SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(AMENDMENT NO. 2)
Filed by the Registrant /X/
Filed by a Party Other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/X/ Soliciting Material Pursuant to ss. 240.14a-12
Z-TEL TECHNOLOGIES, INC.
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(Name of Registrant as Specified In Its Charter)
Payment of filing fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which filing fee is calculated and state how it was
determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a) (2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration No.:
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(3) Filing Party:
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(4) Date Filed:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
SCHEDULE TO
TENDER OFFER STATEMENT UNDER SECTION 14(D)(1) OR SECTION 13(E)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934
Z-TEL TECHNOLOGIES, INC.
(Name of Subject Company)
Z-TEL TECHNOLOGIES, INC.
(Name of Filing Person)
Series D Convertible Preferred Stock,
8% Convertible Preferred Stock, Series E, and
12% Junior Redeemable Convertible Preferred Stock, Series G
(Title of Class of Securities)
N/A
(CUSIP Number of Class of Securities)
Andrew L. Graham, Esq.
Corporate Counsel
Z-Tel Technologies, Inc.
601 South Harbour Island Boulevard, Suite 220
Tampa, Florida 33602
(813) 273-6261
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications on Behalf of Filing Person)
With a copy to:
Gary A. Brooks, Esq.
Cahill Gordon & Reindel LLP
80 Pine Street
New York, New York 10005
(212) 701-3000
CALCULATION OF FILING FEE
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Transaction Valuation Amount of Filing Fee
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$115,142,180* $14,589**
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* Estimated solely for the purpose of calculating the registration fee and based
on the product of (a) the average of the high and low prices of the Company's
common stock as reported on the Nasdaq SmallCap Market on September 28, 2004
($0.49) and (b) the maximum number shares of common stock, assuming all
outstanding shares of preferred stock are tendered and accepted, to be issued in
the exchange offer (234,984,041 shares).
** The amount of the filing fee was calculated in accordance with Rule 0-11 of
the Securities Exchange Act of 1934 and equals $126.70 for each $1,000,000 of
the value of the transaction.
|X| Check the box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number or the Form or Schedule and the date of its filing.
Amount Previous Paid: $23,029 Filing Party: Z-Tel Technologies, Inc.
Form or Registration No.: Schedule TO (File No. 005-57653) Date Filed: September 30, 2004
|_| Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
Check the appropriate boxes below to designate any transactions to which the
statement relates:
|_| third-party tender offer subject to Rule 14d-1.
|X| issuer tender offer subject to Rule 13e-4.
|_| going-private transaction subject to Rule 13e-3.
[ ] amendment to Schedule 13D under Rule 13d-2.
Check the following box if the filing is a final amendment reporting the results
of the tender offer: [ ]
This Amendment No. 1 to the Tender Offer Statement on Schedule TO
("Schedule TO") amends and supplements the Tender Offer Statement on Schedule TO
filed with the Securities and Exchange Commission on September 30, 2004 by Z-Tel
Technologies, Inc., a Delaware corporation (the "Company"), and relates to an
offer by the Company to exchange (the "Exchange Offer") shares of its common
stock for shares of its outstanding series of preferred stock as set forth
herein on the terms and subject to the conditions described in the offer to
exchange (as amended, the "Offer to Exchange"). The terms and conditions of the
Exchange Offer are set forth in the Offer to Exchange and the accompanying
Letter of Transmittal, which are exhibits (a)(1)(A) and (a)(1)(B) hereto.
The information set forth in the Offer to Exchange, including the exhibits
thereto, the accompanying Letter of Transmittal and the Preliminary Proxy
Statement, is hereby expressly incorporated herein by reference in response to
all items required in this Schedule TO.
Item 1. Summary Term Sheet.
See the section of the Offer to Exchange, dated October 21, 2004, attached
hereto as Exhibit (a)(1)(A) (the "Offer to Exchange"), captioned "Summary."
Item 2. Subject Company Information.
(a) The name of the Company to which this Schedule TO relates is Z-Tel
Technologies, Inc., a company organized under the laws of the State of Delaware
(the "Company"). The address of the principal office of the Company is 601 South
Harbour Island Boulevard, Suite 220, Tampa, Florida 33602 and its telephone
number is (813) 273-6261.
(b) The titles of the classes of equity securities to which this Schedule
TO relates are:
i. Series D Convertible Preferred Stock (the "Series D Preferred
Stock"),
ii. 8% Convertible Preferred Stock, Series E (the "Series E Preferred
Stock"), and
iii. 12% Junior Redeemable Convertible Preferred Stock, Series G (the
"Series G Preferred Stock").
As of September 27, 2004, there were 3,976,723 shares of Series D Preferred
Stock, 4,166,667 shares of Series E Preferred Stock, and 171.214286 shares of
Series G Preferred Stock outstanding.
(c) See the section of the Offer to Exchange captioned "Market for Common
Stock and Preferred Stock."
-2-
Item 3. Identity and Background of Filing Person.
(a) This Schedule TO is being filed by Z-Tel Technologies, Inc. The address
of the Company's principal office is 601 South Harbour Island Boulevard, Suite
220, Tampa, Florida 33602 and its telephone number is (813) 273-6261. For the
executive officers and directors of the Company, see the section of the Offer to
Exchange captioned "Management." The business address and telephone numbers of
each executive officer and director are the same as are listed above for the
Company.
Item 4. Terms of the Transaction.
(a) See the sections of the Offer to Exchange captioned "Summary," "Risk
Factors," "The Offer to Exchange," "Description of Our Preferred Stock,"
"Description of Our Common Stock," "Material United States Federal Income Tax
Consequences," and "Certain Securities Laws Considerations."
(b) See the section of the Offer to Exchange captioned "Interests of
Directors and Officers."
Item 5. Past Contacts, Transactions, Negotiations and Agreements.
(a) See the section of the Offer to Exchange captioned "Agreements
Involving Our Securities."
Item 6. Purposes of the Transaction and Plans or Proposals.
(a) See the sections of the Offer to Exchange captioned "Summary" and
"Reasons for the Offer to Exchange."
(b) See the section of the Offer to Exchange captioned "Use of Proceeds."
(c) See the sections of the Offer to Exchange captioned "Summary," "Reasons
for the Offer to Exchange," "Risk Factors," "Business Overview," and "Use of
Proceeds."
Item 7. Source and Amount of Funds or Other Consideration.
(a) See the sections of the Offer to Exchange captioned "Summary" and "The
Offer to Exchange."
(b) See the section of the Offer to Exchange captioned "The Offer to
Exchange-Conditions."
(d) Not Applicable.
Item 8. Interest in Securities of the Subject Company.
(a) See the sections of the Offer to Exchange captioned "Interests of
Directors and Officers" and "Security Ownership."
(b) See the sections of the Offer to Exchange captioned "Interests of
Directors and Officers" and "Security Ownership of Certain Beneficial Owners and
Management."
Item 9. Persons/Assets Retained, Employed, Compensated or Used.
(a) See the section of the Offer to Exchange captioned "Fees and Expenses."
Item 10. Financial Statements.
(a) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003; Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004; and Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004.
-3-
(b) See the section of the Offer to Exchange captioned "Financial
Information."
Item 11. Additional Information.
(a) See the sections of the Offer to Exchange captioned "Interest of
Directors and Officers," "Agreements Involving our Securities" and "Certain
Legal Matters; Regulatory Approvals."
(b) Not applicable.
Item 12. Exhibits.
Exhibit No. Description
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(a)(1)(A) Amended Offer to Exchange, dated October 21, 2004.
(a)(1)(B) Form of Letter of Transmittal, dated October 21, 2004, relating to the
Amended Offer to Exchange.
(a)(2) Preliminary Proxy Statement, filed with the Securities and Exchange
Commission on October 21, 2004.
Item 13. Information Required by Schedule 13E-3.
Not applicable.
-4-
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Z-TEL TECHNOLOGIES, INC.
By: /s/ Horace J. Davis, III
----------------------------------
Name: Horace J. Davis, III
Title: Acting Chief Executive Officer
Dated: October 21, 2004
-5-
Exhibit (a)(1)(A)
Z-TEL TECHNOLOGIES, INC.
AMENDED OFFER TO EXCHANGE
SHARES OF
SERIES D CONVERTIBLE PREFERRED STOCK,
8% CONVERTIBLE PREFERRED STOCK, SERIES E, AND
12% JUNIOR REDEEMABLE CONVERTIBLE PREFERRED STOCK, SERIES G,
FOR SHARES OF COMMON STOCK
____________________________________________
THIS AMENDED OFFER TO EXCHANGE WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON TUESDAY, NOVEMBER 23, 2004, UNLESS EXTENDED PURSUANT
TO THE TERMS HEREOF (THE "EXPIRATION DATE"). HOLDERS OF SHARES OF
PREFERRED STOCK MUST VALIDLY TENDER THOSE SHARES ON OR PRIOR TO THE
EXPIRATION DATE IN ORDER TO BE ELIGIBLE TO RECEIVE THE EXCHANGE OFFER
CONSIDERATION.
___________________________________________
We are offering you the opportunity to voluntarily exchange any or all of
your shares of our outstanding preferred stock as follows (subject in each case
to the impact of any reverse stock split):
o for shares of our Series D Convertible Preferred Stock (the "Series D
Preferred Stock"), which as of September 27, 2004 have a liquidation
preference (representing original investment plus accrued and unpaid
dividends) of $16.55 per share and conversion price of $8.47 per
share, to exchange 25.69030 shares of our common stock, par value
$0.01 per share (the "Common Stock"), for each share of our Series D
Preferred Stock (representing an exchange price of approximately
$0.644 per share);
o for shares of our 8% Convertible Preferred Stock, Series E (the
"Series E Preferred Stock"), which as of September 27, 2004 have a
liquidation preference of $16.26 per share and conversion price of
$8.08 per share, to exchange 25.24216 shares of our Common Stock for
each share of our Series E Preferred Stock (representing an exchange
price of approximately $0.644 per share); and
o for shares of our 12% Junior Redeemable Convertible Preferred Stock,
Series G (the "Series G Preferred Stock" and, together with the Series
D Preferred Stock and the Series E Preferred Stock, the "Preferred
Stock"), which as of September 27, 2004 have a liquidation preference
of $144,975.90 per share and conversion price of $1.28 per share, to
exchange 161,469.4 shares of our Common Stock for each share of our
Series G Preferred Stock (representing an exchange price of
approximately $0.898 per share).
On October 20, 2004, the closing price for the Common Stock on the Nasdaq
SmallCap Market was $0.39 per share.
We intend to call a special meeting (the "Special Meeting") of our
stockholders to be held on November 19, 2004 to approve consummation of this
offer to exchange, as amended (the "Exchange Offer") and certain related
matters. We expect to promptly commence a proxy solicitation of our
stockholders, including holders of Preferred Stock, by means of a separate proxy
statement in connection the Special Meeting. At the special meeting we will ask
our stockholders to, among other things, (1) approve consummation of this
Exchange Offer, (2) amend the terms of the Series D Preferred Stock to remove
certain restrictive provisions provided for in the certificate of designation
governing the Series D Preferred Stock, (3) amend our charter to terminate the
certificate of designation governing the Series D Preferred Stock if all of the
outstanding Series D Preferred Stock is tendered for exchange in this Exchange
Offer, (4) amend our charter to terminate the certificate of designation
governing the Series E Preferred Stock, (5) amend the terms of the Series G
Preferred Stock to remove certain restrictive provisions provided for in the
certificate of designation governing the Series G Preferred Stock, (6) amend our
charter to terminate the certificate of designation governing the Series G
Preferred Stock if all of the outstanding Series G Preferred Stock is tendered
for exchange in this Exchange Offer, (7) authorize our board of directors to
adopt one of several reverse stock split proposals with respect to the Common
Stock, within their discretion, and (8) approve a new management equity
incentive plan and the reservation of shares of Common Stock for issuance
thereunder (collectively, the "Special Meeting Matters"). We intend to file a
press release immediately following the Special Meeting to advise our
stockholders of the result of the votes on the Special Meeting Matters. If we
decide to postpone the Special Meeting and proceed with the Exchange Offer, we
will extend the Exchange Offer to the close of business on the fifth business
day following the Special Meeting date.
CONSUMMATION OF THE EXCHANGE OFFER IS CONDITIONED UPON THE APPROVAL BY OUR
STOCKHOLDERS OF THE SPECIAL MEETING MATTERS AND UPON THE TENDER BY THE 1818 FUND
III, L.P. ("THE 1818 FUND") OF ALL PREFERRED STOCK THAT IT OWNS (AND THE
ACCEPTANCE BY US OF SUCH SHARES) IN THE EXCHANGE OFFER. REPRESENTATIVES OF THE
1818 FUND HAVE INDICATED THAT THEY INTEND TO TENDER ALL OF THE 1818 FUND'S
SHARES OF PREFERRED STOCK IN THE OFFER IF SUBSTANTIALLY ALL OF THE SHARES OF
PREFERRED STOCK OWNED BY OTHER HOLDERS ARE TENDERED IN THE OFFER. CONSUMMATION
OF THE EXCHANGE OFFER IS ALSO SUBJECT TO THE OTHER CONDITIONS DESCRIBED HEREIN.
We will announce, by means of a press release, the amount of each series of
Preferred Stock tendered as of the close of business (1) on the second business
day preceding the date of the Special Meeting and (2) on the second business day
prior to expiration of the Exchange Offer. We will also announce, by means of a
press release, when The 1818 Fund has tendered its shares of Preferred Stock. If
necessary, we will extend the Exchange Offer to the close of business on the
fifth business day following the date upon which The 1818 Fund tenders its
shares of Preferred Stock.
We will accept shares of Preferred Stock ("Preferred Shares") validly
tendered for exchange and not withdrawn as of the Expiration Date, upon the
terms and conditions set forth
herein and in the Letter of Transmittal (the "Letter of Transmittal") attached
hereto as Exhibit A. This Offer to Exchange and the Letter of Transmittal
together constitute the "Offer."
THE ACTUAL NUMBER OF SHARES OF COMMON STOCK TO BE ISSUED IN EXCHANGE FOR
THE PREFERRED STOCK TENDERED IN THE EXCHANGE OFFER WILL AUTOMATICALLY BE
ADJUSTED BY A REVERSE STOCK SPLIT TO BE EFFECTED PRIOR TO THE CONSUMMATION OF
THE EXCHANGE OFFER. FOR ADDITIONAL INFORMATION ON THE REVERSE STOCK SPLIT, SEE
"THE OFFER TO EXCHANGE--NUMBER OF SHARES."
See "Risk Factors" beginning on page 9 and "Material United States Federal
Income Tax Consequences" beginning on page 40 for a discussion of certain
factors that you should consider in connection with the Offer.
You may direct questions and requests for assistance or additional copies
of this Offer to Exchange, the Letter of Transmittal, the Notice of Guaranteed
Delivery and other related documents to Andrew L. Graham, the Exchange and
Information Agent, at the address and telephone numbers set forth on the last
printed page of this Offer to Exchange.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved this transaction or determined if this
document is accurate or complete.
We are not, and our Board of Directors, our employees and the Exchange and
Information Agent are not, making any recommendation to you as to whether you
should tender or refrain from tendering your Preferred Shares. You must make the
decision whether to tender your Preferred Shares and, if so, how many Preferred
Shares to tender.
THE DATE OF THIS AMENDED OFFER TO EXCHANGE IS OCTOBER 21, 2004.
IMPORTANT INFORMATION REGARDING THE OFFER
We are making this Offer in reliance upon the exemption from registration
provided by Section 3(a)(9) of the Securities Act of 1933, as amended (the
"Securities Act"). We are not aware of any jurisdiction where making the Offer
to Exchange is not in compliance with applicable law. If we become aware that
the Offer to Exchange is not in compliance with any jurisdiction's applicable
law, we will make a good faith effort to comply with such law. If with our good
faith efforts, we cannot comply with such law, the Offer to Exchange will not be
made to (nor will tenders be accepted from or on behalf of) the holders of
Preferred Shares residing in such jurisdiction.
You should rely only on the information incorporated by reference or
provided in this Offer to Exchange. We have not authorized anyone to provide you
with different information or to solicit or seek tenders of Preferred Stock
pursuant to the Offer. You should not assume that the information in this Offer
to Exchange or any supplement is accurate as of any date other than the date on
the cover of this Offer to Exchange.
As described on the cover of this Exchange Offer, we expect to commence a
proxy solicitation providing for, among other things, alternative reverse stock
splits of our Common Stock. The information included in and incorporated by
reference into this Offer to Exchange does not give effect to any such reverse
stock split. For additional information on the reverse stock split, see "The
Offer to Exchange--Number of Shares."
The contents of this Offer to Exchange should not be construed as legal,
business or tax advice. You should consult your own attorney, business advisor
and tax advisor as to such matters.
CAUTION AS TO UNAUTHORIZED STATEMENTS
WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR BEHALF
AS TO WHETHER YOU SHOULD TENDER OR REFRAIN FROM TENDERING PREFERRED SHARES UNDER
THE OFFER TO EXCHANGE. WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION, TO
MAKE ANY REPRESENTATION OR TO SOLICIT ANY TENDERS IN CONNECTION WITH THE OFFER
TO EXCHANGE OTHER THAN WHAT IS CONTAINED IN THIS OFFER TO EXCHANGE OR IN THE
LETTER OF TRANSMITTAL.
-i-
TABLE OF CONTENTS
Page
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Summary.......................................................................1
Reasons for the Offer to Exchange.............................................5
Business Overview.............................................................6
Financial Information.........................................................6
Risk Factors..................................................................9
Special Factors Relating to the Offer to Exchange............................20
Management...................................................................22
Use of Proceeds..............................................................23
The Offer to Exchange........................................................23
Description of Our Preferred Stock...........................................32
Description of Our Common Stock..............................................39
Market for Common Stock and Preferred Stock..................................39
Material United States Federal Income Tax Consequences.......................41
Certain Securities Laws Considerations.......................................42
Interests of Directors and Officers..........................................42
Security Ownership...........................................................43
Agreements Involving Our Securities..........................................45
Certain Legal Matters; Regulatory Approvals..................................45
Fees and Expenses............................................................46
Independent Auditors.........................................................46
Incorporation of Certain Documents by Reference..............................46
Miscellaneous................................................................47
Where You Can Find More Information..........................................48
Exhibits
Exhibit A Letter of Transmittal
-ii-
SUMMARY
This general summary is provided solely for your convenience. You
should read the entire Offer to Exchange and the related Letter of Transmittal
before you decide whether to participate in the Offer.
Shares Eligible for Exchange................... The Offer applies to all
shares of our outstanding
Preferred Stock, which is
comprised of the following
three series:
o Series D Convertible
Preferred Stock, par value
$.01 per share,
o 8% Convertible Preferred
Stock, Series E, par value
$.01 per share, and
o 12% Junior Redeemable
Convertible Preferred Stock,
Series G, par value $.01 per
share.
