<PAGE>
As filed with the Securities and Exchange Commission on December 10, 1999
Registration No. 333-89063
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
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 DECEMBER 10, 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.
- --------------------------------------------------------------------------------
<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.
- --------------------------------------------------------------------------------
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............................................................. 7
USE OF PROCEEDS.......................................................... 18
DIVIDEND POLICY.......................................................... 18
CAPITALIZATION........................................................... 19
DILUTION................................................................. 21
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.......................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 23
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
BUSINESS................................................................... 32
MANAGEMENT................................................................. 60
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 67
FINANCING ARRANGEMENT...................................................... 70
PRINCIPAL STOCKHOLDERS..................................................... 71
DESCRIPTION OF CAPITAL STOCK............................................... 73
UNDERWRITING............................................................... 76
LEGAL MATTERS.............................................................. 78
EXPERTS.................................................................... 79
WHERE YOU CAN FIND MORE INFORMATION........................................ 79
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, and as a
result, expect to continue to incur losses for the foreseeable future. As of
September 30, 1999, we had an accumulated deficit of approximately $36.8
million.
We began selling our Z-Line Home Edition service in New York City and Long
Island in late June 1999. This service packages low-priced local and long
distance telephone services with our enhanced communications features and
optional Internet access. 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.
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
1
<PAGE>
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.
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?"
2
<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.
----------------
3
<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.
4
<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>
5
<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>
6
<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
and, if our products and services do not attract customers, the value of your
investment will suffer.
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.
7
<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,
8
<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 which may cause our operating
expenses to be greater than we currently anticipate.
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
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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 are newly
developed and we may face unexpected system difficulties which would adversely
affect our service levels and, consequently, our business.
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.
10
<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.
Our network may fail as a result of factors beyond our control and any extended
failure is likely to interrupt our services and negatively impact our
operations.
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
11
<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.
12
<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.
13
<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
14
<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 generally able to control the outcome of all of the Company's
corporate actions requiring stockholder approval, which could negatively affect
you.
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 does not have a trading history and may be extremely volatile because
we are a newly formed company in a rapidly changing industry.
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
adversely 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
15
<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;
16
<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.
17
<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.
18
<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>
19
<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.
20
<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.
21
<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>
22
<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.
We believe that, over time, revenue derived from our Z-Line Home Edition
service will be greater than that derived from Z-Line Community 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. To
date, Z-Line Community has generated revenue in each state in the U.S.,
however, in states where we do not actively market our services, this revenue
has been insignificant. 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;
23
<PAGE>
. 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.
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.
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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 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
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$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.
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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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. We expect to borrow an additional $2.2
million under this line prior to the end of 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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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
36
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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.
[GRAPHIC OF 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.
[GRAPHIC OF Z-TEL SCREEN CAPTURE]
38
<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.
[GRAPHIC OF 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.
[GRAPHIC OF 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.
[GRAPHIC Of Z-TEL SCREEN CAPTURE]
. Fast Access: Subscribers
can enter
up to six
phone
numbers
from which
they can
access
Z-Line,
which will
give the
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
41
<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:
Services Features
. retain existing phone . web command and . multiple number
number control "find-me" service
. unlimited local calling . voice mail
. caller . group messaging
identification
. 200 minutes of long
distance . user-defined
communities
. Z-Line Communications . call forwarding
Center . one button call
return
. optional Internet access . 3-way calling
for $17.95/month
. call waiting
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. For example, Delta Airlines
is a Z-Tel customer that sponsors a community made up of their pilots, flight
engineers and flight attendants, each of whom has a Z-line assigned to them in
order for them to receive information about flight schedules, changes in
scheduling and other information. In addition, each of them may choose to take
advantage of special discount long distance rates and other Z-Line Community
features. 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
42
<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
43
<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
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<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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<PAGE>
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. There are a number of other issues and proceedings that could
have an effect on our business in the future, including:
. The FCC has adopted rules to require telecommunications service
providers to make their services accessible to individuals with
disabilities, if readily achievable. In addition, we 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.
. The FCC has also ordered telecommunications service providers to provide
law enforcement personnel with a sufficient number of ports and
technical assistance in connection with wiretaps. We cannot predict the
cost to us of complying with this order.
. The FCC has adopted new rules designed to make it easier for customers
to understand the bills of telecommunications carriers. These new rules
establish certain requirements regarding the formatting of bills and the
information that must be included on bills. These rules have been
appealed in Federal court.
. We are subject to annual regulatory fees assessed by the FCC, and must
file an annual employment report to comply with the FCC's Equal
Employment Opportunity policies.
. The FCC has adopted an Order granting limited pricing flexibility to
large incumbent local exchange carriers, and is considering granting
additional pricing flexibility and price deregulation options. These
actions could increase competition for some of our services.
The foregoing is not an exhaustive list of proceedings or issues that could
materially affect our business. We cannot predict the outcome of these or any
other proceedings before the courts, the FCC, or state or local governments.
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
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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.
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.
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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.
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 Mr. Jeffrey Bowden and Mr.
Douglas Williamson. 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
On October 8, 1999, Gramercy Z-Tel L.P. 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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<PAGE>
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 L.P.(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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<PAGE>
(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 L.P., of which Mr.
Grafstein is a senior officer. Mr. Grafstein disclaims beneficial
ownership of the shares owned by Gramercy Z-Tel L.P.
(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.
American Stock Transfer and Trust Company will serve as the transfer agent
for the common 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.
75
<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.
76
<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
77
<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.
78
<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.
79
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent
Certified Public
Accountants............. F-2
Consolidated Financial
Statements:
Consolidated Balance
Sheets................ F-3
Consolidated Statements
of Operations......... F-4
Consolidated Statements
of Changes in
Stockholders' Equity
(Deficit)............. F-5
Consolidated Statements
of Cash Flows......... F-6
Notes to Consolidated
Financial Statements.. F-7
</TABLE>
F-1
<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-2
<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-3
<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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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, 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.
F-20
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
12. Computation of Net Loss Per Share (continued)
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.
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.
F-21
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
13. Subsequent Events (continued)
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-22
<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......................... 95,000
Printing and engraving fees and expenses*.............................. 300,000
Legal fees and expenses*............................................... 400,000
Accountants' fees and expenses*........................................ **
Blue Sky fees and expenses*............................................ **
Transfer Agent and Registrar fees and expenses*........................ 3,000
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*
27 Financial Data Schedule
</TABLE>
- --------
* Previously filed
** 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 December 10, 1999.
Z-TEL TECHNOLOGIES, INC.
By: /s/ D. Gregory Smith
----------------------------------
Name: D. Gregory Smith
Title: President, Chief
Executive Officer and
Chairman of the Board
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 December 10, 1999
______________________________________ Officer, Chairman of the
D. Gregory Smith Board and Director
(Principal executive
officer)
* Chief Financial Officer December 10, 1999
______________________________________ (Principal financial and
John M. Hutchens accounting officer)
* Director December 10, 1999
______________________________________
Douglas C. Williamson
* Director December 10, 1999
______________________________________
Jeffrey A. Bowden
* Director December 10, 1999
______________________________________
Eduard J. Mayer
* Director December 10, 1999
______________________________________
Buford H. Ortale
* Director December 10, 1999
______________________________________
Laurence S. Grafstein
</TABLE>
* By D. Gregory Smith, Attorney-in-Fact
II-6
<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*
27 Financial Data Schedule
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
<PAGE>
EXHIBIT 4.1
SEE REVERSE FOR
CERTAIN DEFINITION
Z-TEL TECHNOLOGIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK
THIS IS TO CERTIFY that CUSIP
is the owner of
full-paid and non-assessable shares of Common Stock of the
par value of One Cent ($.01) each of
Z-TEL TECHNOLOGIES, INC.
CERTIFICATE OF STOCK
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid until countersigned by the Transfer Agent.
WITNESS the facsimile seal of the Corporation and the signatures of its
duly authorized officers.
Dated
[SEAL]
/s/ Mark Johnson /s/ D. Gregory Smith
SECRETARY PRESIDENT
COUNTERSIGNED
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
BY TRANSFER AGENT
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - CUSTODIAN
TEN ENT - as tenants by the portfolios --------
JT TEN - as joint tenants with right of (Minor) (Cust)
survivorship and not as tenants under Uniform Gifts
in common to Minors Act
--------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer
unto ----------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably CONSTITUTE and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------------------------
----------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVENT PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF LATHAM & WATKINS]
December 10, 1999
Z-Tel Technologies, Inc.
601 South Harbour Island Boulevard
Suite 220
Tampa, Florida 33602
Re: Registration Statement No. 333-89063; 6,325,000 shares of
---------------------------------------------------------
Common Stock, par value $.01 per share
--------------------------------------
Ladies and Gentlemen:
In connection with the registration of up to 6,325,000 shares of
common stock of the Company, par value $.01 per share (the "Shares"), under the
Securities Act of 1933, as amended (the "Act"), by Z-Tel Technologies, Inc., a
Delaware corporation (the "Company"), on Form S-1 filed with the Securities and
Exchange Commission (the "Commission") on October 14, 1999 (File No. 333-
89063), as amended by Amendment No. 1 filed with the Commission on November 22,
1999 and Amendment No. 2 filed with the Commission on December 10, 1999
(collectively, the "Registration Statement"), you have requested our opinion
with respect to the matters set forth below.
In our capacity as your counsel in connection with such registration,
we are familiar with the proceedings taken and proposed to be taken by the
Company in connection with the authorization, issuance and sale of the Shares,
and for the purposes of this opinion, have assumed such proceedings will be
timely completed in the manner presently proposed. In addition, we have made
such legal and factual examinations and inquiries, including an examination of
originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
<PAGE>
Latham & Watkins
December 10, 1999
Page 2
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.
We are opining herein as to the effect on the subject transaction only
of the internal laws of the State(s) of New York and the General Corporation Law
of the State of Delaware, and we express no opinion with respect to the
applicability thereto, or the effect thereon, of the laws of any other
jurisdiction or, in the case of Delaware, any other laws, or as to any matters
of municipal law or the laws of any local agencies within any state.
Subject to the foregoing, it is our opinion that the Shares have been
duly authorized, and, upon issuance, delivery and payment therefor in the manner
contemplated by the Registration Statement, will be validly issued, fully paid
and nonassessable.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters."
Very truly yours,
LATHAM & WATKINS
<PAGE>
Exhibit 10.1.2
EMPLOYMENT AGREEMENT
BY AND BETWEEN
Z-TEL TECHNOLOGIES, INC.
AND
D. GREGORY SMITH
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of February 1, 1998, by and between Z-TEL TECHNOLOGIES, INC., a Delaware
corporation (the "Company"), and D. GREGORY SMITH ("Employee").
WHEREAS, the Company and Employee desire to enter into this Agreement
to assure the Company of the services of Employee and to set forth the
respective rights and duties of the parties hereto;
WHEREAS, the Company is presently in the business of providing enhanced
telecommunications products and services (such activities, present and future,
being hereinafter referred to as the "Business");
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, terms and conditions set forth herein, the Company and Employee agree
as follows:
ARTICLE I
Employment
1.1 Employment and Title. The Company hereby employs Employee, and
Employee hereby accepts such employment, as President and Chief Executive
Officer of the Company, all upon the terms and conditions set forth herein.
1.2 Services. During the Term (as hereinafter defined) hereof, Employee
agrees to perform diligently and in good faith the duties of the President and
Chief Executive Officer of the Company, under the direction of the Board of
Directors of the Company (the "Board of Directors") or the Executive Committee
of the Board of Directors (the "Executive Committee"). Employee agrees to devote
his best efforts and all of his full business time, energies and abilities to
the services to be performed hereunder and for the exclusive benefit of the
Company. Employee shall be vested with such authority as is generally
commensurate with the position of President and Chief Executive Officer of the
Company, as further outlined below.
1.3 Location. The principal place of employment and the location of
Employee's principal office shall be in Tampa, Florida; provided, however,
Employee shall, if he determines it to be reasonably necessary, engage in
reasonable travel in the performance of his duties under this Agreement.
1.4 Representations. Each party represents and warrants to the other
that he/it has full power and authority to enter into and perform this Agreement
and that his/its execution and
<PAGE>
performance of this Agreement shall not constitute a default under or breach of
any of the terms of any agreement to which he/it is a party or under which he/it
is bound. Each party represents that no consent or approval of any third party
is required for his/its execution, delivery and performance of this Agreement or
that all consents or approvals of any third party required for his/its
execution, delivery and performance of this Agreement have been obtained.
1.5 Sole Discretion. As the term "sole discretion" is used in this
Agreement, unless otherwise defined, it will be interpreted as the exercise of
reasonable discretion applying normal business practices to a contractual
relationship between a company and its president and chief executive officer.
ARTICLE II
Term
2.1 Term. The term of Employee's employment hereunder (the "Term")
shall commence as of the date hereof (the "Commencement Date") and shall
continue through the third anniversary of the Commencement Date (the "Scheduled
Termination Date"), unless earlier terminated pursuant to the provisions of this
Agreement. This Agreement shall automatically renew for an unlimited number of
successive one-year terms unless either party shall deliver written notice of
non-renewal at least ninety (90) days prior to the Scheduled Termination Date
(or the Scheduled Termination Date of any renewal term).
ARTICLE III
Compensation
3.1 Base Salary. As compensation for the services to be rendered by
Employee, the Company shall pay Employee, during the Term of this Agreement, an
annual base salary of not less than One Hundred Fifty Thousand Dollars
($150,000.00), which base salary shall accrue monthly (prorated for periods less
than a month) and shall be paid in equal monthly installments, in arrears. The
base salary will be reviewed annually, or, more frequently, as appropriate, by
the Board of Directors or the Compensation Committee of the Board of Directors,
as the case may be, for upward, but not downward, adjustment in its sole
discretion.
3.2 Bonus Compensation. Employee shall be eligible to receive bonus or
incentive compensation, which may be granted from time to time in the sole
discretion of the Board of Directors in accordance with the Company's
compensation structure in effect from time to time.
3.3 Employee's Legal Fees. Employee may, and the Company has encouraged
the Employee to, engage competent independent legal counsel for advice and
guidance with respect to this Agreement, including, without limitation, advice
as to the federal income tax consequences of this Article III. The Company shall
reimburse Employee for all reasonable legal fees incurred by Employee in
connection with the negotiation and execution of this Agreement.
2
<PAGE>
3.4 Benefits. Employee shall be entitled, during the Term hereof, to
the same medical, hospital, dental and life insurance coverage and benefits as
are then available to the Company's most senior executive officers, together
with the following additional benefits:
(a) An automobile allowance of One Thousand Dollars
($1,000.00) per month;
(b) Comprehensive medical coverage, including dependent
coverage, paid fully by the Company;
(c) Life insurance in an amount equal to two times
Employee's base salary;
(d) Long-term disability insurance in an amount, adjusted
annually, equal to two-thirds of Employee's prior
year base salary and incentive compensation, if any,
excluding compensation earned through Company stock
options or other securities;
(e) The Company's normal vacation allowance for all
employees who are executive officers of the Company,
but not less than three weeks annually;
(f) An Officers and Directors Indemnity Agreement,
substantially in the form attached hereto as Exhibit
A.
3.5 Withholding. Any and all amounts payable under this Agreement,
including, without limitation, amounts payable under this Article III and
Article VII, are subject to withholding for such federal, state and local taxes
required pursuant to any applicable law, rule or regulation.
ARTICLE IV
Working Facilities, Expenses and Insurance
4.1 Working Facilities and Expenses. Employee shall be furnished with
an office at the Employee's principal office as set forth in Section 1.3 hereof,
or at such other location as agreed to by Employee and the Company, and other
working facilities and secretarial and other assistance suitable to his position
and reasonably required for the performance of his duties hereunder. The Company
shall reimburse Employee for all of Employee's reasonable expenses incurred
while employed and performing his duties under and in accordance with the terms
and conditions of this Agreement, subject to Employee's full and appropriate
documentation, including, without limitation, receipts for all such expenses in
the manner required pursuant to Company's policies and procedures and the
Internal Revenue Code of 1986, as amended (the "Code"), and applicable
regulations in effect from time to time.
