Stock and Warrant Purchase Agreement between Z-Tel Technologies, Inc. and Investors (October 19, 2000)

Summary

This agreement is between Z-Tel Technologies, Inc. and a group of investors. Under the agreement, the investors will purchase shares of Series E 8% Convertible Preferred Stock and receive warrants to buy common stock of Z-Tel Technologies. The agreement outlines the terms of the purchase, conditions for closing, representations and warranties by both parties, and ongoing obligations. It also includes provisions for board representation, registration rights, and indemnification. The agreement is effective as of October 19, 2000, and is subject to certain legal and regulatory approvals.

EX-4.7 2 g65081ex4-7.txt 10/19/00 STOCK & WARRANT PURCHASE AGREEMENT 1 Exhibit 4.7 =============================================================================== STOCK AND WARRANT PURCHASE AGREEMENT By and Among Z-TEL TECHNOLOGIES, INC. And THE INVESTORS LISTED ON SCHEDULE I HERETO ---------------------- Dated October 19, 2000 ---------------------- =============================================================================== 2 Table of Contents Page ARTICLE 1 DEFINITIONS 1 1.1 Definitions 1 1.2 Additional Definitions 8 1.3 Accounting Terms; Financial Covenants 9 ARTICLE 2 PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS 9 2.1 Purchase and Sale of Preferred Shares and Warrants 9 2.3 Use of Proceeds 10 2.4 Initial Closing 10 2.5 Additional Closings 10 ARTICLE 3 CONDITIONS TO THE OBLIGATION OF THE INVESTORS TO CLOSE 11 3.1 Representations and Warranties True 11 3.2 Compliance with this Agreement 11 3.3 Officer's Certificate 11 3.4 Secretary's Certificate 11 3.5 Documents 12 3.6 Purchase Permitted by Applicable Laws; Legal Investment 12 3.7 Filing of Certificate of Designation 12 3.8 Opinion of Counsel 12 3.9 Approval of Counsel to the Investors 12 3.10 Consents and Approvals 12 3.11 No Material Adverse Change 13 3.12 Conduct of Business 13 3.13 Registration Rights Agreement 13 3.14 Charter and By-Laws of the Company 13 3.15 Market Conditions 13 3.16 No Litigation 13 3.17 No Default or Breach 13 3.18 HSR Act 14 3.19 Election of Directors 14 3.20 Warrants 14 ARTICLE 4 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE 14 4.1 Representations and Warranties True 14 4.2 Compliance with this Agreement 14 4.3 Issuance Permitted by Applicable Laws 14 4.4 Approval of Counsel to the Company 15 4.5 Consents and Approvals 15 4.6 HSR Act 15 i 3 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY 15 5.1 Corporate Existence and Power 15 5.2 Corporate Authorization; No Contravention 16 5.3 Governmental Authorization; Third Party Consents 16 5.4 Binding Effect 16 5.5 No Legal Bar 16 5.6 Litigation 17 5.7 No Default or Breach 17 5.8 Title to Properties 17 5.9 Taxes 18 5.10 Financial Condition 18 5.11 No Material Adverse Change 18 5.12 Commission Documents 18 5.13 Environmental Matters 18 5.14 Investment Company 19 5.15 Subsidiaries 19 5.16 Capitalization 19 5.17 Solvency 19 5.18 Private Offering 19 5.19 Broker's, Finder's or Similar Fees 20 5.20 Full Disclosure 20 5.21 Regulatory Compliance 20 5.22 Registration Rights Agreement; Shareholders Agreement 21 5.23 Trade Relations 22 5.24 Material Contracts. 22 5.25 Business Model 22 5.26 No Undisclosed Financial Liabilities 22 5.27 Intellectual Property 22 5.28 ERISA 24 5.29 Labor Relations 24 ARTICLE 6 REPRESENTATIONS AND WARRANTIES AND COVENANTS OF THE INVESTORS 25 6.1 Existence and Power 25 6.2 Authorization; No Contravention 25 6.3 Binding Effect 25 6.4 No Legal Bar 26 6.5 Purchase for Own Account 26 6.6 Broker's, Finder's or Similar Fees 27 6.7 Investment Knowledge 27 ii 4 ARTICLE 7 INDEMNIFICATION 27 7.1 Indemnification by the Company 27 7.2 Notification 28 7.3 Registration Rights Agreement 29 ARTICLE 8 AFFIRMATIVE COVENANTS 29 8.1 Financial Statements 29 8.2 Certificates; Other Information 30 8.3 Preservation of Corporate Existence 31 8.4 Payment of Obligations 31 8.5 Compliance with Laws 31 8.6 Notices 32 8.7 Issue Taxes 32 8.8 Reservation of Shares 32 8.9 Inspection 33 8.10 Board Representation 34 8.11 Registration and Listing 35 8.12 Private Offering 35 8.13 Additional Registration Rights 35 ARTICLE 9 NEGATIVE COVENANTS 36 9.1 Consolidations and Mergers 36 9.2 Transactions with Affiliates 36 9.3 No Inconsistent Agreements 36 9.4 Issuance of Preferred Stock 37 ARTICLE 10 DISPOSITIONS 37 10.1 Dispositions by Smith 37 10.2 Dispositions by the Fund 38 ARTICLE 11 MISCELLANEOUS 39 11.1 Survival of Provisions 39 11.2 Notices 39 11.3 Successors and Assigns 40 11.4 Amendment and Waiver 41 11.5 Counterparts 41 11.6 Headings 41 11.7 Determinations 41 11.8 Governing Law 42 11.9 Jurisdiction 42 11.10 Severability 42 11.11 Rules of Construction 42 11.12 Remedies 42 11.13 Entire Agreement 42 11.14 Attorneys' Fees 43 11.15 Publicity 43 11.16 Expenses 43 iii 5 EXHIBITS Exhibit A Form of Warrant Exhibit B Form of Certificate of Designation Exhibit C Form of Registration Rights Agreement SCHEDULES Schedule 1 Investors Schedule 5.6 Litigation Schedule 5.15 Subsidiaries Schedule 5.16 Capitalization Schedule 5.21 Regulatory Compliance Schedule 5.22 Registration Rights Agreements; Shareholders Agreements Schedule 5.25 Business Model Schedule 5.26 Undisclosed Liability Schedule 5.27 Intellectual Property Schedule 5.29 Labor Relations iv 6 STOCK AND WARRANT PURCHASE AGREEMENT (this "Agreement"), dated October 19, 2000, by and among Z-Tel Technologies, Inc., a corporation organized under the laws of Delaware (the "Company"), and each of the investors listed on Schedule 1 hereto (the "Investors"). The Company proposes that the Company issue to each of the Investors, and each of the Investors proposes to purchase, upon the terms and subject to the conditions set forth in this Agreement, (i) the number of shares of Series E 8% Convertible Preferred Stock, par value $.01 per share, (the "Preferred Stock") set forth opposite such Investor's name on Schedule 1 and (ii) and a warrant (the "Warrant") to purchase, subject to the terms and conditions set forth in the form of Warrant attached hereto as Exhibit A, that number of shares of Common Stock (subject to adjustment), set forth opposite such Investor's name on Schedule 1. In consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions . As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Affiliate" has the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act; provided that for purposes of this Agreement no Investor shall be deemed an Affiliate of the Company. "Agreement" means this Agreement as the same may be amended, supplemented or modified in accordance with the terms hereof. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York, New York are authorized or required by law or executive order to close. "Certificate of Designation" means the Certificate of Designation with respect to the Preferred Stock (the form of which is attached hereto as Exhibit B) to be adopted by the Board of Directors of the Company and filed with the Secretary of State of the State of Delaware. "Certificate of Incorporation" means the Amended and Restated Certificate of Incorporation of the Company, dated May 30, 2000, in the form attached 7 as Exhibit 3.1 to the Company's Registration Statement on Form S-8, filed July 18, 2000, as the same may be amended from time to time. "Change of Control" of the Company shall mean such times as: (i) Any Person or "group" (within the meaning of Section 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of outstanding shares of stock of the Company entitling such Person or Persons to exercise 50% or more of the total votes (excluding the Preferred Stock) entitled to be cast at a regular or special meeting, or by action by written consent, of shareholders of the Company (the term "beneficial owner" shall be determined in accordance with Rule 13d-3, promulgated by the Commission under the Exchange Act); (ii) A majority of the Board of Directors of the Company shall consist of Persons other than Continuing Directors. The term "Continuing Director" shall mean any member of the Board of Directors on the Closing Date or designated pursuant to this Agreement and any other member of the Board of Directors who shall be recommended or elected to succeed or become a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors. (iii) The shareholders of the Company shall have approved a recapitalization, reorganization, merger, consolidation or similar transaction, in each case with respect to which all or substantially all the Persons who were the respective beneficial owners, directly or indirectly, of the outstanding shares of capital stock of the Company immediately prior to such recapitalization, reorganization, merger, consolidation or similar transaction, will own less than 50% of the combined voting power of the then outstanding shares of capital stock of the Company resulting from such recapitalization, reorganization, merger, consolidation or similar transaction; provided that any such recapitalization shall not be considered a Change of Control if the holders of Preferred Stock have the right to participate on at least a pari passu basis. (iv) The shareholders of the Company shall have approved of the sale or other disposition of all or substantially all the assets of the Company in one transaction or in a series of related transactions; (v) Any transaction occurs, the result of which is that the Common Stock is not required to be registered under Section 12 of the Exchange Act and that the holders of Common Stock do not receive common stock of the Person surviving such transaction which is required to be registered under Section 12 of the Exchange Act; or 2 8 (vi) (i) Immediately after any merger, consolidation, recapitalization or similar transaction, Smith or a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) shall be the beneficial owners, directly or indirectly, of outstanding shares of capital stock of the Company (or any Person surviving such transaction) entitling them collectively to exercise 50% or more of the total voting power of shares of capital stock of the Company (or the surviving Person in such transaction) and (2) in connection with or as a result of such transaction, the Company (or such surviving Person) shall have incurred or issued additional indebtedness such that the total indebtedness so incurred or issued equals at least 50% of the consideration payable in such transaction; provided that any such transactions shall not be considered a Change of Control if the holders of Preferred Stock have the right to participate on at least a pari passu basis. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Commission Documents" means all registration statements, proxy statements, reports and other documents (and all amendments thereto), required to be filed by the Company since October 19, 1999 under the Securities Act or the Exchange Act. "Common Stock" means the common stock, par value $.01 per share, and each other class of capital stock of the Company into which such stock is reclassified or reconstituted. "Communications Act" means the Communications Act of 1934, as amended by the Telecommunications Act of 1996, as amended. "Communications Licenses" means all licenses, waivers, consents, permits or other authorizations issued or granted by the FCC or any other state or local public utilities commission to the Company or any of its Subsidiaries in connection with ownership and operation of the services provided by the Company and its Subsidiaries. "Company" means Z-Tel Technologies, Inc., a Delaware corporation. "Condition of the Company" means the assets, business, properties or financial condition of the Company and its Subsidiaries taken as a whole. "Consolidated Net Worth" means, as of the date of determination with respect to any Person, the consolidated stockholders' equity (which, in the case of 3 9 the Company, shall include the Preferred Stock) of such Person and its Subsidiaries, determined in accordance with GAAP. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability of that Person with respect to any Indebtedness, lease, dividend, guaranty, letter of credit or other obligation (the "primary obligation") of another Person (the "primary obligor"), including, without limitation, any obligation of such first-mentioned Person, whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the beneficiary of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the beneficiary of any such primary obligation against loss in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the Company in good faith. "Contractual Obligations" means as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument to which such Person is a party or by which it or any of its property is bound. "Copyrights" means any foreign or United States copyright registrations and applications for registration thereof, and any non-registered copyrights. "Environmental Laws" means any applicable federal, state, territorial, provincial or local law, common law doctrine, rule, order, decree, judgment, injunction, license, permit or regulation in effect as of the Closing Date and each Additional Closing Date, relating to environmental matters, including those pertaining to air, soil, surface water, ground water (including the protection, cleanup, removal, remediation or damage thereof), or any other environmental matter, together with any other laws (federal, state, territorial, provincial or local) relating to emissions, discharges, releases or threatened releases of any contaminant including, without limitation, medical, biological, biohazardous or radioactive waste and materials, into ambient air, land, surface water, groundwater, personal property or structures, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, discharge or handling of any contaminant, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability 4 10 Act (42 U.S.C. ss. 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. ss. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601 et seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss. 136 et seq.), and the Oil Pollution Act of 1990 (33 U.S.C. ss. 2701 et seq.). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "FCC" means the Federal Communications Commission. "FCC Rules" means the current rules, regulations and policies of the FCC. "Fund" means The 1818 Fund III, L.P., a Delaware limited partnership. "GAAP" means generally accepted accounting principles in the United States in effect from time to time. "Governmental Authority" means the government of any nation, state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Holder," with respect to Preferred Shares, Warrants, Warrant Shares or Common Stock issued upon conversion of the Preferred Shares, means the Investors and any subsequent direct or indirect transferee of such security; provided that the term Holder shall not include any Person who owns such security if it has been registered under the Securities Act or if it has been transferred to such Person after such security has been the subject of a distribution to the public pursuant to Rule 144 (or any successor provision) under the Securities Act or otherwise distributed under circumstances not requiring a legend. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations of the Federal Trade Commission thereunder. 5 11 "Indebtedness" means as to any Person, without duplication, (a) all obligations of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all obligations to pay the deferred purchase price of property or services, except trade accounts payable and accrued liabilities arising in the ordinary course of business, (d) all interest rate and currency swaps and similar agreements under which payments are obligated to be made, whether periodically or upon the happening of a contingency, (e) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (f) all obligations under leases which have been or should be, in accordance with GAAP, recorded as capital leases, (g) all indebtedness secured by any Lien (other than Liens in favor of lessors under leases other than leases included in clause (f)) on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person, (h) all obligations of such Person to reimburse or prepay any bank or other Person in respect of amounts paid under a letter of credit, banker's acceptance or similar instrument, (i) all capital stock issued by such Person subject to mandatory redemption that is not contingent upon future events or circumstances, and (j) any Contingent Obligation. "Internet Assets" means any Internet domain names and other computer user identifiers and any rights in and to sites on the worldwide web, including rights in and to any text, graphics, audio and video files and html or other code incorporated in such sites. "Investors" means each of the investors listed on Schedule 1. "Knowledge" means knowledge after due inquiry. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including, without limitation, those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capitalized lease obligation, or any financing lease having substantially the same economic effect as any of the foregoing). "NASDAQ" means the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System. "NYSE" means the New York Stock Exchange, Inc. 6 12 "Orders" means any judgment, injunction, writ, award, decree or order of any nature of any Governmental Authority against, or binding upon, the Company. "Patents" means any foreign or United States patents and patent applications, including any divisions, continuations, continuations-in-part, substitutions or reissues thereof, whether or not patents are issued on such applications and whether or not such applications are modified, withdrawn or resubmitted. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Preferred Stock" means the Series E 8% Convertible Preferred Stock, par value $.01 per share, of the Company. "Registration Rights Agreement" means the Registration Rights Agreement in the form attached hereto as Exhibit C. "Requirements of Law" means as to any Person, the Certificate of Incorporation and By-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "Software" means any computer software programs, source code, object code, data and documentation. "Solvent" means, with respect to any Person, that the fair saleable value on a going concern basis of the assets and property of such Person is, on the date of determination, greater than the total amount of liabilities (including Contingent Obligations) of such Person as of such date and that, as of such date, such Person is able to pay all liabilities of such Person as such liabilities mature. In computing the amount of Contingent Obligations at any time, such liabilities will be computed as the amount which, in light of all the facts and circumstances existing at such time, represents the amount that is probable to become an actual or matured liability. "Subsidiary" means, with respect to any Person, another Person of which 50% or more of the voting power of the voting equity securities or equity 7 13 interest is owned, directly or indirectly, by such first-mentioned Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Company. "Taxes" means all federal, state, county, local, foreign and other taxes, including, without limitation, income taxes, estimated taxes, excise taxes, sales taxes, use taxes, gross receipts taxes, franchise taxes, employment and payroll related taxes, property taxes and import duties, whether or not measured in whole or in part by net income. "Trade Secrets" means any trade secrets, whether in the form of research records, processes, procedures, manufacturing formulae, technical know-how, technology, blue prints, designs, plans, inventions (whether patentable and whether reduced to practice), or invention disclosures and improvements thereto. "Trademarks" means any foreign or United States trademarks, service marks, trade dress, trade names, brand names, designs and logos, corporate names, product or service identifiers, whether registered or unregistered, and all registrations and applications for registration thereof. "Warrant" has the meaning assigned to that term in the preamble to this Agreement. 