Reason for the Offer........................... The purpose of the Offer is
(i) to improve and simplify
our capital structure,
thereby enabling us to
potentially attract
necessary additional
financing for our business
plan, (ii) to provide
holders of Preferred Stock
with a means to gain greater
liquidity by issuing to them
Common Stock and (iii) to
increase the aggregate
market value of our Common
Stock to maintain our
listing on the Nasdaq
SmallCap Market.
Overview of the Offer to Exchange.............. We are offering to all
holders of our Preferred
Shares the right to tender
those shares in exchange for
newly issued shares of our
Common Stock (the "Common
Shares"). The exchange ratio
(the "Exchange Ratio") and
consideration (the "Exchange
Consideration") for each
series of Preferred Stock
will be as follows (subject
in each case to the impact
of any reverse stock
split):
o For each share of our
Series D Preferred Stock, we
will issue 25.69030 Common
Shares (representing an
effective conversion price
of approximately $0.644 per
share);
o For each share of our
Series E Preferred Stock, we
will issue 25.24216 Common
Shares (representing an
effective conversion price
of approximately $0.644 per
share); and
o For each share of our
Series G Preferred Stock, we
will issue 161,494.4 Common
Shares (representing an
effective conversion price
of approximately $0.898 per
share).
As of September 27, 2004
there were approximately
38.8 million shares of
Common Stock outstanding.
The actual number of shares
of Common Stock to be issued
in exchange for the
Preferred Stock tendered in
the Exchange Offer will
automatically be adjusted by
a reverse stock split to be
effected prior to the
consummation of the Exchange
Offer. For additional
information on the reverse
stock split, see "The Offer
to Exchange--Number of
Shares."
Assuming the tender of all
outstanding Preferred Stock
in the Exchange Offer, the
exercise of all outstanding
options (other than
management options
outstanding prior to the
Exchange Offer), warrants
and other rights to acquire
Common Stock and the
inclusion of all shares of
Common Stock expected to be
reserved for issuance under
the new management equity
incentive plan (a "Fully
Diluted Basis"), after
giving effect to the
Exchange Offer:
o the former holders of
Series D Preferred Stock
would own approximately
34.0% of the Common Stock on
a Fully Diluted Basis;
o the former holders of
Series E Preferred Stock
would own approximately
35.0% of the Common Stock on
a Fully Diluted Basis;
o the former holders of
Series G Preferred Stock
would own approximately 9.2%
of the Common Stock on a
Fully Diluted Basis;
o the current holders of
Common Stock would own
approximately 13.8% of the
Common Stock on a Fully
Diluted Basis; and
o approximately 8.0% of
Common Stock, on a Fully
Diluted Basis, would have
been available for issuance
under the new management
equity incentive plan.
-2-
Expiration Date................................ The Offer will expire on
Tuesday, November 23, 2004,
at 5:00 p.m., New York City
time, unless we extend the
Offer.
Number of Shares to Be Exchanged............... The Offer applies to all our
outstanding Preferred
Shares. As of September 27,
2004, there were:
o 3,976,723 shares of Series
D Preferred Stock
outstanding;
o 4,166,667 shares of Series
E Preferred Stock
outstanding; and
o 171.214286 shares of
Series G Preferred Stock
outstanding.
There is no minimum number
of shares that must be
tendered in the Offer. You
may tender some, all, or
none of your Preferred
Shares. However,
consummation of the Offer is
conditioned upon the tender
by The 1818 Fund of all
Preferred Shares that it
owns (and the acceptance by
us of such shares) in the
Offer. Representatives of
The 1818 Fund have indicated
that they intend to tender
all of The 1818 Fund's
Preferred Shares in the
Offer if substantially all
of the Preferred Shares
owned by other holders are
tendered in the Offer. We
will announce, by means of a
press release, the number of
shares of each series of
Preferred Stock tendered as
of the close of business (1)
on the second business day
preceding the date of the
Special Meeting and (2) on
the second business day
prior to expiration of the
Exchange Offer. We will also
announce, by means of a
press release, when The 1818
Fund has tendered its shares
of Preferred Stock. If
necessary, we will extend
the Exchange Offer to the
close of business on the
fifth business day following
the date upon which The 1818
Fund tenders its shares of
Preferred Stock.
Fractional shares will not
be issued. In the event that
a fraction of a Common Share
becomes issuable upon
consummation of the Offer to
Exchange, we will pay you an
amount in cash equal to the
closing price of our Common
Stock on the business day
preceding such consummation
(as adjusted to reflect the
impact of any reverse stock
split), multiplied by such
fraction of a Common Share.
-3-
Conditions..................................... Consummation of the Exchange
Offer is conditioned upon
the approval by stockholders
of the Special Meeting
Matters and upon the tender
by The 1818 Fund of all
Preferred Stock that it owns
in the Exchange Offer and
the acceptance by us of such
shares. In addition, we will
not be required to accept
the tender of any Preferred
Shares, and may terminate,
postpone, or amend the
Offer, if, among other
things, any action or
proceeding is commenced that
threatens the Offer or if
the other conditions
described under the heading
"The Offer to
Exchange--Conditions" are
not met.
Exchange Date.................................. We will exchange your
Preferred Shares for the
Exchange Consideration (or
return your Preferred Shares
to you if the Offer is not
consummated or such shares
are not accepted) promptly
after the Expiration Date.
Exchange and Information Agent................. Andrew L. Graham, our
Corporate Counsel
Withdrawal Rights.............................. You may withdraw tendered
Preferred Shares at any time
prior to the Expiration
Date.
Federal Income Tax Consequences................ Based upon discussions with
our tax counsel, we believe
the Offer will qualify as a
reorganization for federal
income tax purposes.
However, we did not seek or
obtain any tax opinion with
respect to the tax
consequences of the Offer.
Assuming the Offer qualifies
as a reorganization for
federal income tax purposes,
you will not recognize gain
or loss on the receipt of
the Exchange Consideration,
in exchange for the face
amount of your Preferred
Shares. However, to the
extent that Common Shares
are received for accrued but
unpaid dividends on
Preferred Shares, this
portion will be treated as
the payment of a dividend
distribution, but only to
the extent that the fair
market value of the
aggregate Common Shares
received in the exchange
exceeds the aggregate issue
price of the Preferred
Shares surrendered. For
additional information on
certain of the U.S. federal
income tax consequences of
the Exchange Offer, see
"Material United States
Federal Income Tax
Consequences."
For a complete description of the rights and preferences of the Preferred
Shares and the Common Shares, see "Description of Our Preferred Stock,"
"Description of Our Common Stock" and "Certain Securities Laws Considerations."
-4-
REASONS FOR THE OFFER TO EXCHANGE
Our business has been adversely affected by a number of factors in recent
years that have also adversely affected the trading price of our Common Stock.
We have developed a business plan that we believe can create long-term
opportunities for our business, but the execution of that business plan requires
us to obtain additional financing. We have had difficulty in attracting the
financing we will need in part due to the existence of the Preferred Stock
(particularly the mandatory redemption features thereof). Management believes
that the conversion of the Preferred Stock into Common Stock is essential for it
to be able to implement its business plan.
We are making this Offer because we believe that it will:
o Improve and simplify our capital structure by eliminating all or
substantially all of the approximately $158.4 million aggregate
liquidation preference of Preferred Stock in exchange for Common
Stock, thereby enabling us to potentially attract necessary additional
financing for our business plan.
o Eliminate all or substantially all of the dividends payable to holders
of Preferred Stock and the related dilutive effect on holders of
Common Stock (and increase the equity and earnings attributable to
Common Stock).
o Reduce or eliminate the mandatory redemption payments on our Preferred
Stock, which will be due in 2006 on the Series G Preferred Stock and
in 2008 on the Series D Preferred Stock and Series E Preferred Stock.
o Give the holders of Preferred Stock a means to gain greater liquidity
by issuing Common Shares, which subject to securities law restrictions
applicable to our affiliates, will be freely tradable and eligible for
listing or quotation on the stock market or quotation system on which
our Common Stock is then listed or quoted. The Preferred Stock does
not currently trade on any exchange or stock market.
o Give the holders of Preferred Stock an opportunity to receive more
shares of Common Stock than they would be entitled to receive under
the existing conversion provisions of the Preferred Stock. Each share
of Series D Preferred Stock is currently convertible into 1.95 shares
of Common Stock, each share of Series E Preferred Stock is currently
convertible into 2.01 shares of Common Stock, and each share of Series
G Preferred Stock is currently convertible into 113,262 shares of
Common Stock.
o Increase the aggregate market value of our Common Stock, which is
currently below the $35 million minimum amount required to maintain
listing on the Nasdaq SmallCap Market, to an amount substantially in
excess of the minimum amount required to maintain listing of the
Common Stock on the Nasdaq SmallCap Market.
Notwithstanding the fact that the Exchange Offer is conditioned upon the
approval by our stockholders of the Special Meeting Matters we are distributing
the Offer to Exchange to holders of our Preferred Stock prior to the Special
Meeting because under applicable law the Offer is re-
-5-
quired to be kept open for a minimum of 20 business days and we believe we
should attempt to synchronize the Exchange Offer period and the notice period
for the Special Meeting so that they run concurrently, with an overall view
towards most expeditiously and efficiently consummating the Offer and
transactions contemplated by the Special Meeting Matters.
BUSINESS OVERVIEW
Z-Tel Technologies, Inc. is a communications service provider. We provide
innovative and cost effective telecommunications services to consumers, business
and other communications companies by integrating our own enhanced
communications systems and advanced operational support systems with access to
communication networks. Our systems have the capability to integrate with
wireline, wireless, cable, Internet and other communications transport networks.
Our current generation of services relies primarily on access to local and long
distance telephone networks. A recent court ruling has created legal uncertainty
regarding our access to local telephone networks. See "Risk Factors--Risks
Related to Our Business and Financial Condition." We recently launched a new
generation of services using voice over Internet protocol ("VoIP").
We provide services on both a retail and wholesale basis. Our principal
retail services are Z-LineHOME(R), Z-LineBUSINESS(R) and Touch 1 Long Distance.
Z-LineHOME and Z-LineBUSINESS are residential and business versions,
respectively, of our flagship offering, the Z-Line(R). The Z-Line is local
telephone service, typically bundled with long distance and enhanced features,
including a suite of our proprietary Internet-accessible and voice-activated
functions. The enhanced features include voicemail, "Find Me" call forwarding
and our recently introduced Personal Voice Assistant(TM), or "PVA," which
utilizes voice-recognition technology so that users can access secure, online
address books from any phone using simple voice commands in order to send voice
emails, find contact information and dial numbers, among other things. Touch 1
Long Distance is a residential long distance telephone service.
Our principal executive offices are located at 601 South Harbour Island
Boulevard, Suite 220, Tampa, Florida, 33602, and our telephone number at that
address is (813) 273-6261. Our website address is www.ztel.com. Information on
our website does not constitute part of this Offer to Exchange.
For additional information about us, see "Financial Information" and the
documents incorporated by reference into this Offer to Exchange.
FINANCIAL INFORMATION
Our Summary Historical Consolidated Financial Information
The following table sets forth summary historical consolidated financial
and operating information of Z-Tel. Except for the six months ended June 30,
2004 and 2003, and the property information, the summary historical financial
information is derived from audited consolidated financial statements of Z-Tel
for each period presented. The summary historical data are only a summary, and
should be read in conjunction with the historical financial statements and
related notes contained in the annual and quarterly reports of Z-Tel
incorporated herein by reference.
-6-
Six Months Ended
Years Ended December 31, June 30,
------------------------------------------------------- ---------------------
2003 2002 2001 2000 (1) 1999 2004 2003
--------- --------- --------- ----------- --------- --------- ----------
(In thousands, except share and per share data)
Revenues........................ $289,180 $238,397 $280,350 $177,668 $6,615 $132,264 $131,975
Operating expenses:
Network operations (2)........ 135,097 94,474 159,617 107,077 6,518 65,271 58,852
Sales and marketing........... 18,753 12,327 31,243 45,018 8,898 8,971 11,111
General and administrative (3) 127,018 122,579 156,107 99,606 20,055 66,229 58,850
Asset impairment charge (4)... -- 1,129 59,247 -- -- -- --
Wholesale development costs (5) -- 1,018 -- -- -- -- --
Restructuring charge (6)...... -- 1,861 -- -- -- 807 --
Depreciation and amortization. 23,449 23,936 23,277 17,166 4,372 10,420 12,029
---------- --------- --------- ---------- --------- --------- ---------
Total operating expenses.... (304,317) 257,324 429,491 268,867 39,843 151,698 140,842
---------- --------- --------- ---------- --------- --------- ---------
Operating loss............ (15,137) (18,927) (149,141) (91,199) (33,228) (19,434) (8,867)
---------- --------- --------- ---------- --------- --------- ---------
Non-operating income (loss):
Interest and other income..... 2,086 3,509 6,862 5,475 608 1,352 1,164
Interest and other expense.... (3,076) (4,137) (3,789) (2,313) (3,351) (3,412) (1,410)
---------- --------- --------- ---------- --------- --------- ---------
Total non-operating income
(loss).................... (990) (628) 3,073 3,162 (2,743) (2,060) (246)
---------- --------- --------- ---------- --------- --------- ---------
Net loss.................. (16,127) (19,555) (146,068) (88,037) (35,971) (21,494) (9,113)
Less mandatorily redeemable
convertible preferred stock
dividends and accretion...... (17,480) (15,589) (15,059) (3,644) (1,654) (7,991) (8,904)
Less deemed dividend related to
beneficial conversion feature (186) (186) (9,356) (20,027) -- (93) (92)
Net loss attributable to
common stockholders....... $(33,793) $(35,330) $(170,483) $(111,708) $(37,625) $(29,578) $(18,109)
========== ========== ========== ========== ========== ========== ==========
Weighted average common shares
outstanding.................. 35,396,922 34,951,720 33,908,374 33,066,538 15,099,359 36,337,804 35,286,953
---------- --------- --------- ---------- --------- --------- ---------
Basic and diluted net loss per
share........................ $(0.95) $(1.01) $(5.03) $(3.38) $(2.49) $(0.81) $(0.51)
========== ========== ========== ========== ========== ========== ==========
Consolidated Balance Sheet Data
Cash and cash equivalents (7)(8) $12,013 $16,037 $18,892 $46,650 $101,657 $8,196 $14,204
Working capital (deficit)....... (31,038) (19,380) (11,983) 59,245 95,315 (45,127) (24,032)
Total assets.................... 89,453 106,711 116,737 246,461 137,677 $80,569 $104,901
Total debt...................... 5,531 10,144 15,766 20,417 14,134 2,283 7,389
Mandatorily convertible
redeemable preferred stock (8) 144,282 127,631 112,570 84,585 -- 152,366 136,132
Total stockholder's equity 159,022) (116,372)
(deficit).................... (131,019) (99,284) (67,172) 89,100 114,378 (
Other Financial Data
Net cash provided by (used in)
operating activities......... 11,956 18,399 (21,846) (96,862) (32,681) (9,183) 6,149
Net cash used in investing (4,692) (5,756)
activities................... (10,996) (15,600) (15,615) (40,602) (5,182)
Net cash provided by (used in)
financing activities......... (4,984) (5,654) 9,701) 82,455 131,547 10,058 (2,226)
______________________
(1) We completed the acquisition of Touch 1 on April 14, 2000. We used the
purchase accounting method for our acquisition of Touch 1. Therefore, our
discussions of the results of operations and liquidity and capital
resources do not include any discussions regarding Touch 1 prior to our
acquisition of Touch 1, which is treated as being closed for accounting
purposes, on April 1, 2000.
(2) During 2002, we received a $9.0 million retroactive rate reduction for the
unbundled network elements we acquired from Verizon as a result of a
settlement approved by the New York Public Service Commission.
(3) Included in the 2001 general and administrative expense was a write-off of
accounts receivable that resulted in $29.9 million of additional bad debt
expense.
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(4) We recorded a $1.1 and $59.2 million expense related to impaired assets in
2002 and 2001, respectively. This expense was the result of management's
decision to reduce various customer growth initiatives, most notably
telemarketing activity levels. In 2001, a majority of the operations and
assets of telemarketing centers acquired from Touch 1 was either
voluntarily closed or sold. In addition to the goodwill impairment of $54.9
million, we recorded a $4.3 million charge associated with the impairment
of assets, composed of $3.0 million relating to unrealizable software and
development projects, $0.9 million of a worthless telemarketing property
and equipment, and $0.4 million of securities deemed to be worthless. As a
result of management's decision in the second quarter of 2002 to enhance
future cash flow and operating earnings, we closed the remaining call
centers in North Dakota and recorded a $1.1 million asset impairment. We
also incurred restructuring charges as a result of this decision during
2002 as discussed in note (1).
(5) During 2002, we began to provide our services on a wholesale basis. We
recorded start-up costs for developing this new service offering of
approximately $1.0 million. All wholesale related costs after our initial
wholesale services contract signed on March 20, 2002 are included in the
operating expenses line items, rather than being segregated.
(6) During 2002, we closed two call centers in North Dakota and our New York
sales office. As discussed in note (4) above, these expenses consisted
primarily of termination benefits, lease abandonment and lease settlement
costs.
(7) Included in the December 31, 1999 cash balance was approximately $109.1
million of net proceeds from our December 15, 1999 initial public offering.
This cash was obtained through the sale of 6,900,000 shares (including the
underwriters' over-allotment option) of our common stock at $17.00 per
share.
(8) During 2000, we issued series D and E preferred stock for approximately
$56.3 and $50.0 million, respectively. During 2001, we issued series G
preferred stock for approximately $17.5 million.
Summary Pro Forma Consolidated Financial Information of Z-Tel
The following unaudited pro forma information presents the effects of the
Offer assuming all of our outstanding Preferred Shares are exchanged for the
Exchange Consideration as if the exchange occurred as of June 30, 2004 for the
unaudited balance sheet data. There would be no pro forma adjustments to our
income statement data for either the year ended December 31, 2003 or the six
months ended June 30, 2004 if the exchange occurred as of the first day of such
periods. In the quarter in which the exchange is approved, a dividend charge
will be recorded that will impact net earnings. It is expected that this
dividend will reduce net earnings, assuming our Common Stock price remains below
the effective exchange price. Earnings per share attributable to Common Stock
will be adjusted due to the dividend and will show an even greater loss per
Common Share outstanding. The pro forma information does not include costs of
this Offer or a dividend charge that we will incur as a result of the Offer.
