refer to such requirement to
give prompt notice of disposition.
Section 5.6. Limitations on Exercise of Options Granted to Independent
Directors.
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No Option granted to an Independent Director may be exercised to any
extent by anyone after the first to occur of the following events:
(a) The expiration of twelve (12) months from the date of the
Optionee's death;
(b) the expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of three (3) months from the date of the Optionee's
Termination of Directorship for any reason other than such Optionee's death
or his permanent and total disability, unless the Optionee dies within said
three-month period; or
(d) The expiration of ten years from the date the Option was granted.
ARTICLE VI.
AWARD OF RESTRICTED STOCK
Section 6.1. Award of Restricted Stock
(a) The Committee may from time to time, in its sole discretion:
(i) Select from among the key Employees or consultants (including
Employees or consultants who have previously received other awards
under this Plan) such of them as in its opinion should be awarded
Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with this
Plan.
(b) The Committee shall establish the purchase price, if any, and form
of payment for Restricted Stock; provided, however, that such purchase
price shall be no less than the par value of the Common Stock to be
purchased, unless otherwise permitted by applicable state law. In all
cases, legal consideration shall be required for each issuance of
Restricted Stock.
(c) Upon the selection of a key Employee or consultant to be awarded
Restricted Stock, the Committee shall instruct the Secretary of the Company
to issue such Restricted Stock and may impose such conditions on the
issuance of such Restricted Stock as it deems appropriate.
Section 6.2. Restricted Stock Agreement.
Restricted Stock shall be issued only pursuant to a written Restricted Stock
Agreement, which shall be executed by the selected key Employee or consultant
and an authorized officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.
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Section 6.3. Consideration.
As consideration for the issuance of Restricted Stock, in addition to
payment of any purchase price, the Restricted Stockholder shall agree, in the
written Restricted Stock Agreement, to remain in the employ of, or to consult
for, the Company or any Subsidiary for a period of at least one year after the
Restricted Stock is issued (or such shorter period as may be fixed in the
Restricted Stock Agreement or by action of the Committee following grant of the
Restricted Stock). Nothing in this Plan or in any Restricted Stock Agreement
hereunder shall confer on any Restricted Stockholder any right to continue in
the employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Restricted
Stockholder at any time for any reason whatsoever, with or without good cause.
Section 6.4. Rights as Stockholders.
Upon delivery of the shares of Restricted Stock to the escrow holder
pursuant to Section 6.7, the Restricted Stockholder shall have, unless otherwise
provided by the Committee, all the rights of a stockholder with respect to said
shares, subject to the restrictions in his Restricted Stock Agreement, including
the right to receive all dividends and other distributions paid or made with
respect to the shares; provided, however, that in the discretion of the
Committee, any extraordinary distributions with respect to the Common Stock
shall be subject to the restrictions set forth in Section 6.5.
Section 6.5. Restriction.
All shares of Restricted Stock issued under this Plan (including any shares
received by holders thereof with respect to shares of Restricted Stock as a
result of stock dividends, stock splits or any other form of recapitalization)
shall, in the terms of each individual Restricted Stock Agreement, be subject to
such restrictions as the Committee shall provide, which restrictions may
include, without limitation, restrictions concerning voting rights and
transferability and restrictions based on duration of employment with the
Company, Company performance and individual performance; provided, however,
that, unless the Committee otherwise provides in the terms of the Restricted
Stock Agreement or otherwise, no share of Restricted Stock granted to a person
subject to Section 16 of the Exchange Act shall be sold, assigned or otherwise
transferred until at least six months and one day have elapsed from the date on
which the Restricted Stock was issued, and provided, further, that by action
taken after the Restricted Stock is issued, the Committee may, on such terms and
conditions as it may determine to be appropriate, remove any or all of the
restrictions imposed by the terms of the Restricted Stock Agreement. Restricted
Stock may not be sold or encumbered until all restrictions are terminated or
expire. Unless provided otherwise by the Committee, if no consideration was paid
by the Restricted Stockholder upon issuance, a Restricted Stockholder's rights
in unvested Restricted Stock shall lapse upon Termination of Employment or, if
applicable, upon Termination of Consultancy with the Company.
Section 6.6. Repurchase of Restricted Stock.
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The Committee shall provide in the terms of each individual Restricted
Stock Agreement that the Company shall have the right to repurchase from the
Restricted Stockholder the Restricted Stock then subject to restrictions under
the Restricted Stock Agreement immediately upon a Termination of Employment or,
if applicable, upon a Termination of Consultancy between the Restricted
Stockholder and the Company, at a cash price per share equal to the price paid
by the Restricted Stockholder for such Restricted Stock; provided, however, that
provision may be made that no such right of repurchase shall exist in the event
of a Termination of Employment or Termination of Consultancy without cause, or
following a change in control of the Company or because of the Restricted
Stockholder's retirement, death or disability, or otherwise.