4.2 Insurance. The Company may secure in its own name or otherwise, and
at its own expense, life, disability and other insurance covering Employee or
Employee and others, and Employee shall not have any right, title or interest in
or to such insurance other than as expressly provided herein. Employee agrees to
assist the Company in procuring such insurance by submitting to the usual and
customary medical and other examinations to be conducted by such physicians(s)
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as the Company or such insurance company may designate and by signing such
applications and other written instruments as may be required by any insurance
company to which application is made for such insurance. Any information
provided by Employee to such insurance company (the results of examinations
being deemed part of such information) will be provided on a confidential basis,
and the Company shall have no access thereto.
ARTICLE V
Illness or Incapacity
5.1 Right to Terminate. If, during the Term of this Agreement, Employee
shall be unable to perform, with or without a reasonable accommodation, in all
material respects the essential duties of his employment hereunder for a period
exceeding six (6) consecutive months by reason of illness or incapacity, this
Agreement may be terminated by the Company in its sole discretion pursuant to
Section 7.2 hereof.
5.2 Right to Replace. If Employee's illness or incapacity, whether by
physical or mental cause, renders him unable for a minimum period of thirty (30)
consecutive calendar days to carry out his duties and responsibilities as set
forth herein, the Company shall have the right to designate a person to
temporarily perform Employee's duties; provided, however, that if Employee
returns to work from such illness or incapacity within the six (6) month period
following his inability due to such illness or incapacity, he shall be entitled
to be reinstated in the capacity described in Article I hereof with all rights,
duties and privileges attendant thereto.
5.3 Rights Prior to Termination. Employee shall be entitled to his full
base salary under Section 3.1 hereof and full benefits under Section 3.4 hereof
during such illness or incapacity unless and until an election is made by the
Company to terminate this Agreement in accordance with the provisions of this
Article V.
5.4 Determination of Illness or Incapacity. For purposes of this
Article V, the term "illness or incapacity" shall mean Employee's inability to
perform his duties hereunder substantially on a full-time basis due to physical
or mental illness as determined by the Board of Directors, in its reasonable
discretion based upon competent medical evidence. Upon the Company's written
request, Employee shall submit to reasonable medical and other examinations to
provide the evidence required hereunder.
ARTICLE VI
Confidentiality
6.1 Confidentiality. During the Term of this Agreement and for a period
of five (5) years thereafter, Employee agrees to maintain the confidential
nature of the Company's confidential and proprietary trade secrets, including,
without limitation, development ideas, acquisition strategies and plans,
financial information, records, "know-how", methods of doing business, customer,
supplier and distributor lists and all other confidential information of the
Company. Employee shall not use (other than in connection with his employment),
in any way whatsoever, such trade secrets
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except as authorized in writing by the Company. Employee shall, upon the
termination of his employment, deliver to the Company any and all records,
books, documents or any other materials whatsoever (including all copies
thereof) containing such trade secrets which shall be and remain the property of
the Company.
6.2 Non-Removal of Records. All documents, papers, materials, notes,
books, correspondence, drawings and other written and graphic records of the
Business of the Company which Employee shall prepare or use, or come into
contact with, shall be and remain the sole property of the Company and,
effective immediately upon the termination of the Employee's employment with the
Company for any reason, shall not be removed from the Company's premises without
the Company's prior written consent.
ARTICLE VII
Termination
7.1 Termination For Cause. This Agreement and the employment of
Employee may be terminated by the Company "For Cause" in any of the following
circumstances:
(a) Employee has committed any fraud, dishonesty,
misappropriation or similar act against the Company;
or
(b) Employee is in default in a material respect in the
performance of Employee's obligations, services or
duties hereunder, which shall include, without
limitation, Employee's willfully disregarding the
written instructions of the Board of Directors of the
Company concerning the conduct of his duties
hereunder, Employee's conduct which, after written
notice and an opportunity to cure, is materially
inconsistent with the published policies of the
Company, as promulgated from time to time and which
are generally applicable to all employees and/or
senior executives, or Employee's breach of any other
material provision of this Agreement; or
(c) Employee is grossly negligent or engages in willful
misconduct in the performance of his duties
hereunder; or
(d) Employee has been adjudicated guilty by, or enters a
plea of guilty or no contest before, a court of
competent jurisdiction of illegal activities or found
by a court of competent jurisdiction to have engaged
in other wrongful conduct which individually, or in
the aggregate, has a material adverse effect on the
Company, its prospects, earnings or financial
condition, other than minor traffic infractions.
A Termination For Cause under this Section 7.1 shall be
effective upon the date set forth in a written notice of termination delivered
to Employee.
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7.2 Termination Without Cause. This Agreement and the employment of
the Employee may be terminated "Without Cause" as follows:
(a) By mutual agreement of the parties hereto; or
(b) At the election of the Company by its giving not less
than thirty (30) days' written notice to Employee; or
(c) At the election of the Company by its giving not less
than thirty (30) days' written notice to Employee in
the event of an illness or incapacity described in
Section 5.1; or
(d) At the election of the Employee by his giving not
less than thirty (30) days' written notice to the
Company for Good Reason; or
(e) Upon Employee's death.
"Good Reason" means (i) employee ceasing to be a senior
executive officer of the Company or (ii) a change in employee's reporting
requirements.
A Termination Without Cause under Sections 7.2(b), (c) or (d)
hereof shall be effective upon the date set forth in a written notice of
termination or resignation delivered hereunder, which shall be not less than
thirty (30) days nor more than forty-five (45) days after the giving of such
notice. A Termination Without Cause under Sections 7.2(a) or (e) hereof shall be
automatically effective upon the date of mutual agreement or the date of death
of the Employee, as the case may be.
7.3 Effect of Termination For Cause. If Employee's employment is
terminated For Cause:
(a) Employee shall be entitled to accrued base salary
under Section 3.1 and accrued vacation pay, each
through the date of termination;
(b) Employee shall be entitled to reimbursement for
expenses accrued through the date of termination in
accordance with the provisions of Section 4.1 hereof;
and
(c) Except as provided in Article XI, this Agreement
shall thereupon be of no further force and effect.
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7.4 Effect of Termination Without Cause. If Employee's employment is
terminated Without Cause:
(a) Employee shall be entitled to accrued base salary
under Section 3.1 and accrued vacation pay, each
through the date of termination;
(b) Employee shall be entitled to reimbursement for
expenses accrued through the date of termination in
accordance with the provisions of Section 4.1 hereof;
(c) Employee shall be entitled to receive all amounts of
base salary as would have been payable under Section
3.1 (provided that Employee shall receive not less
than twenty-four (24) months of base salary) through
the Scheduled Termination Date of the applicable term
hereof, which amounts shall be paid upon termination;
(d) Employee shall be entitled to receive all bonuses and
benefits as would have been awarded and/or paid under
Sections 3.2 and 3.4 hereof through (or as a result
of events occurring through) the Scheduled
Termination Date, which benefits shall be awarded as
and when the same would have been awarded under the
Agreement had it not been terminated; and
(e) Except as provided in Article XI, this Agreement shall
thereupon be of no further force or effect.
7.5 Termination Upon Change of Control. Upon a "Change of Control" (as
such term is defined in Section 7.6 hereof) of the Company during the Term
hereof, Employee may, at his sole discretion, declare this Agreement terminated
and receive a one-time, lump sum severance payment equal to two and nine-tenths
(2.9) times the total amount of the annual base salary payable under the terms
of Section 3.1 of this Agreement plus any incentive or bonus paid in the prior
year pursuant to Section 3.2 of this Agreement upon the date of such Change of
Control, if within three (3) years of the Change of Control:
(a) Employee's employment hereunder is terminated prior
to the Scheduled Termination Date of the applicable
term hereof Without Cause; or
(b) Employee elects to terminate his employment with the
Company in the event (i) he is removed from the
office which he held prior to the Change of Control
or (ii) the Company fails to afford Employee the
power and authority generally commensurate with the
position of President and Chief Executive Officer
prior to the Change of Control or (iii) the Company
requires Employee to relocate his residence outside
of Tampa, Florida.
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7.6 Change of Control. For purposes of Section 7.5 of this Agreement,
a Change of Control ("Change of Control") shall be deemed to have occurred in
the event of:
(a) The acquisition by any person or entity, or group
thereof acting in concert, of "beneficial" ownership
(as such term is defined in Securities and Exchange
Commission ("SEC") Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange
Act")), of securities of the Company which, together
with securities previously owned, confer upon such
person, entity or group the voting power, on any
matters brought to a vote of shareholders, of thirty
percent (30%) or more of the then outstanding shares
of capital stock of the Company; or
(b) The sale, assignment or transfer of assets of the
Company or any subsidiary or subsidiaries, in a
transaction or series of transactions, if the
aggregate consideration received or to be received by
the Company or any such subsidiary in connection with
such sale, assignment or transfer is greater than
fifty percent (50%) of the book value, determined by
the Company in accordance with generally accepted
accounting principles, of the Company's assets
determined on a consolidated basis immediately before
such transaction or the first of such transactions;
or
(c) The merger, consolidation, share exchange or
reorganization of the Company (or one or more
subsidiaries of the Company) as a result of which the
holders of all of the shares of capital stock of the
Company as a group would receive less than fifty
percent (50%) of the voting power of the capital
stock or other interests of the surviving or
resulting corporation or entity; or
(d) The adoption of a plan of liquidation or the approval
of the dissolution of the Company; or
(e) The commencement (within the meaning of SEC Rule
14d-2 under the Exchange Act) of a tender or exchange
offer which, if successful, would result in a Change
of Control of the Company;
(f) A determination by the Board of Directors of the
Company, in view of then current circumstances or
impending events, that a Change of Control of the
Company has occurred or is imminent, which
determination shall be made for the specific purpose
of triggering the operative provisions of this
Agreement; or
(g) The Board of Directors is not comprised of a majority
of directors who were either directors as of the date
of this Agreement (the "Initial Directors") or whose
nomination or election was approved by at least a
majority of the Initial Directors or by a majority of
directors whose nomination or election was approved
by the Initial Directors.
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7.7 Certain Additional Payments by the Company.
(a) If it shall be determined that any payment,
distribution or benefit received or to be received
by Employee from the Company ("Payments") would be
subject to the excise tax imposed by Section 4999 of
the Code (the "Excise Tax"), then Employee shall be
entitled to receive an additional payment (the
"Excise Tax Gross-Up Payment) in an amount such that
the net amount retained by Employee, after the
calculation and deduction of any Excise Tax on the
Payments and any federal, state and local income
taxes and excise tax on the Excise Tax Gross-Up
Payment provided for in this Section 7.7, shall be
equal to the Payments. In determining this amount,
the amount of the Excise Tax Gross-Up Payment
attributable to federal income taxes shall be
reduced by the maximum reduction in federal income
taxes that could be obtained by the deduction of the
portion of the Excise Tax Gross-Up Payment
attributable to state and local income taxes.
Finally, the Excise Tax Gross-Up Payment shall be
reduced by income or excise tax withholding payments
made by the Company or any affiliate of either to
any federal, state or local taxing authority with
respect to the Excise Tax Gross-Up Payment that was
not deducted from compensation payable to Employee.
(b) All determinations required to be made under this
Section 7.7, including whether and when an Excise
Tax Gross-Up Payment is required and the amount of
such Excise Tax Gross-Up Payment and the assumptions
to be utilized in arriving at such determination,
except as specified in Section 7.7(a) above, shall
be made by the Company's independent auditors (the
"Accounting Firm"), which shall provide detailed
supporting calculations both to the Company and
Employee within 15 business days after Employee
provides the Company with notice that a Payment has
been or will be made or such earlier time as may be
required by the Company. The determination of tax
liability made by the Accounting Firm shall be
subject to review by the Employee's tax advisor and,
if Employee's tax advisor does not agree with the
determination reached by the Accounting Firm, then
the Accounting Firm and Employee's tax advisor shall
jointly designate a nationally recognized public
accounting firm, which shall make the determination.
All fees and expenses of the accountants and tax
advisors retained by either Employee or the Company
shall be borne by the Company. Any Excise Tax
Gross-Up Payment, as determined pursuant to this
Section 7.7, with respect to a Payment shall be paid
by the Company to Employee at such time as Employee
is entitled to receive the Payment. Any
determination by a jointly designated public
accounting firm shall be binding upon the Company
and Employee.
(c) As a result of the uncertainty in the application of
Subsection 4999 of the Code at the time of the
initial determination hereunder, it is possible that
Excise Tax Gross-Up Payments will not have been made
by the Company that should have been made consistent
with the calculations required to be
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<PAGE>
made hereunder ("Underpayment"). In the event that
Employee thereafter is required to make a payment of
any Excise Tax, any such Underpayment calculated in
accordance with and in the same manner as the Excise
Tax Gross-Up Payment in Section 7.7(a) above shall
be promptly paid by the Company to or for the
benefit of Employee. In the event that the Excise
Tax Gross-Up Payment exceeds the amount subsequently
determined to be due, such excess shall constitute a
loan from the Company to Employee payable on the
fifth day after demand by the Company (together with
interest at the rate provided in Section
1274(b)(2)(B) of the Code).
ARTICLE VIII
Non-Competition and Non-Interference
8.1 Non-Competition. Employee agrees that during the Term hereof and,
in the case of a Termination For Cause, for a period of two (2) years
thereafter, Employee will not, directly, indirectly, or as an agent on behalf of
or in conjunction with any person, firm, partnership, corporation or other
entity, own, manage, control, join, or participate in the ownership, management,
operation, or control of, or be financially interested in or advise, lend money
to, or be employed by or provide consulting services to (i) any person or entity
seeking to provide the services or products which the Company provided or
planned on providing as of the date of termination, or (ii) any person or entity
to whom Employee provided services in any capacity on behalf of the Company, or
(iii) any person or entity to whom Employee was introduced or about whom
Employee received information through the Company and which person or entity is
located within the United States of America; provided, however, that the
foregoing restriction regarding financial interest shall not apply to ownership
of less than 5% of the common equity of any entity whose common equity is
registered under the Securities Exchange Act of 1934, as amended.
8.2 Non-Interference. Employee agrees that during the Term hereof and,
in the case of a Termination For Cause, for a period of two (2) years
thereafter, Employee will not, directly or as an agent on behalf of or in
conjunction with any person, firm, partnership, corporation or other entity,
retain or hire any person who was an employee of the Company while Employee was
employed by the Company or to whom Employee was introduced or about whom
Employee received information through the Company.
8.3 Severability. If any covenant or provision contained in this
Article VIII is determined to be void or unenforceable in whole or in part, it
shall not be deemed to affect or impair the validity of any other covenant or
provision. If, in any arbitral or judicial proceeding, a tribunal shall refuse
to enforce all of the separate covenants deemed included in this Article VIII,
then such unenforceable covenants shall be deemed eliminated from the provisions
hereof for the purpose of such proceedings to the extent necessary to permit the
remaining separate covenants to be enforced in such proceedings.
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ARTICLE IX
Remedies
9.1 Equitable Remedies. Employee and the Company agree that the
services to be rendered by Employee pursuant to this Agreement, and the rights
and interests granted and the obligations to be performed by Employee to the
Company pursuant to this Agreement, are of a special, unique, extraordinary and
intellectual character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law,
and that a breach by Employee of any of the terms of this Agreement will cause
the Company great and irreparable injury and damage. Employee hereby expressly
agrees that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to prevent a breach of Articles
VI and VIII of this Agreement, both pendente lite and permanently, against
Employee, as such breach would cause irreparable injury to the Company and a
remedy at law would be inadequate and insufficient. Therefore, the Company may,
in addition to pursuing its other remedies, obtain an injunction from any court
having jurisdiction in the matter restraining any further violation.
9.2 Rights and Remedies Preserved. Nothing in this Agreement except
Section 10.11 shall limit any right or remedy the Company or Employee may have
under this Agreement or pursuant to law for any breach of this Agreement by the
other party. The rights granted to the parties herein are cumulative and the
election of one shall not constitute a waiver of such party's right to assert
all other legal remedies available under the circumstances.