Consolidated Pro Forma Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
-------------------------------------------------------------------------------------------------------------------
June 30, Pro Forma
2004 Adjustments Pro Forma
----------- ----------- ----------
Assets
Current assets:
Cash and cash equivalents $ 8,196 $ -- $ 8,196
Accounts receivable, net of allowance for doubtful 28,672 28,672
accounts
Prepaid expenses and other current assets 4,804 4,804
----------- ----------- ----------
Total current assets 41,672 -- 41,672
Property and equipment, net 34,298 34,298
Intangible assets, net 1,372 1,372
Other assets 3,227 3,227
----------- ----------- ----------
Total assets $ 80,569 $ -- $ 80,569
=========== =========== ==========
-8-
Consolidated Pro Forma Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
June 30, Pro Forma
2004 Adjustments Pro Forma
----------- ----------- ----------
Liabilities, preferred stock and deficit
Current liabilities:
Accounts payable and accrued liabilities $ 63,745 $ -- $ 63,745
Deferred revenue 8,357 8,357
Current portion of long-term debt and capital lease
obligations 14,697 14,697
----------- ----------- ----------
Total current liabilities 86,799 86,799
Long-term deferred revenue 221 221
Long-term debt and capital lease obligations 205 -- 205
----------- ----------- ----------
Total liabilities 87,225 -- 87,225
----------- ----------- ----------
Mandatorily redeemable convertible preferred stock 152,366 (152,366) --
Stockholders' deficit:
Common stock 373 2,538 2,911
Notes receivable from stockholders (930) (930)
Additional paid-in capital 183,281 149,828 333,109
Accumulated deficit (341,358) -- (341,358)
Treasury stock (388) -- (388)
----------- ----------- ----------
Total stockholders' deficit (159,022) 152,366 (6,656)
Total liabilities, preferred stock and deficit $ 80,569 $ -- $ 80,569
=========== =========== ==========
Risk Factors
You should carefully consider the risks described below, in addition to the
other information in this Offer to Exchange, before making a decision to tender.
Each of these risk factors could adversely affect our business, financial
condition and operating results as well as adversely affecting the value of an
investment in our Common Stock.
Risks Related to the Offer
By participating in the Offer, you will give up the special rights of a holder
of Preferred Stock.
The holders of Preferred Shares have various rights which are better than
the rights of holders of Common Stock. Those rights include:
o the right to receive dividends at the rate of 8% per year (or 12% per
year, in the case of the Series G Preferred Stock);
o the right to have the Preferred Stock redeemed in 2008 at $12.00 per
share (or $100,000.00 per share in the case of Series G Preferred
Stock) plus all accrued and unpaid dividends;
o in the case of the Series E Preferred Stock, the right to vote as a
separate class on mergers and certain other transactions;
-9-
o the right to receive a preferential payment of $12.00 per share (or
$100,000.00 per share in the case of Series G Preferred Stock) plus
accrued and unpaid dividends if we liquidate; and
o the right to vote, as a class, to block the issuance of any series of
stock having preferential dividend or liquidation rights.
You will lose these rights if your Preferred Shares are exchanged in the Offer.
The Common Stock does not have any special rights.
By participating in the Offer, you will give up the seniority that you have over
holders of Common Stock or any other class of stock which is junior to your
Preferred Stock.
Holders of Preferred Shares are entitled to receive dividends and other
distributions before holders of Common Stock are entitled to receive them,
including any distributions that might be made in liquidation or bankruptcy. If
you exchange your Preferred Shares in the Offer, you will no longer have that
seniority over holders of Common Stock. Holders of Series D Preferred Stock and
Series E Preferred Stock are entitled to receive dividends and other
distributions before holders of Series G Preferred Stock are entitled to receive
them, including any distributions that might be made in liquidation or
bankruptcy. If you exchange your shares of Series D Preferred Stock or Series E
Preferred Stock in the Offer, you will no longer have that seniority over
holders of the Series G Preferred Stock.
Prior to the consummation of the Exchange Offer certain of the terms of the
Preferred Stock may be amended.
If the proposed amendments contemplated in the Special Meeting Matters that
will be described in the proxy statement to be prepared for the Special Meeting
are adopted, the terms of those series of Preferred Stock will change
significantly and holders of such Preferred Stock that is not tendered in the
Offer will cease to have certain preferential rights that they had prior to the
Offer.
If you do not participate in the Offer, your ownership percentage and voting
power may be diluted.
Consummation of the Offer will result in holders of Preferred Shares
acquiring a higher percentage of our ownership than they possessed prior to the
Offer, resulting in the dilution of the ownership of the preferred stockholders
who do not participate. In the case of the holders of Series D Preferred Stock
and Series E Preferred Stock, consummation of the Offer will result in holders
of Series D Preferred Stock and Series E Preferred Stock acquiring a higher
percentage of voting power than they possessed prior to the Offer, resulting in
the dilution of the voting power of the holders of Series D Preferred Stock and
Series E Preferred Stock who do not participate.
-10-
Risks Related to Our Business and Financial Condition
Our business depends on the availability and favorable pricing of unbundled
network components.
Our current generation of local telephone services, which produces
approximately 95% of our revenue, relies on access to local telephone networks.
Our access to these networks is based upon the Telecommunications Act of 1996
(the "Telecommunications Act"), which imposes a variety of duties upon the
traditional local telephone companies ("incumbent local exchange carriers" or
"ILECs"), including the duty to provide competitive local exchange companies,
like us, with access to the individual components of their networks. Our
business strategy depends on a continued availability of ILEC unbundled network
components and on states maintaining and adopting favorable pricing rules for
ILEC unbundled network components. The FCC has issued rules regarding access to
key components of the ILEC networks, including transport and switching. A recent
court ruling, however, has created considerable legal uncertainty regarding this
access. In United States Telecom Ass'n v. FCC, Nos. 00-1012, 00-1015, 03-1310 et
al. (D.C. Cir. March 2, 2004) ("USTA II"), the D.C. Circuit Court ordered that
the FCC's unbundled transport and switching rules be vacated after sixty days or
upon denial of a petition for rehearing, whichever occurs later. Both the U.S.
Solicitor General and the FCC have declined to appeal the case. U.S. Supreme
Court Chief Justice William Rehnquist on June 14, 2004 refused to issue a stay
of the decision.
On August 20, 2004, the Federal Communications Commission issued a Notice
of Proposed Rulemaking ("NPRM") seeking comment on unbundling rules to implement
obligations under section 251(c)(3) of the Telecommunications Act and to respond
to the D.C. Circuit's vacatur in USTA II of the rules that the FCC adopted in
the Triennial Review Order. The FCC also released an order setting forth a
two-phase plan to govern the provision of unbundled network elements ("UNEs")
while the FCC considers permanent rules. Under the first phase of the interim
plan, ILECs must continue to make available dedicated transport, mass market
switching and enterprise loops in accordance with the rates, terms and
conditions set forth in their interconnection agreements as of June 15, 2004.
Under the second phase of the plan, ILECs would be required for an additional
six months to continue to provide such UNEs to requesting carriers for the
embedded customer base subject to the rate increases specified in the FCC's
order. We do not believe these rate increases will impede our short-term
business plans. In its NPRM, the FCC seeks comment on how to establish
sustainable new unbundling rules in response to the D.C. Circuit's decision.
Specifically, the FCC seeks comment on how various ILEC offerings and
obligations fit into the unbundling framework, how best to define the relevant
markets to develop unbundling rules and how to make determinations on access to
individual network elements.
The uncertainty the ruling and the order have created could have material
adverse effects upon us and our operations. Certain potential adverse effects
from this ruling and the uncertainty it has created are set forth below. This
list is not exhaustive as a listing of all the potential adverse effects would
be impossible.
-11-
o ILECs, after some period of time, could deny us access to their
networks in violation of interconnection agreements and essentially
destroy our ability to provide our services.
o ILECs could refuse new service orders, including repair and change
orders. We would not be able to add new customers. Our business would
diminish because of normal customer churn -- that is, the normal loss
of existing customers over time.
o Our customer churn could increase as our customers return to ILEC
services in response to the uncertainty.
o ILECs could significantly raise the prices they charge for access to
their networks. We would be forced to raise our rates to
non-competitive levels.
o Vendors, including long distance companies, could alter the terms
under which they do business with us, such as credit terms, thereby
increasing our costs and diminishing our cash flow and liquidity.
o We may be unable to obtain new financing at acceptable rates. We have
already encountered difficulty in attempting to obtain financing from
one particular lender.
o We may lose prospective customers that otherwise would have become our
customers. We believe we have already lost at least one large
prospective customer (over 5,000 lines) because of the uncertainty.
o Our wholesale customers may decline to expend marketing resources to
increase their customer bases.
o We could lose major marketing partners and potential marketing
partners as they decline to expend resources in marketing our
services.
o We could lose key personnel, as they seek security in offers from
other prospective employers.
o The cost of litigation and of participation in administrative
proceedings relating to interconnection agreements and new regulations
could be excessively burdensome.
The availability of favorable pricing rules for unbundled network components is
another key element of our business strategy.
The public utilities commissions of certain states have adopted pricing
rules for unbundled network components. In general, ILECs are required to
provide us with access to their networks at forward-looking, long-run
incremental cost-based prices. However, we cannot be certain that unbundled
network components will continue to be available at favorable prices in those
states or that other states will ever adopt favorable pricing, particularly in
light of the recent D.C. Circuit Court ruling referred to above.
-12-
Because we are in an emerging industry sector, we could encounter unforeseen
issues that may adversely affect our operations.
VoIP is a new, emerging sector of the telecommunications industry. Our
experience, as well as the experience of others, in this sector is limited. As a
result we will likely encounter numerous unforeseen difficulties and challenges.
We will almost certainly need to raise additional capital.
We will need to raise additional capital from debt or equity sources in
order to finance our operations and our VoIP rollout and may need additional
capital if we enter into other lines of business. On April 22, 2004, we obtained
a $25 million credit facility pursuant to a Loan and Security Agreement with
Textron Financial Corporation. The facility has a three-year term and as of
September 27, 2004 we had borrowings of approximately $15.4 million outstanding;
this is the maximum amount permitted to be outstanding thereunder based on our
current borrowing base availability. It replaced our previous accounts
receivable facility with RFC Corporation. In addition, we have also obtained a
facility from The 1818 Fund, an affiliate of one of our stockholders, providing
for borrowings of up to $15 million. We have borrowed $5 million under this
facility, but additional borrowings thereunder are at the discretion of The 1818
Fund. Representatives of The 1818 Fund have told us that, in any event, they do
not intend to make additional loans unless the Exchange Offer is successfully
completed. There cannot, however, be any assurance that we will be able to meet
the conditions to borrowing under either of these facilities. If we cannot
obtain required 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 our
Common Stock.
We may not be able to efficiently expand 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 business is dependent upon our ability to resell long distance services.
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.
Recently, several long distance carriers have encountered financial
difficulties, including both carriers utilized by us. Financial difficulties
encountered by any of our carriers could cause disruption of service to our
customers and could diminish the value of any receivables or credits that may be
due to us from such carriers. Our agreements with long distance carriers
generally provide for the resale of long distance services on a per-minute basis
and contain minimum volume commitments. In cases in which we have agreed to
minimum volume commitments and fail to meet them, we will be obligated to pay
underutili-
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zation charges. In some instances, if we incur underutilization charges, our
basic rate will increase, which could further adversely affect our operating
results. We recently settled a dispute by agreeing to a higher rate. In
addition, if our sales fall from their historical levels, our business could be
materially and adversely affected. We cannot guarantee you that we will be able
to maintain these historical sales levels.
Software failures and errors may have a material adverse impact on our business.
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 inability to protect our proprietary technology could adversely affect our
revenues.
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.
We depend on certain information systems, which if failed, may have a material
adverse affect on our business.
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.
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
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we continue 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. We cannot be certain that we will be able to meet
these additional requirements.
Our business could be adversely affected in the event of a network failure.
The successful operation of our network will depend on a continuous supply
of electricity at multiple points. Our system is dependent on the availability
of electrical power to manage data and calls and to offer enhanced services,
such as voicemail and call forwarding, and although it has been designed to
operate under extreme weather conditions (including hurricanes, tropical storms,
heavy rain, wind 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 backup and an on-site emergency generator.
Certain of our back-up systems, however, have failed in the past. We are working
to correct those failures. However, a power failure could negatively impact our
operations and damage our systems.
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.
We depend on local exchange carriers as a key component for our business.
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 be able
to obtain such unbundled elements on the scale and within the time frames
required by us. Any failure to obtain these components, services or additional
capacity on a timely and accurate basis could adversely affect us.
We depend on third party vendors to supply our telecommunications equipment, and
any interruption in such supply could adversely affect our business.
We currently purchase the majority of our telecommunications equipment as
needed from third party vendors, including Lucent Technologies, Inc., Sonus
Networks, Inc., Dialogic Communications Corporation, Hewlett-Packard Company,
Compaq Computer Corporation, Sun Microsystems, Inc., EMC Corporation, and Cisco
Systems, Inc. In addition, we currently license our software from third party
vendors, including Oracle Corporation, INPRISE Corporation, Mercator Software,
Inc., Microsoft Corporation, Nuance Communications, Inc., SpeechWorks
International, Inc., Telution, Inc., AMS, Inc., Netscape Communications, Inc.
and Accenture. 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 suppli-
-15-
ers or failure to obtain suitable software licensing terms could have a
disruptive effect on our business and could adversely affect our results of
operations.
Our business is dependent on our management and key personnel.
We depend on a limited number of key personnel who would be difficult to
replace. If we lose the services of some of our key personnel, our business
could suffer. We also 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. In the last several months we have experienced
significant employee attrition and some of those employees who have departed are
among our key personnel. If we are unable to replace the employees who have
departed and attract and retain our key employees, the value of our Common Stock
could suffer.
We are subject to government regulation and legal uncertainties that could
adversely affect our business.
We are subject to varying degrees of federal, state, and local regulation.
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 assess on a going-forward basis as the rates change
periodically. Our failure to comply with regulatory requirements 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 engage in substantial volume and term
discount pricing practices for their end-user 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. Our legal
and administrative expenses may be increased because of our having to actively
participate in rate cases filed by incumbent local exchange carriers, in which
they seek to increase the rates they can charge for the unbundled network
element platform components. Our profitability may be adversely affected if
those carriers prevail in those cases. Pending court cases in which certain
provisions of the Telecommunications Act will be conclusively interpreted may
result in an increase in our cost of obtaining unbundled network elements.
We are also subject to federal and state laws and regulations prohibiting
"slamming," which occurs when specific procedures are not followed when a
customer changes telecommunications services. Although we attempt to diligently
comply with all such laws and regulations and have procedures in place to
prevent "slamming," if violations of such laws and regulations
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occur, we could become subject to significant fines and penalties, legal fees
and costs, and our business reputation could be harmed.
Our inability to successfully compete within our industry could adversely affect
our business.
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. We believe 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. Competitor actions and responses to our actions could,
therefore, materially and 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
favor 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. 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 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 include
-17-
information service providers, telecommunications companies, on-line service
providers and Internet service providers.
We face risks associated with unauthorized transactions and the theft or abuse
of our services.
We may be the victim of fraud or theft or abuse of services. 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. To date, we have
not encountered material fraud or theft of our service. From time to time, we
encounter users that exploit provisions of our tariffs or terms of service for
their own profit. As a regulated common carrier we are required to offer our
services on a non-discriminatory manner. Such use of our services may not be
fraudulent but is abusive. We manage the risks of abuse through our internal
controls and our monitoring and blocking systems and by rapid reaction.
Risks Related to Our Common Stock
Future sales of our Common Stock could depress our stock price.
We cannot predict the effect that future sales of our Common Stock will
have on the market price of our Common Stock. As of September 27, 2004, we had
38,776,343 shares of Common Stock outstanding. Shares of Common Stock that we
issue in the Offer or other shares of our Common Stock that we issue in the
future may become available for resale in the public market from time to time.
Sales of substantial amounts of our Common Stock, or the perception that such
sales may occur, could adversely affect the market price of our Common Stock or
our ability to raise capital by offering equity securities.
Our Common Stock may be delisted from the Nasdaq SmallCap Market.
By letter dated July 28, 2004, the Nasdaq Stock Market, Inc. notified us
that for 10 consecutive days, the market value of our Common Stock on the Nasdaq
Small Cap Market was not $35 million or more, as required for continued
inclusion on the Nasdaq Small Cap Market by the Nasdaq rules. The market value
of our Common Stock remained below the minimum market value, and as a result the
Nasdaq staff provided us with written notification that our Common Stock will be
delisted. Currently we are appealing the staff's decision to a Listing
Qualifications Panel primarily on the basis that we believe, following
consummation of the Exchange Offer, that the market value of our Common Stock
will substantially exceed the minimum required amount. The Listing
Qualifications Panel may not grant our request to defer a determination of
delisting until after the Exchange Offer is consummated. In that event our
Common Stock will be delisted, our Common Stock will only be traded over the
counter on the Nasdaq Bulletin Board and the liquidity and price of our Common
Stock may be negatively affected. Even if our request is granted, we cannot
assure you that we will achieve the necessary market value for our Common Stock
following the Exchange Offer or that our Common Stock will maintain the
necessary market value for any length of time. If we fail to achieve and
maintain the market value for our Common Stock above that required by the Nasdaq
rules, our Common Stock will ultimately be delisted from the Nasdaq SmallCap
Market.
-18-
We have also been advised by the Nasdaq staff that our Common Stock does
not currently meet the minimum bid price per share of $1.00 necessary to
maintain listing on the Nasdaq SmallCap Market as required by the Nasdaq rules.
Although we believe that the reverse stock split proposal, if adopted at the
Special Meeting, will allow us to regain compliance, we cannot assure you that
the Common Stock will achieve the necessary bid price per share following the
reverse stock split or that our Common Stock will maintain the necessary minimum
bid price for any length of time. If we fail to achieve and maintain a bid price
for our Common Stock above that required by the Nasdaq rules, our Common Stock
will ultimately be delisted from the Nasdaq SmallCap Market.
We may experience volatility in our stock price that could affect your
investment.
The price of our Common Stock has been, and may continue to be, highly
volatile in response to various factors, many of which are beyond our control,
including:
o developments in the industries in which we operate;
o actual or anticipated variations in quarterly or annual operating
results;
o speculation in the press or investment community; and
o announcements of technological innovations or new products by us or
our competitors.
Our Common Stock's market price may also be affected by our inability to
meet analyst and investor expectations and failure to achieve projected
financial results, including those set forth in this Offer to Exchange, or as a
result of the issuance of the shares of Common Stock in the Offer and the
dilution of the currently outstanding shares of Common Stock. Any failure to
meet such expectations or projected financial results, even if minor, could
cause the market price of our Common Stock to decline.
In addition, assuming the tender of all outstanding Preferred Stock in the
Offer, The 1818 Fund, will own approximately 47% of our Common Stock which may
reduce the amount of shares of our Common Stock that are traded on a daily basis
and potentially increase the volatility of the price thereof.