Section 6.7. Escrow.
The Secretary of the Company or such other escrow holder as the Committee
may appoint shall retain physical custody of each certificate representing
Restricted Stock until all of the restrictions imposed under the Restricted
Stock Agreement with respect to the shares evidenced by such certificate expire
or shall have been removed.
Section 6.8. Legend.
In order to enforce the restrictions imposed upon shares of Restricted
Stock hereunder, the Committee shall cause a legend or legends to be placed on
certificates representing all shares of Restricted Stock that are still subject
to restrictions under Restricted Stock Agreements, which legend or legends shall
make appropriate reference to the conditions imposed thereby.
ARTICLE VII.
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS
DEFERRED STOCK, STOCK PAYMENTS
Section 7.1. Performance Awards.
Any key Employee or consultant selected by the Committee may be granted one
or more Performance Awards. The value of such Performance Awards may be linked
to the market value, book value, net profits or other measure of the value of
Common Stock or other specific performance criteria determined appropriate by
the Committee, in each case on a specified date or dates or over any period or
periods determined by the Committee, or may be based upon the appreciation in
the market value, book value, net profits or other measure of the value of a
specified number of shares of Common Stock over a fixed period or periods
determined by the Committee. In making such determinations, the Committee shall
consider (among such other factors as it deems relevant in light of the specific
type of award) the contributions, responsibilities and other compensation of the
particular key Employee or consultant.
Section 7.2. Dividend Equivalents.
Any key Employee or consultant selected by the Committee may be granted
Dividend Equivalents based on the dividends declared on Common Stock, to be
credited as of dividend payment dates, during the period between the date an
Option, Stock Appreciation Right, Deferred
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Stock or Performance Award is granted, and the date such Option, Stock
Appreciation Right, Deferred Stock or Performance Award is exercised, vests or
expires, as determined by the Committee. Such Dividend Equivalents shall be
converted to cash or additional shares of Common Stock by such formula and at
such time and subject to such limitations as may be determined by the Committee.
With respect to Dividend Equivalents granted with respect to Options intended to
be qualified performance-based compensation for purposes of Section 162(m) of
the Code, such Dividend Equivalents shall be payable regardless of whether such
Option is exercised.
Section 7.3. Stock Payments.
Any key Employee or consultant selected by the Committee may receive Stock
Payments in the manner determined from time to time by the Committee. The number
of shares shall be determined by the Committee and may be based upon the Fair
Market Value, book value, net profits or other measure of the value of Common
Stock or other specific performance criteria determined appropriate by the
Committee, determined on the date such Stock Payment is made or on any date
thereafter.
Section 7.4. Deferred Stock.
Any key Employee or consultant selected by the Committee may be granted an
award of Deferred Stock in the manner determined from time to time by the
Committee. The number of shares of Deferred Stock shall be determined by the
Committee and may be linked to the market value, book value, net profits or
other measure of the value of Common Stock or other specific performance
criteria determined to be appropriate by the Committee, in each case on a
specified date or dates or over any period or periods determined by the
Committee. Common Stock underlying a Deferred Stock award will not be issued
until the Deferred Stock award has vested, pursuant to a vesting schedule or
performance criteria set by the Committee. Unless otherwise provided by the
Committee, a Grantee of Deferred Stock shall have no rights as a Company
stockholder with respect to such Deferred Stock until such time as the award has
vested and the Common Stock underlying the award has been issued.
Section 7.5. Performance Award Agreement, Dividend Equivalent Agreement,
Deferred Stock Agreement, Stock Payment Agreement.
Each Performance Award, Dividend Equivalent, award of Deferred Stock and/or
Stock Payment shall be evidenced by a written agreement, which shall be executed
by the Grantee and an authorized Officer of the Company and which shall contain
such terms and conditions as the Committee shall determine, consistent with this
Plan.
Section 7.6. Term.
The term of a Performance Award, Dividend Equivalent, award of Deferred
Stock and/or Stock Payment shall be set by the Committee in its discretion.
Section 7.7. Exercise Upon Termination of Employment.
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A Performance Award, Dividend Equivalent, award of Deferred Stock and/or
Stock Payment is exercisable or payable only while the Grantee is an Employee or
consultant; provided that the Committee may determine that the Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be
exercised or paid subsequent to Termination of Employment or Termination of
Consultancy without cause, or following a change in control of the Company, or
because of the Grantee's retirement, death or disability, or otherwise.