ARTICLE X
Miscellaneous
10.1 No Waivers. The failure of either party to enforce any provision
of this Agreement shall not be construed as a waiver of any such provision, nor
prevent such party thereafter from enforcing such provision or any other
provision of this Agreement.
10.2 Notices. Any notice to be given to the Company and Employee under
the terms of this Agreement may be delivered in person, by telecopy, telex or
other form of written electronic transmission, or by registered or certified
mail, postage prepaid, and shall be addressed as follows:
If to the Company: Z-Tel Technologies, Inc.
601 South Harbour Island Boulevard, Suite 220
Tampa, FL 33602
Attention: Chief Legal Officer
If to Employee: D. Gregory Smith
5312 Crescent Drive
Tampa, Florida 33611
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<PAGE>
Either party may hereafter notify the other in writing of any change in address.
Any notice shall be deemed duly given (i) when personally delivered, (ii) when
telecopied, telexed or transmitted by other form of written electronic
transmission (upon confirmation of receipt) or (iii) on the third day after it
is mailed by registered or certified mail, postage prepaid, as provided herein.
10.3 Severability. The provisions of this Agreement are severable and
if any provision of this Agreement shall be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions, or
enforceable parts thereof, shall not be affected thereby.
10.4 Successors and Assigns. The rights and obligations of the Company
under this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the Company, including the survivor upon any merger,
consolidation, share exchange or combination of the Company with any other
entity. Employee shall not have the right to assign, delegate or otherwise
transfer any duty or obligation to be performed by him hereunder to any person
or entity.
10.5 Entire Agreement. This Agreement supersedes all prior and
contemporaneous agreements and understandings between the parties hereto, oral
or written, and may not be modified or terminated orally. No modification,
termination or attempted waiver shall be valid unless in writing, signed by the
party against whom such modification, termination or waiver is sought to be
enforced. This Agreement was the subject of negotiation by the parties hereto
and their counsel. The parties agree that no prior drafts of this Agreement
shall be admissible as evidence (whether in any arbitration or court of law) in
any proceeding which involves the interpretation of any provisions of this
Agreement.
10.6 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of Florida without reference
to the conflict of law principles thereof.
10.7 Section Headings. The section headings contained herein are for
the purposes of convenience only and are not intended to define or limit the
contents of said sections.
10.8 Further Assurances. Each party hereto shall cooperate and shall
take such further action and shall execute and deliver such further documents as
may be reasonably requested by the other party in order to carry out the
provisions and purposes of this Agreement.
10.9 Gender. Whenever the pronouns "he" or "his" are used herein they
shall also be deemed to mean "she" or "hers" or "it" or "its" whenever
applicable. Words in the singular shall be read and construed as though in the
plural and words in the plural shall be read and construed as though in the
singular in all cases where they would so apply.
10.10 Counterparts. This Agreement may be executed in counterparts, all
of which taken together shall be deemed one original.
10.11 Confidential Arbitration. The parties hereto agree that any
dispute concerning or arising out of the provisions of this Agreement shall be
resolved by confidential arbitration in accordance with the rules of the
American Arbitration Association. Such confidential arbitration
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shall be held in Tampa, Florida, and the decision of the arbitrator(s) shall be
conclusive and binding on the parties and shall be enforceable in any court of
competent jurisdiction. The arbitrator may, in his or her discretion, award
attorneys fees and costs to such party as he or she sees fit in rendering his or
her decision. Notwithstanding the foregoing, if any dispute arises hereunder as
to which the Company desires to exercise any rights or remedies under Section
9.1 hereof, the Company may, in its discretion, in lieu of submitting the matter
to arbitration, bring an action thereon in any court of competent jurisdiction
in Tampa, Florida, which court may grant any and all relief available in equity
or at law. In any such action, the prevailing party shall be entitled to
reasonable attorneys' fees and costs as may be awarded by the court.
10.12 Other Agreements. Simultaneously with this Agreement, Employee is
entering into an Indemnity Agreement and Employee Stock Restriction Agreement.
In doing so, Employee has relied on the Company's assurances that the other
senior executives of the Company are entering into identical agreements, except
with respect to title and number of shares. The Company agrees that if it
subsequently amends any of those agreements in a manner favorable to the other
party thereto (other than to change the number of shares covered thereby), it
will offer the same amendment to Employee.
ARTICLE XI
Survival
11.1 Survival. The provisions of Articles VI, VII, VIII, IX and X, of
this Agreement shall survive the termination of this Agreement whether upon, or
prior to, the Scheduled Termination Date hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
Z-TEL TECHNOLOGIES, INC.,
a Delaware corporation
By:
---------------------------------
D. Gregory Smith, President and
Chief Executive Officer
EMPLOYEE
-------------------------------------
Address: 5312 Crescent Drive
Tampa, FL 33611
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Exhibit 10.1.3
EMPLOYMENT AGREEMENT
BY AND BETWEEN
Z-TEL COMMUNICATIONS, INC
AND
JOHN HUTCHENS
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of October 1, 1999, by and between Z-TEL COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), and JOHN HUTCHENS ("Employee").
1. Employment and Title. The Company hereby employs Employee, and
Employee hereby accepts such employment, as Senior Vice-President
- Chief Financial Officer, all upon the terms and conditions set
forth herein.
2. Services. During the Term (as defined herein) hereof, Employee
agrees to perform diligently and in good faith the duties of
Senior Vice President - Chief Financial Officer of the Company
under the direction of the Company's Chief Executive Officer.
Employee agrees to devote his best efforts and all of his business
time, energies and abilities to the services to be performed
hereunder and for the exclusive benefit of the Company. In such
capacity, Employee shall have full responsibility for and
oversight of all audit and accounting functions of the Company and
shall assist the Chief Executive Officer in corporate finance
functions.
3. Location. The principal place of employment and the location of
Employee's principal office shall be in Tampa, Florida.
4. Term. The term of Employee's employment hereunder (the "Term")
shall commence on the date hereof (the "Commencement Date") and
continue through the third anniversary of the Commencement Date
(the "Scheduled Termination Date"), unless earlier terminated
pursuant to the terms of this Agreement.
5. Base Salary. As compensation for the services to be rendered by
Employee hereunder, the Company shall pay Employee, during the
Term of this Agreement, an annual base salary of not less than One
Hundred Fifty Thousand Dollars ($150,000.00), which base salary
shall accrue monthly (prorated for periods less than a month) and
shall be paid in equal bi-monthly installments, in arrears. The
Company will increase Employee's base salary 10% on October 1 in
each of 2000, 2001 and 2002.
6. Bonus Compensation. Commencing in FY00, Employee shall be eligible
to participate in all bonus compensation programs generally
available to members of the senior management team, subject to the
discretion of the Compensation Committee of the Company's Board of
Directors.
<PAGE>
7. Equity Participation. Subject to the terms of The 1998 Equity
Participation Plan of Z-Tel Technologies, Inc. and the incentive
stock option agreements issued thereunder, Employee shall be
granted options to purchase 150,000 shares of the common stock of
Z-Tel Technologies, Inc. at $4.00 per share.
8. Benefits. Employee shall be entitled, during the Term hereof, to
the following benefits: (a) comprehensive medical and dental
insurance, including dependent coverage, paid fully by the
Company, with coverage commencing three months after the date
hereof and COBRA coverage reimbursed by the Company, (b) two weeks
paid vacation per year, and (c) an officers and directors
indemnity agreement in the form prescribed by the Company from
time to time.
9. Confidentiality. During the term of this Agreement and thereafter,
Employee shall maintain the confidential nature of the Company's
confidential and proprietary trade secrets, including, without
limitation, development ideas, acquisition strategies and plans,
financial information, records, "know-how," methods of doing
business, customer, supplier and distributor lists and all other
confidential information of the Company. Employee shall not use
(other than in connection with his employment) in any way
whatsoever, such trade secrets except as authorized in writing by
the Company. Employee shall, upon the termination of his
employment, deliver to the Company any and all records, books,
documents or any other materials whatsoever (including all copies
thereof) containing such trade secrets which shall be and remain
the sole and exclusive property of the Company. Employee shall, as
a condition of this Agreement, execute a copy of the Company's
Confidential Information and Inventions Agreement.
10. Termination. This Agreement and the employment of Employee may be
terminated "For Cause" in any of the following circumstances: (a)
Employee has committed any fraud, dishonesty, misappropriation or
similar act against the Company; (b) Employee has willfully
disregarded the written or oral instructions of the Chief
Executive Officer of the Company concerning the conduct of his
duties hereunder and, following written notice by the Company, has
failed to comply with such instructions, or has breached of any
other material provision of this Agreement; (c) Employee has been
negligent or has engaged in willful misconduct in the performance
of his duties hereunder; or (d) Employee has engaged in illegal
activities or other wrongful conduct which individually, or in the
aggregate, has a material adverse effect on the Company, its
prospects, earnings or financial condition. A termination "For
Cause" hereunder shall be effective upon the date set forth in a
written notice of termination delivered to the Employee. In the
event Employee is terminated other than "For Cause" prior to the
Scheduled Termination Date, the Company shall pay Employee one
years' base salary in full settlement of all of Employee's claims,
if any, against the Company arising out of or in connection with
such termination.
<PAGE>
11. Non-Competition. Employee agrees that during the Term hereof and
for a period of one (1) year thereafter, Employee will nor,
directly, indirectly, or as an agent on behalf of or in
conjunction with any person, firm, partnership, corporation or
other entity, own, manage, control, join, or participate in the
ownership, management, operation, or control of, or be financially
interested in or advise, lend money to, or be employed by or
provide consulting services to, or be connected in any manner with
any similar business located within the United States of America;
provided that the foregoing restriction regarding financial
interest shall not apply to ownership of less than 5% of the
common equity of any entity whose common equity is registered
under the Securities Exchange Act of 1934, as amended. In the
event of a termination other "For Cause" hereunder, the provisions
of this Section 11 shall not survive the termination of this
Agreement.
12. Non-Interference. Employee agrees that during the Term hereof and
for a period of one (1) year thereafter, Employee will not
directly, indirectly, or as an agent on behalf of or in
conjunction with any person, firm, partnership, corporation or
other entity, hire any employee of the Company whose employment
was not already terminated or cause anyone else to do so, provided
that general advertisements and executive recruiting searches
shall not in any event violate this Section 12.
13. Severability. If any covenant or provisions contained in Section
11 or 12 is determined to be void or unenforceable in whole or in
part, it shall not be deemed to affect or impair the validity of
any other covenant or provision. If, in any arbitral or judicial
proceeding, a tribunal shall refuse to enforce all of the separate
covenants deemed included in Section 11 or 12, then such
unenforceable covenants shall be deemed eliminated from the
provisions hereof for the purpose of such proceedings to the
extent necessary to permit the remaining separate covenants to be
enforced in such proceedings.
14. Equitable Remedies. Employee and the Company agree that the
services to be rendered by Employee pursuant to this Agreement,
and the rights and interests granted and the obligations to be
performed by Employee to the Company pursuant to this Agreement,
are of a special, unique, extraordinary and intellectual
character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any
action at law, and that a breach by Employee of any of the terms
of this Agreement will cause the Company great and irreparable
injury and damage. Employee hereby expressly agrees that the
Company shall be entitled to the remedies of injunction, specific
performance and other equitable relief to prevent a breach of
Section 12 or 13 of this Agreement, both pendente lite and
permanently, against Employee, as such breach would cause
irreparable injury to the Company and a remedy at law would be
inadequate and insufficient. Therefore, the Company may, in
addition to pursuing its other remedies,
<PAGE>
obtain an injunction from any court having jurisdiction in the
matter restraining any further violation.
15. Rights and Remedies Preserved. Nothing in this Agreement shall
limit any right or remedy the Company or Employee may have under
this Agreement or pursuant to law for any breach of this Agreement
by the other party. The rights granted to the parties herein are
cumulative and the election of one shall not constitute a waiver
of such party's right to assert all other legal remedies available
under the circumstances.
16. No Waivers. The failure of either party to enforce any provision
of this Agreement shall not be construed as a waiver of any such
provision, nor prevent such party thereafter from enforcing such
provision or any other provision of this Agreement.
17. Notices. Any notice to be given to the Company and Employer under
the terms of this Agreement may be delivered personally, by
telecopy, telex or other form of written electronic transmission,
or by registered or certified mail, postage prepared, and shall be
addressed as follows:
If to the Company: Z-Tel Technologies, Inc.
601 South Harbour Island Boulevard
Suite 220
Tampa, Florida 33602
Attention: Chief Legal Officer
If to Employee: John Hutchens
Either party may hereafter notify the other in writing of any
change in address. Any notice shall be deemed duly given (i) when
personally delivered, (ii) when telecopied, telexed or transmitted
by other form of written electronic transmission (upon
confirmation of receipt), or (iii) on the third day after it is
mailed by registered or certified mail, postage prepared, as
provided herein.
18. Severability. The provisions of this Agreement are severable and
if any provision of this Agreement shall be held to be invalid or
otherwise unenforceable, in whole or in part, the remainder of the
provisions, or enforceable parts thereof, shall not be affected
thereby.
19. Successors and Assigns. The rights and obligations of the Company
under this Agreement shall inure to the benefit of and be binding
upon the successors and assigns of the Company, including the
survivor upon any merger, consolidation, share exchange or
combination of the Company with any other entity. Employee shall
not have the right to assign, delegate or
<PAGE>
otherwise transfer any duty or obligation to be performed by him
hereunder to any person or entity.
20. Entire Agreement. This Agreement supersedes all prior and
contemporaneous agreements and understandings between the parties
hereto, oral or written, and may not be modified or terminated
orally. No modification, termination or attempted waiver shall be
valid unless in writing, signed by the party against whom such
modification, termination or waiver is sought to be enforced. This
Agreement was the subject of negotiation by the parties hereto and
their counsel. The parties agree that no prior drafts of this
Agreement shall be admissible as evidence (whether in any
arbitration or court of law) in any proceeding which involves the
interpretation of any provisions of this Agreement.
21. Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of Florida
without reference to the conflict of law principles thereof.
22. Section Headings. The section headings contained herein are for
the purposes of convenience only and are not intended to define or
limit the contents of said sections.
23. Further Assurances. Each party hereto shall cooperate and shall
take such further action and shall execute and deliver such
further documents as may be reasonably requested by the other
party in order to carry out the provisions and purposes of this
Agreement.
24. Gender. Whenever the pronouns "he" or "his" are used herein, they
shall also be deemed to mean "she" or "hers" or "it" or "its"
whenever applicable. Words in the singular shall be read and
construed as though in the plural and words in the plural shall be
read and construed as though in the singular in all cases where
they would so apply.
25. Counterparts. This Agreement may be executed in counterparts, all
of which taken together shall be deemed one original.
26. Confidential Aribtration. The parties hereto agree that any
dispute concerning or arising out of the provisions of this
Agreement shall be resolved by confidential arbitration in
accordance with the rules of the American Arbitration Association.
Such confidential arbitration shall be held in Tampa, Florida, and
the decision of the arbitrator(s) shall be conclusive and binding
on the parties and shall be enforceable in any court of competent
jurisdiction. The arbitrator may, in his or her discretion, award
attorneys fees and costs to such party as he or she sees fit in
rendering his or her decision. Notwithstanding the foregoing, if
any dispute arises hereunder as to which the Company desires to
exercise any rights or remedies under Section 11 or 12
<PAGE>
hereof, the Company may, in its discretion, in lieu of submitting
the matter to arbitration, bring an action thereon in any court of
competent jurisdiction in Florida, which court may grant any and
all relief available in equity or at law. In any such action, the
prevailing party shall be entitled to reasonable attorneys' fees
and costs as may be awarded by the court.