Furthermore, stock markets have generally experienced a high level of price
and volume volatility, and the market prices of equity securities of many
companies have experienced wide price fluctuations not necessarily related to
the operating performance of such companies. These broad market fluctuations may
adversely affect our Common Stock's market price. In the past, securities class
action lawsuits frequently have been instituted against such companies following
periods of volatility in the market price of such companies' securities. If any
such litigation is instigated against us, it could result in substantial costs
and a diversion of management's attention and resources, which could have a
material adverse effect on our business, results of operations, and financial
condition.
-19-
After completion of the Exchange Offer one stockholder who is represented on our
board of directors will control a significant percentage of our Common Stock and
may cause us to take actions that are adverse to your interests.
If all the Preferred Shares are tendered in the Exchange Offer, after the
completion thereof, The 1818 Fund, which is represented on our board of
directors, in the aggregate will beneficially own approximately 47% of our
Common Stock. As a result, The 1818 Fund can significantly influence all matters
requiring stockholder approval, including the election and removal of directors
and approval of significant corporate transactions such as mergers,
consolidations, and sales of assets. It also could dictate the management of our
business and affairs. This concentration of ownership could have the effect of
delaying, deferring, or preventing a change in control or impeding a merger or
consolidation, takeover, or other business combination, which could cause the
market price of our Common Stock to fall or prevent you from receiving a premium
in such a transaction.
Anti-takeover provisions in our certificate of incorporation and bylaws and
provisions of Delaware law could delay or prevent a change of control that you
may favor.
Certain provisions of our certificate of incorporation and bylaws may
inhibit changes in control of us not approved by the board of directors. These
provisions include: (i) a prohibition on stockholder action through written
consents; (ii) a requirement that special meetings of stockholders be called
only by the board of directors; (iii) advance notice requirements for
stockholder proposals and nominations; (iv) limitations on the ability of
stockholders to amend, alter or repeal the bylaws; and (v) the authority of the
board of directors to issue, without stockholder approval, preferred stock with
such terms as the board of directors may determine. We will also be afforded the
protections of Section 203 of the Delaware General Corporation Law, which could
have similar effects. The foregoing provisions could delay or make more
difficult transactions involving a change in control of us or our management.
SPECIAL FACTORS RELATING TO THE OFFER TO EXCHANGE
In addition to the other information set forth herein, holders of Preferred
Shares should carefully consider the following information:
Special Committee of the Board of Directors
Because certain members of our Board of Directors either hold or are
affiliated with holders of Preferred Stock, our Board of Directors formed a
special committee (the "Special Committee") of its independent directors
comprised of Messrs. John K. Aurell, W. Andrew Krusen, Jr. and Richard F.
LaRoche, Jr., to evaluate the fairness, from a financial point of view, of the
Exchange Offer to the holders of Common Stock. The Special Committee retained
the services of a financial advisor, Morgan Keegan & Company, Inc. ("Morgan
Keegan"). Morgan Keegan has rendered an opinion to the Special Committee as to
the fairness, from a financial point of view, of the Exchange Offer to the
holders of Common Stock. NONE OF THE SPECIAL COMMITTEE, MORGAN KEEGAN OR THE
BOARD OF DIRECTORS HAS EVALUATED THE FAIRNESS OF THE EXCHANGE OFFER TO THE
HOLDERS OF PREFERRED STOCK. ACCORDINGLY, NEITHER THE SPECIAL COMMITTEE
-20-
NOR THE BOARD OF DIRECTORS IS MAKING ANY RECOMMENDATION WHATSOEVER AS TO WHETHER
HOLDERS OF PREFERRED STOCK SHOULD PARTICIPATE IN THE EXCHANGE OFFER.
Prior to this Offer, members of the Special Committee discussed the
possibility of the Exchange Offer with The 1818 Fund to ascertain its interest
in participating in the transaction. The 1818 Fund is our largest holder of
Preferred Stock and owns all of our outstanding Series E Preferred Stock, and
approximately 73% of our outstanding Series G Preferred Stock. We have been
advised by The 1818 Fund that it currently intends to tender all of its
Preferred Stock in the Exchange Offer and to vote in favor of the Special
Meeting Matters, subject to our receiving tenders of substantially all of the
Preferred Stock in the Exchange Offer, in its sole judgment. The 1818 Fund has
not advised us what level of tenders would, in its judgment, constitute
"substantially all" of the Preferred Stock. The 1818 Fund is not obligated to
participate in the Exchange Offer or to vote in favor of the Special Meeting
Matters and may decide not to do so at any time for any reason. However, because
this Offer is contingent upon The 1818 Fund tendering all of its Preferred Stock
and because The 1818 Fund will determine the vote of holders of Series E
Preferred Stock and Series G Preferred Stock at the Special Meeting, the
Exchange Offer will not occur unless The 1818 Fund tenders, and we accept, all
of its Preferred Stock in the Exchange Offer and votes in favor of the Special
Meeting Matters.
Two of our directors are associated with The 1818 Fund: Andrew C. Cowen is
a Senior Vice President of and Lawrence C. Tucker is a General Partner of Brown
Brothers Harriman & Co., a private investment banking firm that manages The 1818
Fund. In addition, Mr. Charles D. Hyman, one of our directors, owns
approximately 0.5% of the outstanding Series D Preferred Stock.
On the basis of its discussions with The 1818 Fund and the opinion of
Morgan Keegan as to the fairness of the Exchange Offer, from a financial point
of view, to the holders of Common Stock, and the potential failure to be able
raise additional financing required for our new business plan as long as the
Preferred Stock remains outstanding, the Special Committee recommended to the
Board of Directors that we pursue the Exchange Offer. In structuring the terms
of the Exchange Offer, the Special Committee considered the rights and
preferences of the Preferred Shares, including the dividend rate; the relative
preferences and other terms relative to the Common Shares; the fact that
acceptance of the Offer is not mandatory and that each holder of the Preferred
Stock may participate in its sole discretion; recent market prices for our
Common Stock; the lack of attractive alternatives available to us in lieu of the
Exchange Offer; the assumed pro forma effect of the Offer to Exchange on our
consolidated capitalization; the United States federal income tax consequences
of the Offer to Exchange on us and on the holders of our Preferred Stock; and
the fairness opinion of Morgan Keegan.
For the following reasons our Board of Directors determined to accept the
recommendation of the Special Committee and proceed with the Exchange Offer: it
will improve and simplify our capital structure and increase our net book value;
it will reduce or eliminate the dividends and mandatory redemption obligation on
our Preferred Stock; it is within the discretion of each holder of Preferred
Stock to determine whether it should participate in the Exchange Offer; it will
give holders of our Preferred Stock an opportunity to effectively convert their
Preferred
-21-
Stock to Common Stock at a substantial premium to the conversion rates presently
in effect for the Preferred Stock; it will give holders of our Preferred Stock
an opportunity to obtain greater liquidity on their investment; it should
significantly increase the aggregate market value of our Common Stock and
facilitate our continued listing on the Nasdaq SmallCap Market; and the failure
to convert the Preferred Stock into Common Stock will continue to be an
impediment to financing our new business plan.
Determining Whether or Not to Tender
NONE OF THE SPECIAL COMMITTEE, MORGAN KEEGAN OR THE BOARD OF DIRECTORS HAS
EVALUATED THE FAIRNESS OF THE EXCHANGE OFFER TO THE HOLDERS OF PREFERRED STOCK.
ACCORDINGLY, NEITHER THE SPECIAL COMMITTEE NOR THE BOARD OF DIRECTORS IS MAKING
ANY RECOMMENDATION WHATSOEVER AS TO WHETHER HOLDERS OF PREFERRED STOCK SHOULD
PARTICIPATE IN THE EXCHANGE OFFER.
The decision to tender Preferred Shares pursuant to the Offer to Exchange
should be made by holders of Preferred Shares after considering the value of the
Preferred Shares they are tendering, the value of the Common Shares they are
ultimately receiving, individual investment objectives and other factors
affecting such holders individually, including any federal, state, local or
foreign tax consequences of tendering Preferred Stock. Holders of Preferred
Stock should consider the current market price of the Common Shares as well as
their view of the future market price of the Common Shares. Holders of Preferred
Stock are urged to evaluate carefully all information contained or incorporated
by reference in this Offer to Exchange and to consult their own financial and
tax advisors to make their own decisions concerning whether to tender Preferred
Shares in the Offer to Exchange. See "Risk Factors," "Description of Our
Preferred Stock," "Description of Our Common Stock," "Market for Common Stock"
and "Material United States Federal Income Tax Consequences."
MANAGEMENT
The following table sets forth information about our directors and
executive officers as of the date of this Offer to Exchange:
Name Position
Horace J. Davis, III Acting Chief Executive Officer,
Treasurer and Senior Vice President --
Chief Financial Officer
Frank Grillo Chief Operating Officer
Paul Kohler Chief Technology Officer
Doug Jackson Senior Vice President Consumer Services
Mike Slauson Senior Vice President Customer Service
and Support Operations
John Tomljanovic Senior Vice President Business Operations
John K. Aurell Director
Andrew C. Cowen Director
Charles D. Hyman Director
-22-
Name Position
W. Andrew Krusen, Jr. Director
Richard F. LaRoche, Jr. Director
Lawrence C. Tucker Director
For additional information regarding our directors and officers, reference
is hereby made to our definitive Proxy Statement on Schedule 14A filed on April
29, 2004.
USE OF PROCEEDS
We will not receive any cash proceeds from this Offer. Preferred Shares
surrendered in exchange for Common Shares will be retired and returned to the
pool of authorized but unissued Preferred Shares.
THE OFFER TO EXCHANGE
This Offer to Exchange and the related Letter of Transmittal are being
mailed to record holders of Preferred Shares and will be furnished to brokers,
banks and similar persons whose names, or the names of whose nominees, appear on
our stockholder lists or, if applicable, who are listed as participants in a
clearing agency's security position listing for subsequent transmittal to
beneficial owners of Preferred Shares.
Number of Shares
Upon the terms and subject to the conditions of this Offer to Exchange, we
will exchange all of the Preferred Shares outstanding, or such lesser number of
Preferred Shares as are validly tendered and not withdrawn prior to the
Expiration Date, for Common Shares as follows (subject in each case to the
impact of any reverse stock split):
o We will exchange 25.69030 shares of our Common Stock for each share of
our Series D Preferred Stock, of which there were 3,976,723 shares
outstanding as of September 27, 2004 (representing an exchange price
of approximately $0.644 per share);
o We will exchange 25.24216 shares of our Common Stock for each share of
our Series E Preferred Stock, of which there were 4,166,667 shares
outstanding as of September 27, 2004 (representing an exchange price
of approximately $0.644 per share); and
o We will exchange 161,469.4 shares of our Common Stock for each share
of our Series G Preferred Stock, of which there were 171.214286 shares
outstanding as of September 27, 2004 (representing an exchange price
of approximately $0.898 per share).
The actual number of shares of Common Stock to be issued in exchange for
the Preferred Stock tendered in the Exchange Offer may be adjusted by the
reverse stock split which is part of the Special Meeting Matters. Subject to the
approval by our stockholders, our Board of Direc-
-23-
tors will be authorized to amend our certificate of incorporation to effect a 3
for 1, 4 for 1, 5 for 1, 6 for 1, 7 for 1 or 8 for 1 reverse stock split of the
outstanding shares of our Common Stock, with the actual implemented ratio to be
determined by our Board of Directors in its discretion. If approved by our
stockholders, the reverse stock split would become effective shortly before
consummation of the Exchange Offer or on any other date selected by our Board of
Directors prior to our next annual meeting of stockholders. Our Board of
Directors may effect only one reverse stock split. In determining the reverse
stock split ratio, our Board of Directors will consider numerous factors
including the historical and projected performance of our Common Stock, the
requirements for continued listing on the Nasdaq SmallCap Market, prevailing
market conditions and general economic trends, and will place emphasis on the
expected closing price of our Common Stock in the period following the
effectiveness of the reverse stock split. The purpose of selecting a range is to
give our Board of Directors the flexibility to provide for a post reverse stock
split market price that may allow us to maximize our ability to support future
growth. Even if the stockholders approve the reverse stock split, our Board of
Directors will reserve the right not to effect the reverse stock split if the
Board of Directors does not deem it to be in our or our stockholders' best
interest to effect the reverse stock split. Accordingly, the actual number of
shares of Common Stock outstanding will be adjusted by dividing such number of
shares by the split ratio, if any, approved by our stockholders and ultimately
effected.
As of September 27, 2004, if all of the outstanding Preferred Stock was
converted into Common Stock at the then prevailing conversion rates:
o the former holders of Series D Preferred Stock would own approximately
10.4% of our Common Stock on a fully diluted basis;
o the former holders of Series E Preferred Stock would own approximately
11.3% of our Common Stock on a fully diluted basis;
o the former holders of Series G Preferred Stock would own approximately
26.1% of our Common Stock on a fully diluted basis; and
o the current holders of Common Stock would own approximately 52.2% of
our Common Stock on a fully diluted basis.
As of the same date, if all of the outstanding Preferred Stock is exchanged
in the Exchange Offer:
o the former holders of Series D Preferred Stock would own approximately
34.0% of the Common Stock on a Fully Diluted Basis;
o the former holders of Series E Preferred Stock would own approximately
35.0% of the Common Stock on a Fully Diluted Basis;
o the former holders of Series G Preferred Stock would own approximately
9.2% of the Common Stock on a Fully Diluted Basis;
-24-
o the current holders of Common Stock would own approximately 13.8% of
the Common Stock on a Fully Diluted Basis; and
o approximately 8.0% of the Fully Diluted Common Stock would have been
reserved for issuance under the new management equity incentive plan.
We will not issue fractional shares. In the event that a fraction of a
Common Share becomes issuable upon consummation of the Offer to Exchange, we
will pay you an amount in cash equal to the closing price of our Common Stock on
the business day preceding such consummation (as adjusted to reflect the impact
of any reverse stock split), multiplied by such fraction of a Common Share.
Expiration Date
The term "Expiration Date" means 5:00 p.m., New York City time, on Tuesday,
November 23, 2004, unless and until we, in our sole discretion, extend the
period of time during which the Offer to Exchange will remain open, in which
event the term "Expiration Date" shall refer to the latest time and date at
which the Offer to Exchange shall expire. See "--Extension of the Tender Period;
Termination; Amendment" below.
Procedures for Tendering Preferred Shares
A holder who wishes to tender Preferred Shares for exchange pursuant to the
Offer to Exchange must transmit a properly completed and duly executed Letter of
Transmittal, or a facsimile thereof, together with certificates for such
Preferred Shares and any other required documents, to the Exchange and
Information Agent prior to 5:00 p.m., New York City time, on the Expiration
Date.
To be effectively tendered, Preferred Shares, the Letter of Transmittal and
other required documents must be received by the Exchange and Information Agent
at the address set forth on the last printed page of this Offer to Exchange
prior to 5:00 p.m., New York City time, on the Expiration Date.
The tender by a stockholder will constitute an agreement between that
stockholder and us in accordance with the terms and subject to the conditions
contained in this Offer to Exchange and in the Letter of Transmittal.
The method of delivery of Preferred Shares and all other required documents
is at your election. If you deliver your Preferred Shares by mail, we recommend
registered mail, properly insured, with return receipt requested. In all cases,
you should allow sufficient time to assure timely delivery. Please send all
certificates representing Preferred Shares and Letters of Transmittal to the
Exchange and Information Agent for the Offer to Exchange, at the address set
forth on the last printed page of this Offer to Exchange. Please do not send
these materials to us.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Preferred Shares listed therein, these Preferred Shares
must be endorsed or accompanied by a properly completed stock power and signed
by the registered holder as the registered holder's name appears on the
Preferred Share certificates.
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If the Letter of Transmittal or Preferred Shares or stock powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
these persons should so indicate when signing, unless waived by us. If we waive
any condition or matter with respect to any holder of Preferred Stock, we will
similarly waive such condition or matter for all holders of Preferred Stock.
Evidence satisfactory to us of their authority so to act must be submitted with
the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution unless the Preferred
Shares tendered pursuant thereto are tendered:
o by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the
Letter of Transmittal, or
o for the account of an Eligible Institution.
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-5 under the Exchange Act
(an "Eligible Institution").
We will determine all questions as to the validity, form, eligibility,
including time of receipt, acceptance and withdrawal of tendered Preferred
Shares in our sole discretion, which determination shall be final and binding.
We reserve the absolute right to reject any and all Preferred Shares not
properly tendered or any Preferred Shares, our acceptance of which would, in the
opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular Preferred
Shares; provided that any such waiver shall similarly apply to all holders of
Preferred Stock. Our interpretation of the terms and conditions of the Offer to
Exchange, including the instructions in the Letter of Transmittal, shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with the tender of Preferred Shares must be cured within the time
as we shall determine. Neither we, the Exchange and Information Agent nor any
other person shall incur any liability for failure to give notice of any defect
or irregularity with respect to any tender of Preferred Shares. Tenders of
Preferred Shares will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Preferred Shares received by the
Exchange and Information Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will not be deemed
to have been properly tendered. Any Preferred Shares received by the Exchange
and Information Agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned by the Exchange
and Information Agent to the tendering stockholder, unless otherwise provided in
the Letter of Transmittal, promptly following the Expiration Date.
-26-
Conditions
Consummation of the Exchange Offer is conditioned upon the approval of
stockholders of the Special Meeting Matters and upon the tender by The 1818 Fund
of all Preferred Stock that it owns in the Exchange Offer and our acceptance of
those shares. In addition, notwithstanding any other provision of this Offer to
Exchange, we shall not be required to accept for exchange any Preferred Shares
tendered, and may terminate or amend the Offer or may postpone the acceptance
for exchange of any Preferred Shares tendered, if at any time on or before the
expiration of the Offer, any of the following events shall have occurred which,
in our reasonable judgment, makes it inadvisable to proceed with the Offer to
Exchange or with such exchange:
o any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Offer, or any
material adverse development has occurred in any existing action or
proceeding with respect to us or any of our subsidiaries, which, in
our reasonable judgment, might materially impair our ability to
proceed with the Offer;
o any law, statute, rule or regulation is proposed, adopted or enacted
which, in our reasonable judgment, might materially impair our ability
to proceed with the Offer; or
o any governmental approval has not been obtained, which approval we, in
our reasonable judgment, shall deem necessary for the consummation of
the Offer as contemplated hereby.
The foregoing conditions may be asserted by us regardless of the
circumstances giving rise to any such condition or may be waived by us in whole
or in part. With the exception of those dependent on the receipt of necessary
governmental approvals, all of the foregoing conditions must be satisfied or
waived on or before the Expiration Date. We will promptly terminate the Offer or
issue a press release stating our intentions upon becoming aware of any
condition that may not be satisfied. Any determination by us concerning the
foregoing conditions shall be final and binding on all parties.