Section 7.8. Payment on Exercise.
Payment of the amount determined under Section 7.1 or 7.2 above shall be in
cash, in Common Stock or a combination of both, as determined by the Committee.
To the extent any payment under this Article VII is effected in Common Stock, it
shall be made subject to satisfaction of all provisions of Section 5.3.
Section 7.9. Consideration.
In consideration of the granting of a Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment, the Grantee shall
agree, in a written agreement, to remain in the employ of, or to consult for,
the Company or any Subsidiary for a period of at least one year after such
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment is granted (or such shorter period as may be fixed in such agreement or
by action of the Committee following such grant). Nothing in this Plan or in any
agreement hereunder shall confer on any Grantee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without good cause.
Section 7.10. Provisions Applicable to Section 162(m) Participants.
(a) Notwithstanding anything in the Plan to the contrary, the
Committee may grant any performance or incentive awards described in
Article VII to a Section 162(m) Participant that vest or become exercisable
upon the attainment of performance targets for the Company which are
related to one or more of the following performance goals: (i) pre-tax
income, (ii) operating income, (iii) cash flow, (iv) earnings per share,
(v) return on equity, (vi) return on invested capital or assets and (vii)
cost reductions or savings.
(b) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with respect
to performance or incentive awards described in Article VII which may be
granted to one or more Section 162(m) Participants, no later than ninety
(90) days following the commencement of any fiscal year in question or any
other designated fiscal period (or such other time as may be required or
permitted by Section 162(m) of the Code), the Committee shall, in writing,
(i) designate one or more Section 162(m) Participants, (ii) select the
performance goal or goals applicable to the fiscal year or other designated
fiscal period, (iii) establish the various targets and bonus amounts which
may be earned for such fiscal year or other designated fiscal period and
(iv) specify the relationship between performance goals and targets and the
amounts to be earned by each Section 162(m)
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Participant for such fiscal year or other designated fiscal period.
Following the completion of each fiscal year or other designated fiscal
period, the Committee shall certify in writing whether the applicable
performance targets have been achieved for such fiscal year or other
designated fiscal period. In determining the amount earned by a Section
162(m) Participant, the Committee shall have the right to reduce (but not
to increase) the amount payable at a given level of performance to take
into account additional factors that the Committee may deem relevant to the
assessment of individual or corporate performance for the fiscal year or
other designated fiscal period.
ARTICLE VIII.
STOCK APPRECIATION RIGHTS
Section 8.1. Grant of Stock Appreciation Rights.
A Stock Appreciation Right may be granted to any key Employee or consultant
selected by the Committee. A Stock Appreciation Right may be granted (i) in
connection and simultaneously with the grant of an Option, (ii) with respect to
a previously granted Option, or (iii) independent of an Option. A Stock
Appreciation Right shall be subject to such terms and conditions not
inconsistent with this Plan as the Committee shall impose and shall be evidenced
by a written Stock Appreciation Right Agreement, which shall be executed by the
Grantee and an authorized officer of the Company. The Committee, in its
discretion, may determine whether a Stock Appreciation Right is to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
and Stock Appreciation Right Agreements evidencing Stock Appreciation Rights
intended to so qualify shall contain such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the Code.
Without limiting the generality of the foregoing, the Committee may, in its
discretion and on such terms as it deems appropriate, require as a condition of
the grant of a Stock Appreciation Right to an Employee or consultant that the
Employee or consultant surrender for cancellation some or all of the unexercised
Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments, or other rights
which have been previously granted to him under this Plan or otherwise. A Stock
Appreciation Right, the grant of which is conditioned upon such surrender, may
have an exercise price lower (or higher) than the exercise price of the
surrendered Option or other award, may cover the same (or a lesser or greater)
number of shares as such surrendered Option or other award, may contain such
other terms as the Committee deems appropriate, and shall be exercisable in
accordance with its terms, without regard to the number of shares, price,
exercise period or any other term or condition of such surrendered Option or
other award.
Section 8.2. Coupled Stock Appreciation Rights
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number
of shares subject to the simultaneously or previously granted Option to
which it is coupled.
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(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the
extent then exercisable pursuant to its terms) and to receive from the
Company in exchange therefor an amount determined by multiplying the
difference obtained by subtracting the Option exercise price from the Fair
Market Value of a share of Common Stock on the date of exercise of the CSAR
by the number of shares of Common Stock with respect to which the CSAR
shall have been exercised, subject to any limitations the Committee may
impose.
Section 8.3. Independent Stock Appreciation Rights
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine.