27. Survival. The provisions of Sections 9, 11 (except in the case of
a termination other than "For Cause"), 12, 13, 14 and 26 of this
Agreement shall survive the termination of this Agreement whether
upon, or prior to, the Scheduled Termination Date hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
Z-TEL COMMUNICATIONS, INC.,
a Delaware corporation
By:
---------------------------------------------
Russell T. Alba
Chief Legal Officer and Senior Vice
President - Business Development
EMPLOYEE
-----------------------------------------------
JOHN HUTCHENS
Address:
<PAGE>
EXHIBIT 10.1.4
EMPLOYMENT AGREEMENT
BY AND BETWEEN
Z-TEL TECHNOLOGIES, INC.
AND
CHARLES W. MCDONOUGH
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of August 1, 1998, by and between Z-TEL TECHNOLOGIES, INC., a Delaware
corporation (the "Company"), and CHARLES W. MCDONOUGH ("Employee").
WHEREAS, the Company and Employee desire to enter into this Agreement
to assure the Company of the services of Employee and to set forth the
respective rights and duties of the parties hereto;
WHEREAS, the Company is presently in the business of providing enhanced
telecommunications products and services (such activities, present and future,
being hereinafter referred to as the "Business");
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, terms and conditions set forth herein, the Company and Employee agree
as follows:
ARTICLE I
Employment
1.1 Employment and Title. The Company hereby employs Employee, and
Employee hereby accepts such employment, as Senior Vice President - Chief
Technology Officer of the Company, all upon the terms and conditions set forth
herein.
1.2 Services. During the Term (as hereinafter defined) hereof, Employee
agrees to perform diligently and in good faith the duties of Senior Vice
President - Chief Technology Officer of the Company, under the direction of the
Board of Directors of the Company (the "Board of Directors") or the Executive
Committee of the Board of Directors (the "Executive Committee"). Employee agrees
to devote his best efforts and all of his full business time, energies and
abilities to the services to be performed hereunder and for the exclusive
benefit of the Company. Employee shall be vested with such authority as is
generally commensurate with the position of Senior Vice President - Chief
Technology Officer of the Company, as further outlined below. Employee will
report solely to D. Gregory Smith, the Company's President and Chief Executive
Officer.
1.3 Location. The principal place of employment and the location of
Employee's principal office shall be in Tampa, Florida; provided, however,
Employee shall, if he determines it to be reasonably necessary, engage in
reasonable travel in the performance of his duties under this Agreement.
<PAGE>
1.4 Representations. Each party represents and warrants to the other
that he/it has full power and authority to enter into and perform this Agreement
and that his/its execution and performance of this Agreement shall not
constitute a default under or breach of any of the terms of any agreement to
which he/it is a party or under which he/it is bound. Each party represents that
no consent or approval of any third party is required for his/its execution,
delivery and performance of this Agreement or that all consents or approvals of
any third party required for his/its execution, delivery and performance of this
Agreement have been obtained.
1.5 Sole Discretion. As the term "sole discretion" is used in this
Agreement, unless otherwise defined, it will be interpreted as the exercise of
reasonable discretion applying normal business practices to a contractual
relationship between a company and its senior vice president - chief technology
officer.
ARTICLE II
Term
2.1 Term. The term of Employee's employment hereunder (the "Term")
shall commence as of the date hereof (the "Commencement Date") and shall
continue through the third anniversary of the Commencement Date (the "Scheduled
Termination Date"), unless earlier terminated pursuant to the provisions of this
Agreement. This Agreement shall automatically renew for an unlimited number of
successive one-year terms unless either party shall deliver written notice of
non-renewal at least ninety (90) days prior to the Scheduled Termination Date
(or the Scheduled Termination Date of any renewal term).
ARTICLE III
Compensation
3.1 Base Salary. As compensation for the services to be rendered by
Employee, the Company shall pay Employee, during the Term of this Agreement, an
annual base salary of not less than One Hundred Fifty Thousand Dollars
($150,000.00), which base salary shall accrue monthly (prorated for periods less
than a month) and shall be paid in equal monthly installments, in arrears. The
base salary will be reviewed annually, or, more frequently, as appropriate, by
the Board of Directors or the Compensation Committee of the Board of Directors,
as the case may be, for upward, but not downward, adjustment in its sole
discretion. Employee shall in no event receive an annual base salary less than
that paid to the Company's Chief Executive Officer.
3.2 Bonus Compensation. Employee shall be eligible to receive bonus or
incentive compensation, which may be granted from time to time in the sole
discretion of the Board of Directors in accordance with the Company's
compensation structure in effect from time to time.
3.3 Employee's Legal Fees. Employee may, and the Company has encouraged
the Employee to, engage competent independent legal counsel for advice and
guidance with respect to this Agreement, including, without limitation, advice
as to the federal income tax consequences of
2
<PAGE>
this Article III. The Company shall reimburse Employee for all reasonable legal
fees incurred by Employee in connection with the negotiation and execution of
this Agreement.
3.4 Benefits. Employee shall be entitled, during the Term hereof, to
the same medical, hospital, dental and life insurance coverage and benefits as
are then available to the Company's most senior executive officers, together
with the following additional benefits:
(a) An automobile allowance of One Thousand Dollars ($1,000.00)
per month;
(b) Comprehensive medical coverage, including dependent coverage,
paid fully by the Company;
(c) Life insurance in an amount equal to two times Employee's
base salary;
(d) Long-term disability insurance in an amount, adjusted
annually, equal to two-thirds of Employee's prior year base
salary and incentive compensation, if any, excluding
compensation earned through Company stock options or other
securities;
(e) The Company's normal vacation allowance for all employees who
are executive officers of the Company, but not less than
three weeks annually;
(f) An Officers and Directors Indemnity Agreement, substantially
in the form attached hereto as Exhibit A.
3.5 Withholding. Any and all amounts payable under this Agreement,
including, without limitation, amounts payable under this Article III and
Article VII, are subject to withholding for such federal, state and local taxes
required pursuant to any applicable law, rule or regulation.
ARTICLE IV
Working Facilities, Expenses and Insurance
4.1 Working Facilities and Expenses. Employee shall be furnished with
an office at the Employee's principal office as set forth in Section 1.3 hereof,
or at such other location as agreed to by Employee and the Company, and other
working facilities and secretarial and other assistance suitable to his position
and reasonably required for the performance of his duties hereunder. The Company
shall reimburse Employee for all of Employee's reasonable expenses incurred
while employed and performing his duties under and in accordance with the terms
and conditions of this Agreement, subject to Employee's full and appropriate
documentation, including, without limitation, receipts for all such expenses in
the manner required pursuant to Company's policies and procedures and the
Internal Revenue Code of 1986, as amended (the "Code"), and applicable
regulations in effect from time to time.
4.2 Insurance. The Company may secure in its own name or otherwise, and
at its own expense, life, disability and other insurance covering Employee or
Employee and others, and
3
<PAGE>
Employee shall not have any right, title or interest in or to such insurance
other than as expressly provided herein. Employee agrees to assist the Company
in procuring such insurance by submitting to the usual and customary medical and
other examinations to be conducted by such physicians(s) as the Company or such
insurance company may designate and by signing such applications and other
written instruments as may be required by any insurance company to which
application is made for such insurance. Any information provided by Employee to
such insurance company (the results of examinations being deemed part of such
information) will be provided on a confidential basis, and the Company shall
have no access thereto.
ARTICLE V
Illness or Incapacity
5.1 Right to Terminate. If, during the Term of this Agreement, Employee
shall be unable to perform, with or without a reasonable accommodation, in all
material respects the essential duties of his employment hereunder for a period
exceeding six (6) consecutive months by reason of illness or incapacity, this
Agreement may be terminated by the Company in its sole discretion pursuant to
Section 7.2 hereof.
5.2 Right to Replace. If Employee's illness or incapacity, whether by
physical or mental cause, renders him unable for a minimum period of thirty (30)
consecutive calendar days to carry out his duties and responsibilities as set
forth herein, the Company shall have the right to designate a person to
temporarily perform Employee's duties; provided, however, that if Employee
returns to work from such illness or incapacity within the six (6) month period
following his inability due to such illness or incapacity, he shall be entitled
to be reinstated in the capacity described in Article I hereof with all rights,
duties and privileges attendant thereto.
5.3 Rights Prior to Termination. Employee shall be entitled to his full
base salary under Section 3.1 hereof and full benefits under Section 3.4 hereof
during such illness or incapacity unless and until an election is made by the
Company to terminate this Agreement in accordance with the provisions of this
Article V.
5.4 Determination of Illness or Incapacity. For purposes of this
Article V, the term "illness or incapacity" shall mean Employee's inability to
perform his duties hereunder substantially on a full-time basis due to physical
or mental illness as determined by the Board of Directors, in its reasonable
discretion based upon competent medical evidence. Upon the Company's written
request, Employee shall submit to reasonable medical and other examinations to
provide the evidence required hereunder.
ARTICLE VI
Confidentiality
6.1 Confidentiality. During the Term of this Agreement and for a period
of five (5) years thereafter, Employee agrees to maintain the confidential
nature of the Company's confidential and proprietary trade secrets, including,
without limitation, development ideas, acquisition strategies
4
<PAGE>
and plans, financial information, records, "know-how", methods of doing
business, customer, supplier and distributor lists and all other confidential
information of the Company. Employee shall not use (other than in connection
with his employment), in any way whatsoever, such trade secrets except as
authorized in writing by the Company. Employee shall, upon the termination of
his employment, deliver to the Company any and all records, books, documents or
any other materials whatsoever (including all copies thereof) containing such
trade secrets which shall be and remain the property of the Company.
6.2 Non-Removal of Records. All documents, papers, materials, notes,
books, correspondence, drawings and other written and graphic records of the
Business of the Company which Employee shall prepare or use, or come into
contact with, shall be and remain the sole property of the Company and,
effective immediately upon the termination of the Employee's employment with the
Company for any reason, shall not be removed from the Company's premises without
the Company's prior written consent.
ARTICLE VII
Termination
7.1 Termination For Cause. This Agreement and the employment of
Employee may be terminated by the Company "For Cause" in any of the following
circumstances:
(a) Employee has committed any fraud, dishonesty,
misappropriation or similar act against the Company; or
(b) Employee is in default in a material respect in the
performance of Employee's obligations, services or duties
hereunder, which shall include, without limitation,
Employee's willfully disregarding the written instructions of
the Chief Executive Officer of the Company concerning the
conduct of his duties hereunder, Employee's conduct which,
after written notice and an opportunity to cure, is
materially inconsistent with the published policies of the
Company, as promulgated from time to time and which are
generally applicable to all employees and/or senior
executives, or Employee's breach of any other material
provision of this Agreement; or
(c) Employee is grossly negligent or engages in willful
misconduct in the performance of his duties hereunder; or
(d) Employee has been adjudicated guilty by, or enters a plea of
guilty or no contest before, a court of competent
jurisdiction of illegal activities or found by a court of
competent jurisdiction to have engaged in other wrongful
conduct which individually, or in the aggregate, has a
material adverse effect on the Company, its prospects,
earnings or financial condition, other than minor traffic
infractions.
5
<PAGE>
A Termination For Cause under this Section 7.1 shall be
effective upon the date set forth in a written notice of termination delivered
to Employee.
7.2 Termination Without Cause. This Agreement and the employment of the
Employee may be terminated "Without Cause" as follows:
(a) By mutual agreement of the parties hereto; or
(b) At the election of the Company by its giving not less than
thirty (30) days' written notice to Employee; or
(c) At the election of the Company by its giving not less than
thirty (30) days' written notice to Employee in the event of
an illness or incapacity described in Section 5.1; or
(d) At the election of the Employee by his giving not less than
thirty (30) days' written notice to the Company for Good
Reason; or
(e) Upon Employee's death.
"Good Reason" means (i) employee ceasing to be a senior
executive officer of the Company or (ii) a change in employee's reporting
requirements.
A Termination Without Cause under Sections 7.2(b), (c) or (d)
hereof shall be effective upon the date set forth in a written notice of
termination or resignation delivered hereunder, which shall be not less than
thirty (30) days nor more than forty-five (45) days after the giving of such
notice. A Termination Without Cause under Sections 7.2(a) or (e) hereof shall be
automatically effective upon the date of mutual agreement or the date of death
of the Employee, as the case may be.
7.3 Effect of Termination For Cause. If Employee's employment is
terminated For Cause:
(a) Employee shall be entitled to accrued base salary under
Section 3.1 and accrued vacation pay, each through the date
of termination;
(b) Employee shall be entitled to reimbursement for expenses
accrued through the date of termination in accordance with
the provisions of Section 4.1 hereof; and
(c) Except as provided in Article XI, this Agreement shall
thereupon be of no further force and effect.
6
<PAGE>
7.4 Effect of Termination Without Cause. If Employee's employment is
terminated Without Cause:
(a) Employee shall be entitled to accrued base salary under
Section 3.1 and accrued vacation pay, each through the date
of termination;
(b) Employee shall be entitled to reimbursement for expenses
accrued through the date of termination in accordance with
the provisions of Section 4.1 hereof;
(c) Employee shall be entitled to receive all amounts of base
salary as would have been payable under Section 3.1 (provided
that Employee shall receive not less than twenty-four (24)
months of base salary) through the Scheduled Termination Date
of the applicable term hereof, which amounts shall be paid
upon termination;
(d) Employee shall be entitled to receive all bonuses and
benefits as would have been awarded and/or paid under
Sections 3.2 and 3.4 hereof through (or as a result of events
occurring through) the Scheduled Termination Date, which
benefits shall be awarded as and when the same would have
been awarded under the Agreement had it not been terminated;
and
(e) Except as provided in Article XI, this Agreement shall
thereupon be of no further force or effect.
7.5 Termination Upon Change of Control. Upon a "Change of Control" (as
such term is defined in Section 7.6 hereof) of the Company during the Term
hereof, Employee may, at his sole discretion, declare this Agreement terminated
and receive a one-time, lump sum severance payment equal to two and nine-tenths
(2.9) times the total amount of the annual base salary payable under the terms
of Section 3.1 of this Agreement plus any incentive or bonus paid in the prior
year pursuant to Section 3.2 of this Agreement upon the date of such Change of
Control, if within three (3) years of the Change of Control:
(a) Employee's employment hereunder is terminated prior to the
Scheduled Termination Date of the applicable term hereof
Without Cause; or
(b) Employee elects to terminate his employment with the Company
in the event (i) he is removed from the office which he held
prior to the Change of Control or (ii) the Company fails to
afford Employee the power and authority generally
commensurate with the position of Senior Vice President -
Chief Technology Officer prior to the Change of Control or
(iii) the Company requires Employee to relocate his residence
outside of Sanibel, Florida.
7
<PAGE>
7.6 Change of Control. For purposes of Section 7.5 of this Agreement, a
Change of Control ("Change of Control") shall be deemed to have occurred in the
event of:
(a) The acquisition by any person or entity, or group thereof
acting in concert, of "beneficial" ownership (as such term is
defined in Securities and Exchange Commission ("SEC") Rule
13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), of securities of the Company which,
together with securities previously owned, confer upon such
person, entity or group the voting power, on any matters
brought to a vote of shareholders, of thirty percent (30%) or
more of the then outstanding shares of capital stock of the
Company; or
(b) The sale, assignment or transfer of assets of the Company or
any subsidiary or subsidiaries, in a transaction or series of
transactions, if the aggregate consideration received or to
be received by the Company or any such subsidiary in
connection with such sale, assignment or transfer is greater
than fifty percent (50%) of the book value, determined by the
Company in accordance with generally accepted accounting
principles, of the Company's assets determined on a
consolidated basis immediately before such transaction or the
first of such transactions; or
(c) The merger, consolidation, share exchange or reorganization
of the Company (or one or more subsidiaries of the Company)
as a result of which the holders of all of the shares of
capital stock of the Company as a group would receive less
than fifty percent (50%) of the voting power of the capital
stock or other interests of the surviving or resulting
corporation or entity; or
(d) The adoption of a plan of liquidation or the approval of the
dissolution of the Company; or
(e) The commencement (within the meaning of SEC Rule 14d-2 under
the Exchange Act) of a tender or exchange offer which, if
successful, would result in a Change of Control of the
Company;
(f) A determination by the Board of Directors of the Company, in
view of then current circumstances or impending events, that
a Change of Control of the Company has occurred or is
imminent, which determination shall be made for the specific
purpose of triggering the operative provisions of this
Agreement; or
(g) The Board of Directors is not comprised of a majority of
directors who were either directors as of the date of this
Agreement (the "Initial Directors") or whose nomination or
election was approved by at least a majority of the Initial
Directors or by a majority of directors whose nomination or
election was approved by the Initial Directors.