If we determine in our reasonable discretion that any of the conditions are
not satisfied, we may:
o refuse to accept the Preferred Shares and return all tendered shares
to the tendering holders;
o extend the Offer and retain all Preferred Shares tendered prior to the
expiration of the Offer, subject, however, to the rights of holders to
withdraw their tendered shares (see "--Withdrawal of Tenders"); or
o waive the unsatisfied conditions with respect to the Offer and accept
all properly tendered Preferred Shares that have not been withdrawn.
If such a waiver constitutes a material change to the Offer, we will
promptly disclose this waiver by means of an Offer supplement that
will be distributed to the record holders of Preferred Shares. We will
also extend the Offer for a period of five to ten business days,
depending
-27-
upon the significance of the waiver and the manner of disclosure to
the record holders, if the Offer would otherwise expire during such
five to ten business day period.
Acceptance of Preferred Shares for Exchange; Delivery of Common Shares
For purposes of the Offer, we shall be deemed to have accepted properly
tendered Preferred Shares for exchange when, as and if we have given oral or
written notice thereof to the Exchange and Information Agent.
In all cases, the issuance of Common Shares for Preferred Shares that are
accepted for exchange pursuant to the Offer will be made only after timely
receipt by the Exchange and Information Agent of certificates for the Preferred
Shares, a properly completed and duly executed Letter of Transmittal and all
other required documents. If any tendered Preferred Shares are not accepted for
any reason set forth in the terms and conditions of the Offer, or if Preferred
Shares are submitted for a greater principal amount than the stockholder desires
to exchange, these unaccepted or non-exchanged Preferred Shares will be promptly
returned without expense to the tendering stockholder of these Preferred Shares.
All tendered Preferred Shares will promptly be either (1) exchanged for
shares of Common Stock or (2) returned to the tendering stockholder following
the Expiration Date.
Guaranteed Delivery Procedures
Stockholders who wish to tender their Preferred Shares and whose Preferred
Shares are not immediately available, or who cannot deliver their Preferred
Shares, the Letter of Transmittal or any other required documents to the
Exchange and Information Agent prior to the Expiration Date, may effect a tender
if:
o the tender is made through an Eligible Institution;
o prior to the Expiration Date, the Exchange and Information Agent
receives from such Eligible Institution a properly completed and duly
executed notice of guaranteed delivery, by facsimile transmission,
mail or hand delivery, setting forth the name and address of the
stockholder, the certificate number(s) of the Preferred Shares and the
principal amount of Preferred Shares tendered, stating that the tender
is being made thereby and guaranteeing that, within three (3) Nasdaq
Stock Market trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing the Preferred Shares and any other documents required by
the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange and Information Agent; and
o such properly completed and executed Letter of Transmittal (or
facsimile thereof) as well as the certificate(s) representing all
tendered Preferred Shares in proper form for transfer and all other
documents required by the Letter of Transmittal are received by the
Exchange and Information Agent within three Nasdaq Stock Market
trading days after the Expiration Date.
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Lost or Missing Certificate
If you desire to tender Preferred Shares pursuant to this Offer to
Exchange, but the certificates representing such Preferred Shares have been
mutilated, lost, stolen or destroyed, you should write to or telephone the
Exchange and Information Agent at the addresses or telephone numbers listed on
the last printed page of this Offer to Exchange, about procedures for obtaining
replacement certificates for such Preferred Shares, arranging for
indemnification or about any other matter that requires handling by the Exchange
and Information Agent.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Preferred Shares may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Preferred Shares in the Offer to Exchange, a
written or facsimile transmission notice of withdrawal must be received by the
Exchange and Information Agent at its address set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date.
You also have the right to withdraw your tendered Preferred Shares at any
time after the expiration of 40 business days from the commencement of the Offer
to Exchange, which is November 24, 2004, if we have not yet accepted your
Preferred Shares for exchange at that time.
Any notice of withdrawal must:
o specify the name of the person having deposited the Preferred Shares
to be withdrawn (the "Depositor");
o identify the Preferred Shares to be withdrawn (including the
certificate numbers and principal amounts of such Preferred Shares);
o be signed by the stockholder in the same manner as the original
signature on the Letter of Transmittal by which such Preferred Shares
were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the trustee
with respect to the Preferred Shares register the transfer of these
Preferred Shares into the name of the person withdrawing the tender;
and
o specify the name in which any of the Preferred Shares are to be
registered, if different from that of the Depositor.
If certificates representing Preferred Shares have been delivered or
otherwise identified to the Exchange and Information Agent, then, prior to the
release of such certificates, the withdrawing stockholder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal. We will determine in our sole discretion all questions as
to the validity, form and eligibility (including time of receipt) of those
notices, which determination shall be final and binding on all parties. Any
Preferred Shares so withdrawn will be deemed not to have been validly tendered
for purposes of the Offer and no Common Stock will be issued with respect
thereto unless the Preferred Shares so withdrawn are validly retendered.
Properly
-29-
withdrawn Preferred Shares may be retendered by following one of the procedures
described above.
Any Preferred Shares that have been tendered but that are not accepted for
exchange due to withdrawal, rejection of tender or termination of the Offer will
be returned promptly after withdrawal, rejection of tender or termination of the
Offer to the holder of the Preferred Shares, without cost to the stockholder.
Exchange and Information Agent
We have appointed Andrew L. Graham as the Exchange and Information Agent
for the Offer. All completed Letters of Transmittal should be directed to the
Exchange and Information Agent at the address set forth on the last printed page
of this Offer to Exchange.
Delivery of a Letter of Transmittal to an address other than the address
listed herein or transmission of instructions by facsimile other than as set
forth herein is not valid delivery of the Letter of Transmittal.
All questions regarding the procedures for tendering in the Offer and
requests for assistance in tendering your Preferred Shares can be directed to
the Exchange and Information Agent at the telephone number or the address on the
last printed page of this Offer to Exchange.
Requests for additional copies of this Offer to Exchange, the Letter of
Transmittal or other exchange offer materials, our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, our 2003 Annual Report on Form 10-K and our 2002
Annual Report on Form 10-K, or any of the other documents incorporated by
reference herein, may be directed to the Exchange and Information Agent at the
telephone number and address listed on the last printed page of this Offer to
Exchange.
All deliveries, correspondence and questions sent or presented to the
Exchange and Information Agent relating to the Offer should be directed to the
address or telephone number set forth on the last printed page of this Offer to
Exchange.
Extension of the Tender Period; Termination; Amendment
We expressly reserve the absolute right, in our sole discretion:
o to delay accepting any Preferred Shares, to extend the Offer or, if in
our reasonable judgment, any of the conditions described above under
the caption "--Conditions" are not satisfied, to terminate the Offer
or waive any condition set forth in the Offer, by giving oral or
written notice of this delay, extension, termination or waiver to the
Exchange and Information Agent;
o to amend the terms of the Offer in any manner, any such amendment to
be followed promptly by a public announcement thereof; and
-30-
o to terminate the Offer and not accept for exchange Preferred Shares
tendered pursuant thereto.
Our reservation of the right to delay the exchange of Preferred Shares is
limited by Rule 13e-4(f)(5) promulgated under the Exchange Act, which requires
that we must pay the consideration offered or return the Preferred Shares
tendered promptly after termination or withdrawal of the Offer. Any waiver,
amendment or modification will apply to all Preferred Shares tendered,
regardless of when or in what order such Preferred Shares were tendered. Any
extension or termination of the Offer or any amendment or modification of the
terms set forth in the Offer will be followed promptly by public announcement
thereof, such announcement in the case of an extension to be issued no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date, unless otherwise required by applicable
law or regulation.
If we materially change the terms of the Offer or the information
concerning the Offer, we will extend the Offer to the extent required by Rules
13e-4(d)(2) and 13e-4(e)(3) promulgated under the Exchange Act. These rules
provide certain minimum periods during which an offer must remain open following
material changes in the terms of the Offer or information concerning the Offer.
We will promptly disclose such amendment by means of an Offer supplement that
will be distributed to record holders of Preferred Shares, and extend the Offer
for a period of five to ten business days, depending upon the significance of
the amendment and the manner of disclosure to the registered holders, if the
Offer would otherwise expire during such five to ten business day period.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, termination or amendment of the Offer,
except as required by applicable law, we have no obligation to publish,
advertise or otherwise communicate any such public announcement, other than by
making a timely release to Business Wire, for further dissemination to leading
financial and general news organizations, including Associated Press, Dow Jones
and Reuters.
Accounting Treatment
The exchange of Common Stock for Preferred Stock will be treated as an
induced conversion for accounting purposes per Financial Accounting Standards
Board ("FASB") Statement No. 84, "Induced Conversions of Convertible Debt." An
"induced conversion" is considered to occur when the conversion privileges,
pursuant to the original terms of the instrument, are changed or additional
consideration is offered to security holders for the purpose of inducing prompt
conversion of the security. Per Topic D-42 and FASB 84, a dividend charge will
be incurred representing the difference between the value of the Common Stock
issued in the Offer, and the value of the shares that were issuable under the
original conversion terms of the Preferred Stock. The dividend charge will
result in an adjustment to net earnings in the quarter in which the conversion
is approved. This adjustment is expected to be a reduction to net earnings,
assuming our Common Stock price remains below the Preferred Stock effective
exchange price on the day the conversion is approved. Earnings per share
attributable to Common Stock will be adjusted due to the dividend and will show
an even greater loss per Common Share outstanding.
Regulatory Approvals
We do not believe that the receipt of any material federal or state
regulatory approvals will be necessary in connection with the Offer.
-31-
Voluntary Exchange
Participation in the Offer is voluntary and holders of Preferred Shares
should carefully consider whether to accept the terms and conditions of the
Offer. Holders of the Preferred Shares are urged to consult their financial and
tax advisors in making their own decisions on what action to take with respect
to the Offer.
Description of Our Preferred Stock
The following are summaries of the principal terms and conditions of each
series of our outstanding Preferred Stock, as provided in our Amended and
Restated Certificate of Incorporation, as amended (the "Certificate of
Incorporation"). The following summaries are subject to, and qualified in their
entirety by reference to, all of the provisions of the Certificate of
Incorporation. In addition, as described above, if the proposed amendments
contemplated in the Special Meeting Matters that will be described in the proxy
statement to be prepared for the Special Meeting are adopted, the terms of the
Series D Preferred Stock and Series G Preferred Stock will change significantly
and will cease to have certain preferential rights that they had prior to the
Offer.
Series D Preferred Stock
Series D Preferred Shares Outstanding.............. 3,976,723 preferred shares
(as of September 27, 2004)
Parity with Series E Preferred Stock............... The Series D Preferred Stock
ranks on a parity with the
Series E Preferred Stock
with respect to dividend
rights and rights on
liquidation, dissolution or
winding up.
Dividends.......................................... Dividends equal to 8% per
annum of the Liquidation
Preference (as defined
below), are payable at the
option of the Board of
Directors in cash,
additional shares of Series
D Preferred Stock or in any
combination thereof.
Dividends automatically
accrue and are added to the
Liquidation Preference of
the Series D Preferred Stock
in the absence of a payment
election by the Board of
Directors.
Restriction on Dividends on Common Stock........... No dividends may be declared
or paid on shares of Common
Stock while there are any
shares of Series D Preferred
Stock outstanding, nor may
we redeem, purchase or
acquire stock that is junior
in rights and preferences to
the Series D Preferred Stock
("Junior Stock") in excess
of 1 million shares of
Common Stock in any 12-month
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period, unless all accrued
and unpaid dividends on the
Series D Preferred Stock
have been paid or set aside
for payment and sufficient
funds for payment of current
dividends on the Series D
Preferred have been paid or
set aside for payment. We
may declare and pay
dividends on Junior Stock
which are payable in
additional shares, or an
increase in the liquidation
value of, Junior Stock.
Optional Redemption................................ The Series D Preferred Stock
is redeemable at our option
at any time at a price per
share equal to the
Liquidation Preference, plus
a premium ranging from 5% in
the year following the third
anniversary of the original
issue date thereof to 0%
from and after the eighth
anniversary of such original
issue date, plus accrued and
unpaid dividends, whether or
not declared, to the
redemption date. The premium
for a redemption at our
option in effect from the
date of this Offer to
Exchange to June 30, 2005 is
4%.
Mandatory Redemption............................... The Series D Preferred Stock
is mandatorily redeemable by
us in 2008, at a price per
share equal to the
Liquidation Preference plus
all accrued but unpaid
dividends, whether or not
declared, to the redemption
date.
Liquidation Preference............................. $12.00 per share, plus
accrued and unpaid
dividends, prior to any
payment in respect of Junior
Stock. The Series D
Preferred Stock has parity
with the Series E Preferred
Stock ("Parity Stock"). In
the event that the proceeds
available on liquidation are
insufficient to satisfy the
Liquidation Preference of
the Series D Preferred Stock
and the Parity Stock, the
proceeds shall be
distributed among the
holders of the Series D
Preferred Stock and the
Parity Stock ratably in
proportion to the total
amounts to which all holders
of Series D Preferred Stock
and the Parity Stock are
entitled upon liquidation.
Conversion Rights.................................. Holders may convert each
share of Series D Preferred
Stock into 1.3905 shares of
Common Stock at any time,
subject to adjustment.
-33-
Forced Conversion.................................. We have the right to convert
all (and not less than all)
shares of Series D Preferred
Stock each time the Common
Stock trades at a price per
share exceeding two times
the then-applicable
Conversion Price for twenty
consecutive trading days.
Based upon a Conversion
Price of $8.47 (as of
September 27, 2004), we have
the right to convert all
(and not less than all)
shares of Series D Preferred
Stock each time that the
Common Stock trades at a
price per share exceeding
$16.94 for twenty
consecutive trading days.
Voting Rights...................................... Each holder of Series D
Preferred Stock is entitled
to a number of votes equal
to the number of shares of
Common Stock into which that
holder's shares of Series D
Preferred Stock are then
convertible. The Series D
Preferred Stock votes as a
single class with the Common
Stock on all matters
submitted to stockholders.
The approval of seventy
percent (70%) of the
outstanding voting power of
the Series D Preferred Stock
is necessary to authorize or
issue any stock that is
senior to or on parity with
the Preferred Stock.
Accumulated Unpaid Dividends and Interest.......... $4.55 in the aggregate per
share of Series D Preferred
Stock (as of September 27,
2004). Total accumulated
unpaid dividends and
interest on all issued and
outstanding shares of Series
D Preferred Stock are
$65,809,802 as of September
27, 2004.
Series E Preferred Stock
Series E Preferred Shares Outstanding.............. 4,166,667 preferred shares
(as of September 27, 2004)
Parity with Series D Preferred Stock............... The Series E Preferred Stock
ranks on a parity with the
Series D Preferred Stock
with respect to dividend
rights and rights on
liquidation, dissolution or
winding up.
Dividends.......................................... Cumulative dividends equal
to 8% per annum of the
Liquidation Preference (as
defined below). At our
option, no dividends are
payable in cash until the
earlier of redemption or
liquidation. If
-34-
we do not pay dividends,
they automatically accrue
and are added to the
Liquidation Preference of
the Series E Preferred
Stock. In the event of
conversion of shares of
Series E Preferred Stock,
accrued and unpaid dividends
shall be applied to increase
the number of shares of
Common Stock into which
shares of Series E Preferred
Stock are convertible.
Restriction on Redemption of Junior Stock.......... If dividends payable on
Shares of Series E Preferred
Stock are not paid in full
in cash, we may not redeem,
purchase or acquire stock
that is junior in rights and
preferences to the Series E
Preferred Stock ("Junior
Stock") in excess of 1
million shares of Common
Stock in any 12-month period
unless all accrued and
unpaid dividends on the
Series E Preferred Stock
have been paid or set aside
for payment and sufficient
funds for payment of current
dividends on the Series E
Preferred have been paid or
set aside for payment.
Participation with Dividends on Common Stock....... In the event that we declare
and pay any dividends or
make any distributions on
Common Stock (whether in
cash, stock, or pursuant to
a stockholder rights plan),
each holder of Series E
Preferred Stock shall be
entitled to receive the
dividend which is payable to
the number of shares of
Common Stock into which that
holder's shares of Series E
Preferred Stock are then
convertible.
Optional Redemption................................ The Series E Preferred Stock
is not redeemable at our
option prior to July 2,
2006. From and after July 2,
2006, the Series E Preferred
Stock is redeemable at our
option at any time at a
price per share equal to the
Liquidation Preference, plus
a premium equal to 2% in the
year beginning July 2, 2006,
1% on the year beginning
July 2, 2007, and 0% from
and after October 19, 2008,
plus accrued and unpaid
dividends, whether or not
declared, to the redemption
date.
Mandatory Redemption............................... The Series E Preferred Stock
is mandatorily redeemable by
us on October 19, 2008, at a
price
-35-
per share equal to the
Liquidation Preference plus
all accrued but unpaid
dividends, whether or not
declared, to the redemption
date.
Liquidation Preference............................. $12.00 per share, plus
accrued and unpaid
dividends, prior to any
payment in respect of Junior
Stock. The Series E
Preferred Stock has parity
with the Series D Preferred
Stock ("Parity Stock"). In
the event that the proceeds
available on liquidation are
insufficient to satisfy the
Liquidation Preference of
the Series E Preferred Stock
and the Parity Stock, the
proceeds shall be
distributed among the
holders of the Series E
Preferred Stock and the
Parity Stock ratably in
proportion to the total
amounts to which all holders
of Series E Preferred Stock
and the Parity Stock are
entitled upon liquidation.
Conversion Rights.................................. Holders may convert each
share of Series E Preferred
Stock into 2.5737 shares of
Common Stock at any time,
subject to adjustment.
Forced Conversion.................................. From and after July 2, 2006,
we have the right to convert
all (and not less than all)
shares of Series E Preferred
Stock each time the Common
Stock trades at a price per
share exceeding 250% of the
then-applicable Conversion
Price for twenty consecutive
trading days. Based upon a
Conversion Price of $8.08
(as of September 27, 2004),
from and after July 2, 2006,
we would have the right to
convert all (and not less
than all) shares of Series E
Preferred Stock each time
that the Common Stock trades
at a price per share
exceeding $20.20 for twenty
consecutive trading days.
Voting Rights...................................... Each holder of Series E
Preferred Stock is entitled
to a number of votes equal
to the number of shares of
Common Stock into which that
holder's shares of Series E
Preferred Stock are then
convertible. The Series E
Preferred Stock votes as a
single class with the Common
Stock on all matters
submitted to stockholders.
The approval of at least
fifty percent (50%) of the
outstanding voting power of
the Series E Preferred Stock
is necessary to authorize or
issue any stock that is
senior to or on parity with
the Series E Preferred
-36-
Stock, or effect certain
mergers or acquisitions
involving material
subsidiaries, sales of
assets in excess of $50
million, incurrence of
indebtedness for borrowed
money in excess of $100
million.
Accumulated Unpaid Dividends and Interest.......... $4.26 in the aggregate per
share of Series E Preferred
Stock (as of September 27,
2004). Total accumulated
unpaid dividends and
interest on all issued and
outstanding shares of Series
E Preferred Stock are
$67,750,315 as of September
27, 2004.