An ISAR shall cover such number of shares of Common Stock as the Committee
may determine; provided, however, that unless the Committee otherwise
provides in the terms of the ISAR or otherwise, no ISAR granted to a person
subject to Section 16 of the Exchange Act shall be exercisable until at
least six months have elapsed from (but excluding) the date on which the
Option was granted. The exercise price per share of Common Stock subject to
each ISAR shall be set by the Committee. An ISAR is exercisable only while
the Grantee is an Employee or consultant; provided that the Committee may
determine that the ISAR may be exercised subsequent to Termination of
Employment or Termination of Consultancy without cause, or following a
change in control of the Company, or because of the Grantee's retirement,
death or disability, or otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified
portion of the ISAR (to the extent then exercisable pursuant to its terms)
and to receive from the Company an amount determined by multiplying the
difference obtained by subtracting the exercise price per share of the ISAR
from the Fair Market Value of a share of Common Stock on the date of
exercise of the ISAR by the number of shares of Common Stock with respect
to which the ISAR shall have been exercised, subject to any limitations the
Committee may impose.
Section 8.4. Payment and Limitations on Exercise
(a) Payment of the amount determined under Section 8.2(c) and 8.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as
of the date the Stock Appreciation Right is exercised) or a combination of
both, as determined by the Committee. To the extent such payment is
effected in Common Stock it shall be made subject to satisfaction of all
provisions of Section 5.3 above pertaining to Options.
(b) Grantees of Stock Appreciation Rights may be required to comply
with any timing or other restrictions with respect to the settlement or
exercise of a Stock Appreciation Right, including a window-period
limitation, as may be imposed in the discretion of the Board or Committee.
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Section 8.5. Consideration.
In consideration of the granting of a Stock Appreciation Right, the Grantee
shall agree, in the written Stock Appreciation Right Agreement, to remain in the
employ of, or to consult for, the Company or any Subsidiary for a period of at
least one year after the Stock Appreciation Right is granted (or such shorter
period as may be fixed in the Stock Appreciation Right Agreement or by action of
the Committee following grant of the Restricted Stock). Nothing in this Plan or
in any Stock Appreciation Right Agreement hereunder shall confer on any Grantee
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Grantee at any time for any reason whatsoever, with or without good cause.
ARTICLE IXI
ADMINISTRATION
Section 9.1. Compensation Committee.
The Compensation Committee (or another committee or a subcommittee of the
Board assuming the functions of the Committee under this Plan) shall consist
solely of two or more Independent Directors appointed by and holding office at
the pleasure of the Board, each of whom is both a "non-employee director" as
defined by Rule 1 6b-3 and an "outside director" for purposes of Section 162(m)
of the Code. Appointment of Committee members shall be effective upon acceptance
of appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee may be filled by the Board.
Section 9.2. Duties and Powers of Committee.
It shall be the duty of the Committee to conduct the general administration
of this Plan in accordance with its provisions. The Committee shall have the
power to interpret this Plan and the agreements pursuant to which Options,
awards of Restricted Stock or Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments are granted or
awarded, and to adopt such rules for the administration, interpretation, and
application of this Plan as are consistent therewith and to interpret, amend or
revoke any such rules. Notwithstanding the foregoing, the full Board, acting by
a majority of its members in office, shall conduct the general administration of
the Plan with respect to Options granted to Independent Directors. Any such
grant or award under this Plan need not be the same with respect to each
Optionee, Grantee or Restricted Stockholder. Any such interpretations and rules
with respect to Incentive Stock Options shall be consistent with the provisions
of Section 422 of the Code. In its sole discretion, the Board may at any time
and from time to time exercise any and all rights and duties of the Committee
under this Plan except with respect to matters which under Rule 16b-3 or
Section 162(m) of the Code, or any regulations or rules issued thereunder, are
required to be determined in the sole discretion of the Committee.
Section 9.3. Majority Rule; Unanimous Written Consent
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The Committee shall act by a majority of its members in attendance at a
meeting at which a quorum is present or by a memorandum or other written
instrument signed by all members of the Committee.
Section 9.4. Compensation; Professional Assistance; Good Faith Actions.
Members of the Committee shall receive such compensation for their services
as members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Optionees, Grantees, Restricted Stockholders, the Company and all other
interested persons. No members of the Committee or Board shall be personally
liable for any action, determination or interpretation made in good faith with
respect to this Plan, Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, and all members of the Committee and the Board shall be fully
protected by the Company in respect of any such action, determination or
interpretation.
ARTICLE X.
MISCELLANEOUS PROVISIONS
Section 10.1. Not Transferable.