8
<PAGE>
7.7 Certain Additional Payments by the Company.
(a) If it shall be determined that any payment, distribution or
benefit received or to be received by Employee from the
Company ("Payments") would be subject to the excise tax
imposed by Section 4999 of the Code (the "Excise Tax"), then
Employee shall be entitled to receive an additional payment
(the "Excise Tax Gross-Up Payment) in an amount such that the
net amount retained by Employee, after the calculation and
deduction of any Excise Tax on the Payments and any federal,
state and local income taxes and excise tax on the Excise Tax
Gross-Up Payment provided for in this Section 7.7, shall be
equal to the Payments. In determining this amount, the amount
of the Excise Tax Gross-Up Payment attributable to federal
income taxes shall be reduced by the maximum reduction in
federal income taxes that could be obtained by the deduction
of the portion of the Excise Tax Gross-Up Payment
attributable to state and local income taxes. Finally, the
Excise Tax Gross-Up Payment shall be reduced by income or
excise tax withholding payments made by the Company or any
affiliate of either to any federal, state or local taxing
authority with respect to the Excise Tax Gross-Up Payment
that was not deducted from compensation payable to Employee.
(b) All determinations required to be made under this Section
7.7, including whether and when an Excise Tax Gross-Up
Payment is required and the amount of such Excise Tax
Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, except as specified in
Section 7.7(a) above, shall be made by the Company's
independent auditors (the "Accounting Firm"), which shall
provide detailed supporting calculations both to the Company
and Employee within 15 business days after Employee provides
the Company with notice that a Payment has been or will be
made or such earlier time as may be required by the Company.
The determination of tax liability made by the Accounting
Firm shall be subject to review by the Employee's tax advisor
and, if Employee's tax advisor does not agree with the
determination reached by the Accounting Firm, then the
Accounting Firm and Employee's tax advisor shall jointly
designate a nationally recognized public accounting firm,
which shall make the determination. All fees and expenses of
the accountants and tax advisors retained by either Employee
or the Company shall be borne by the Company. Any Excise Tax
Gross-Up Payment, as determined pursuant to this Section 7.7,
with respect to a Payment shall be paid by the Company to
Employee at such time as Employee is entitled to receive the
Payment. Any determination by a jointly designated public
accounting firm shall be binding upon the Company and
Employee.
(c) As a result of the uncertainty in the application of
Subsection 4999 of the Code at the time of the initial
determination hereunder, it is possible that Excise Tax
Gross-Up Payments will not have been made by the Company that
should have been made consistent with the calculations
required to be
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<PAGE>
made hereunder ("Underpayment"). In the event that Employee
thereafter is required to make a payment of any Excise Tax,
any such Underpayment calculated in accordance with and in
the same manner as the Excise Tax Gross-Up Payment in Section
7.7(a) above shall be promptly paid by the Company to or for
the benefit of Employee. In the event that the Excise Tax
Gross-Up Payment exceeds the amount subsequently determined
to be due, such excess shall constitute a loan from the
Company to Employee payable on the fifth day after demand by
the Company (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
ARTICLE VIII
Non-Competition and Non-Interference
8.1 Non-Competition. Employee agrees that during the Term hereof and,
in the case of a Termination For Cause, for a period of two (2) years
thereafter, Employee will not, directly, indirectly, or as an agent on behalf of
or in conjunction with any person, firm, partnership, corporation or other
entity, own, manage, control, join, or participate in the ownership, management,
operation, or control of, or be financially interested in or advise, lend money
to, or be employed by or provide consulting services to (i) any person or entity
seeking to provide the services or products which the Company provided or
planned on providing as of the date of termination, or (ii) any person or entity
to whom Employee provided services in any capacity on behalf of the Company, or
(iii) any person or entity to whom Employee was introduced or about whom
Employee received information through the Company and which person or entity is
located within the United States of America; provided, however, that the
foregoing restriction regarding financial interest shall not apply to ownership
of less than 5% of the common equity of any entity whose common equity is
registered under the Securities Exchange Act of 1934, as amended.
8.2 Non-Interference. Employee agrees that during the Term hereof and,
in the case of a Termination For Cause, for a period of two (2) years
thereafter, Employee will not, directly or as an agent on behalf of or in
conjunction with any person, firm, partnership, corporation or other entity,
retain or hire any person who was an employee of the Company while Employee was
employed by the Company or to whom Employee was introduced or about whom
Employee received information through the Company.
8.3 Severability. If any covenant or provision contained in this
Article VIII is determined to be void or unenforceable in whole or in part, it
shall not be deemed to affect or impair the validity of any other covenant or
provision. If, in any arbitral or judicial proceeding, a tribunal shall refuse
to enforce all of the separate covenants deemed included in this Article VIII,
then such unenforceable covenants shall be deemed eliminated from the provisions
hereof for the purpose of such proceedings to the extent necessary to permit the
remaining separate covenants to be enforced in such proceedings.
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ARTICLE IX
Remedies
9.1 Equitable Remedies. Employee and the Company agree that the
services to be rendered by Employee pursuant to this Agreement, and the rights
and interests granted and the obligations to be performed by Employee to the
Company pursuant to this Agreement, are of a special, unique, extraordinary and
intellectual character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law,
and that a breach by Employee of any of the terms of this Agreement will cause
the Company great and irreparable injury and damage. Employee hereby expressly
agrees that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to prevent a breach of Articles
VI and VIII of this Agreement, both pendente lite and permanently, against
Employee, as such breach would cause irreparable injury to the Company and a
remedy at law would be inadequate and insufficient. Therefore, the Company may,
in addition to pursuing its other remedies, obtain an injunction from any court
having jurisdiction in the matter restraining any further violation.
9.2 Rights and Remedies Preserved. Nothing in this Agreement except
Section 10.11 shall limit any right or remedy the Company or Employee may have
under this Agreement or pursuant to law for any breach of this Agreement by the
other party. The rights granted to the parties herein are cumulative and the
election of one shall not constitute a waiver of such party's right to assert
all other legal remedies available under the circumstances.
ARTICLE X
Miscellaneous
10.1 No Waivers. The failure of either party to enforce any provision
of this Agreement shall not be construed as a waiver of any such provision, nor
prevent such party thereafter from enforcing such provision or any other
provision of this Agreement.
10.2 Notices. Any notice to be given to the Company and Employee under
the terms of this Agreement may be delivered in person, by telecopy, telex or
other form of written electronic transmission, or by registered or certified
mail, postage prepaid, and shall be addressed as follows:
If to the Company: Z-Tel Technologies, Inc.
601 South Harbour Island Boulevard, Suite 220
Tampa, FL 33602
Attention: Chief Legal Officer
If to Employee: Charles W. McDonough
-------------------------------------
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Either party may hereafter notify the other in writing of any change in address.
Any notice shall be deemed duly given (i) when personally delivered, (ii) when
telecopied, telexed or transmitted by other form of written electronic
transmission (upon confirmation of receipt) or (iii) on the third day after it
is mailed by registered or certified mail, postage prepaid, as provided herein.
10.3 Severability. The provisions of this Agreement are severable and
if any provision of this Agreement shall be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions, or
enforceable parts thereof, shall not be affected thereby.
10.4 Successors and Assigns. The rights and obligations of the Company
under this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the Company, including the survivor upon any merger,
consolidation, share exchange or combination of the Company with any other
entity. Employee shall not have the right to assign, delegate or otherwise
transfer any duty or obligation to be performed by him hereunder to any person
or entity.
10.5 Entire Agreement. This Agreement supersedes all prior and
contemporaneous agreements and understandings between the parties hereto, oral
or written, and may not be modified or terminated orally. No modification,
termination or attempted waiver shall be valid unless in writing, signed by the
party against whom such modification, termination or waiver is sought to be
enforced. This Agreement was the subject of negotiation by the parties hereto
and their counsel. The parties agree that no prior drafts of this Agreement
shall be admissible as evidence (whether in any arbitration or court of law) in
any proceeding which involves the interpretation of any provisions of this
Agreement.
10.6 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of Florida without reference
to the conflict of law principles thereof.
10.7 Section Headings. The section headings contained herein are for
the purposes of convenience only and are not intended to define or limit the
contents of said sections.
10.8 Further Assurances. Each party hereto shall cooperate and shall
take such further action and shall execute and deliver such further documents as
may be reasonably requested by the other party in order to carry out the
provisions and purposes of this Agreement.
10.9 Gender. Whenever the pronouns "he" or "his" are used herein they
shall also be deemed to mean "she" or "hers" or "it" or "its" whenever
applicable. Words in the singular shall be read and construed as though in the
plural and words in the plural shall be read and construed as though in the
singular in all cases where they would so apply.
10.10 Counterparts. This Agreement may be executed in counterparts, all
of which taken together shall be deemed one original.
10.11 Confidential Arbitration. The parties hereto agree that any
dispute concerning or arising out of the provisions of this Agreement shall be
resolved by confidential arbitration in accordance with the rules of the
American Arbitration Association. Such confidential arbitration
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shall be held in Tampa, Florida, and the decision of the arbitrator(s) shall be
conclusive and binding on the parties and shall be enforceable in any court of
competent jurisdiction. The arbitrator may, in his or her discretion, award
attorneys fees and costs to such party as he or she sees fit in rendering his or
her decision. Notwithstanding the foregoing, if any dispute arises hereunder as
to which the Company desires to exercise any rights or remedies under Section
9.1 hereof, the Company may, in its discretion, in lieu of submitting the matter
to arbitration, bring an action thereon in any court of competent jurisdiction
in Tampa, Florida, which court may grant any and all relief available in equity
or at law. In any such action, the prevailing party shall be entitled to
reasonable attorneys' fees and costs as may be awarded by the court.
10.12 Other Agreements. Simultaneously with this Agreement, Employee is
entering into an Indemnity Agreement and Employee Stock Restriction Agreement.
In doing so, Employee has relied on the Company's assurances that the other
senior executives of the Company are entering into identical agreements, except
with respect to title and number of shares. The Company agrees that if it
subsequently amends any of those agreements in a manner favorable to the other
party thereto (other than to change the number of shares covered thereby), it
will offer the same amendment to Employee.
ARTICLE XI
Survival
11.1 Survival. The provisions of Articles VI, VII, VIII, IX and X, of
this Agreement shall survive the termination of this Agreement whether upon, or
prior to, the Scheduled Termination Date hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
Z-TEL TECHNOLOGIES, INC.,
a Delaware corporation
By:
-----------------------------------------
D. Gregory Smith, President and
Chief Executive Officer
EMPLOYEE
---------------------------------------------
Address:
------------------------------------
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EXHIBIT 10.1.5
EMPLOYMENT AGREEMENT
BY AND BETWEEN
Z-TEL TECHNOLOGIES, INC.
AND
J. BRYAN BUNTING
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of August 1, 1998, by and between Z-TEL TECHNOLOGIES, INC., a Delaware
corporation (the "Company"), and J. BRYAN BUNTING ("Employee").
WHEREAS, the Company and Employee desire to enter into this Agreement
to assure the Company of the services of Employee and to set forth the
respective rights and duties of the parties hereto;
WHEREAS, the Company is presently in the business of providing enhanced
telecommunications products and services (such activities, present and future,
being hereinafter referred to as the "Business");
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, terms and conditions set forth herein, the Company and Employee agree
as follows:
ARTICLE I
Employment
1.1 Employment and Title. The Company hereby employs Employee, and
Employee hereby accepts such employment, as Senior Vice President - Z-Tel
Business Network of the Company, all upon the terms and conditions set forth
herein.
1.2 Services. During the Term (as hereinafter defined) hereof, Employee
agrees to perform diligently and in good faith the duties of Senior Vice
President - Z-Tel Business Network of the Company, under the direction of the
Board of Directors of the Company (the "Board of Directors") or the Executive
Committee of the Board of Directors (the "Executive Committee"). Employee agrees
to devote his best efforts and all of his full business time, energies and
abilities to the services to be performed hereunder and for the exclusive
benefit of the Company. Employee shall be vested with such authority as is
generally commensurate with the position of Senior Vice President - Z-Tel
Business Network of the Company, as further outlined below. Employee will report
solely to D. Gregory Smith, the Company's President and Chief Executive Officer.
1.3 Location. The principal place of employment and the location of
Employee's principal office shall be in Charlotte, North Carolina; provided,
however, Employee shall, if he determines it to be reasonably necessary, engage
in reasonable travel in the performance of his duties under this Agreement.
<PAGE>
1.4 Representations. Each party represents and warrants to the other
that he/it has full power and authority to enter into and perform this Agreement
and that his/its execution and performance of this Agreement shall not
constitute a default under or breach of any of the terms of any agreement to
which he/it is a party or under which he/it is bound. Each party represents that
no consent or approval of any third party is required for his/its execution,
delivery and performance of this Agreement or that all consents or approvals of
any third party required for his/its execution, delivery and performance of this
Agreement have been obtained.
1.5 Sole Discretion. As the term "sole discretion" is used in this
Agreement, unless otherwise defined, it will be interpreted as the exercise of
reasonable discretion applying normal business practices to a contractual
relationship between a company and its senior vice president.
ARTICLE II
Term
2.1 Term. The term of Employee's employment hereunder (the "Term")
shall commence as of the date hereof (the "Commencement Date") and shall
continue through the third anniversary of the Commencement Date (the "Scheduled
Termination Date"), unless earlier terminated pursuant to the provisions of this
Agreement. This Agreement shall automatically renew for an unlimited number of
successive one-year terms unless either party shall deliver written notice of
non-renewal at least ninety (90) days prior to the Scheduled Termination Date
(or the Scheduled Termination Date of any renewal term).
ARTICLE III
Compensation
3.1 Base Salary. As compensation for the services to be rendered by
Employee, the Company shall pay Employee, during the Term of this Agreement, an
annual base salary of not less than One Hundred Fifty Thousand Dollars
($150,000.00), which base salary shall accrue monthly (prorated for periods less
than a month) and shall be paid in equal monthly installments, in arrears. The
base salary will be reviewed annually, or, more frequently, as appropriate, by
the Board of Directors or the Compensation Committee of the Board of Directors,
as the case may be, for upward, but not downward, adjustment in its sole
discretion. Employee shall in no event receive an annual base salary less than
that paid to the Company's Chief Executive Officer.
3.2 Bonus Compensation. Employee shall be eligible to receive bonus or
incentive compensation, which may be granted from time to time in the sole
discretion of the Board of Directors in accordance with the Company's
compensation structure in effect from time to time.
3.3 Employee's Legal Fees. Employee may, and the Company has encouraged
the Employee to, engage competent independent legal counsel for advice and
guidance with respect to this Agreement, including, without limitation, advice
as to the federal income tax consequences of this Article III. The Company shall
reimburse Employee for all reasonable legal fees incurred by Employee in
connection with the negotiation and execution of this Agreement.
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3.4 Benefits. Employee shall be entitled, during the Term hereof, to
the same medical, hospital, dental and life insurance coverage and benefits as
are then available to the Company's most senior executive officers, together
with the following additional benefits:
(a) An automobile allowance of One Thousand Dollars ($1,000.00)
per month;
(b) Comprehensive medical coverage, including dependent coverage,
paid fully by the Company;
(c) Life insurance in an amount equal to two times Employee's
base salary;
(d) Long-term disability insurance in an amount, adjusted
annually, equal to two-thirds of Employee's prior year base
salary and incentive compensation, if any, excluding
compensation earned through Company stock options or other
securities;
(e) The Company's normal vacation allowance for all employees who
are executive officers of the Company, but not less than
three weeks annually;
(f) An Officers and Directors Indemnity Agreement, substantially
in the form attached hereto as Exhibit A.