Series G Preferred Stock
Series G Preferred Shares Outstanding.............. 171.214286 preferred shares
(as of September 27, 2004)
Junior to Series D Preferred Stock and Series E
Preferred Stock................................. The Series G Preferred Stock
ranks junior to the Series D
Preferred Stock and the
Series E Preferred Stock
with respect to dividend
rights and rights on
liquidation, dissolution or
winding up.
Dividends.......................................... Cumulative dividends equal
to 12% per annum of the
Liquidation Preference (as
defined below). At our
option, no dividends are
payable in cash until the
earlier of redemption or
liquidation. If we do not
pay dividends, they
automatically accrue and are
added to the Liquidation
Preference of the Series G
Preferred Stock. In the
event of conversion of
Series G Preferred Stock
into Common Stock, accrued
and unpaid dividends are
applied to increase the
number of shares of Common
Stock into which the Series
G Preferred Stock is
convertible.
Restriction on Dividends on Common Stock........... If dividends payable on the
shares of Series G Preferred
Stock are not paid in full
in cash, we may not redeem,
purchase or acquire stock
that is junior in rights and
preferences to the Series G
Preferred Stock ("Junior
Stock") in excess of 1
million shares of Common
Stock in any 12-month period
unless all accrued and
unpaid dividends on the
Series G Preferred Stock
have been
-37-
paid or set aside for
payment and sufficient funds
for payment of dividends on
the Series G Preferred have
been paid or set aside for
payment.
Optional Redemption................................ Subject to the rights and
privileges of the holders of
the Series D Preferred Stock
and the Series E Preferred
Stock, the Series G
Preferred Stock is
redeemable at our option at
any time after September 18,
2002 at a price per share
equal to the Liquidation
Preference, plus accrued and
unpaid dividends, whether or
not declared, to the
redemption date.
Right to Put Series G Preferred Stock on Change in
Control......................................... Subject to the rights and
privileges of the holders of
the Series D Preferred Stock
and the Series E Preferred
Stock, in the event that on
or prior to July 2, 2006, a
Change in Control occurs,
each holder of shares of
Series G Preferred Stock has
the option to require us to
redeem all of such holder's
Series G Preferred Stock for
a price equal to 125% of the
sum of the Liquidation
Preference and accrued and
unpaid dividends through the
redemption date.
Mandatory Redemption............................... Subject to the rights and
privileges of the holders of
the Series D Preferred Stock
and the Series E Preferred
Stock, the Series G
Preferred Stock is
mandatorily redeemable by us
on September 18, 2006, at a
price per share equal to the
Liquidation Preference plus
all accrued but unpaid
dividends, whether or not
declared, to the redemption
date.
Liquidation Preference............................. Subject to the rights and
privileges of the holders of
the Series D Preferred Stock
and the Series E Preferred
Stock, $100,000.00 per
share, plus accrued and
unpaid dividends, prior to
any payment in respect of
Junior Stock.
Conversion Rights.................................. Holders may convert each
share of Series G Preferred
Stock into 113,262 shares of
Common Stock at any time
(based upon a Conversion
Price of $1.28, as of
September 27, 2004).
Automatic Conversion............................... If at any time the Common
Stock trades at a price per
share of $10.00 for twenty
consecutive trading days.
Based upon a Conversion
Price of
-38-
$1.28 (as of September 27,
2004), each share of Series
G Preferred Stock is
convertible into
118,901.6174 shares of
Common Stock.
Voting Rights...................................... The holders of the Series G
Preferred Stock are not
entitled to any voting
rights, except as required
by law.
Accumulated Unpaid Dividends and Interest.......... $44,974.90 in the aggregate
per share of Series G
Preferred Stock (as of
September 27, 2004). Total
accumulated unpaid dividends
and interest on all issued
and outstanding shares of
Series G Preferred Stock are
$24,821,153 as of September
27, 2004.
DESCRIPTION OF OUR COMMON STOCK
We are authorized to issue 150,000,000 shares of Common Stock, of which
38,776,343 shares were outstanding on September 27, 2004. All shares of Common
Stock have equal rights to participate in the distribution of assets in the
event of a liquidation of Z-Tel, subject to the preferences established on the
Preferred Stock. Each holder of Common Stock is entitled to one vote for each
share held on all matters submitted to a vote of the stockholders. Common Stock
carries no conversion, preemptive or subscription rights and is not subject to
redemption. All outstanding shares of Common Stock are fully paid and
nonassessable. Although holders of Common Stock are entitled to receive any
dividends declared thereon by the Board of Directors out of legally available
funds, we have never paid a cash dividend on our Common Stock and are prohibited
from doing so by the terms of the agreements governing our indebtedness. As a
result, we do not anticipate paying any dividends in the foreseeable future.
In addition, in our proxy statement to be prepared in connection with the
Special Meeting Matters we intend to request that our stockholders authorize our
Board of Directors to adopt one of several reverse stock split proposals. If the
reverse stock split is approved, the number of outstanding shares of Common
Stock outstanding will be reduced, but the number of authorized shares of Common
Stock under our charter will not change.
MARKET FOR COMMON STOCK AND PREFERRED STOCK
Our Common Stock currently trades on the Nasdaq SmallCap Market under the
symbol "ZTEL." Our Preferred Stock does not trade on an exchange, nor is it
listed or quoted on an inter-dealer quotation system. The price ranges presented
below for Common Stock represent high and low sale prices for each quarter, as
reported by the Nasdaq SmallCap Market. There is no established trading market
for the Preferred Stock.
-39-
HIGH LOW
2002 (1):
First Quarter $2.98 $1.25
Second Quarter $2.25 $0.35
Third Quarter $1.55 $0.41
Fourth Quarter $1.37 $0.70
2003:
First Quarter $1.60 $0.60
Second quarter $2.99 $1.58
Third Quarter $3.25 $1.70
Fourth Quarter $3.08 $1.40
2004:
First Quarter $4.79 $2.00
Second Quarter $3.19 $1.25
Third Quarter $1.41 $0.29
October 1, 2004 through October 20, 2004 $0.56 $0.37
(1) Prices for our Common Stock for periods prior to September
10, 2002 represent stock prices on the Nasdaq National Market,
the exchange on which our Common Stock was listed prior to such
date.
As of September 27, 2004, there were 229 record holders of Common Shares,
36 record holders of Series D Preferred Shares, 1 record holder of Series E
Preferred Shares, and 7 record holders of Series G Preferred Shares.
By letter dated July 28, 2004, the Nasdaq Stock Market, Inc. notified us
that for 10 consecutive days, the market value of our Common Stock on the Nasdaq
SmallCap Market was not $35 million or more, as required for continued inclusion
on the Nasdaq SmallCap Market by the Nasdaq rules. The market value of our
Common Stock remained below the minimum market value, and as a result the Nasdaq
staff provided us with written notification that our Common Stock will be
delisted. Currently we are appealing the staff's decision to a Listing
Qualifications Panel primarily on the basis that we believe, following
consummation of the Exchange Offer, that the market value of our Common Stock
will substantially exceed the minimum required amount. The Listing
Qualifications Panel may not grant our request to defer a determination of
delisting until after the Exchange Offer is consummated. In that event our
Common Stock will be delisted, our Common Stock will only be traded over the
counter on the Nasdaq Bulletin Board and the liquidity and price of our Common
Stock may be negatively affected. Even if our request is granted, we may not
achieve the necessary market value for our Common Stock following the Exchange
Offer or our Common Stock may not maintain the necessary market value for any
length of time. If we fail to achieve and maintain the market value for our
Common Stock above that required by the Nasdaq rules, our Common Stock will
ultimately be delisted from the Nasdaq SmallCap Market.
We have also been advised by the Nasdaq staff that our Common Stock does
not currently meet the minimum bid price per share of $1.00 necessary to
maintain listing on the
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Nasdaq SmallCap Market as required by the Nasdaq rules. Although we believe that
the reverse stock split proposal, if adopted at the Special Meeting, will allow
us to regain compliance, we may not achieve the necessary bid price per share
following the reverse stock split or our Common Stock may not maintain the
necessary minimum bid price for any length of time. If we fail to achieve and
maintain a bid price for our Common Stock above that required by the Nasdaq
rules, our Common Stock will ultimately be delisted from the Nasdaq SmallCap
Market
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain material United States ("U.S.")
federal income tax consequences to U.S. holders of Preferred Shares who exchange
their Preferred Shares for the Exchange Consideration pursuant to the Offer to
Exchange. This discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect on the
date hereof and all of which are subject to change, possibly with retroactive
effect, or different interpretations. Tax consequences that are different from
or in addition to those described herein may apply to holders of Preferred
Shares who are subject to special treatment under the U.S. federal income tax
laws, such as non-U.S. persons, tax-exempt organizations, financial
institutions, insurance companies, broker-dealers, U.S. holders whose functional
currency is not the U.S. dollar, holders who hold their Preferred Shares as part
of a hedge, straddle, wash sale, synthetic security, conversion transaction or
other integrated investment comprised of Preferred Shares and one or more other
investments, and persons who acquired their shares in compensatory transactions.
This discussion does not address non-U.S. or state or local tax considerations.
The summary of U.S. federal income tax consequences below is for general
information only. This discussion is not a substitute for an individual analysis
of the tax consequences of the exchange to a particular holder of Preferred
Shares. Each holder of Preferred Shares should consult a tax adviser regarding
the particular federal, state, local and non-U.S. tax consequences of the
exchange in light of such holder's own situation.
Based upon discussions with our tax counsel, we believe that the Offer will
qualify as a reorganization under Section 368(a)(1)(E) of the Code. However, we
did not seek or obtain any tax opinion with respect to the tax consequences of
the Offer. Assuming the Offer qualifies as a reorganization for federal income
tax purposes, the following U.S. federal income tax consequences will occur:
o you will not recognize gain or loss upon the receipt of Common Stock
solely in exchange for the face amount of your Preferred Shares
pursuant to the Offer to Exchange. However, you will be treated as
having received a distribution with respect to your Preferred Shares
to the extent Common Stock is received for accrued but unpaid
dividends on the Preferred Shares. Common Stock is deemed received for
accrued and unpaid dividends only to the extent of the lesser of: 1)
the amount by which the fair market value of the aggregate Common
Stock received in the exchange exceeds the aggregate issue price of
the Preferred Shares surrendered; or 2) the amount of dividends in
arrears. Any deemed distribution for accrued dividends will be treated
as a taxable dividend (to the extent of our accumulated or current
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earnings and profits, if any), then as a tax-free return of capital to
the extent of your basis in your Preferred Shares, and thereafter as
capital gain;
o the aggregate tax basis of the Common Shares received by you in
exchange for your Preferred Shares will be the same as the aggregate
tax basis of the Preferred Shares surrendered in exchange, increased
by any taxable amounts realized for accrued and unpaid dividends on
the Preferred Shares; and
o the holding period of the Common Shares received tax free by you in
exchange for your Preferred Shares will include the holding period of
the Preferred Shares surrendered by you, provided that you held such
Preferred Shares as capital assets at the effective time of the
exchange. The Common Shares received for accrued and unpaid dividends
will have a new holding period commencing on the date of the exchange.
CERTAIN SECURITIES LAWS CONSIDERATIONS
All of the Preferred Shares were issued by us in private transactions that
were not registered pursuant to the Securities Act, or any state securities
laws. The Common Shares to be issued in the Offer to Exchange are being offered
pursuant to an exemption from the registration requirements of the Securities
Act under Section 3(a)(9) of the Securities Act. Section 3(a)(9) provides for an
exemption from registration for any security exchanged by an issuer with its
existing security holders exclusively where no commission or other remuneration
is paid or given directly or indirectly for soliciting such exchange.
When securities are exchanged for other securities of an issuer under
Section 3(a)(9), the securities received in essence assume the character of the
exchanged securities for purposes of the Securities Act. Accordingly, so long as
you are not an "affiliate" of Z-Tel within the meaning of Rule 144 under the
Securities Act, if the Preferred Shares that you are tendering are no longer
"restricted securities" within the meaning of Rule 144, then the Common Shares
issued to you in the Offer to Exchange will not be "restricted shares" within
the meaning of Rule 144 under the Securities Act, and such shares will therefore
be freely tradeable by you. However, if you tender Preferred Shares that are
"restricted securities" within the meaning of Rule 144, the Common Shares you
receive in the Offer to Exchange will not be freely tradeable, and any resale
would have to comply with applicable exemptions under the securities laws,
including without limitation, the provisions of Rule 144(k). If you are an
"affiliate" of Z-Tel within the meaning of Rule 144, your Common Stock received
in the Offer to Exchange will be subject to certain provisions of Rule 144, even
if the Preferred Shares that you are tendering are no longer deemed to be
restricted securities, and therefore the Common Stock received by you will not
be freely tradeable.
INTERESTS OF DIRECTORS AND OFFICERS
Our officers, directors, and affiliates who are also holders of Preferred
Shares will receive the Offer to Exchange and will be eligible to tender their
Preferred Shares on the same basis as any other holder of Preferred Shares. Each
of The 1818 Fund and Charles D. Hyman have indicated to us that they currently
intend to tender all of their Preferred Shares in the Offer to Ex-
-42-
change. See "Special Factors Relating to the Offer to Exchange--Special
Committee of the Board of Directors" and "Security Ownership of Certain
Beneficial Owners and Management."
We are not otherwise aware of any intention to tender or consideration of
tendering Preferred Shares on the part of directors, officers or affiliates.
Neither we, nor any subsidiary of ours nor, to the best of our knowledge, any of
our directors or executive officers, nor any affiliates of any of the foregoing,
had any transactions in Preferred Shares during the 60 business days prior to
the date hereof.
SECURITY OWNERSHIP
The following table sets forth as of September 27, 2004 (unless otherwise
stated and based on 38,776,343 shares of Common Stock outstanding on that date),
the number of shares of our Common Stock, our Series D Preferred Stock, our
Series E Preferred Stock and our Series G Preferred Stock beneficially owned by:
o each person who we know to be a beneficial owner of 5% or more of that
class or series of stock (based, in part, upon copies of all Schedules
13D and 13G filed with the SEC);
o each of our directors;
o each of our Named Executive Officers; and
o all executive officers and directors as a group.
Each share of Series D Preferred Stock is currently convertible by its
holder into 1.95 shares of Common Stock, each share of Series E Preferred Stock
is currently convertible by its holder into 2.01 shares of Common Stock, and
each shares of Series G Preferred Stock is currently convertible by its holder
into 113,262 shares of Common Stock. Under the rules of the SEC, beneficial
ownership of Preferred Stock constitutes beneficial ownership of the amount of
Common Stock into which the shares of Preferred Stock are convertible.
Beneficial ownership of Common Stock is shown in the table and the portion of
that beneficial ownership traceable to beneficial ownership of Preferred Stock
is set forth in the footnotes to the table. Shares of Preferred Stock, shown
unconverted, are also shown in the table itself.
Shares Beneficially Owned and Percentage of Class
Series D Series E Series G Pro Forma Pro
Common Preferred Preferred Preferred Common Forma
Beneficial Owner (1) Stock % Stock % Stock % Stock % Stock (19) %
------------------------ ---------- ----- ---------- ------- ----------- --- --------- ---- ----------- ------
D. Gregory Smith(3) 12,834,566 29.25 416,667 10.48 -- -- 28.0 16.35 24,687,830 8.96
Carol Jane Smith(3) 5,500,000 14.32 -- -- -- -- -- -- 5,500,000 2.01
G/CJ Investments, L.P.(3) 5,500,000 14.32 -- -- -- -- -- -- 5,500,000 2.01
Charles D. Hyman(2)(4) 381,376 * 20,833 * -- -- 1.5 * 978,840 *
Buford H. Ortale(5) 2,249,917 5.76 252,667 6.35 -- -- -- -- 8,496,449 3.10
Lawrence C. Tucker(6) 28,717,781 42.79 -- -- 4,166,667 100 125.0 73.01 133,047,840 47.00
Brown Brothers Harriman &
Co.(6) 28,639,482 42.72 -- -- 4,166,667 100 125.0 73.01 132,969,814 46.98
Andrew C. Cowen(2)(7) 76,926 * -- -- -- -- -- -- 76,926 *
John K. Aurell(2)(8) 112,368 * -- -- -- -- -- -- 112,368 *
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Series D Series E Series G Pro Forma Pro
Common Preferred Preferred Preferred Common Forma
Beneficial Owner (1) Stock % Stock % Stock % Stock % Stock (19) %
------------------------ ---------- ----- ---------- ------- ----------- --- --------- ---- ----------- ------
Richard F.LaRoche, Jr.(2)(9) 59,984 * -- -- -- -- -- -- 59,984 *
W. Andrew Krusen, Jr.(2) 16,000 * -- -- -- -- -- -- 16,000 *
Douglas W. Jackson(2)(10) 346,094 * -- -- -- -- -- -- 346,094 *
Frank M. Grillo(2)(11) 52,777 * -- -- -- -- -- -- 52,777 *
Horace J. Davis III(2)(12) 365,277 * -- -- -- -- -- -- 365,277 *
John Tomlijanovic(2)(13) 82,498 * -- -- -- -- 82,498 *
Michael Slauson(2)(14) 257,753 * -- -- -- -- 257,753 *
Fulmead Ventures
Limited(15) 1,794,359 4.46 250,000 6.29 -- -- 10.0 5.84 8,491,216 3.10
Richland Ventures III,
L.P.(16) 3,308,860 7.93 1,250,000 27.36 -- -- -- -- 34,382,611 12.47
Gramercy Z-Tel LLC(17) 2,250,483 5.53 782,225 19.67 -- -- -- -- 21,987,040 7.98
-------------------------------------------------------------------------------------------------------------------------------
All directors and officers 30,468,834 44.35 20,833 * 4,166,667 100 126.5 73.88 135,396,357 47.60
as a group(18)
* 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 convertible
securities currently convertible or convertible within 60 days and shares
of common stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of the date of this chart 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 stockholder's address is c/o Z-Tel Technologies, Inc., 601 South
Harbour Island Boulevard, Suite 220, Tampa, Florida 33602.
(3) D. Gregory Smith and Carol Jane Smith are husband and wife. The number of
shares shown for D. Gregory Smith and for Carol Jane Smith each includes
all of the shares held by G/ CJ Investments, L.P., a Delaware limited
partnership. G/CJ Investments, Inc., a Delaware corporation established and
controlled by Mr. and Mrs. Smith, is the sole general partner of G/CJ
Investments, L.P. The share amount also includes 2,051,387 shares for Mr.
Smith that are deemed to be beneficially owned by him by virtue of certain
stock options that are currently exercisable or become exercisable within
60 days and certain stock purchase warrants. The address of D. Gregory
Smith, Carol Jane Smith and G/CJ Investments, L.P. is 300 Delaware Avenue,
Suite 900, Wilmington, Delaware 19801.