Options, Restricted Stock awards, Deferred Stock awards, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under
this Plan may not be sold, pledged, assigned, or transferred in any manner other
than by will or the laws of descent and distribution or pursuant to a QDRO,
unless and until such rights or awards have been exercised, or the shares
underlying such rights or awards have been issued, and all restrictions
applicable to such shares have lapsed. No Option, Restricted Stock award,
Deferred Stock award, Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment or interest or right therein shall be liable for the
debts, contracts or engagements of the Optionee, Grantee or Restricted
Stockholder or his successors in interest or shall be subject to disposition by
transfer, alienation, anticipation, pledge, encumbrance, assignment or any other
means whether such disposition be voluntary or involuntary or by operation of
law by judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect, except to the extent that such disposition is
permitted by the preceding sentence.
During the lifetime of the Optionee or Grantee, only he may exercise an
Option or other right or award (or any portion thereof) granted to him under the
Plan, unless it has been disposed of pursuant to a QDRO. After the death of the
Optionee or Grantee, any exercisable portion of an Option or other right or
award may, prior to the time when such portion becomes unexercisable under the
Plan or the applicable Stock Option Agreement or other agreement, be
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exercised by his personal representative or by any person empowered to do so
under the deceased Optionee's or Grantee's will or under the then applicable
laws of descent and distribution.
Section 10.2. Amendment, Suspension or Termination of this Plan.
Except as otherwise provided in this Section 10.2, this Plan may be wholly
or partially amended or otherwise modified, suspended or terminated at any time
or from time to time by the Board or the Committee. However, without approval of
the Company's stockholders given within twelve months before or after the action
by the Board or the Committee, no action of the Board or the Committee may,
except as provided in Section 10.3, increase the limits imposed in Section 2.1
on the maximum number of shares which may be issued under this Plan or modify
the Award Limit, and no action of the Board or the Committee may be taken that
would otherwise require stockholder approval as a matter of applicable law,
regulation or rule. No amendment, suspension or termination of this Plan shall,
without the consent of the holder of Options, Restricted Stock awards, Deferred
Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments, alter or impair any rights or obligations under
any Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments theretofore
granted or awarded, unless the award itself otherwise expressly so provides. No
Options, Restricted Stock, Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments may be granted or
awarded during any period of suspension or after termination of this Plan, and
in no event may any Incentive Stock Option be granted under this Plan after the
first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 10.4.
Section 10.3. Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company and Other Corporate Events.
(a) Subject to Section 10.3(d), in the event that the Committee (or
the Board, in the case of Options granted to Independent Directors)
determines that any dividend or other distribution (whether in the form of
cash, Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company (including, but not limited
to, a Corporate Transaction), or exchange of Common Stock or other
securities of the Company, issuance of warrants or other rights to purchase
Common Stock or other securities of the Company, or other similar corporate
transaction or event, in the Committee's sole discretion (or in the case of
Options granted to Independent Directors, the Board's sole discretion),
affects the Common Stock such that an adjustment is determined by the
Committee to be appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the
Plan or with respect to an Option, Restricted Stock award,
-23-
<PAGE>
Performance Award, Stock Appreciation Right, Dividend Equivalent, Deferred
Stock award or Stock Payment, then the Committee (or the Board, in the case
of Options granted to Independent Directors) shall, in such manner as it
may deem equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments may be granted under the Plan, or which may be granted as
Restricted Stock or Deferred Stock (including, but not limited to,
adjustments of the limitations in Section 2.1 on the maximum number
and kind of shares which may be issued and adjustments of the Award
Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents, or Stock
Payments, and in the number and kind of shares of outstanding
Restricted Stock or Deferred Stock, and
(iii) the grant or exercise price with respect to any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment.