3.5 Withholding. Any and all amounts payable under this Agreement,
including, without limitation, amounts payable under this Article III and
Article VII, are subject to withholding for such federal, state and local taxes
required pursuant to any applicable law, rule or regulation.
ARTICLE IV
Working Facilities, Expenses and Insurance
4.1 Working Facilities and Expenses. Employee shall be furnished with
an office at the Employee's principal office as set forth in Section 1.3 hereof,
or at such other location as agreed to by Employee and the Company, and other
working facilities and secretarial and other assistance suitable to his position
and reasonably required for the performance of his duties hereunder. The Company
shall reimburse Employee for all of Employee's reasonable expenses incurred
while employed and performing his duties under and in accordance with the terms
and conditions of this Agreement, subject to Employee's full and appropriate
documentation, including, without limitation, receipts for all such expenses in
the manner required pursuant to Company's policies and procedures and the
Internal Revenue Code of 1986, as amended (the "Code"), and applicable
regulations in effect from time to time.
4.2 Insurance. The Company may secure in its own name or otherwise, and
at its own expense, life, disability and other insurance covering Employee or
Employee and others, and Employee shall not have any right, title or interest in
or to such insurance other than as expressly provided herein. Employee agrees to
assist the Company in procuring such insurance by submitting
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to the usual and customary medical and other examinations to be conducted by
such physicians(s) as the Company or such insurance company may designate and by
signing such applications and other written instruments as may be required by
any insurance company to which application is made for such insurance. Any
information provided by Employee to such insurance company (the results of
examinations being deemed part of such information) will be provided on a
confidential basis, and the Company shall have no access thereto.
ARTICLE V
Illness or Incapacity
5.1 Right to Terminate. If, during the Term of this Agreement, Employee
shall be unable to perform, with or without a reasonable accommodation, in all
material respects the essential duties of his employment hereunder for a period
exceeding six (6) consecutive months by reason of illness or incapacity, this
Agreement may be terminated by the Company in its sole discretion pursuant to
Section 7.2 hereof.
5.2 Right to Replace. If Employee's illness or incapacity, whether by
physical or mental cause, renders him unable for a minimum period of thirty (30)
consecutive calendar days to carry out his duties and responsibilities as set
forth herein, the Company shall have the right to designate a person to
temporarily perform Employee's duties; provided, however, that if Employee
returns to work from such illness or incapacity within the six (6) month period
following his inability due to such illness or incapacity, he shall be entitled
to be reinstated in the capacity described in Article I hereof with all rights,
duties and privileges attendant thereto.
5.3 Rights Prior to Termination. Employee shall be entitled to his full
base salary under Section 3.1 hereof and full benefits under Section 3.4 hereof
during such illness or incapacity unless and until an election is made by the
Company to terminate this Agreement in accordance with the provisions of this
Article V.
5.4 Determination of Illness or Incapacity. For purposes of this
Article V, the term "illness or incapacity" shall mean Employee's inability to
perform his duties hereunder substantially on a full-time basis due to physical
or mental illness as determined by the Board of Directors, in its reasonable
discretion based upon competent medical evidence. Upon the Company's written
request, Employee shall submit to reasonable medical and other examinations to
provide the evidence required hereunder.
ARTICLE VI
Confidentiality
6.1 Confidentiality. During the Term of this Agreement and for a period
of five (5) years thereafter, Employee agrees to maintain the confidential
nature of the Company's confidential and proprietary trade secrets, including,
without limitation, development ideas, acquisition strategies and plans,
financial information, records, "know-how", methods of doing business, customer,
supplier and distributor lists and all other confidential information of the
Company. Employee shall
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not use (other than in connection with his employment), in any way whatsoever,
such trade secrets except as authorized in writing by the Company. Employee
shall, upon the termination of his employment, deliver to the Company any and
all records, books, documents or any other materials whatsoever (including all
copies thereof) containing such trade secrets which shall be and remain the
property of the Company.
6.2 Non-Removal of Records. All documents, papers, materials, notes,
books, correspondence, drawings and other written and graphic records of the
Business of the Company which Employee shall prepare or use, or come into
contact with, shall be and remain the sole property of the Company and,
effective immediately upon the termination of the Employee's employment with the
Company for any reason, shall not be removed from the Company's premises without
the Company's prior written consent.
ARTICLE VII
Termination
7.1 Termination For Cause. This Agreement and the employment of
Employee may be terminated by the Company "For Cause" in any of the following
circumstances:
(a) Employee has committed any fraud, dishonesty,
misappropriation or similar act against the Company; or
(b) Employee is in default in a material respect in the
performance of Employee's obligations, services or duties
hereunder, which shall include, without limitation,
Employee's willfully disregarding the written instructions of
the Chief Executive Officer of the Company concerning the
conduct of his duties hereunder, Employee's conduct which,
after written notice and an opportunity to cure, is
materially inconsistent with the published policies of the
Company, as promulgated from time to time and which are
generally applicable to all employees and/or senior
executives, or Employee's breach of any other material
provision of this Agreement; or
(c) Employee is grossly negligent or engages in willful
misconduct in the performance of his duties hereunder; or
(d) Employee has been adjudicated guilty by, or enters a plea of
guilty or no contest before, a court of competent
jurisdiction of illegal activities or found by a court of
competent jurisdiction to have engaged in other wrongful
conduct which individually, or in the aggregate, has a
material adverse effect on the Company, its prospects,
earnings or financial condition, other than minor traffic
infractions.
A Termination For Cause under this Section 7.1 shall be
effective upon the date set forth in a written notice of termination delivered
to Employee.
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7.2 Termination Without Cause. This Agreement and the employment of the
Employee may be terminated "Without Cause" as follows:
(a) By mutual agreement of the parties hereto; or
(b) At the election of the Company by its giving not less than
thirty (30) days' written notice to Employee; or
(c) At the election of the Company by its giving not less than
thirty (30) days' written notice to Employee in the event of
an illness or incapacity described in Section 5.1; or
(d) At the election of the Employee by his giving not less than
thirty (30) days' written notice to the Company for Good
Reason; or
(e) Upon Employee's death.
"Good Reason" means (i) employee ceasing to be a senior
executive officer of the Company or (ii) a change in employee's reporting
requirements.
A Termination Without Cause under Sections 7.2(b), (c) or (d)
hereof shall be effective upon the date set forth in a written notice of
termination or resignation delivered hereunder, which shall be not less than
thirty (30) days nor more than forty-five (45) days after the giving of such
notice. A Termination Without Cause under Sections 7.2(a) or (e) hereof shall be
automatically effective upon the date of mutual agreement or the date of death
of the Employee, as the case may be.
7.3 Effect of Termination For Cause. If Employee's employment is
terminated For Cause:
(a) Employee shall be entitled to accrued base salary under
Section 3.1 and accrued vacation pay, each through the date
of termination;
(b) Employee shall be entitled to reimbursement for expenses
accrued through the date of termination in accordance with
the provisions of Section 4.1 hereof; and
(c) Except as provided in Article XI, this Agreement shall
thereupon be of no further force and effect.
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7.4 Effect of Termination Without Cause. If Employee's employment is
terminated Without Cause:
(a) Employee shall be entitled to accrued base salary under
Section 3.1 and accrued vacation pay, each through the date
of termination;
(b) Employee shall be entitled to reimbursement for expenses
accrued through the date of termination in accordance with
the provisions of Section 4.1 hereof;
(c) Employee shall be entitled to receive all amounts of base
salary as would have been payable under Section 3.1 (provided
that Employee shall receive not less than twenty-four (24)
months of base salary) through the Scheduled Termination Date
of the applicable term hereof, which amounts shall be paid
upon termination;
(d) Employee shall be entitled to receive all bonuses and
benefits as would have been awarded and/or paid under
Sections 3.2 and 3.4 hereof through (or as a result of events
occurring through) the Scheduled Termination Date, which
benefits shall be awarded as and when the same would have
been awarded under the Agreement had it not been terminated;
and
(e) Except as provided in Article XI, this Agreement shall
thereupon be of no further force or effect.
7.5 Termination Upon Change of Control. Upon a "Change of Control" (as
such term is defined in Section 7.6 hereof) of the Company during the Term
hereof, Employee may, at his sole discretion, declare this Agreement terminated
and receive a one-time, lump sum severance payment equal to two and nine-tenths
(2.9) times the total amount of the annual base salary payable under the terms
of Section 3.1 of this Agreement plus any incentive or bonus paid in the prior
year pursuant to Section 3.2 of this Agreement upon the date of such Change of
Control, if within three (3) years of the Change of Control:
(a) Employee's employment hereunder is terminated prior to the
Scheduled Termination Date of the applicable term hereof
Without Cause; or
(b) Employee elects to terminate his employment with the Company
in the event (i) he is removed from the office which he held
prior to the Change of Control or (ii) the Company fails to
afford Employee the power and authority generally
commensurate with the position of Senior Vice President -
Z-Tel Business Network prior to the Change of Control or
(iii) the Company requires Employee to relocate his residence
outside of Charlotte, North Carolina.
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7.6 Change of Control. For purposes of Section 7.5 of this Agreement, a
Change of Control ("Change of Control") shall be deemed to have occurred in the
event of:
(a) The acquisition by any person or entity, or group thereof
acting in concert, of "beneficial" ownership (as such term is
defined in Securities and Exchange Commission ("SEC") Rule
13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), of securities of the Company which,
together with securities previously owned, confer upon such
person, entity or group the voting power, on any matters
brought to a vote of shareholders, of thirty percent (30%) or
more of the then outstanding shares of capital stock of the
Company; or
(b) The sale, assignment or transfer of assets of the Company or
any subsidiary or subsidiaries, in a transaction or series of
transactions, if the aggregate consideration received or to
be received by the Company or any such subsidiary in
connection with such sale, assignment or transfer is greater
than fifty percent (50%) of the book value, determined by the
Company in accordance with generally accepted accounting
principles, of the Company's assets determined on a
consolidated basis immediately before such transaction or the
first of such transactions; or
(c) The merger, consolidation, share exchange or reorganization
of the Company (or one or more subsidiaries of the Company)
as a result of which the holders of all of the shares of
capital stock of the Company as a group would receive less
than fifty percent (50%) of the voting power of the capital
stock or other interests of the surviving or resulting
corporation or entity; or
(d) The adoption of a plan of liquidation or the approval of the
dissolution of the Company; or
(e) The commencement (within the meaning of SEC Rule 14d-2 under
the Exchange Act) of a tender or exchange offer which, if
successful, would result in a Change of Control of the
Company;
(f) A determination by the Board of Directors of the Company, in
view of then current circumstances or impending events, that
a Change of Control of the Company has occurred or is
imminent, which determination shall be made for the specific
purpose of triggering the operative provisions of this
Agreement; or
(g) The Board of Directors is not comprised of a majority of
directors who were either directors as of the date of this
Agreement (the "Initial Directors") or whose nomination or
election was approved by at least a majority of the Initial
Directors or by a majority of directors whose nomination or
election was approved by the Initial Directors.
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7.7 Certain Additional Payments by the Company.
(a) If it shall be determined that any payment, distribution or
benefit received or to be received by Employee from the
Company ("Payments") would be subject to the excise tax
imposed by Section 4999 of the Code (the "Excise Tax"), then
Employee shall be entitled to receive an additional payment
(the "Excise Tax Gross-Up Payment) in an amount such that the
net amount retained by Employee, after the calculation and
deduction of any Excise Tax on the Payments and any federal,
state and local income taxes and excise tax on the Excise Tax
Gross-Up Payment provided for in this Section 7.7, shall be
equal to the Payments. In determining this amount, the amount
of the Excise Tax Gross-Up Payment attributable to federal
income taxes shall be reduced by the maximum reduction in
federal income taxes that could be obtained by the deduction
of the portion of the Excise Tax Gross-Up Payment
attributable to state and local income taxes. Finally, the
Excise Tax Gross-Up Payment shall be reduced by income or
excise tax withholding payments made by the Company or any
affiliate of either to any federal, state or local taxing
authority with respect to the Excise Tax Gross-Up Payment
that was not deducted from compensation payable to Employee.
(b) All determinations required to be made under this Section
7.7, including whether and when an Excise Tax Gross-Up
Payment is required and the amount of such Excise Tax
Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, except as specified in
Section 7.7(a) above, shall be made by the Company's
independent auditors (the "Accounting Firm"), which shall
provide detailed supporting calculations both to the Company
and Employee within 15 business days after Employee provides
the Company with notice that a Payment has been or will be
made or such earlier time as may be required by the Company.
The determination of tax liability made by the Accounting
Firm shall be subject to review by the Employee's tax advisor
and, if Employee's tax advisor does not agree with the
determination reached by the Accounting Firm, then the
Accounting Firm and Employee's tax advisor shall jointly
designate a nationally recognized public accounting firm,
which shall make the determination. All fees and expenses of
the accountants and tax advisors retained by either Employee
or the Company shall be borne by the Company. Any Excise Tax
Gross-Up Payment, as determined pursuant to this Section 7.7,
with respect to a Payment shall be paid by the Company to
Employee at such time as Employee is entitled to receive the
Payment. Any determination by a jointly designated public
accounting firm shall be binding upon the Company and
Employee.
(c) As a result of the uncertainty in the application of
Subsection 4999 of the Code at the time of the initial
determination hereunder, it is possible that Excise Tax
Gross-Up Payments will not have been made by the Company that
should have been made consistent with the calculations
required to be
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made hereunder ("Underpayment"). In the event that Employee
thereafter is required to make a payment of any Excise Tax,
any such Underpayment calculated in accordance with and in
the same manner as the Excise Tax Gross-Up Payment in Section
7.7(a) above shall be promptly paid by the Company to or for
the benefit of Employee. In the event that the Excise Tax
Gross-Up Payment exceeds the amount subsequently determined
to be due, such excess shall constitute a loan from the
Company to Employee payable on the fifth day after demand by
the Company (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
ARTICLE VIII
Non-Competition and Non-Interference
8.1 Non-Competition. Employee agrees that during the Term hereof and,
in the case of a Termination For Cause, for a period of two (2) years
thereafter, Employee will not, directly, indirectly, or as an agent on behalf of
or in conjunction with any person, firm, partnership, corporation or other
entity, own, manage, control, join, or participate in the ownership, management,
operation, or control of, or be financially interested in or advise, lend money
to, or be employed by or provide consulting services to (i) any person or entity
seeking to provide the services or products which the Company provided or
planned on providing as of the date of termination, or (ii) any person or entity
to whom Employee provided services in any capacity on behalf of the Company, or
(iii) any person or entity to whom Employee was introduced or about whom
Employee received information through the Company and which person or entity is
located within the United States of America; provided, however, that the
foregoing restriction regarding financial interest shall not apply to ownership
of less than 5% of the common equity of any entity whose common equity is
registered under the Securities Exchange Act of 1934, as amended.
8.2 Non-Interference. Employee agrees that during the Term hereof and,
in the case of a Termination For Cause, for a period of two (2) years
thereafter, Employee will not, directly or as an agent on behalf of or in
conjunction with any person, firm, partnership, corporation or other entity,
retain or hire any person who was an employee of the Company while Employee was
employed by the Company or to whom Employee was introduced or about whom
Employee received information through the Company.
8.3 Severability. If any covenant or provision contained in this
Article VIII is determined to be void or unenforceable in whole or in part, it
shall not be deemed to affect or impair the validity of any other covenant or
provision. If, in any arbitral or judicial proceeding, a tribunal shall refuse
to enforce all of the separate covenants deemed included in this Article VIII,
then such unenforceable covenants shall be deemed eliminated from the provisions
hereof for the purpose of such proceedings to the extent necessary to permit the
remaining separate covenants to be enforced in such proceedings.