(4) Common Stock includes 153,313 shares deemed beneficially owned by Mr. Hyman
by virtue of certain stock options that are currently exercisable or which
become exercisable within 60 days and certain stock purchase warrants.
(5) Common Stock includes 402,955 shares deemed beneficially owned by Mr.
Ortale by virtue of certain stock purchase warrants. Ownership deemed owned
by Mr. Ortale includes shares owned by Sewanee Ventures and the Ortale
Family Foundation over which he has investment power. Mr. Ortale's address
is 4410 Gerald Place, Nashville, Tennessee 37205.
(6) According to a Schedule 13D dated November 20, 2000, as amended July 12,
2001, August 3, 2001 and August 26, 2004, filed jointly by Brown Brothers
Harriman & Co., The 1818 Fund III, L.P., T. Michael Long and Lawrence C.
Tucker, each of the joint filers has shared voting and dispositive power
with respect to all of the shares shown, except that Mr. Tucker's shares
include 78,026 shares deemed beneficially owned by him by virtue of certain
stock options currently exercisable or which become exercisable within 60
days. Of the shares of common stock shown for Mr. Tucker and Brown Brothers
Harriman & Co., 9,610,116 shares are deemed to be beneficially owned by
virtue of certain stock purchase warrants (excluding the 78,026 additional
shares beneficially owned by Mr. Tucker). The address of Brown Brothers
Harriman & Co., The 1818 Fund III, L.P., T. Michael Long and Lawrence C.
Tucker is 140 Broadway, New York, New York 10005.
(7) Common Stock includes 76,926 shares deemed beneficially owed by Mr. Cowen
by virtue of certain stock options that are currently exercisable or which
become exercisable within 60 days.
(8) Common Stock includes 76,095 shares deemed beneficially owned by Mr. Aurell
by virtue of certain stock options that are currently exercisable or which
become exercisable within 60 days.
(9) Common Stock includes 28,049 shares deemed beneficially owned by Mr.
LaRoche by virtue of certain stock options that are currently exercisable
or which become exercisable within 60 days.
(10) Common Stock includes 320,444 shares deemed beneficially owned by Mr.
Jackson by virtue of certain stock options that are currently exercisable
or which become exercisable within 60 days.
(11) Common Stock includes 52,777 shares deemed beneficially owned by Mr. Grillo
by virtue of certain stock options that are currently exercisable or which
become exercisable within 60 days.
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(12) Common Stock includes 340,277 shares deemed beneficially owned by Mr. Davis
by virtue of certain stock options that are currently exercisable or which
become exercisable within 60 days.
(13) Common Stock includes 57,498 shares deemed beneficially owned by Mr.
Tomljanovic by virtue of certain stock options that are currently
exercisable or which become exercisable within 60 days.
(14) Common Stock includes 216,944 shares deemed beneficially owned by Mr.
Slauson by virtue of certain stock options that are currently exercisable
or which become exercisable within 60 days.
(15) This information is derived in part from a Schedule 13D dated February 8,
2000, as amended February 15, 2002, July 9, 2003, February 18, 2004 and
September 13, 2004, filed jointly by Professional Holdings Limited, The
Mayer Trust, Mutual Trust Management (Jersey) Limited, MTM Trustees
Limited, MTM Nominees Limited, MTM Investments Limited, Michael Cordwell
and Fulmead Ventures Limited. Each of these parties reports to have shared
voting and dispositive power with respect to all of the shares shown.
Eduard J. Mayer, beneficiary of The Mayer Trust disclaims beneficial
ownership of the shares shown. The common shares shown include 453,947
shares deemed beneficially owned by virtue of certain stock purchase
warrants. The address of the foregoing persons is 36 Hilgrove Street, St.
Helier, Jersey JE4 8TR Channel Islands.
(16) Of the shares of Common Stock shown, 2,269,736 are deemed to be
beneficially owned by virtue of warrants exercisable into shares of our
Common Stock. The address of Richland Ventures III, L.P. is 200 31st Avenue
North, Suite 200, Nashville, TN 37203.
(17) Of the shares of Common Stock shown, 1,891,446 shares are deemed to be
beneficially owned by virtue of warrants exercisable convertible into
shares of our Common Stock. The address of Gramercy is c/o Onex
Corporation, 161 Bay Street, P.O. Box 700, Toronto, Ontario CANADA M5J 2S1.
(18) Common Stock includes 11,010,738 shares deemed beneficially owned by virtue
of certain stock options that are currently exercisable or which become
exercisable within 60 days and certain stock purchase warrants.
(19) The pro forma share ownership data presents the effect of the Exchange
Offer assuming all of our outstanding Preferred Shares are exchanged for
the Exchange Consideration, after giving effect to which we would have no
shares of Preferred Stock outstanding.
AGREEMENTS INVOLVING OUR SECURITIES
On November 10, 2000, we entered into a registration rights agreement with
The 1818 Fund. Under the registration rights agreement, we agreed that, upon the
request of The 1818 Fund, we would file on one occasion a shelf registration
statement under the Securities Act registering the resale of (i) all Common
Shares issued to The 1818 Fund upon the conversion of the Series E Preferred
Stock and Series G Preferred Stock, (ii) all Common Shares issued to The 1818
Fund pursuant to previously issued warrants, and (iii) any other Common Shares
otherwise owned by The 1818 Fund. The Registration Rights Agreements also give
The 1818 Fund piggyback registration rights with respect to other registrations
of Z-Tel's Common Stock. Because The 1818 Fund has not yet exercised its rights
under the registration rights agreement, The 1818 Fund will, following the
Offer, continue to have the right to request that a shelf registration statement
be filed by us.
CERTAIN LEGAL MATTERS; REGULATORY APPROVALS
We are not aware of any license or regulatory permit that appears to be
material to our business that might be adversely affected by our repurchase of
the Preferred Stock as contemplated herein or of any approval or other action by
any government or governmental, administrative, or regulatory authority or
agency, domestic or foreign, that would be required for the repurchase of
Preferred Stock by us as contemplated herein. Should any such approval or other
action be required, we presently contemplate that such approval or other action
will be sought. We are unable to predict whether we will be required to delay
the acceptance for exchange of or exchange of Preferred Stock tendered pursuant
to the Offer to Exchange pending the outcome of
-45-
any such matter. There can be no assurance that any such approval or other
action, if needed, would be obtained or would be obtained without substantial
conditions, or that the failure to obtain any such approval or other action
might not result in adverse consequences to our business. Our obligations under
the Offer to accept for exchange and exchange Preferred Shares are subject to
certain conditions. See "The Offer to Exchange--Conditions."
FEES AND EXPENSES
Under the terms of an engagement letter dated July 6, 2004, we paid Morgan
Keegan a $50,000 retainer and have agreed to pay Morgan Keegan an additional
$25,000 in connection with the delivery of its fairness opinion. We expect that
payments to Morgan Keegan for other financial advisory services contemplated by
the engagement letter will not exceed $100,000. We have also agreed to reimburse
Morgan Keegan for its reasonable out-of-pocket expenses incurred in connection
with the engagement, including attorneys' fees, and to indemnify Morgan Keegan
and its respective related parties from and against certain liabilities,
including liabilities under the federal securities laws.
We will not pay fees or commissions to any broker, dealer or other person
for soliciting tenders of Preferred Stock pursuant to the Offer. We will,
however, upon request, reimburse brokers, dealers and commercial banks for
customary mailing and handling expenses incurred by such persons in forwarding
the Offer to Exchange and related materials to the beneficial owners of
Preferred Stock held by any such person as a nominee or in a fiduciary capacity.
No broker, dealer, commercial bank or trust company has been authorized to act
as our agent for purposes of the Offer.
We will pay or cause to be paid all stock transfer taxes, if any, on the
exchange of Preferred Stock except as otherwise provided in Instruction 6 in the
Letter of Transmittal. All fees and expenses attributable to the Offer will be
paid by us.
INDEPENDENT AUDITORS
Our annual consolidated financial statements incorporated by reference
hereto from our Annual Reports of Form 10-K for the years ended December 31,
2002 and 2003, have been audited by PricewaterhouseCoopers LLP, an independent
registered certified public accounting firm, as stated in their reports also
incorporated by reference herein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We are incorporating by reference into this Offer to Exchange the following
documents filed by us with the SEC:
o Annual Report on Form 10-K for the fiscal year ended December 31,
2003;
o Quarterly Report on Form 10-Q for the quarter ended March 31, 2004;
o Quarterly Report on Form 10-Q for the quarter ended June 30, 2004;
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o Quarterly Report on Form 10-Q for the quarter ended June 30, 2004;
o Definitive Proxy Statement on Schedule 14A filed on April 29, 2004;
o Current Report on Form 8-K filed on February 20, 2004 (including
amendment filed on same date);
o Current Report on Form 8-K filed on May 13, 2004;
o Current Report on Form 8-K filed on June 14, 2004;
o Current Report on Form 8-K filed on July 2, 2004;
o Current Report on Form 8-K filed on August 2, 2004;
o Current Report on Form 8-K filed on August 10, 2004;
o Current Report on Form 8-K filed on August 26, 2004;
o Current Report on Form 8-K filed on September 1, 2004;
o Current Report on Form 8-K filed on September 7, 2004;
o Current Report on Form 8-KA filed on October 6, 2004;
o Current Report on Form 8-K filed on October 12, 2004; and
o Current Report on Form 8-K filed on October 13, 2004.
The information incorporated herein by reference is considered to be part
of this Offer to Exchange and later information that we file with the SEC will
automatically update and supersede this information.
You may obtain a copy of these filings at no cost by writing or telephoning
us at:
Z-Tel Technologies, Inc.
Attention: Andrew L. Graham, Esq.
601 South Harbour Island Boulevard,
Suite 220, Tampa, Florida 33602
(813) 273-6261
MISCELLANEOUS
We are not aware of any jurisdiction where the making of the Offer is not
in compliance with applicable law. If we become aware of any jurisdiction where
the making of the Offer is not in compliance with any valid applicable law, we
will make a good faith effort to comply with such law. If, after such good faith
effort, we cannot comply with such law, the Offer will not be
-47-
made to (nor will tenders be accepted from or on behalf of) the holders of
Preferred Stock residing in such jurisdiction. In any jurisdiction where the
securities or blue sky laws of which require the Offer to be made by a licensed
broker or dealer, the Offer shall be deemed to be made on our behalf by one or
more registered brokers or dealers licensed under the laws of such jurisdiction.
Pursuant to Rule 13e-4 of the General Rules and Regulations under the
Exchange Act, we have filed with the SEC an Issuer Tender Offer Statement on
Schedule TO that contains additional information with respect to the Offer. Such
Schedule TO, including the exhibits and any amendments thereto, may be examined,
and copies may be obtained, at the same places and in the same manner as is set
forth under the caption "Where You Can Find More Information."
No person has been authorized to give any information or make any
representation on our behalf in connection with the offer other than those
contained in this Offer to Exchange or in the Letter of Transmittal. If given or
made, such information or representation must not be relied upon as having been
authorized by us.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain further information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are also
available to the public over the Internet at the SEC's website at
http://www.sec.gov.
The Exchange and Information Agent for the Offer to Exchange is:
Andrew L. Graham
Corporate Counsel
Z-Tel Technologies, Inc.
601 South Harbour Island Blvd.
Suite 220
Tampa, FL 33602
Telephone: (813) 233-4567
Facsimile: (813) 233-4623
Additional copies of the Offer to Exchange, the Letter of Transmittal or other
tender offer materials may be obtained from the Exchange and Information Agent
and will be furnished at our expense. Questions and requests for assistance may
be directed to the Exchange and Information Agent as set forth above. Holders
also may contact their local broker, dealer, commercial bank, trust company or
other nominee for assistance concerning the Offer.
-48-
Exhibit (a)(1)(B)
LETTER OF TRANSMITTAL
To Tender Preferred Shares of
Series D Convertible Preferred Stock (the "Series D Preferred Stock")
8% Convertible Preferred Stock, Series E (the "Series E Preferred Stock")
12% Junior Redeemable Convertible Preferred Stock, Series G
(the "Series G Preferred Stock" and, together with the Series D Preferred Stock
and the Series E Preferred Stock, the "Preferred Shares")
for shares of common stock
of
Z-Tel Technologies, Inc.
Pursuant to the Amended Offer to Exchange
Dated October 21, 2004
by
Z-Tel Technologies, Inc.
--------------------------------------------------------------------------------
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P. M., NEW YORK CITY TIME,
ON TUESDAY, NOVEMBER 23, 2004, UNLESS
THE OFFER IS EXTENDED
(THE "EXPIRATION DATE").
--------------------------------------------------------------------------------
The Exchange and Information Agent for the Offer is
Andrew L. Graham
Corporate Counsel
Z-Tel Communications, Inc.
601 South Harbour Island Blvd.
Suite 220
Tampa, FL 33602
Telephone: (813) 233-4567
Facsimile: (813) 233-4623
--------------------
DELIVERY OF THIS LETTER OF TRANSMITTAL (THE "LETTER OF TRANSMITTAL") TO AN
ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA
FACSIMILE OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY TO
THE EXCHANGE AGENT. YOU MUST SIGN THIS LETTER OF TRANSMITTAL WHERE INDICATED
BELOW AND COMPLETE THE SUBSTITUTE FORM W-9 BELOW.
THE INSTRUCTIONS CONTAINED WITHIN THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. TO THE EXTENT THERE
ARE ANY CONFLICTS BETWEEN THE TERMS AND CONDITIONS OF THIS LETTER OF TRANSMITTAL
AND THE TERMS AND CONDITIONS OF THE AMENDED OFFER TO EXCHANGE, THE TERMS AND
CONDITIONS OF THE AMENDED OFFER TO EXCHANGE SHALL CONTROL.
DESCRIPTION OF PREFERRED SHARES TENDERED
----------------------------------------------------------------------------------------------------------------------
Name(s) and Addresses(es) of Registered Holder(s)
(Please fill in, if blank, exactly as name(s) appear(s) Certificate(s) and Preferred Share(s) Tendered
on the Preferred Shares Certificate(s)) (Attach additional list if necessary)
---------------------------------------------------------- -----------------------------------------------------------
Number of
Preferred Shares Number of
Certificate Represented by Preferred Shares
Number(s)* Certificate(s) Tendered*
---------------------------------------------------------- --------------------- ------------------ ------------------
---------------------------------------------------------- --------------------- ------------------ ------------------
---------------------------------------------------------- --------------------- ------------------ ------------------
---------------------------------------------------------- --------------------- ------------------ ------------------
---------------------------------------------------------- --------------------- ------------------ ------------------
---------------------------------------------------------- --------------------- ------------------ ------------------
---------------------------------------------------------- --------------------- ------------------ ------------------
---------------------------------------------------------- --------------------- ------------------ ------------------
---------------------------------------------------------- --------------------- ------------------ ------------------
Total Preferred
Shares
----------------------------------------------------------------------------------------------------------------------
* Unless otherwise indicated, it will be assumed that all Preferred Shares
represented by any Certificates delivered to the Exchange and Information
Agent are being tendered. See Instruction 4.
----------------------------------------------------------------------------------------------------------------------
IF CERTIFICATES HAVE BEEN LOST OR DESTROYED, SEE INSTRUCTION 11.
This Letter of Transmittal is to be completed by holders of Preferred
Shares of Z-Tel Technologies, Inc., (the "Stockholders") and certificates
evidencing its Series D Preferred Stock, Series E Preferred Stock or, Series G
Preferred Stock are to be forwarded herewith.
Stockholders whose Certificates are not immediately available or who
cannot deliver their Certificates and all other required documents to the
Exchange and Information Agent prior to the Expiration Date (as defined in the
Amended Offer to Exchange) must tender their Preferred Shares according to the
guaranteed delivery procedures set forth in "The Offer to Exchange - Guaranteed
Delivery Procedures" of the Offer to Exchange. See Instruction 2 hereof.
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE INSTRUCTIONS CAREFULLY.
-2-
Ladies and Gentlemen:
The undersigned hereby tenders to Z-Tel Technologies, Inc., a Delaware
corporation ("Z-Tel"), the above-described Preferred Shares, each in exchange
for consideration ("Exchange Consideration"), consisting of shares of Common
Stock, $0.01 par value per share (the "Common Shares"), pursuant to and as
described in the Amended Offer to Exchange, dated October 21, 2004 (the "Offer
to Exchange") and this Letter of Transmittal (which together with the Offer to
Exchange constitute the "Offer"). Receipt of the Offer to Exchange is hereby
acknowledged.
Subject to, and effective upon, acceptance for exchange of all or any
portion of the Preferred Shares tendered herewith in accordance with the terms
and subject to the conditions of the Offer (including, if the Offer is extended
or amended, the terms or conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to, or upon the order of, Z-Tel
all right, title and interest in and to all of the Preferred Shares that are
being tendered hereby and irrevocably constitutes and appoints the Exchange and
Information Agent the true and lawful agent and attorney-in-fact of the
undersigned with respect to such Preferred Shares, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), to (i) deliver Certificates evidencing such Preferred
Shares, with all accompanying evidences of transfer and authenticity to, or upon
the order of Z-Tel, (ii) present such Preferred Shares for transfer on the books
of Z-Tel and (iii) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Preferred Shares, all in accordance with the terms
and subject to the conditions of the Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Preferred
Shares tendered hereby, that the undersigned owns the Preferred Shares tendered
hereby within the meaning of Rule 14e-4 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), that the tender of the
tendered Preferred Shares complies with Rule 14e-4 under the Exchange Act, and
that when the same are accepted for exchange by Z-Tel, Z-Tel will acquire good,
marketable and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and the same will not be subject to any
adverse claims. The undersigned will, upon request, execute and deliver any
additional documents deemed by the Exchange and Information Agent or Z-Tel to be
necessary or desirable to complete the sale, assignment and transfer of the
Preferred Shares tendered.
All authority conferred or agreed to be conferred in this Letter of
Transmittal shall be binding upon the successors, assigns, heirs, executors,
administrators and legal representatives of the undersigned and shall not be
affected by, and shall survive, the death or incapacity of the undersigned.
Except as stated in the Offer to Exchange, this tender is irrevocable.