(b) Subject to Sections l0.3(b)(vii) and 10.3(d), in the event of any
Corporate Transaction or other transaction or event described in Section
10.3(a) or any unusual or nonrecurring transactions or events affecting the
Company, any affiliate of the Company, or the financial statements of the
Company or any affiliate, or of changes in applicable laws, regulations, or
accounting principles, the Committee (or the Board, in the case of Options
granted to Independent Directors) in its discretion is hereby authorized to
take any one or more of the following actions whenever the Committee (or
the Board, in the case of Options granted to Independent Directors)
determines that such action is appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made
available under the Plan or with respect to any option, right or other
award under this Plan, to facilitate such transactions or events or to give
effect to such changes in laws, regulations or principles:
(i) In its sole discretion, and on such terms and conditions as
it deems appropriate, the Committee (or the Board, in the case of
Options granted to Independent Directors) may provide, either by the
terms of the agreement or by action taken prior to the occurrence of
such transaction or event and either automatically or upon the
optionee's request, for either the purchase of any such Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, or
Stock Payment, or any Restricted Stock or Deferred Stock for an amount
of cash equal to the amount that could have been attained upon the
exercise of such option, right or award or realization of the
optionee's rights had such option, right or award been currently
exercisable or payable or fully vested or the replacement of such
option, right or award with other rights or property selected by the
Committee (or the Board, in the case of Options granted to Independent
Directors) in its sole discretion;
-24-
<PAGE>
(ii) In its sole discretion, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either
by the terms of such Option, Performance Award, Stock Appreciation
Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or
Deferred Stock or by action taken prior to the occurrence of such
transaction or event that it cannot be exercised after such event;
(iii) In its sole discretion, and on such terms and conditions as
it deems appropriate, the Committee (or the Board, in the case of
Options granted to Independent Directors) may provide, either by the
terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction
or event, that for a specified period of time prior to such
transaction or event, such option, right or award shall be exercisable
as to all shares covered thereby, notwithstanding anything to the
contrary in (i) Section 4.4 or (ii) the provisions of such Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, or
Stock Payment, or Restricted Stock or Deferred Stock;
(iv) In its sole discretion, and on such terms and conditions as
it deems appropriate, the Committee (or the Board, in the case of
Options granted to Independent Directors) may provide, either by the
terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction
or event, that upon such event, such option, right or award be assumed
by the successor or survivor corporation, or a parent or subsidiary
thereof, or shall be substituted for by similar options, rights or
awards covering the stock of the successor or survivor corporation, or
a parent or subsidiary thereof, with appropriate adjustments as to the
number and kind of shares and prices; and
(v) In its sole discretion, and on such terms and conditions as
it deems appropriate, the Committee (or the Board, in the case of
Options granted to Independent Directors) may make adjustments in the
number and type of shares of Common Stock (or other securities or
property) subject to outstanding Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents, or Stock Payments, and in
the number and kind of outstanding Restricted Stock or Deferred Stock
and/or in the terms and conditions of (including the grant or exercise
price), and the criteria included in, outstanding options, rights and
awards and options, rights and awards which may be granted in the
future.
(vi) In its sole discretion, and on such terms and conditions as
it deems appropriate, the Committee may provide either by the terms of
a Restricted Stock award or Deferred Stock award or by action taken
prior to the occurrence of such event that, for a specified period of
time prior to such event, the restrictions imposed under a Restricted
Stock Agreement or a Deferred Stock Agreement upon some or all shares
of Restricted Stock or Deferred Stock may be terminated,
-25-
<PAGE>
and, in the case of Restricted Stock, some or all shares of such
Restricted Stock may cease to be subject to repurchase under Section
6.6 or forfeiture under Section 6.5 after such event.
(vii) None of the foregoing discretionary actions taken under
this Section 10.3(b) shall be permitted with respect to Options
granted under Section 3.4(d) to Independent Directors to the extent
that such discretion would be inconsistent with the applicable
exemptive conditions of Rule 16b-3. In the event of a Change in
Control or a Corporate Transaction, to the extent that the Board does
not have the ability under Rule 16b-3 to take or to refrain from
taking the discretionary actions set forth in Section 10.3(b)(iii)
above, each Option granted to an Independent Director shall be
exercisable as to all shares covered thereby upon such Change in
Control or during the five days immediately preceding the consummation
of such Corporate Transaction and subject to such consummation,
notwithstanding anything to the contrary in Section 4.4 or the vesting
schedule of such Options. In the event of a Corporate Transaction, to
the extent that the Board does not have the ability under Rule 16b-3
to take or to refrain from taking the discretionary actions set forth
in Section l0.3(b)(ii) above, no Option granted to an Independent
Director may be exercised following such Corporate Transaction unless
such Option is, in connection with such Corporate Transaction, either
assumed by the successor or survivor corporation (or parent or
subsidiary thereof) or replaced with a comparable right with respect
to shares of the capital stock of the successor or survivor
corporation (or parent or subsidiary thereof).
(c) Notwithstanding Sections 10.3(a) and 10.3(b), in the event of any
Corporate Transaction, each outstanding Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, Stock Payment, Restricted Stock,
or Deferred Stock award shall, immediately prior to the effective date of
the Corporate Transaction, automatically become fully exercisable for all
of the shares of Common Stock at the time subject to such rights or fully
vested, as applicable, and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. However, an outstanding right shall
not so accelerate if and to the extent: (i) such right is, in connection
with the Corporate Transaction, either to be assumed by the successor or
survivor corporation (or parent thereof) or to be replaced with a
comparable right with respect to shares of the capital stock of the
successor or survivor corporation (or parent thereof) or (ii) the
acceleration of exercisability of such right is subject to other
limitations imposed by the Plan Administrator at the time of grant. The
determination of comparability of rights under clause (i) above shall be
made by the Plan Administrator, and its determination shall be final,
binding and conclusive.