1.2 Additional Definitions. The following terms are defined in the section of the Agreement set forth opposite such term: Term Section ---- ------- Additional Closing 2.5 Additional Investors 2.5 Annual Report on Form 10-K 5.15 Business Model 5.25 Closing Date 2.4 Indemnified Party 7.1 Initial Closing 2.4 Intellectual Property 5.27 Liabilities 7.1 Material Contracts 5.24 1999 Audited Financials 5.10 1998 Audited Financials 5.10 Preferred Shares 2.1 Purchase Price 2.1 Smith 10.1(a) 2000 Interim Financials 5.10 Warrant Shares 2.1 8 14 1.3 Accounting Terms; Financial Covenants. All accounting terms used herein not expressly defined in this Agreement shall have the respective meanings given to them in accordance with sound accounting practice. The term "sound accounting practice" shall mean such accounting practice as, in the opinion of the independent accountants regularly retained by the Company, conforms at the time to GAAP applied on a consistent basis except for changes with which such accountants concur. If any changes in accounting principles are hereafter occasioned by promulgation of rules, regulations, pronouncements or opinions by or are otherwise required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions), and any of such changes results in a change in the method of calculation of, or affects the results of such calculation of, any of the financial covenants, standards or terms found herein, then the parties hereto agree to enter into and diligently pursue negotiations in order to amend such financial covenants, standards or terms so as to reflect fairly and equitably such changes, with the desired result that the criteria for evaluating the Company's financial condition and results of operations shall be the same after such changes as if such changes had not been made. ARTICLE 2 PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS 2.1 Purchase and Sale of Preferred Shares and Warrants. Subject to the terms and conditions herein set forth, the Company agrees to issue and sell to each Investor, and each Investor severally agrees to purchase from the Company, on the Closing Date the number of shares of Preferred Stock and a Warrant to purchase the aggregate number of shares of Common Stock set forth opposite such Investor's name on Schedule 1, for the purchase price set forth opposite such Investor's name on Schedule 1 (all of the shares of Preferred Stock being purchased pursuant hereto being referred to herein as the "Preferred Shares;" all of the shares of Common Stock issuable upon the exercise of the Warrants being issued pursuant hereto being referred to herein as the "Warrant Shares;" and the aggregate purchase price for the Preferred Shares and Warrants being referred to herein as the "Purchase Price"). The Purchase Price shall be paid to the Company in cash, by wire transfer of immediately available funds to an account designated by the Company, one Business Day prior to the Closing Date. 2.2 Certificate of Designation. The Preferred Shares shall have the preferences and rights set forth in the Certificate of Designation. 9 15 2.3 Use of Proceeds. The Company shall use the proceeds from the sale of the Preferred Shares and the Warrants to the Investors to fund the Company's working capital and operating funds. 2.4 Initial Closing. Subject to Articles 3 and 4, the purchase and issuance of the Preferred Shares and the Warrants shall take place at the closing (the "Initial Closing") to be held at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New York, New York 10019-6064 on November 10, 2000, or such later date on or prior to December 31, 2000 as the parties may agree (the "Initial Closing Date"), at 10:00 a.m., New York City time. At the Initial Closing, subject to the terms and conditions set forth herein, the Company shall sell the Preferred Shares and Warrants to the Investors by delivering to each of the Investors a certificate representing the number of Preferred Shares set forth opposite such Investor's name on Schedule 1 and a Warrant exercisable for the number of shares of Common Stock set forth opposite such Investor's name on Schedule 1, each registered in the name of such Investor or its designees, with appropriate issue stamps, if any, affixed at the expense of the Company, free and clear of any Lien. At the Initial Closing, the Investors shall purchase the Preferred Shares and Warrants in accordance with the provisions of Section 2.1. 2.5 Additional Closings. (a) Conditions of Additional Closing. At any time and from time to time during the ninety (90) day period immediately following the Initial Closing, the Fund may by written notice advise the Company that it and/or a Person or Persons designated by it (and reasonably acceptable to the Company) (any such person who is not an Investor, an "Additional Investor") elects to purchase, subject to Articles 3 and 4, shares of Preferred Stock (together with Warrants to purchase one-half of a share of Common Stock for each share of Preferred Stock to be purchased); provided that in no event shall the Company issue more than 2,083,333 shares of Preferred Stock pursuant to this Section 2.5. Such notice to the Company shall include the name of the Additional Investor, the number of shares of Preferred Stock (together with Warrants to purchase one-half of a share of Common Stock for each share of Preferred Stock) to be purchased, and the scheduled date of the closing of the purchase of such shares of Preferred Stock and Warrants (which date shall in no event be earlier than two business days and no later than five business days after the date of such notice). Each date specified in such notice on which such purchase shall be scheduled to occur shall be an "Additional Closing." (b) Amendments. The Company and the Additional Investors purchasing Preferred Stock and Warrants at each Additional Closing will execute counterpart signature pages to this Agreement and Registration Rights Agreement and such Additional Investors will, upon delivery to the Company of such signature pages, become parties to, and bound by, this Agreement and Registration Rights Agreement 10 16 each to the same extent as if they had been Investors at the Initial Closing. Immediately after each Additional Closing, Schedule 1 to this Agreement will be amended to list the Additional Investors purchasing shares of Preferred Stock and Warrants hereunder and setting forth the number of shares of Preferred Stock and the number of shares of Common Stock for which the Warrant may be exercised acquired by each Additional Investor or existing Investors under this Agreement at each such Additional Closing. The Company will promptly furnish to each Investor copies of the amendments to Schedule 1 referred to in the preceding sentence. (c) Status of Additional Investors. Upon the completion of each Additional Closing as provided in this Section 2.5, each New Investor will be deemed to be an "Investor" for all purposes of this Agreement and Registration Rights Agreement. ARTICLE 3 CONDITIONS TO THE OBLIGATION OF THE INVESTORS TO CLOSE The obligation of the Investors to purchase the Preferred Shares and the Warrants, to pay the Purchase Price at the Initial Closing and any Additional Closing ("Relevant Closing Date") and to perform any obligations hereunder shall be subject to the satisfaction or waiver of the following conditions on or before the Relevant Closing Date (except as set forth below): 3.1 Representations and Warranties True. The representations and warranties of the Company contained in Section 5 hereof shall be true and correct in all material respects at and as of the Relevant Closing Date as if made at and as of such Date; provided that any representation and warranty qualified in any respect by materiality shall be true and correct at and as of the Relevant Closing Date as if made at and as of such Date. 3.2 Compliance with this Agreement. The Company shall have performed and complied with all of its agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Company on or before the Relevant Closing Date. 3.3 Officer's Certificate. The Investors shall have received a certificate, dated the Relevant Closing Date and signed by the President or a Vice-President of the Company, certifying that the conditions set forth in Sections 3.1 and 3.2 hereof have been satisfied on and as of such date. 3.4 Secretary's Certificate. The Investors shall have received a certificate, dated the Relevant Closing Date and signed by the Secretary or an Assistant Secretary of the Company, certifying the truth and correctness of attached copies of the 11 17 Certificate of Incorporation and By-laws of the Company and resolutions of the Board of Directors and shareholders of the Company, if applicable, approving this Agreement and the transactions contemplated hereby. 3.5 Documents. Prior to the Initial Closing Date, the Investors shall have received copies of such documents as they reasonably may request in connection with the sale of the Preferred Shares and the Warrants and the transactions contemplated hereby, all in form and substance reasonably satisfactory to the Investors. 3.6 Purchase Permitted by Applicable Laws; Legal Investment. The acquisition of and payment for the Preferred Shares and the Warrants to be acquired by the Investors hereunder and the consummation of the transactions contemplated hereby (a) shall not be prohibited by any applicable law or governmental regulation and (b) shall not subject any of the Investors to any penalty or, in its reasonable judgment, other onerous condition under or pursuant to any applicable law or governmental regulation. 3.7 Filing of Certificate of Designation. Prior to the Initial Closing Date, the Certificate of Designation shall have been duly filed by the Company with the Secretary of State of the State of Delaware. 3.8 Opinion of Counsel. The Investors shall have received the opinion of King & Spalding, counsel to the Company, dated the Initial Closing Date, in a form satisfactory to the Investors. 