The undersigned understands that the valid tender of the Preferred Shares
pursuant to any one of the procedures described in "The Offer to Exchange" of
the Offer to Exchange and in the Instructions hereto will constitute a binding
agreement between the undersigned and Z-Tel upon the terms and subject to the
conditions of the Offer to Exchange (and if the Offer to Exchange is extended or
amended, the terms or conditions of any such extension or amendment). Without
limiting the foregoing, if the Exchange Ratio (as defined in the Offer to
Exchange) to be offered in the Offer to Exchange is amended, the Exchange Ratio
to be given to the undersigned will be the amended Exchange Ratio
notwithstanding the fact that a different Exchange Ratio is stated in this
Letter of Transmittal. The undersigned recognizes that under certain
circumstances set forth in the Offer to Exchange, Z-Tel may not be required to
accept for exchange any of the Preferred Shares tendered hereby.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the Exchange Consideration exchanged for pursuant to the Offer to Exchange
and/or return any certificates for Preferred Shares not tendered or accepted for
exchange in the name(s) of the registered holder(s) appearing above under
"Description of Preferred Shares Tendered." Similarly, unless otherwise
indicated under "Special Delivery Instructions," please mail the Exchange
Consideration exchanged for pursuant to the Offer to Exchange and/or return any
certificates for Preferred Shares not tendered or not accepted for exchange (and
any accompanying documents, as appropriate) to the address(es) of the registered
holder(s) appearing above under "Description of Preferred Shares Tendered." In
the event that the boxes entitled "Special Issuance Instructions" and "Special
Delivery Instructions" below are both completed, please issue the Exchange
Consideration exchanged for pursuant to the Offer to Exchange and/or return any
certificates evidencing Preferred Shares not tendered or not accepted for
-3-
exchange (and any accompanying documents, as appropriate) in the name(s) of, and
deliver such check and/or return any such certificates (and any accompanying
documents, as appropriate) to, the person(s) so indicated. The undersigned
recognizes that Z-Tel has no obligation, pursuant to the "Special Issuance
Instructions," to transfer any Preferred Shares from the name of the registered
holder thereof if Z-Tel does not accept for exchange any of the Preferred Shares
so tendered.
Dividends on the Preferred Shares accrue at the rate of 8% per annum in
the case of the Series D Preferred Stock and the Series E Preferred Stock and
12% per annum in the case of the Series G Preferred Stock. If you exchange your
Preferred Shares in the Offer to Exchange, you will forfeit the dividend that
has accrued on your Preferred Shares since September 30, 2004, the last payment
date for dividends on the Preferred Shares.
-4-
---------------------------------------------------------- -- -------------------------------------------------------
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 5, 6 and 7) (See Instructions 1, 5, 6 and 7)
To be completed ONLY if Certificates for Pre- To be completed ONLY if Certificates for Preferred
ferred Shares not tendered or not accepted for ex- Shares not tendered or not accepted for exchange, or
change, or Exchange Consideration if issued pursuant Consideration if issued pursuant to the to Exchange,
to the Offer Exchange, are to be issued in the name are to be sent to someone other than the undersigned
of someone other than the undersigned. or to the undersigned at an address other than that
shown above.
Issue: |_| Exchange Consideration
and/or |_| Preferred Stock Mail: |_| Exchange Consideration
Certificate(s) to: and/or |_| Preferred Stock
Certificate(s) to:
Name________________________________________________ Name__________________________________________________
(Please Print) (Please Print)
Address_____________________________________________ Address_______________________________________________
____________________________________________________ ______________________________________________________
____________________________________________________ ______________________________________________________
(Zip Code) (Zip Code)
____________________________________________________ ______________________________________________________
(Taxpayer Identification or Social Security No.) (Taxpayer Identification or Social Security No.)
(Also Complete Substitute Form W-9) (Also Complete Substitute Form W-9)
---------------------------------------------------------- -- -------------------------------------------------------
-5-
--------------------------------------------------------------------------------
SIGN HERE
(Also Complete Substitute Form W-9 Below)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Signature(s) of Stockholder(s)
Name(s):
------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Please Print)
Capacity (Full Title):
----------------------------------------------------------
Address:
------------------------------------------------------------------------
------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number:_________________________________________________
Taxpayer Identification or Social Security Number:______________________________
(See Substitute Form W-9)
Dated:______________________________
Must be signed by the registered holder(s) exactly as name(s) appear(s) on the
stock certificate(s) or on a security position listing or by person(s)
authorized to become registered holder(s) by certificates and documents
transmitted herewith. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, agent, officer of a corporation or other person
acting in a fiduciary or representative capacity, please set forth full title
and see Instruction 5.)
GUARANTEE OF SIGNATURE(S)
(See Instructions 1 and 5)
FOR USE BY FINANCIAL INSTITUTIONS ONLY. PLEASE PLACE MEDALLION GUARANTEE BELOW.
Authorized Signature(s):________________________________________________________
Name:___________________________________________________________________________
________________________________________________________________________________
(Please Print)
Name of Firm:___________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number:_________________________________________________
Dated:_________________________________
--------------------------------------------------------------------------------
-6-
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. Guarantee of Signatures. No signature guarantee is required on this
Letter of Transmittal if (a) this Letter of Transmittal is signed by the
registered holder(s) of Preferred Shares tendered herewith, unless such
registered holder(s) has completed either the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" on the Letter
of Transmittal; or (b) if such Preferred Shares are tendered for the account of
a financial institution (including most commercial banks, savings and loan
associations and brokerage houses) that is a participant in the Security
Transfer Agents Medallion Program, the New York Stock Exchange Medallion
Signature Guarantee Program or the Stock Exchange Medallion Program (each, an
"Eligible Institution"). In all other cases, all signatures on this Letter of
Transmittal must be guaranteed by an Eligible Institution. See Instruction 5.
2. Delivery of Letter of Transmittal and Preferred Shares; Guaranteed
Delivery Procedures. This Letter of Transmittal is to be completed by
stockholders of Z-Tel in order to participate in the Offer to Exchange. For a
stockholder to validly tender Preferred Shares pursuant to the Offer to
Exchange, either (a) a properly completed and duly executed Letter of
Transmittal (or facsimile thereof), together with any required signature
guarantees and any other required documents, must be received by the Exchange
and Information Agent at one of its addresses set forth herein prior to the
Expiration Date and certificates for tendered Preferred Shares must be received
by the Exchange and Information Agent at one of such addresses prior to the
Expiration Date; or (b) the tendering stockholder must comply with the
guaranteed delivery procedures set forth herein and in "The Offer to Exchange -
Guaranteed Delivery Procedures" of the Offer to Exchange.
Stockholders whose certificates for Preferred Shares are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange and Information Agent prior to the Expiration Date may
tender their Preferred Shares by properly completing and duly executing the
Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedure set
forth herein and in "The Offer to Exchange - Guaranteed Delivery Procedures" of
the Offer to Exchange.
Pursuant to such guaranteed delivery procedures, (a) such tender must be
made by or through an Eligible Institution; (b) a properly completed and duly
executed Notice of Guaranteed Delivery, substantially in the form provided by
Z-Tel, must be received by the Exchange and Information Agent prior to the
Expiration Date; and (c) the certificates for all tendered Preferred Shares, in
proper form for transfer, together with a properly completed and duly executed
Letter of Transmittal (or a facsimile thereof), with any required signature
guarantees and any other required documents must be received by the Exchange and
Information Agent within three trading days after the date of execution of such
Notice of Guaranteed Delivery. A "trading day" is any day on which the Nasdaq
Stock Market is open for business.
The signatures on this Letter of Transmittal cover the Preferred Shares
tendered hereby.
THE METHOD OF DELIVERY OF THE PREFERRED SHARES, THIS LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS, IS AT THE ELECTION AND RISK OF THE TENDERING
STOCKHOLDER. THE PREFERRED SHARES WILL BE DEEMED DELIVERED ONLY WHEN ACTUALLY
RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH
RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
No alternative, conditional or contingent tenders will be accepted. All
tendering stockholders, by executing this Letter of Transmittal (or facsimile
thereof), waive any right to receive any notice of acceptance of their Preferred
Shares for exchange.
3. Inadequate Space. If the space provided herein is inadequate, the
information required under "Description of Preferred Shares Tendered" should be
listed on a separate signed schedule and attached hereto.
-7-
4. Partial Tenders. If less than all of the Preferred Shares represented by
any Certificates delivered to the Exchange and Information Agent herewith are to
be tendered hereby, fill in the number of Preferred Shares which are to be
tendered in the box entitled "Number of Preferred Shares Tendered." In such
case, a new Certificate(s) for the remainder of the Preferred Shares that were
evidenced by the old Certificates will be sent, without expense, to the
person(s) signing this Letter of Transmittal, unless otherwise provided in the
box entitled "Special Payment Instructions" or the box entitled "Special
Delivery Instructions" on this Letter of Transmittal, as soon as practicable
after the Expiration Date. All Preferred Shares represented by Certificate(s)
delivered to the Exchange and Information Agent will be deemed to have been
tendered unless otherwise indicated.
5. Signatures on Letter of Transmittal, Instruments of Transfer and
Endorsements. If this Letter of Transmittal is signed by the registered
holder(s) of the Preferred Shares tendered hereby, the signature(s) must
correspond exactly with the name(s) as written on the face of the Certificate(s)
without alteration, enlargement or any change whatsoever.
If any of the Preferred Shares tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If any of the tendered Preferred Shares are registered in different names
on several Certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal as there are different registrations of
Certificates.
If this Letter of Transmittal is signed by the registered holder(s) of the
Preferred Shares listed and transmitted hereby, no endorsements of Certificates
or separate instruments of transfer are required unless payment is to be made,
or Certificates not tendered or not purchased are to be issued or returned, to a
person other than the registered holder(s).
If this Letter of Transmittal or any certificates or instruments of
transfer are signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, such person should so indicate when signing, and
proper evidence satisfactory to Z-Tel of such person's authority to so act must
be submitted.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Preferred Shares evidenced by the Certificate(s)
listed and transmitted hereby, or if payment is to be made, or any
Certificate(s) not tendered or not purchased are to be issued or returned, to a
person other than the registered holder(s), the Certificate(s) must be endorsed
or accompanied by appropriate instruments of transfer, in either case signed
exactly as the name(s) of the registered holder(s) appear(s) on the
Certificates. Signature(s) on such Certificate(s) and such endorsements or
instruments of transfer must be guaranteed by an Eligible Institution.
6. Transfer Taxes. Except as set forth in this Instruction 6, Z-Tel will
pay or cause to be paid any transfer taxes required to be paid by it with
respect to the transfer and sale of purchased Preferred Shares to it or its
order pursuant to the Offer. If, however, payment of the purchase price is to be
made to, or (in the circumstances permitted hereby) if Certificate(s) for
Preferred Shares not tendered or not purchased are to be registered in the name
of, any person other than the registered holder(s), or if tendered
Certificate(s) are registered in the name of any person other than the person(s)
signing this Letter of Transmittal, the amount of any transfer taxes (whether
imposed on the registered holder(s) or such persons) payable on account of the
transfer to such person will not be the responsibility of Z-Tel and may be
deducted from the purchase price unless satisfactory evidence of the payment of
such taxes or exemption therefrom is submitted herewith.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Certificates listed in this Letter of
Transmittal.
7. Special Payment and Delivery Instructions. If any Exchange Consideration
exchanged for any Preferred Shares tendered are to be issued in the name of,
and/or Preferred Share certificates for Preferred Shares not accepted for
payment or not tendered are to be issued in the name of and/or returned to, a
person other than the signer of this Letter of Transmittal, and/or such
certificates are to be returned to a person other than the signer of this Letter
-8-
of Transmittal, or to an address other than that shown above, the appropriate
boxes on this Letter of Transmittal should be completed.
8. Requests for Assistance or Additional Copies. Questions and requests for
assistance may be directed to the Exchange and Information Agent at its address
or telephone number set forth below. Requests for additional copies of the Offer
to Exchange, this Letter of Transmittal and the Notice of Guaranteed Delivery
may be directed to the Exchange and Information Agent or brokers, dealers,
commercial banks and trust companies.
9. Waiver of Conditions. The conditions of the Offer may be waived by
Z-Tel, in whole or in part, at any time or from time to time, at Z-Tel's sole
discretion, subject to the terms of the Offer.
10. Backup Withholding Tax. In order to avoid "backup withholding" of
federal income tax on payments of cash pursuant to the Offer to Exchange, a
stockholder surrendering Preferred Shares in the Offer to Exchange must, unless
an exemption applies, provide the Exchange and Information Agent with such
stockholder's correct taxpayer identification number ("TIN") on Substitute Form
W-9 in this Letter of Transmittal and certify, under penalties of perjury, that
such TIN is correct and that such stockholder is not subject to backup
withholding.
Backup withholding is not an additional income tax. Rather, the amount of
the backup withholding can be credited against the federal income tax liability
of the person subject to the backup withholding, provided that the required
information is given to the IRS. If backup withholding results in an overpayment
of tax, a refund can be obtained by the stockholder upon filing an income tax
return.
The stockholder is required to give the Exchange and Information Agent the
TIN (i.e., social security number or employer identification number) of the
record owner of the Preferred Shares. If the Preferred Shares are held in more
than one name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
If the tendering stockholder has not been issued a TIN and has applied for
a TIN or intends to apply for a TIN in the near future, the stockholder or other
payee must also complete the Certificate of Awaiting Taxpayer Identification
Number below in order to avoid backup withholding. Notwithstanding that the
Certificate of Awaiting Taxpayer Identification Number is completed, the
Exchange and Information Agent will withhold 28% on all payments made prior to
the time a properly certified TIN is provided to the Exchange and Information
Agent. However, such amounts will be refunded to such stockholder if a TIN is
provided to the Exchange and Information Agent within 60 days.
Certain stockholders (including, among others, all corporations and certain
foreign individuals and entities) are not subject to backup withholding.
Noncorporate foreign stockholders should complete and sign the main signature
form and a Form W-8, Certificate of Foreign Status, a copy of which may be
obtained from the Exchange and Information Agent, in order to avoid backup
withholding. See the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for more instructions.
11. Lost or Destroyed Certificates. If any Certificate has been lost or
destroyed, the holder should promptly notify the Exchange and Information Agent.
The holder will then be instructed as to the procedure to be followed in order
to replace the Certificate. This Letter of Transmittal and related documents
cannot be processed until the procedures for replacing lost or destroyed
Certificate have been followed.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF) TOGETHER WITH ANY
REQUIRED SIGNATURE GUARANTEES, AND ANY OTHER REQUIRED DOCUMENTS, MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE AND EITHER
CERTIFICATES FOR TENDERED PREFERRED SHARES MUST BE RECEIVED BY THE EXCHANGE
AGENT PRIOR TO THE EXPIRATION DATE, OR THE TENDERING STOCKHOLDER MUST COMPLY
WITH THE PROCEDURES FOR GUARANTEED DELIVERY.
-9-
IMPORTANT TAX INFORMATION
Under Federal income tax law, a stockholder whose tendered Preferred Shares
are accepted for payment is required to provide the Exchange and Information
Agent with such stockholder's correct TIN on Substitute Form W-9 below. If such
stockholder is an individual, the TIN is his social security number. If a
tendering stockholder is subject to backup withholding, such stockholder must
cross out item (2) of the Certification box on the Substitute Form W-9. If the
Exchange and Information Agent is not provided with the correct TIN, the
stockholder may be subject to a $50 penalty imposed by the Internal Revenue
Service. In addition, any payments that are made to such stockholder with
respect to Preferred Shares exchanged pursuant to the Offer to Exchange may be
subject to backup withholding.
Certain stockholders (including, among others, all corporations, and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, that stockholder must submit a statement, signed under
penalties of perjury, attesting to that individual's exempt status. Such
statements can be obtained from the Exchange and Information Agent. Exempt
stockholders, other than foreign individuals, should furnish their TIN, write
"Exempt" on the face of the Substitute Form W-9 below, and sign, date and return
the Substitute Form W-9 to the Exchange and Information Agent. See the enclosed
Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9 for additional instructions.
If backup withholding applies, the Exchange and Information Agent is
required to withhold 28% of any payments made to the stockholder. Backup
withholding is not an additional tax. Rather, the tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained from
the Internal Revenue Service.
Purpose of Substitute Form W-9
To prevent backup withholding on any payments that are made to a
stockholder with respect to Preferred Shares exchanged pursuant to the Offer to
Exchange, the stockholder is required to notify the Exchange and Information
Agent of such stockholder's correct taxpayer identification number by completing
the form contained herein certifying that the TIN provided on Substitute Form
W-9 is correct (or that such stockholder is awaiting a TIN).
What Number to Give the Exchange and Information Agent
The stockholder is required to give the Exchange and Information Agent the
social security number or employer identification number of the record owner of
the Preferred Shares. If the Preferred Shares are in more than one name or are
not in the name of the actual owner, consult the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 for
additional guidance on which number to report. If the tendering stockholder has
not been issued a TIN and has applied for a number or intends to apply for a
number in the near future, such stockholder should write "Applied For" in the
space provided for in the TIN in Part I, and sign and date the Substitute Form
W-9. If "Applied For" is written in Part I and the Exchange and Information
Agent is not provided with a TIN within 60 days, the Exchange and Information
Agent will withhold 28% on all payments of the purchase price until a TIN is
provided to the Exchange and Information Agent.
-10-
PAYER'S NAME: [Depositary]
-------------------------------- ---------------------------------------------- --------------------------------------
Part I--PLEASE PROVIDE YOUR TIN IN THE BOX AT TIN:
-------------------------------
SUBSTITUTE RIGHT AND CERTIFY BY SIGNING AND DATING Social Security Number
Form W-9 BELOW. or Employer Identification Number
Department of the Part II--For Payees exempt from backup
Treasury Internal withholding, see the enclosed Guidelines for
Revenue Service Certification of Taxpayer Identification Number
on Substitute Form W-9 and complete as
Payor's Request instructed therein.
for Taxpayer
Identification Certification--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
Number ("TIN") Part III--
and Certification (1) The number shown on this form is my correct TIN
(or I am waiting for a number
to be issued to me); and
(2) I am not subject to backup withholding
because (a) I am exempt from backup
withholding, (b) I have not been notified
by the Internal Revenue Service (the
"IRS") that I am subject to backup
withholding as a result of a failure to
report all interest or dividends or (c)
the IRS has notified me that I am no
longer subject to backup withholding.
SIGNATURE: DATE: , 1997
---------------------------------------- ---------------
-------------------------------- -------------------------------------------------------------------------------------
Certification Instructions -- You must cross out item (2) of Part III above
if you have been notified by the IRS that you are subject to backup withholding
because of underreporting interest or dividends on your tax return. However, if
after being notified by the IRS that you were subject to backup withholding, you
received another notification from the IRS that you were no longer subject to
backup withholding, do not cross out item (2) of Part III. (Also see the
instructions in the enclosed Guidelines.)
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT
IN BACKUP WITHHOLDING OF 28% OF ANY PAYMENTS MADE TO YOU PURSUANT TO
THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION
OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING YOUR
TIN.
--------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a TIN has not been issued to me,
and either (1) I have mailed or delivered an application to receive a TIN to the
appropriate IRS Center or Social Security Administration Officer or (2) I intend
to mail or deliver an application in the near future. I understand that if I do
not provide a TIN by the time of payment, 28% of all payments pursuant to the
Offer made to me thereafter will be withheld until I provide a number.
SIGNATURE: DATE:
------------------------------------------- -------------
-11-