(d) Subject to Section 10.3(d) and 10.8, the Committee (or the Board,
in the case of Options granted to Independent Directors) may, in its
discretion, include such further provisions and limitations in any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock
Payment, or Restricted Stock or Deferred Stock agreement or certificate, as
it may deem equitable and in the best interests of the Company.
-26-
<PAGE>
(e) With respect to Options, Stock Appreciation Rights and performance
or incentive awards described in Article VII which are granted to Section
162(m) Participants and are intended to qualify as performance-based
compensation under Section 162(m)(4)(C), no adjustment or action described
in this Section 10.3 or in any other provision of the Plan shall be
authorized to the extent that such adjustment or action would cause the
Plan to violate Section 422(b)(1) of the Code or would cause such option or
stock appreciation right to fail to so qualify under Section 162(m)(4)(C),
as the case may be, or any successor provisions thereto. Furthermore, no
such adjustment or action shall be authorized to the extent such adjustment
or action would result in short-swing profits liability under Section 16 or
violate the exemptive conditions of Rule 16b-3 unless the Committee (or the
Board, in the case of Options granted to Independent Directors) determines
that the option or other award is not to comply with such exemptive
conditions. The number of shares of Common Stock subject to any option,
right or award shall always be rounded to the next whole number.
Section 10.4. Approval of Plan by Stockholders.
This Plan will be submitted for the approval of the Company's stockholders
within twelve months after the date of the Board's initial adoption of this
Plan. Options, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments may be granted and Restricted Stock or Deferred
Stock may be awarded prior to such stockholder approval, provided that such
Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments shall not be exercisable and such Restricted Stock or Deferred
Stock shall not vest prior to the time when this Plan is approved by the
stockholders, and provided further that if such approval has not been obtained
at the end of said twelve-month period, all Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments previously granted
and all Restricted Stock or Deferred Stock previously awarded under this Plan
shall thereupon be canceled and become null and void.
Section 10.5. Tax Withholding.
The Company shall be entitled to require payment in cash or deduction from
other compensation payable to each Optionee, Grantee or Restricted Stockholder
of any sums required by federal, state or local tax law to be withheld with
respect to the issuance, vesting or exercise of any Option, Restricted Stock,
Deferred Stock, Performance Award, Stock Appreciation Right, Dividend Equivalent
or Stock Payment. The Committee (or the Board, in the case of Options granted to
Independent Directors) may in its discretion and in satisfaction of the
foregoing requirement allow such Optionee, Grantee or Restricted Stockholder to
elect to have the Company withhold shares of Common Stock otherwise issuable
under such Option or other award (or allow the return of shares of Common Stock)
having a Fair Market Value equal to the sums required to be withheld.
Section 10.6. Loans.
The Committee may, in its discretion, extend one or more loans to key
Employees in connection with the exercise or receipt of an Option, Performance
Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment granted
under this Plan, or the issuance of
-27-
<PAGE>
Restricted Stock or Deferred Stock awarded under this Plan. The terms and
conditions of any such loan shall be set by the Committee.
Section 10.7. Forfeiture Provisions.
Pursuant to its general authority to determine the terms and conditions
applicable to awards under the Plan, the Committee (or the Board, in the case of
Options granted to Independent Directors) shall have the right (to the extent
consistent with the applicable exemptive conditions of Rule 16b-3) to provide,
in the terms of Options or other awards made under the Plan, or to require the
recipient to agree by separate written instrument, that (i) any proceeds, gains
or other economic benefit actually or constructively received by the recipient
upon any receipt or exercise of the award, or upon the receipt or resale of any
Common Stock underlying such award, must be paid to the Company, and (ii) the
award shall terminate and any unexercised portion of such award (whether or not
vested) shall be forfeited, if (a) a Termination of Employment, Termination of
Consultancy or Termination of Directorship occurs prior to a specified date, or
within a specified time period following receipt or exercise of the award, or
(b) the recipient at any time, or during a specified time period, engages in any
activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee (or
the Board, as applicable).
Section 10.8. Limitations Applicable to Section 16 Persons and Performance-Based
Compensation.