3.9 Approval of Counsel to the Investors. Prior to the Initial Closing Date, all actions and proceedings hereunder and all documents required to be delivered by the Company hereunder or in connection with the consummation of the transactions contemplated hereby, and all other related matters, shall have been reasonably acceptable to Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Investors, as to their form and substance. 3.10 Consents and Approvals. All consents, exemptions, authorizations, or other actions by, or notices to, or filings with, Governmental Authorities and other Persons, necessary or required in connection with the execution, delivery or performance (including, without limitation, the payment of dividends on the Preferred Stock and the issuance of Common Stock upon the conversion of the Preferred Stock or exercise of the Warrants) by the Company or enforcement against the Company of this Agreement, the Preferred Shares, the Warrants or the Registration Rights Agreement shall have been obtained and be in full force and effect, and the Investors shall have been furnished with appropriate evidence thereof. 12 18 3.11 No Material Adverse Change Since June 30, 2000, there shall have been no material adverse change, nor shall any such change be threatened, in the Condition of the Company since that date. 3.12 Conduct of Business. The Company shall have conducted its business in the ordinary course from the date hereof to the Initial Closing Date, and no transaction not in the ordinary course of business shall have occurred without the Investors' consent. 3.13 Registration Rights Agreement. Prior to the Initial Closing Date, the Company shall have duly executed and delivered to the Investors the Registration Rights Agreement. 3.14 Charter and By-Laws of the Company. Except for the Certificate of Designation or as otherwise approved by the Fund, no amendments to the Certificate of Incorporation or By-Laws of the Company as in effect on the date hereof shall have been effected. 3.15 Market Conditions. Between the date of this Agreement and the Relevant Closing Date, (a) trading in the Common Stock shall not have been suspended by the Commission or by the NASDAQ for a material portion of a trading day, (b) trading in securities generally on the NYSE or NASDAQ shall not have been suspended or limited or minimum or maximum prices shall not have been generally established on such exchange, or additional material governmental restrictions, not in force on the date of this Agreement, shall not have been imposed upon trading in securities generally by such exchange or by order of the Commission or any court or other Governmental Authority, (c) a general banking moratorium shall not have been declared by either Federal or New York State authorities and (d) any material adverse change in the financial or securities markets in the United States or in political, financial or economic conditions in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity or crisis shall not have occurred. 3.16 No Litigation. No action, suit, proceeding, claim or dispute shall have been brought or otherwise arisen at law, in equity, in arbitration or before any Governmental Authority against the Company or any of its Subsidiaries which would, if adversely determined, (i) have a material adverse effect on the Condition of the Company or (ii) have a material adverse effect on the ability of the Company to perform its obligations under this Agreement, the Preferred Shares, the Warrants or the Registration Rights Agreement. 3.17 No Default or Breach. Neither the Company nor any of its Subsidiaries shall have been in default under or with respect to any Contractual Obligation in any respect, which, individually or together with all such defaults, would 13 19 be materially adverse to the Condition of the Company or which could materially adversely affect the ability of the Company to perform its obligations under this Agreement, the Preferred Shares, the Warrants or the Registration Rights Agreement. 3.18 HSR Act. Any applicable waiting period under the HSR Act with respect to the Preferred Shares and Warrants to be purchased by the Investors shall have expired or been terminated. 3.19 Election of Directors. On the Initial Closing Date, two individuals designated by the Fund shall have been elected to the Board of Directors of the Company in accordance with Section 8.10(a). 3.20 Warrants. The Company shall have duly executed and delivered to each Investor a Warrant exercisable for the number of shares of Common Stock set forth opposite such Investor's name on Schedule 1 hereto, registered in the name of such Investor. ARTICLE 4 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE The obligations of the Company to issue and sell the Preferred Shares and the Warrants, and to consummate the transactions contemplated herein on the Relevant Closing Date, shall be subject to the satisfaction or waiver of the following conditions on or before the Closing Date: 4.1 Representations and Warranties True. The representations and warranties of the Investors contained in Section 6 hereof shall be true and correct in all material respects at and as of the Relevant Closing Date as if made at and as of such date. 4.2 Compliance with this Agreement. The Investors shall have performed and complied with all of their agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Investors on or before the Relevant Closing Date. 4.3 Issuance Permitted by Applicable Laws. The issuance of the Preferred Shares and the Warrants and the consummation of the transactions contemplated hereby by the Company (a) shall not be prohibited by any applicable law or governmental regulation and (b) shall not subject the Company to any penalty or, in its reasonable judgment, other onerous condition under or pursuant to any applicable law or governmental regulation. 14 20 4.4 Approval of Counsel to the Company. All actions and proceedings hereunder and all documents required to be delivered by the Investors hereunder or in connection with the consummation of the transactions contemplated hereby, and all other related matters, shall have been reasonably acceptable to King & Spalding, counsel to the Company, as to their form and substance. 4.5 Consents and Approvals. All consents, exemptions, authorizations, or other actions by, or notices to, or filings with, Governmental Authorities and other Persons necessary or required in connection with the execution, delivery or performance by the Investors or enforcement against the Investors of this Agreement shall have been obtained and be in full force and effect, and the Company shall have been furnished with appropriate evidence thereof. 4.6 HSR Act. Any applicable waiting period under the HSR Act with respect to the Preferred Shares and Warrants to be purchased by the Investors shall have expired or been terminated. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Investors, and to each of them, as follows: 5.1 Corporate Existence and Power. The Company and each of its Subsidiaries: (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has (i) full corporate (or other organizational) power and authority and (ii) all governmental licenses, authorizations, consents and approvals to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is currently proposed to be, engaged; (c) is duly qualified as a foreign person, licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification; and (d) is in compliance with all Requirements of Law; except, in the case of (b)(ii), (c) or (d) of this Section 5.1, to the extent that the failure to so comply would not have a material adverse effect on the Condition of the Company. 15 21 5.2 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement, the Registration Rights Agreement and the transactions contemplated hereby and thereby, including without limitation the issuance of the Preferred Shares, the Warrants and the Common Stock issuable upon the conversion of the Preferred Shares and exercise of the Warrants: (a) are within the Company's corporate power and authority and have been duly authorized by all necessary corporate action; and (b) will not violate, conflict with or result in any breach or contravention of or the creation of any Lien under, any Material Contract of the Company or any of its Subsidiaries or any order or decree directly relating to the Company or any of its Subsidiaries. 5.3 Governmental Authorization; Third Party Consents. Except as contemplated by Section 4.6 and certain consents from holders of registration rights, no approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person, is necessary or required in connection with the execution, delivery or performance by the Company or enforcement against the Company of this Agreement, the Preferred Shares, the Warrants, the Registration Rights Agreement or the transactions contemplated hereby or thereby. 5.4 Binding Effect. This Agreement has been duly executed and delivered by the Company, and at the Initial Closing and each Additional Closing, the Preferred Shares, the Warrants and the Registration Rights Agreement will be duly executed or delivered, as applicable, by the Company. This Agreement constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject, as to enforcement of remedies, to bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer, or similar laws affecting creditors' rights generally from time to time in effect and general equitable principles, except that any rights to indemnification set forth in this Agreement may be limited by federal and state securities laws and public policy considerations. At the Initial Closing and each Additional Closing, the Registration Rights Agreement, the Warrants and the Preferred Shares will constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, subject, as to enforcement of remedies, to bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer, or similar laws affecting creditors' rights generally from time to time in effect and general equitable principles, except that any rights to indemnification set forth in the Registration Rights Agreement may be limited by federal and state securities laws and public policy considerations. 