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ARTICLE IX
Remedies
9.1 Equitable Remedies. Employee and the Company agree that the
services to be rendered by Employee pursuant to this Agreement, and the rights
and interests granted and the obligations to be performed by Employee to the
Company pursuant to this Agreement, are of a special, unique, extraordinary and
intellectual character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law,
and that a breach by Employee of any of the terms of this Agreement will cause
the Company great and irreparable injury and damage. Employee hereby expressly
agrees that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to prevent a breach of Articles
VI and VIII of this Agreement, both pendente lite and permanently, against
Employee, as such breach would cause irreparable injury to the Company and a
remedy at law would be inadequate and insufficient. Therefore, the Company may,
in addition to pursuing its other remedies, obtain an injunction from any court
having jurisdiction in the matter restraining any further violation.
9.2 Rights and Remedies Preserved. Nothing in this Agreement except
Section 10.11 shall limit any right or remedy the Company or Employee may have
under this Agreement or pursuant to law for any breach of this Agreement by the
other party. The rights granted to the parties herein are cumulative and the
election of one shall not constitute a waiver of such party's right to assert
all other legal remedies available under the circumstances.
ARTICLE X
Miscellaneous
10.1 No Waivers. The failure of either party to enforce any provision
of this Agreement shall not be construed as a waiver of any such provision, nor
prevent such party thereafter from enforcing such provision or any other
provision of this Agreement.
10.2 Notices. Any notice to be given to the Company and Employee under
the terms of this Agreement may be delivered in person, by telecopy, telex or
other form of written electronic transmission, or by registered or certified
mail, postage prepaid, and shall be addressed as follows:
If to the Company: Z-Tel Technologies, Inc.
601 South Harbour Island Boulevard, Suite 220
Tampa, FL 33602
Attention: Chief Legal Officer
If to Employee: J. Bryan Bunting
400 N. Church Street, Unit 204
Charlotte, NC 28202
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Either party may hereafter notify the other in writing of any change in address.
Any notice shall be deemed duly given (i) when personally delivered, (ii) when
telecopied, telexed or transmitted by other form of written electronic
transmission (upon confirmation of receipt) or (iii) on the third day after it
is mailed by registered or certified mail, postage prepaid, as provided herein.
10.3 Severability. The provisions of this Agreement are severable and
if any provision of this Agreement shall be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions, or
enforceable parts thereof, shall not be affected thereby.
10.4 Successors and Assigns. The rights and obligations of the Company
under this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the Company, including the survivor upon any merger,
consolidation, share exchange or combination of the Company with any other
entity. Employee shall not have the right to assign, delegate or otherwise
transfer any duty or obligation to be performed by him hereunder to any person
or entity.
10.5 Entire Agreement. This Agreement supersedes all prior and
contemporaneous agreements and understandings between the parties hereto, oral
or written, and may not be modified or terminated orally. No modification,
termination or attempted waiver shall be valid unless in writing, signed by the
party against whom such modification, termination or waiver is sought to be
enforced. This Agreement was the subject of negotiation by the parties hereto
and their counsel. The parties agree that no prior drafts of this Agreement
shall be admissible as evidence (whether in any arbitration or court of law) in
any proceeding which involves the interpretation of any provisions of this
Agreement.
10.6 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of Florida without reference
to the conflict of law principles thereof.
10.7 Section Headings. The section headings contained herein are for
the purposes of convenience only and are not intended to define or limit the
contents of said sections.
10.8 Further Assurances. Each party hereto shall cooperate and shall
take such further action and shall execute and deliver such further documents as
may be reasonably requested by the other party in order to carry out the
provisions and purposes of this Agreement.
10.9 Gender. Whenever the pronouns "he" or "his" are used herein they
shall also be deemed to mean "she" or "hers" or "it" or "its" whenever
applicable. Words in the singular shall be read and construed as though in the
plural and words in the plural shall be read and construed as though in the
singular in all cases where they would so apply.
10.10 Counterparts. This Agreement may be executed in counterparts, all
of which taken together shall be deemed one original.
10.11 Confidential Arbitration. The parties hereto agree that any
dispute concerning or arising out of the provisions of this Agreement shall be
resolved by confidential arbitration in accordance with the rules of the
American Arbitration Association. Such confidential arbitration
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shall be held in Tampa, Florida, and the decision of the arbitrator(s) shall be
conclusive and binding on the parties and shall be enforceable in any court of
competent jurisdiction. The arbitrator may, in his or her discretion, award
attorneys fees and costs to such party as he or she sees fit in rendering his or
her decision. Notwithstanding the foregoing, if any dispute arises hereunder as
to which the Company desires to exercise any rights or remedies under Section
9.1 hereof, the Company may, in its discretion, in lieu of submitting the matter
to arbitration, bring an action thereon in any court of competent jurisdiction
in Tampa, Florida, which court may grant any and all relief available in equity
or at law. In any such action, the prevailing party shall be entitled to
reasonable attorneys' fees and costs as may be awarded by the court.
10.12 Other Agreements. Simultaneously with this Agreement, Employee is
entering into an Indemnity Agreement and Employee Stock Restriction Agreement.
In doing so, Employee has relied on the Company's assurances that the other
senior executives of the Company are entering into identical agreements, except
with respect to title and number of shares. The Company agrees that if it
subsequently amends any of those agreements in a manner favorable to the other
party thereto (other than to change the number of shares covered thereby), it
will offer the same amendment to Employee.
ARTICLE XI
Survival
11.1 Survival. The provisions of Articles VI, VII, VIII, IX and X, of
this Agreement shall survive the termination of this Agreement whether upon, or
prior to, the Scheduled Termination Date hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
Z-TEL TECHNOLOGIES, INC.,
a Delaware corporation
By:
----------------------------------------
D. Gregory Smith, President and
Chief Executive Officer
EMPLOYEE
--------------------------------------------
Address: 400 N. Church Street, Unit 204
Charlotte, NC 28202
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EXHIBIT 10.1.6
EMPLOYMENT AGREEMENT
BY AND BETWEEN
Z-TEL TECHNOLOGIES, INC.
AND
JAMES A. KITCHEN
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of February 1, 1998, by and between Z-TEL TECHNOLOGIES, INC., a Delaware
corporation (the "Company"), and JAMES A. KITCHEN ("Employee").
WHEREAS, the Company and Employee desire to enter into this Agreement
to assure the Company of the services of Employee and to set forth the
respective rights and duties of the parties hereto;
WHEREAS, the Company is presently in the business of providing enhanced
telecommunications products and services (such activities, present and future,
being hereinafter referred to as the "Business");
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, terms and conditions set forth herein, the Company and Employee agree
as follows:
ARTICLE I
Employment
1.1 Employment and Title. The Company hereby employs Employee, and
Employee hereby accepts such employment, as Senior Vice President - Engineering
of the Company, all upon the terms and conditions set forth herein.
1.2 Services. During the Term (as hereinafter defined) hereof, Employee
agrees to perform diligently and in good faith the duties of Senior Vice
President - Engineering of the Company, under the direction of the Board of
Directors of the Company (the "Board of Directors") or the Executive Committee
of the Board of Directors (the "Executive Committee"). Employee agrees to devote
his best efforts and all of his full business time, energies and abilities to
the services to be performed hereunder and for the exclusive benefit of the
Company. Employee shall be vested with such authority as is generally
commensurate with the position of Senior Vice President - Engineering of the
Company, as further outlined below. Employee will report solely to D. Gregory
Smith, the Company's President and Chief Executive Officer.
1.3 Location. The principal place of employment and the location of
Employee's principal office shall be in Atlanta, Georgia; provided, however,
Employee shall, if he determines it to be reasonably necessary, engage in
reasonable travel in the performance of his duties under this Agreement.
<PAGE>
1.4 Representations. Each party represents and warrants to the other
that he/it has full power and authority to enter into and perform this Agreement
and that his/its execution and performance of this Agreement shall not
constitute a default under or breach of any of the terms of any agreement to
which he/it is a party or under which he/it is bound. Each party represents that
no consent or approval of any third party is required for his/its execution,
delivery and performance of this Agreement or that all consents or approvals of
any third party required for his/its execution, delivery and performance of this
Agreement have been obtained.
1.5 Sole Discretion. As the term "sole discretion" is used in this
Agreement, unless otherwise defined, it will be interpreted as the exercise of
reasonable discretion applying normal business practices to a contractual
relationship between a company and its senior vice president - engineering.
ARTICLE II
Term
2.1 Term. The term of Employee's employment hereunder (the "Term")
shall commence as of the date hereof (the "Commencement Date") and shall
continue through the third anniversary of the Commencement Date (the "Scheduled
Termination Date"), unless earlier terminated pursuant to the provisions of this
Agreement. This Agreement shall automatically renew for an unlimited number of
successive one-year terms unless either party shall deliver written notice of
non-renewal at least ninety (90) days prior to the Scheduled Termination Date
(or the Scheduled Termination Date of any renewal term).
ARTICLE III
Compensation
3.1 Base Salary. As compensation for the services to be rendered by
Employee, the Company shall pay Employee, during the Term of this Agreement, an
annual base salary of not less than One Hundred Fifty Thousand Dollars
($150,000.00), which base salary shall accrue monthly (prorated for periods less
than a month) and shall be paid in equal monthly installments, in arrears. The
base salary will be reviewed annually, or, more frequently, as appropriate, by
the Board of Directors or the Compensation Committee of the Board of Directors,
as the case may be, for upward, but not downward, adjustment in its sole
discretion. Employee shall in no event receive an annual base salary less than
that paid to the Company's Chief Executive Officer.
3.2 Bonus Compensation. Employee shall be eligible to receive bonus or
incentive compensation, which may be granted from time to time in the sole
discretion of the Board of Directors in accordance with the Company's
compensation structure in effect from time to time.
3.3 Employee's Legal Fees. Employee may, and the Company has encouraged
the Employee to, engage competent independent legal counsel for advice and
guidance with respect to this Agreement, including, without limitation, advice
as to the federal income tax consequences of
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this Article III. The Company shall reimburse Employee for all reasonable legal
fees incurred by Employee in connection with the negotiation and execution of
this Agreement.
3.4 Benefits. Employee shall be entitled, during the Term hereof, to
the same medical, hospital, dental and life insurance coverage and benefits as
are then available to the Company's most senior executive officers, together
with the following additional benefits:
(a) An automobile allowance of One Thousand Dollars ($1,000.00)
per month;
(b) Comprehensive medical coverage, including dependent coverage,
paid fully by the Company;
(c) Life insurance in an amount equal to two times Employee's
base salary;
(d) Long-term disability insurance in an amount, adjusted
annually, equal to two-thirds of Employee's prior year base
salary and incentive compensation, if any, excluding
compensation earned through Company stock options or other
securities;
(e) The Company's normal vacation allowance for all employees who
are executive officers of the Company, but not less than
three weeks annually;
(f) An Officers and Directors Indemnity Agreement, substantially
in the form attached hereto as Exhibit A.
3.5 Withholding. Any and all amounts payable under this Agreement,
including, without limitation, amounts payable under this Article III and
Article VII, are subject to withholding for such federal, state and local taxes
required pursuant to any applicable law, rule or regulation.
ARTICLE IV
Working Facilities, Expenses and Insurance
4.1 Working Facilities and Expenses. Employee shall be furnished with
an office at the Employee's principal office as set forth in Section 1.3 hereof,
or at such other location as agreed to by Employee and the Company, and other
working facilities and secretarial and other assistance suitable to his position
and reasonably required for the performance of his duties hereunder. The Company
shall reimburse Employee for all of Employee's reasonable expenses incurred
while employed and performing his duties under and in accordance with the terms
and conditions of this Agreement, subject to Employee's full and appropriate
documentation, including, without limitation, receipts for all such expenses in
the manner required pursuant to Company's policies and procedures and the
Internal Revenue Code of 1986, as amended (the "Code"), and applicable
regulations in effect from time to time.
4.2 Insurance. The Company may secure in its own name or otherwise, and
at its own expense, life, disability and other insurance covering Employee or
Employee and others, and
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Employee shall not have any right, title or interest in or to such insurance
other than as expressly provided herein. Employee agrees to assist the Company
in procuring such insurance by submitting to the usual and customary medical and
other examinations to be conducted by such physicians(s) as the Company or such
insurance company may designate and by signing such applications and other
written instruments as may be required by any insurance company to which
application is made for such insurance. Any information provided by Employee to
such insurance company (the results of examinations being deemed part of such
information) will be provided on a confidential basis, and the Company shall
have no access thereto.
ARTICLE V
Illness or Incapacity
5.1 Right to Terminate. If, during the Term of this Agreement, Employee
shall be unable to perform, with or without a reasonable accommodation, in all
material respects the essential duties of his employment hereunder for a period
exceeding six (6) consecutive months by reason of illness or incapacity, this
Agreement may be terminated by the Company in its sole discretion pursuant to
Section 7.2 hereof.
5.2 Right to Replace. If Employee's illness or incapacity, whether by
physical or mental cause, renders him unable for a minimum period of thirty (30)
consecutive calendar days to carry out his duties and responsibilities as set
forth herein, the Company shall have the right to designate a person to
temporarily perform Employee's duties; provided, however, that if Employee
returns to work from such illness or incapacity within the six (6) month period
following his inability due to such illness or incapacity, he shall be entitled
to be reinstated in the capacity described in Article I hereof with all rights,
duties and privileges attendant thereto.
5.3 Rights Prior to Termination. Employee shall be entitled to his full
base salary under Section 3.1 hereof and full benefits under Section 3.4 hereof
during such illness or incapacity unless and until an election is made by the
Company to terminate this Agreement in accordance with the provisions of this
Article V.
5.4 Determination of Illness or Incapacity. For purposes of this
Article V, the term "illness or incapacity" shall mean Employee's inability to
perform his duties hereunder substantially on a full-time basis due to physical
or mental illness as determined by the Board of Directors, in its reasonable
discretion based upon competent medical evidence. Upon the Company's written
request, Employee shall submit to reasonable medical and other examinations to
provide the evidence required hereunder.
ARTICLE VI
Confidentiality
6.1 Confidentiality. During the Term of this Agreement and for a period
of five (5) years thereafter, Employee agrees to maintain the confidential
nature of the Company's confidential and proprietary trade secrets, including,
without limitation, development ideas, acquisition strategies
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and plans, financial information, records, "know-how", methods of doing
business, customer, supplier and distributor lists and all other confidential
information of the Company. Employee shall not use (other than in connection
with his employment), in any way whatsoever, such trade secrets except as
authorized in writing by the Company. Employee shall, upon the termination of
his employment, deliver to the Company any and all records, books, documents or
any other materials whatsoever (including all copies thereof) containing such
trade secrets which shall be and remain the property of the Company.
6.2 Non-Removal of Records. All documents, papers, materials, notes,
books, correspondence, drawings and other written and graphic records of the
Business of the Company which Employee shall prepare or use, or come into
contact with, shall be and remain the sole property of the Company and,
effective immediately upon the termination of the Employee's employment with the
Company for any reason, shall not be removed from the Company's premises without
the Company's prior written consent.
ARTICLE VII
Termination
7.1 Termination For Cause. This Agreement and the employment of
Employee may be terminated by the Company "For Cause" in any of the following
circumstances:
(a) Employee has committed any fraud, dishonesty,
misappropriation or similar act against the Company; or
(b) Employee is in default in a material respect in the
performance of Employee's obligations, services or duties
hereunder, which shall include, without limitation,
Employee's willfully disregarding the written instructions of
the Chief Executive Officer of the Company concerning the
conduct of his duties hereunder, Employee's conduct which,
after written notice and an opportunity to cure, is
materially inconsistent with the published policies of the
Company, as promulgated from time to time and which are
generally applicable to all employees and/or senior
executives, or Employee's breach of any other material
provision of this Agreement; or
(c) Employee is grossly negligent or engages in willful
misconduct in the performance of his duties hereunder; or
(d) Employee has been adjudicated guilty by, or enters a plea of
guilty or no contest before, a court of competent
jurisdiction of illegal activities or found by a court of
competent jurisdiction to have engaged in other wrongful
conduct which individually, or in the aggregate, has a
material adverse effect on the Company, its prospects,
earnings or financial condition, other than minor traffic
infractions.
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A Termination For Cause under this Section 7.1 shall be effective
upon the date set forth in a written notice of termination delivered to
Employee.