Notwithstanding any other provision of this Plan, this Plan, and any
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment granted, or Restricted Stock or Deferred Stock awarded, to any
individual who is then subject to Section 16 of the Exchange Act, shall be
subject to any additional limitations set forth in any applicable exemptive rule
under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of
the Exchange Act) that are requirements for the application of such exemptive
rule. To the extent permitted by applicable law, the Plan, Options, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents, Stock Payments,
Restricted Stock and Deferred Stock granted or awarded hereunder shall be deemed
amended to the extent necessary to conform to such applicable exemptive rule.
Furthermore, notwithstanding any other provision of this Plan, any Option, Stock
Appreciation Right or performance or incentive award described in Article VII
which is granted to a Section 162(m) Participant and is intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
shall be subject to any additional limitations set forth in Section 162(m) of
the Code (including any amendment to Section 162(m) of the Code) or any
regulations or rulings issued thereunder that are requirements for qualification
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and this Plan shall be deemed amended to the extent necessary to conform
to such requirements.
Section 10.9. Effect of Plan Upon Options and Compensation Plans.
The adoption of this Plan shall not affect any other compensation or
incentive plans in effect for the Company or any Subsidiary. Nothing in this
Plan shall be construed to limit the right of the Company (i) to establish any
other forms of incentives, or compensation for Employees, Directors or
Consultants of the Company or any Subsidiary or (ii) to grant or assume
-28-
<PAGE>
options or other rights otherwise than under this Plan in connection with any
proper corporate purpose including but not by way of limitation, the grant or
assumption of options in connection with the acquisition by purchase, lease,
merger, consolidation or otherwise, of the business, stock or assets of any
corporation, partnership, limited liability company, firm or association.
Section 10.10. Compliance with Laws.
This Plan, the granting and vesting of Options, Restricted Stock awards,
Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments under this Plan and the issuance and delivery of
shares of Common Stock and the payment of money under this Plan or under
Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments granted or Restricted Stock or Deferred Stock awarded hereunder
are subject to compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities law and
federal margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
this Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan, Options, Restricted Stock awards,
Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments granted or awarded hereunder shall be deemed
amended to the extent necessary to conform to such laws, rules and regulations.
Section 10.11. Titles.
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Plan.
Section 10.12. Governing Law.
This Plan and any agreements hereunder shall be administered, interpreted
and enforced under the internal laws of the State of Delaware without regard to
conflicts of laws thereof
*****
I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors of Z-Tel Technologies, Inc. effective October 13, 1999.
Executed this 9th day of November 1999.
/s/ Mark H. Johnson
---------------------------
Mark H. Johnson, Secretary
-29-
<PAGE>
EXHIBIT 21
Z-TEL TECHNOLOGIES, INC.
List of Subsidiaries
Z-Tel Communications, Inc. (a Delaware corporation)
Z-Tel Business Networks, Inc. (a Delaware corporation)
Z-Tel Network Services, Inc. (a Delaware corporation)
Z-Tel Holdings, Inc. (a Florida corporation)
Z-Tel Communications of Virginia, Inc. (a Virginia corporation)
Z-Tel, Inc. (a Nevada corporation)
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated November 14, 1999, except for Note 1(B), as to which the date
is November 19, 1999, relating to the financial statements of Z-Tel
Technologies, Inc. and subsidiaries, which appear in such Registration
Statement. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Registration Statement.
PricewaterhouseCoopers LLP
Tampa, Florida
November 14, 1999,
except for Note 1(B),
as to which the date is
November 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS AND FOOTNOTES AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> OTHER 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-15-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 7,973,000 2,682,000
<SECURITIES> 0 0
<RECEIVABLES> 69,000 687,000
<ALLOWANCES> 54,000 80,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,411,000 4,062,000
<PP&E> 12,993,000 23,658,000
<DEPRECIATION> 1,283,000 4,032,000
<TOTAL-ASSETS> 20,274,000 24,958,000
<CURRENT-LIABILITIES> 5,083,000 12,158,000
<BONDS> 0 0
15,154,000 26,128,000
0 0
<COMMON> 144,000 144,000
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 20,274,000 24,958,000
<SALES> 140,000 2,170,000
<TOTAL-REVENUES> 140,000 2,170,000
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> (13,312,000) 23,350,000
<LOSS-PROVISION> 54,000 859,000
<INTEREST-EXPENSE> 178,000 2,786,000
<INCOME-PRETAX> (13,122,000) (23,647,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (13,122,000) (23,647,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,122,000) (23,647,000)
<EPS-BASIC> (2.03) (1.71)
<EPS-DILUTED> (2.03) (1.71)
</TABLE>