5.5 No Legal Bar. Neither the execution, delivery or performance of this Agreement or the Registration Rights Agreement nor the issuance or performance 16 22 of the terms of the Preferred Shares or the Warrants will violate any Requirement of Law or any rule or regulation of NASDAQ. 5.6 Litigation. (a) Except as set forth on Schedule 5.6, there are no actions, suits, proceedings, claims or disputes pending, or to the Knowledge of the Company, threatened, at law, in equity, in arbitration or before any Governmental Authority against the Company or any of its Subsidiaries: (i) with respect to this Agreement, the Preferred Shares, the Warrants or the Registration Rights Agreement or any of the transactions contemplated hereby or thereby; or (ii) which would, if adversely determined, (i) have a material adverse effect on the Condition of the Company or (ii) have a material adverse effect on the ability of the Company to perform its obligations under this Agreement, the Preferred Shares, the Warrants or the Registration Rights Agreement. (b) No injunction, writ, temporary restraining order, decree or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery and performance of this Agreement, the Preferred Shares, the Warrants or the Registration Rights Agreement. 5.7 No Default or Breach. No event has occurred and is continuing which constitutes a default under or breach of any of the provisions of Article 8 or 9. No event which constitutes a default under or breach of any of the provisions of Article 8 or 9 is likely to result from the incurring of obligations by the Company under this Agreement, or the Registration Rights Agreement or from the issuance of the Preferred Shares or the Warrants. Neither the Company nor any of its Subsidiaries is in default under or with respect to any Contractual Obligation in any respect, which, individually or together with all such defaults, would have a material adverse effect on the Condition of the Company or on the ability of the Company to perform its obligations under this Agreement, the Preferred Shares, the Warrants or the Registration Rights Agreement. 5.8 Title to Properties. The Company and each of its Subsidiaries have good and defensible title to, or hold leases in full force and effect in all their real property, except for such defects in title as could not, individually or in the aggregate, have a material adverse effect on the Condition of the Company or the ability of the Company to perform its obligations under this Agreement, the Preferred Shares, the Warrants or the Registration Rights Agreement. 17 23 5.9 Taxes. The Company and its Subsidiaries have filed or caused to be filed, or have properly filed extensions for, all income tax returns which are required to be filed and have paid or caused to be paid all taxes as shown on said returns and on all assessments received by it to the extent that such taxes have become due, except taxes the validity or amount of which is being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside. The Company and its Subsidiaries have paid or caused to be paid, or have established reserves that the Company reasonably believes to be adequate for all income tax liabilities applicable to the Company and its Subsidiaries for all fiscal years which have not been examined and reported on by the taxing authorities (or closed by applicable statutes). 5.10 Financial Condition. The Company heretofore has delivered to the Investors true and correct copies of audited consolidated financial statements of the Company and its Subsidiaries dated as of December 31, 1998 (the "1998 Audited Financials), December 31, 1999 (the "1999 Audited Financials") and the unaudited consolidated financial statements of the Company and its Subsidiaries dated as of June 30, 2000 (the "2000 Interim Financials"). The 1998 Audited Financials, 1999 Audited Financials and the 2000 Interim Financials have been prepared in accordance with GAAP applied consistently and present fairly in all material respects the consolidated financial condition of the Company as of the dates thereof and the consolidated results of operations of the Company for the period, or portion thereof, then ended (except in the case of the 2000 Interim Financials, for normal year-end adjustments and the absence of footnotes). 5.11 No Material Adverse Change. Since June 30, 2000, there has not been any material adverse change, nor to the Knowledge of the Company is any such change threatened, in the Condition of the Company. 5.12 Commission Documents. The Company has filed all registration statements, proxy statements, reports and other documents required to be filed by it under the Securities Act or the Exchange Act, and all amendments thereto. The Company has furnished or made available to the Investors copies of all Commission Documents, each as filed with the Commission. Each Commission Document, as amended, when filed with the Commission or as so amended was true and accurate in all material respects and in compliance in all material respects with the requirements of its respective report form. 5.13 Environmental Matters. The Company is in compliance with all applicable Environmental Laws except as would not have a material adverse effect on the Condition of the Company. There is no civil, criminal or administrative judgment, action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter pending or, to the Knowledge of the Company, threatened against the Company pursuant to Environmental Laws except as would not have a 18 24 material adverse effect on the Condition of the Company; and, to the Knowledge of the Company, there are no past or present events, conditions, circumstances, activities, practices, incidents, agreements, actions or plans which could reasonably be expected to prevent compliance with, or which have given rise to or will give rise to liability under, Environmental Laws except as would have not have a material adverse effect on the Condition of the Company. 5.14 Investment Company. Neither the Company nor any Person controlling the Company is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5.15 Subsidiaries. Schedule 5.15 sets forth a complete and accurate list of all of the Subsidiaries of the Company together with their respective jurisdictions of incorporation or organization. Each such Subsidiary is directly or indirectly wholly owned by the Company. 5.16 Capitalization. As of the date hereof, the authorized capital stock of the Company consists of 150,000,000 shares of Common Stock, par value $.0l per share, and 39,523,816 shares of preferred stock, par value $.01 per share, of which as of the date hereof, 33,678,287 shares of Common Stock and 4,688,247 shares of preferred stock are issued and outstanding. Except as set forth on Schedule 5.16, there are no shares of capital stock of the Company reserved for issuance. All of the outstanding shares of capital stock of the Company have been duly authorized and are fully paid and non-assessable. The Preferred Shares when issued upon payment of the Purchase Price, and the shares of Common Stock when issued upon conversion of the Preferred Shares or exercise of the Warrants, will be duly authorized, and, in each case, validly issued, fully paid and nonassessable. Except for the Warrants, this Agreement, or as set forth on Schedule 5.16 or in the Certificate of Designation, there are no options, warrants or other rights to any Person to purchase shares of capital stock or other securities of the Company, and the Company is not obligated in any manner to issue shares of its capital stock or other securities. Except as contemplated hereby and for relevant state and federal securities laws, there are no restrictions on the transfer of shares of capital stock of the Company issued or issuable to the Investors. 5.17 Solvency. On and as of the Closing Date, after giving effect to the transactions contemplated in this Agreement, the Company will be Solvent. 5.18 Private Offering. No form of general solicitation or general advertising was used by the Company or, to its knowledge, its representatives in connection with the offer or sale of the Preferred Shares. Assuming the truth and accuracy of the Investors' representation in Section 6.5, no registration of the Preferred Shares or the Warrants pursuant to the provisions of the Securities Act or any state securities or "blue sky" laws will be required by the offer, sale or issuance of the Preferred Shares or the Warrants pursuant to this Agreement. The Company agrees 19 25 that neither it, nor anyone acting on its behalf, will offer or sell the Preferred Shares or the Warrants or any other security so as to require the registration of the Preferred Shares or the Warrants pursuant to the provisions of the Securities Act or any state securities or "blue sky" laws, unless such Preferred Shares or the Warrants are so registered. 5.19 Broker's, Finder's or Similar Fees. Except for the obligation of the Company to pay an advisory fee to Breckenridge Securities Corp., and as set forth on Schedule 5.16, there are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Company or any of its Subsidiaries, or any action taken by any such entity. 5.20 Full Disclosure. (a) No statement by the Company contained in (i) this Agreement or (ii) any certificates delivered to the Investors in connection with the purchase and sale of the Preferred Shares at the Closing contains (or will contain) an untrue statement of a material fact or omits (or will omit) to state a material fact required to be stated therein or necessary to make the statements made, in the light of the circumstances in which made, not materially false or misleading. (b) There is no fact that the Company has not disclosed to the Investors in writing which materially adversely affects, or insofar as the Company can reasonably foresee could materially adversely affect, the Condition of the Company or the ability of the Company to perform its obligations under this Agreement, the Preferred Shares, the Warrants, the Registration Rights Agreement or any document contemplated hereby or thereby. 