7.2 Termination Without Cause. This Agreement and the employment of the
Employee may be terminated "Without Cause" as follows:
(a) By mutual agreement of the parties hereto; or
(b) At the election of the Company by its giving not less than
thirty (30) days' written notice to Employee; or
(c) At the election of the Company by its giving not less than
thirty (30) days' written notice to Employee in the event of
an illness or incapacity described in Section 5.1; or
(d) At the election of the Employee by his giving not less than
thirty (30) days' written notice to the Company for Good
Reason; or
(e) Upon Employee's death.
"Good Reason" means (i) employee ceasing to be a senior
executive officer of the Company or (ii) a change in employee's reporting
requirements.
A Termination Without Cause under Sections 7.2(b), (c) or (d)
hereof shall be effective upon the date set forth in a written notice of
termination or resignation delivered hereunder, which shall be not less than
thirty (30) days nor more than forty-five (45) days after the giving of such
notice. A Termination Without Cause under Sections 7.2(a) or (e) hereof shall be
automatically effective upon the date of mutual agreement or the date of death
of the Employee, as the case may be.
7.3 Effect of Termination For Cause. If Employee's employment is
terminated For Cause:
(a) Employee shall be entitled to accrued base salary under
Section 3.1 and accrued vacation pay, each through the date
of termination;
(b) Employee shall be entitled to reimbursement for expenses
accrued through the date of termination in accordance with
the provisions of Section 4.1 hereof; and
(c) Except as provided in Article XI, this Agreement shall
thereupon be of no further force and effect.
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7.4 Effect of Termination Without Cause. If Employee's employment is
terminated Without Cause:
(a) Employee shall be entitled to accrued base salary under
Section 3.1 and accrued vacation pay, each through the date
of termination;
(b) Employee shall be entitled to reimbursement for expenses
accrued through the date of termination in accordance with
the provisions of Section 4.1 hereof;
(c) Employee shall be entitled to receive all amounts of base
salary as would have been payable under Section 3.1 (provided
that Employee shall receive not less than twenty-four (24)
months of base salary) through the Scheduled Termination Date
of the applicable term hereof, which amounts shall be paid
upon termination;
(d) Employee shall be entitled to receive all bonuses and
benefits as would have been awarded and/or paid under
Sections 3.2 and 3.4 hereof through (or as a result of events
occurring through) the Scheduled Termination Date, which
benefits shall be awarded as and when the same would have
been awarded under the Agreement had it not been terminated;
and
(e) Except as provided in Article XI, this Agreement shall
thereupon be of no further force or effect.
7.5 Termination Upon Change of Control. Upon a "Change of Control" (as
such term is defined in Section 7.6 hereof) of the Company during the Term
hereof, Employee may, at his sole discretion, declare this Agreement terminated
and receive a one-time, lump sum severance payment equal to two and nine-tenths
(2.9) times the total amount of the annual base salary payable under the terms
of Section 3.1 of this Agreement plus any incentive or bonus paid in the prior
year pursuant to Section 3.2 of this Agreement upon the date of such Change of
Control, if within three (3) years of the Change of Control:
(a) Employee's employment hereunder is terminated prior to the
Scheduled Termination Date of the applicable term hereof
Without Cause; or
(b) Employee elects to terminate his employment with the Company
in the event (i) he is removed from the office which he held
prior to the Change of Control or (ii) the Company fails to
afford Employee the power and authority generally
commensurate with the position of Senior Vice President -
Engineering prior to the Change of Control or (iii) the
Company requires Employee to relocate his residence outside
of Atlanta, Georgia.
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7.6 Change of Control. For purposes of Section 7.5 of this Agreement, a
Change of Control ("Change of Control") shall be deemed to have occurred in the
event of:
(a) The acquisition by any person or entity, or group thereof
acting in concert, of "beneficial" ownership (as such term is
defined in Securities and Exchange Commission ("SEC") Rule
13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), of securities of the Company which,
together with securities previously owned, confer upon such
person, entity or group the voting power, on any matters
brought to a vote of shareholders, of thirty percent (30%) or
more of the then outstanding shares of capital stock of the
Company; or
(b) The sale, assignment or transfer of assets of the Company or
any subsidiary or subsidiaries, in a transaction or series of
transactions, if the aggregate consideration received or to
be received by the Company or any such subsidiary in
connection with such sale, assignment or transfer is greater
than fifty percent (50%) of the book value, determined by the
Company in accordance with generally accepted accounting
principles, of the Company's assets determined on a
consolidated basis immediately before such transaction or the
first of such transactions; or
(c) The merger, consolidation, share exchange or reorganization
of the Company (or one or more subsidiaries of the Company)
as a result of which the holders of all of the shares of
capital stock of the Company as a group would receive less
than fifty percent (50%) of the voting power of the capital
stock or other interests of the surviving or resulting
corporation or entity; or
(d) The adoption of a plan of liquidation or the approval of the
dissolution of the Company; or
(e) The commencement (within the meaning of SEC Rule 14d-2 under
the Exchange Act) of a tender or exchange offer which, if
successful, would result in a Change of Control of the
Company;
(f) A determination by the Board of Directors of the Company, in
view of then current circumstances or impending events, that
a Change of Control of the Company has occurred or is
imminent, which determination shall be made for the specific
purpose of triggering the operative provisions of this
Agreement; or
(g) The Board of Directors is not comprised of a majority of
directors who were either directors as of the date of this
Agreement (the "Initial Directors") or whose nomination or
election was approved by at least a majority of the Initial
Directors or by a majority of directors whose nomination or
election was approved by the Initial Directors.
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7.7 Certain Additional Payments by the Company.
(a) If it shall be determined that any payment, distribution or
benefit received or to be received by Employee from the
Company ("Payments") would be subject to the excise tax
imposed by Section 4999 of the Code (the "Excise Tax"), then
Employee shall be entitled to receive an additional payment
(the "Excise Tax Gross-Up Payment) in an amount such that the
net amount retained by Employee, after the calculation and
deduction of any Excise Tax on the Payments and any federal,
state and local income taxes and excise tax on the Excise Tax
Gross-Up Payment provided for in this Section 7.7, shall be
equal to the Payments. In determining this amount, the amount
of the Excise Tax Gross-Up Payment attributable to federal
income taxes shall be reduced by the maximum reduction in
federal income taxes that could be obtained by the deduction
of the portion of the Excise Tax Gross-Up Payment
attributable to state and local income taxes. Finally, the
Excise Tax Gross-Up Payment shall be reduced by income or
excise tax withholding payments made by the Company or any
affiliate of either to any federal, state or local taxing
authority with respect to the Excise Tax Gross-Up Payment
that was not deducted from compensation payable to Employee.
(b) All determinations required to be made under this Section
7.7, including whether and when an Excise Tax Gross-Up
Payment is required and the amount of such Excise Tax
Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, except as specified in
Section 7.7(a) above, shall be made by the Company's
independent auditors (the "Accounting Firm"), which shall
provide detailed supporting calculations both to the Company
and Employee within 15 business days after Employee provides
the Company with notice that a Payment has been or will be
made or such earlier time as may be required by the Company.
The determination of tax liability made by the Accounting
Firm shall be subject to review by the Employee's tax advisor
and, if Employee's tax advisor does not agree with the
determination reached by the Accounting Firm, then the
Accounting Firm and Employee's tax advisor shall jointly
designate a nationally recognized public accounting firm,
which shall make the determination. All fees and expenses of
the accountants and tax advisors retained by either Employee
or the Company shall be borne by the Company. Any Excise Tax
Gross-Up Payment, as determined pursuant to this Section 7.7,
with respect to a Payment shall be paid by the Company to
Employee at such time as Employee is entitled to receive the
Payment. Any determination by a jointly designated public
accounting firm shall be binding upon the Company and
Employee.
(c) As a result of the uncertainty in the application of
Subsection 4999 of the Code at the time of the initial
determination hereunder, it is possible that Excise Tax
Gross-Up Payments will not have been made by the Company that
should have been made consistent with the calculations
required to be
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made hereunder ("Underpayment"). In the event that Employee
thereafter is required to make a payment of any Excise Tax,
any such Underpayment calculated in accordance with and in
the same manner as the Excise Tax Gross-Up Payment in Section
7.7(a) above shall be promptly paid by the Company to or for
the benefit of Employee. In the event that the Excise Tax
Gross-Up Payment exceeds the amount subsequently determined
to be due, such excess shall constitute a loan from the
Company to Employee payable on the fifth day after demand by
the Company (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
ARTICLE VIII
Non-Competition and Non-Interference
8.1 Non-Competition. Employee agrees that during the Term hereof and,
in the case of a Termination For Cause, for a period of two (2) years
thereafter, Employee will not, directly, indirectly, or as an agent on behalf of
or in conjunction with any person, firm, partnership, corporation or other
entity, own, manage, control, join, or participate in the ownership, management,
operation, or control of, or be financially interested in or advise, lend money
to, or be employed by or provide consulting services to (i) any person or entity
seeking to provide the services or products which the Company provided or
planned on providing as of the date of termination, or (ii) any person or entity
to whom Employee provided services in any capacity on behalf of the Company, or
(iii) any person or entity to whom Employee was introduced or about whom
Employee received information through the Company and which person or entity is
located within the United States of America; provided, however, that the
foregoing restriction regarding financial interest shall not apply to ownership
of less than 5% of the common equity of any entity whose common equity is
registered under the Securities Exchange Act of 1934, as amended.
8.2 Non-Interference. Employee agrees that during the Term hereof and,
in the case of a Termination For Cause, for a period of two (2) years
thereafter, Employee will not, directly or as an agent on behalf of or in
conjunction with any person, firm, partnership, corporation or other entity,
retain or hire any person who was an employee of the Company while Employee was
employed by the Company or to whom Employee was introduced or about whom
Employee received information through the Company.
8.3 Severability. If any covenant or provision contained in this
Article VIII is determined to be void or unenforceable in whole or in part, it
shall not be deemed to affect or impair the validity of any other covenant or
provision. If, in any arbitral or judicial proceeding, a tribunal shall refuse
to enforce all of the separate covenants deemed included in this Article VIII,
then such unenforceable covenants shall be deemed eliminated from the provisions
hereof for the purpose of such proceedings to the extent necessary to permit the
remaining separate covenants to be enforced in such proceedings.
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ARTICLE IX
Remedies
9.1 Equitable Remedies. Employee and the Company agree that the
services to be rendered by Employee pursuant to this Agreement, and the rights
and interests granted and the obligations to be performed by Employee to the
Company pursuant to this Agreement, are of a special, unique, extraordinary and
intellectual character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law,
and that a breach by Employee of any of the terms of this Agreement will cause
the Company great and irreparable injury and damage. Employee hereby expressly
agrees that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to prevent a breach of Articles
VI and VIII of this Agreement, both pendente lite and permanently, against
Employee, as such breach would cause irreparable injury to the Company and a
remedy at law would be inadequate and insufficient. Therefore, the Company may,
in addition to pursuing its other remedies, obtain an injunction from any court
having jurisdiction in the matter restraining any further violation.
9.2 Rights and Remedies Preserved. Nothing in this Agreement except
Section 10.11 shall limit any right or remedy the Company or Employee may have
under this Agreement or pursuant to law for any breach of this Agreement by the
other party. The rights granted to the parties herein are cumulative and the
election of one shall not constitute a waiver of such party's right to assert
all other legal remedies available under the circumstances.
ARTICLE X
Miscellaneous
10.1 No Waivers. The failure of either party to enforce any provision
of this Agreement shall not be construed as a waiver of any such provision, nor
prevent such party thereafter from enforcing such provision or any other
provision of this Agreement.
10.2 Notices. Any notice to be given to the Company and Employee under
the terms of this Agreement may be delivered in person, by telecopy, telex or
other form of written electronic transmission, or by registered or certified
mail, postage prepaid, and shall be addressed as follows:
If to the Company: Z-Tel Technologies, Inc.
601 South Harbour Island Boulevard, Suite 220
Tampa, FL 33602
Attention: Chief Legal Officer
If to Employee: James A. Kitchen
215 Bolling Road
Atlanta, GA 30305
11
<PAGE>
Either party may hereafter notify the other in writing of any change in address.
Any notice shall be deemed duly given (i) when personally delivered, (ii) when
telecopied, telexed or transmitted by other form of written electronic
transmission (upon confirmation of receipt) or (iii) on the third day after it
is mailed by registered or certified mail, postage prepaid, as provided herein.
10.3 Severability. The provisions of this Agreement are severable and
if any provision of this Agreement shall be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions, or
enforceable parts thereof, shall not be affected thereby.
10.4 Successors and Assigns. The rights and obligations of the Company
under this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the Company, including the survivor upon any merger,
consolidation, share exchange or combination of the Company with any other
entity. Employee shall not have the right to assign, delegate or otherwise
transfer any duty or obligation to be performed by him hereunder to any person
or entity.
10.5 Entire Agreement. This Agreement supersedes all prior and
contemporaneous agreements and understandings between the parties hereto, oral
or written, and may not be modified or terminated orally. No modification,
termination or attempted waiver shall be valid unless in writing, signed by the
party against whom such modification, termination or waiver is sought to be
enforced. This Agreement was the subject of negotiation by the parties hereto
and their counsel. The parties agree that no prior drafts of this Agreement
shall be admissible as evidence (whether in any arbitration or court of law) in
any proceeding which involves the interpretation of any provisions of this
Agreement.
10.6 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of Florida without reference
to the conflict of law principles thereof.
10.7 Section Headings. The section headings contained herein are for
the purposes of convenience only and are not intended to define or limit the
contents of said sections.
10.8 Further Assurances. Each party hereto shall cooperate and shall
take such further action and shall execute and deliver such further documents as
may be reasonably requested by the other party in order to carry out the
provisions and purposes of this Agreement.
10.9 Gender. Whenever the pronouns "he" or "his" are used herein they
shall also be deemed to mean "she" or "hers" or "it" or "its" whenever
applicable. Words in the singular shall be read and construed as though in the
plural and words in the plural shall be read and construed as though in the
singular in all cases where they would so apply.
10.10 Counterparts. This Agreement may be executed in counterparts, all
of which taken together shall be deemed one original.
10.11 Confidential Arbitration. The parties hereto agree that any
dispute concerning or arising out of the provisions of this Agreement shall be
resolved by confidential arbitration in accordance with the rules of the
American Arbitration Association. Such confidential arbitration
12
<PAGE>
shall be held in Tampa, Florida, and the decision of the arbitrator(s) shall be
conclusive and binding on the parties and shall be enforceable in any court of
competent jurisdiction. The arbitrator may, in his or her discretion, award
attorneys fees and costs to such party as he or she sees fit in rendering his or
her decision. Notwithstanding the foregoing, if any dispute arises hereunder as
to which the Company desires to exercise any rights or remedies under Section
9.1 hereof, the Company may, in its discretion, in lieu of submitting the matter
to arbitration, bring an action thereon in any court of competent jurisdiction
in Tampa, Florida, which court may grant any and all relief available in equity
or at law. In any such action, the prevailing party shall be entitled to
reasonable attorneys' fees and costs as may be awarded by the court.
10.12 Other Agreements. Simultaneously with this Agreement, Employee is
entering into an Indemnity Agreement and Employee Stock Restriction Agreement.
In doing so, Employee has relied on the Company's assurances that the other
senior executives of the Company are entering into identical agreements, except
with respect to title and number of shares. The Company agrees that if it
subsequently amends any of those agreements in a manner favorable to the other
party thereto (other than to change the number of shares covered thereby), it
will offer the same amendment to Employee.
ARTICLE XI
Survival
11.1 Survival. The provisions of Articles VI, VII, VIII, IX and X, of
this Agreement shall survive the termination of this Agreement whether upon, or
prior to, the Scheduled Termination Date hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
Z-TEL TECHNOLOGIES, INC.,
a Delaware corporation
By:
-------------------------------------
D. Gregory Smith, President and
Chief Executive Officer
EMPLOYEE
------------------------------------------
Address: 215 Bolling Road
Atlanta, GA 30305
13
<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 as to the stock split described in
Note 1(B), which is as of 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
December 10, 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>