5.21 Regulatory Compliance. (a) The Company and its Subsidiaries hold all Communications Licenses required under the Communications Act, the FCC Rules or other state or local laws or rules to own and operate their properties and to carry on the business of the Company and its Subsidiaries as now conducted, except as would not have a material adverse effect on the Condition of the Company. (b) Set forth on Schedule 5.21 is a complete list of all Communications Licenses of the Company and its Subsidiaries relating to or used in connection with the business of the Company and its Subsidiaries, including which legal entity holds such License and, if such legal entity is neither the Company nor any of its Subsidiaries, a summary of the terms under which the Company and its Subsidiaries is permitted to engage in the business relating to such License. Such list correctly sets forth the expiration date, if any, of each such Communications License. 20 26 Each such Communications License is in full force and effect, and is not subject to any special conditions outside the ordinary course. The Company and its Subsidiaries have taken all actions and performed all of their obligations that are necessary to maintain such Communications Licenses without adverse modification or impairment. (c) The Company and its Subsidiaries are not parties to, nor to the best knowledge of the Company and each Subsidiary is there threatened in writing, any formal investigation, notice of apparent liability, violation, forfeiture or other notice, order or formal complaint issued by or before any court or regulatory body, including the FCC, that could in any manner threaten or adversely affect the validity or continued effectiveness of the Communications Licenses of the Company and its Subsidiaries. Since January 1, 1998, the Company and each Subsidiary has filed in a substantially timely manner all material reports, applications, documents, instruments and information required to be filed by it pursuant to the Communications Act, the FCC Rules or other state or local laws or rules related to Communications Licenses. All such filings are accurate and complete in all material respects. (d) The Company and its Subsidiaries are in compliance with the Communications Licenses, the Communications Act, the FCC Rules or other state or local laws or rules, except as would not have a material adverse effect on the Condition of the Company. (e) The Company and the Subsidiaries are not aware of any facts, and the Company and the Subsidiaries have received no formal written notice, indicating that the Company and the Subsidiaries, in their ownership and operation of the business of the Company and the Subsidiaries, are not in compliance with all requirements of (i) applicable FCC Rules or the Communications Act, or (ii) similar state and local statutes, regulations and ordinances, except as would not have a material adverse effect on the Condition of the Company. (f) No consent, waiver or other action of, or filing or notification to, the FCC is required for the consummation of the transactions contemplated hereby. 5.22 Registration Rights Agreement; Shareholders Agreement. Schedule 5.22 sets forth all agreements to which the Company or any Subsidiary is a party or by which it is bound relating to the registration of its securities or, in the case of a Subsidiary, the securities of the Company. Except as set forth on Schedule 5.22, no agreements grant any registration rights to any Person which are inconsistent with the rights to be granted to the Investors in the Registration Rights Agreement. Schedule 5.22 sets forth all agreements to which the Company or any of its subsidiaries has Knowledge relating to the voting of Common Stock or restricting the transfer of Common Stock. 21 27 5.23 Trade Relations. There exists (i) to the Knowledge of the Company, no actual or (ii) so far as the Company is aware, no threatened, material change in the business relationship of the Company and its Subsidiaries taken as a whole with any customer or any group of customers, or with any supplier, which would have a material adverse effect on the business of the Company and its Subsidiaries, taken as a whole. 5.24 Material Contracts. All contracts, agreements and commitments of the Company and its Subsidiaries required to be filed with the Company's Commission Documents ("Material Contracts") are in full force and effect and binding upon the parties thereto in accordance with their terms, subject, as to enforcement of remedies, to bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer, or similar laws affecting creditors' rights generally from time to time in effect and general equitable principles. Neither the Company nor any of its Subsidiaries, nor, to the Knowledge of the Company or any of its Subsidiaries, any other party to a Material Contract, is in default under, and no condition exists that with notice or lapse of time, or both, would constitute a default under any Material Contract, in each case other than defaults that individually or in the aggregate would not have a material adverse effect on the Condition of the Company. Neither the Company nor any of its Subsidiaries has any knowledge of any threatened cancellation or termination of any Material Contract. 5.25 Business Model. Prior to the date hereof, the Company delivered to the Investors the Z-Tel Technologies, Inc. Consolidated Business Model "Budget View" dated August 29, 2000, a copy of which is attached as Schedule 5.25 (the "Business Model"). The assumptions used in preparation of the Business Model were reasonable when made and continue to be reasonable as of the Closing Date. The Business Model has been prepared in good faith. The Investors acknowledge that the Business Model contains assumptions about future events and that actual results during the period or periods covered may differ from the data and results contained in such Business Model and such differences may be material and adverse to the Company. 5.26 No Undisclosed Financial Liabilities. Except as set forth on Schedule 5.26, the Company and its Subsidiaries, after giving effect to the transactions contemplated hereby, will not have any material direct or indirect indebtedness, liability (including, without limitation, product liability or warranty claim), obligation, whether known or unknown, fixed or unfixed, contingent or otherwise, and whether or not of a kind required by GAAP to be set forth on a financial statement, other than (i) liabilities fully and adequately reflected on the 2000 Interim Financials, (ii) liabilities incurred since June 30, 2000 in the ordinary course of business, (iii) liabilities incurred pursuant to this Agreement and (iv) liabilities which individually or in the aggregate would not have a material adverse effect on the Condition of the Company. 5.27 Intellectual Property. 22 28 (a) (i) The Company is the owner of all, or has the license or right to use, sell and license all of, the Copyrights, Patents, Trade Secrets, Trademarks, Internet Assets, Software and other proprietary rights (collectively, "Intellectual Property") that are used in connection with its business as presently conducted or contemplated in the Business Plan, free and clear of all Liens, except as would have not have a material adverse effect on the Condition of the Company. (ii) Except as set forth on Schedules 5.6 and 5.27, no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to the knowledge of the Company, threatened in writing, which challenges the validity, enforceability, use or ownership of the Intellectual Property. (iii) The Company has substantially performed all obligations imposed upon it under any Intellectual Property licenses, and is not, nor to the knowledge of the Company is any other party thereto, in breach of or default thereunder in any respect, nor is there any event which with notice or lapse of time or both would constitute a default thereunder. All of the Intellectual Property licenses are enforceable and in full force and effect, and will continue to be so on identical terms immediately following the Closing except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity relating to enforceability (regardless of whether considered in a proceeding at law or in equity). (b) To the Knowledge of the Company, no Person is infringing upon or otherwise violating any Trademarks of the Company and to the knowledge of the Company, no Person is violating any other Intellectual Property rights of the Company. (c) Except as set forth in Schedule 5.6, no former employer of any employee of the Company has made a claim against the Company that such employee is utilizing Intellectual Property of such former employer. (d) The Company is not a party to or bound by any license or other agreement requiring the payment by the Company of any royalty payment, excluding such agreements relating to software licensed for use solely on the computers of the Company. (e) To the Knowledge of the Company, no employee of the Company is in violation of any term of any employment agreement, patent or invention disclosure agreement or other contract or agreement relating to the relationship of such employee with the Company. Subject to Section 5.6, to the knowledge of the Company, no employee of the Company is in violation of any term of any employment 23 29 agreement, patent or invention disclosure agreement or other contract or agreement relating to the relationship of such employee with any prior employer. (f) To the Knowledge of the Company, none of the Trade Secrets of the Company, wherever located, the value of which is contingent upon maintenance of confidentiality thereof, has been disclosed to any Person other than employees, representatives and agents of the Company, except as required pursuant to the filing of a patent application by the Company or pursuant to a non-disclosure agreement. (g) Except on Schedule 5.27, it is not necessary for the Company's business to use any Intellectual Property owned by any director, officer, employee or consultant of the Company (or persons the Company presently intends to hire). (h) All present employees of the Company have executed and delivered confidentiality agreements with the Company, and are obligated under the terms thereof to protect all confidential information received during the course of employment for a period of five years after such information is received. 5.28 ERISA. Neither the Company nor any of the Subsidiaries has violated any provisions of ERISA, or the rules and regulations promulgated thereunder, except for such violations which would not, individually or in the aggregate, have a material adverse effect on the Condition of the Company. If any plan subject to ERISA is adopted, the execution and delivery of this Agreement and the sale of the Preferred Shares and the Warrants will not involve any non-exempt prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. 5.29 Labor Relations. Except to the extent set forth in Schedule 5.29, (a) neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement, (b) the Company and each of its Subsidiaries is in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including but not limited to, the Workers Adjustment and Retraining Notification Act, and neither the Company nor any of its Subsidiaries is engaged in any unfair labor practice, (c) there is no unfair labor practice complaint against the Company or any of its Subsidiaries or pending before the National Labor Relations Board, (d) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the best of the Company's or any Subsidiary's Knowledge, threatened against or affecting the Company or any of its Subsidiaries, (e) with respect to the Company or any of its Subsidiaries, no grievance or arbitration proceeding arising out of or under collective bargaining agreements is pending or exists and, to the best of the Company's or any Subsidiary's Knowledge, no claim therefor is threatened, and (f) neither the Company nor any of its Subsidiaries has experienced any work stoppage or other labor difficulty since inception; except in the case of clauses 24 30 (b), (c), (d), (e) and (f) as would not have a material adverse effect on the Condition of the Company. ARTICLE 6 REPRESENTATIONS AND WARRANTIES AND COVENANTS OF THE INVESTORS The Investors severally and not jointly represent and warrant to, and covenant and agree with, the Company as follows: 6.1 Existence and Power. Each of the Investors: (a) is duly organized and validly existing under the laws of the jurisdiction of its organization; and (b) has full power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is currently proposed to be, engaged. 6.2 Authorization; No Contravention. The execution, delivery and performance by each of the Investors of this Agreement, the Registration Rights Agreement and the transactions contemplated hereby and thereby, including without limitation the acquisition of the Preferred Shares, the Warrants and the Common Stock issuable upon the conversion of the Preferred Shares and exercise of the Warrants: (a) is within the Investor's power and authority and has been duly authorized by all necessary action; (b) does not contravene the terms of the Investor's governing documents, or any amendment thereof; (c) will not violate, conflict with or result in any breach or contravention of or the creation of any Lien under, any Contractual Obligation of the Investor, or any order or decree directly relating to the Investor, and (d) does not require approval, consent, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person, other than filing and expiration of the applicable waiting period under the HSR Act. 6.3 Binding Effect. This Agreement has been and, on the Initial Closing Date, the Registration Rights Agreement will be duly executed and delivered by each of the Investors, constitutes the legal, valid and binding obligation of each of the Investors enforceable against it in accordance with its terms, except as 25 31 enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 6.4 No Legal Bar. The execution, delivery and performance of this Agreement and the Registration Rights Agreement will not violate any Requirement of Law or any Contractual Obligation of any of the Investors. 6.5 Purchase for Own Account. The Preferred Shares and the Warrants (including, for purposes of this Section 6.5, the Common Shares issuable upon conversion of the Preferred Shares and exercise of the Warrants) to be acquired by each of the Investors pursuant to this Agreement are being acquired for its own account for investment purposes and with no view toward any "distribution" thereof within the meaning of the Securities Act, without prejudice, however, to the rights of such Investors at all times to sell or otherwise dispose of all or any part of the Preferred Shares or the Warrants under an effective registration statement under the Securities Act, or under an exemption from such registration available under the Securities Act, or pursuant to Article 10 hereof, and subject, nevertheless, to the disposition of the Investors' property being at all times within their control. If any of the Investors should in the future decide to dispose of any of the Preferred Shares, Warrants, the shares of Common Stock issuable upon conversion of the Preferred Shares or the Warrant Shares, such Investor understands and agrees that it may do so only in compliance with the Securities Act and applicable state securities laws, as then in effect, and that stop-transfer instructions to that effect, where applicable, will be in effect with respect to the Preferred Shares. If any of the Investors should decide to dispose of the Preferred Shares or Warrants, other than pursuant to the provisions of the Registration Rights Agreement or Article 10 hereof, such Investor, if requested by the Company, will have the obligation in connection with such disposition, at the Investors's expense, of delivering to the Company an opinion of counsel of recognized standing in securities law, to the effect that the proposed disposition of the Preferred Shares or Warrants would not be in violation of the Securities Act or any applicable state securities laws and, assuming such opinion is required and is otherwise appropriate in form and substance under the circumstances, the Company will accept, and will recommend to any applicable transfer agent or trustee for any such securities that it accept, such opinion. The Investors agree to the imprinting, so long as required by law, of a legend on certificates representing all of the Preferred Shares and the shares of Common Stock issued on conversion thereof to the following effect: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN 26 32 APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS." The Investors agree to the imprinting, so long as required by law, of a legend on the Warrants and the Warrant Shares to the following effect: "THE WARRANT AND SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR QUALIFIED UNDER ANY STATE SECURITIES LAW. THE WARRANT AND SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT THERETO UNLESS SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN A TRANSACTION THAT IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT." 6.6 Broker's, Finder's or Similar Fees. There are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Investors or any action taken by the Investors. 6.7 Investment Knowledge. Each Investor has sufficient knowledge and experience in financial and business matters and the business in which the Company is engaged so as to be capable of evaluating the merits and risks of its investment in the Preferred Shares, Warrants, the shares of Common Stock issuable upon conversion of the Preferred Shares and the Warrant Shares, and is able to bear the economic risk of the loss of its investment in the Company. Each of the Investors is an "accredited investor" within the meaning of Rule 501 promulgated under the Securities Act. ARTICLE 7 INDEMNIFICATION 7.1 Indemnification by the Company. In addition to all other sums due hereunder or provided for in this Agreement, the Company agrees to indemnify and hold harmless the Investors and their Affiliates (including, without limitation, Brown Brothers Harriman & Co.) and their respective officers, directors, agents, employees, subsidiaries, partners and controlling persons (each, an "Indemnified Party") to the fullest extent permitted by law from and against any and all losses, claims, damages, expenses (including reasonable fees, disbursements and other charges of counsel) or other liabilities ("Liabilities") resulting from any breach of any covenant, agreement, representation or warranty of the Company in this Agreement or any legal, 27 33 administrative or other actions (including actions brought by the Company or any equity holders of the Company or derivative actions brought by any Person claiming through the Company or in the Company's name), proceedings or investigations (whether formal or informal), or written threats thereof, based upon, relating to or arising out of this Agreement, the Preferred Shares, the Warrants, the Registration Rights Agreement, the transactions contemplated hereby or thereby, or any indemnified person's role therein or in the transactions contemplated hereby or thereby; provided, however, that the Company shall not be liable under this Section 7.1: (a) for any amount paid in settlement of claims without the Company's consent (which consent shall not be unreasonably withheld), (b) with respect to Liabilities arising solely out of actions brought by the partners or members of any of the Investors against an Indemnified Party or by one Indemnified Party against another, (c) to the extent that it is finally judicially determined that such Liabilities resulted primarily from (i) the willful misconduct, bad faith or gross negligence of such Indemnified Party or (ii) a breach of the Investor's representations in Article 6 or any breach of the Investor's obligations under this Agreement or the Registration Rights Agreement, or (d) any Liabilities arising solely from the transfer of the Preferred Shares or the Warrants by any of the Investors to any Person; provided, further, that if and to the extent that such indemnification is unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of such indemnified liability which shall be permissible under applicable laws. In connection with the obligation of the Company to indemnify for expenses as set forth above, the Company further agrees to reimburse each Indemnified Party for all such expenses (including reasonable fees, disbursements and other charges of counsel) as they are incurred by such Indemnified Party; provided, however, that if an Indemnified Party is reimbursed hereunder for any expenses, such reimbursement of expenses shall be refunded to the extent it is finally judicially determined that the Liabilities in question resulted primarily from the willful misconduct, bad faith or gross negligence of such Indemnified Party. The maximum aggregate amount the Company shall be required to pay any Investor under this section 7.1 with respect to Liabilities resulting from any breach of any covenant, agreement, representation or warranty of the Company in this Agreement shall not exceed the aggregate Purchase Price paid by such Investor under this Agreement. 7.2 Notification. Each Indemnified Party under this Article 7 will, promptly after the receipt of notice of the commencement of any action or other proceeding against such Indemnified Party in respect of which indemnity may be sought from the Company under this Article 7, notify the Company in writing of the commencement thereof. The omission of any Indemnified Party so to notify the Company of any such action shall not relieve the Company from any liability which it may have to such Indemnified Party (i) other than pursuant to this Article 7 or (ii) under this Article 7 unless, and only to the extent that, such omission results in the Company's forfeiture of substantive rights or defenses. In case any such action or other proceeding shall be brought against any Indemnified Party and it shall promptly notify the Company of the commencement thereof, the Company shall be entitled to 28 34 participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel reasonably satisfactory to such Indemnified Party; provided, however, that any Indemnified Party may, at its own expense, retain separate counsel to participate in such defense. Notwithstanding the foregoing, in any action or proceeding in which both the Company and an Indemnified Party is, or is reasonably likely to become, a party, such Indemnified Party shall have the right to employ separate counsel at the Company's expense and to control its own defense of such action or proceeding if, in the reasonable opinion of counsel to such Indemnified Party, (a) there are or may be legal defenses available to such Indemnified Party or to other indemnified parties that are different from or additional to those available to the Company or (b) any conflict or potential conflict exists between the Company and such Indemnified Party that would make such separate representation advisable; provided, however, that in no event shall the Company be required to pay unreasonable fees or expenses or fees and expenses under this Section 7 for more than one firm of attorneys in any jurisdiction in any one legal action or group of related legal actions. The Company agrees that the Company will not, without the prior written consent of the Investors, settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated hereby (if any Indemnified Party is a party thereto or has been actually threatened to be made a party thereto) unless such settlement, compromise or consent includes an unconditional release of the Investors and each other Indemnified Party from all liability arising or that may arise out of such claim, action or proceeding. The rights accorded to indemnified parties hereunder shall be in addition to any rights that any Indemnified Party may have at common law, by separate agreement or otherwise. 7.3 Registration Rights Agreement. Notwithstanding anything to the contrary in this Article 7, the indemnification and contribution provisions of the Registration Rights Agreement shall govern any claim made with respect to registration statements filed pursuant thereto or sales made thereunder. ARTICLE 8 AFFIRMATIVE COVENANTS The Company hereby covenants and agrees (a) with the Investors, and each of them, and any Affiliate of the Investors with respect to all of this Article 8, and (b) with any other Holder, with respect to all of this Article 8 except Sections 8.1(c), 8.9, 8.10 and 8.12, so long as such Investor, such Affiliate or such Holder holds any Preferred Shares or Warrants, and with respect to Section 8.10, 8.11, 8.12 and 8.13 so long as such Investor, such Affiliate or such Holder holds any shares of Common Stock issued or issuable upon conversion of the Preferred Shares or exercise of the Warrants: 8.1 Financial Statements. The Company shall deliver to the Investors and any of their Affiliates that are Holders: 29 35 (a) as soon as available, but not later than one hundred twenty (120) days after the end of each fiscal year of the Company, a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as of the end of such year and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous year, all in reasonable detail and accompanied by a management discussion and analysis of the operations of the Company and its Subsidiaries for such fiscal year and by the opinion of [insert name of Company's accountants] (or any successor thereto) or another nationally recognized independent public accounting firm which report shall state that such consolidated financial statements present fairly in all material respects the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except for changes with respect to which such accounting firm concurs); provided, however, that the delivery of a copy of the Company's Annual Report on Form 10-K shall satisfy the requirements of this Section 8.1(a); (b) commencing with the fiscal period ending on September 30, 2000, as soon as available, but in any event not later than fourty-five (45) days (or fifty (50) days if the Company avails itself of the time extension provided by Rule 12b-25 promulgated under the Exchange Act) after the end of each of the first three fiscal quarters of each year, the unaudited consolidated balance sheet of the Company and its Subsidiaries, and the related consolidated statements of income and cash flow for quarter and for the period commencing on the first day of the fiscal year and ending on the last day of such quarter, all certified by an appropriate officer of the Company; provided, however, that the delivery of a copy of the Company's Quarterly Report on Form 10-Q shall satisfy the requirements of this Section 8.1(b); (c) annual budgets and such other financial and operating data of the Company and its Subsidiaries, as the Investors reasonably may request, to the extent that such information is formally prepared for the Company's Chairman, President, Board of Directors and/or banks or other lenders, subject to the provisions of Section 8.9(b); (d) at any time when it is not subject to Section 13 or 15(d) of the Exchange Act, upon request, to the Investors and prospective investors of the Preferred Shares or the Warrants, information of the type that would satisfy the requirement of subsection (d)(4)(i) of Rule 144A (or any similar successor provision) under the Securities Act; and (e) except as otherwise provided in Sections 8.1(a) and (b), promptly after the same are filed, copies of all Commission Documents. 8.2 Certificates; Other Information. The Company shall furnish to the Investors and to any Affiliate of the Investors that is a Holder, concurrently with 30 36 the delivery of the financial statements referred to in Section 8.1(a), a certificate of the Company's Chief Financial Officer stating that to the knowledge of such officer there is no default under or breach of Articles 8 and 9, except as specified in such certificates. 8.3 Preservation of Corporate Existence. The Company shall, and shall cause each of its Subsidiaries to: (a) preserve and maintain in full force and effect its corporate or organizational existence under the laws of its jurisdiction of incorporation or organization except as permitted by Section 9.2; (b) preserve and maintain in full force and effect all material rights, privileges, qualifications, licenses and franchises necessary in the normal conduct of its business; and (c) use its reasonable efforts to preserve its business organization. 8.4 Payment of Obligations. The Company shall, and shall cause its Subsidiaries to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including without limitation: (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary; (b) all lawful claims which the Company and each of its Subsidiaries is obligated to pay, which are due and which, if unpaid, might by law become a Lien upon its property (other than Liens which individually or in the aggregate would not have a material adverse effect on the Condition of the Company), unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary; and (c) all payments of principal of and interest on Indebtedness when due (giving effect to any grace periods relating thereto). 8.5 Compliance with Laws. The Company shall comply, and shall cause each Subsidiary to comply, in all material respects with all Requirements of Law and with the directions of any Governmental Authority having jurisdiction over it or its business, except such as to which such failure to comply would not have a material adverse effect on the Condition of the Company. 31 37 8.6 Notices. Upon knowledge of the Chief Executive Officer, the President or the Chief Financial Officer of the Company of the events described below, the Company shall give written notice within 10 days to the Investors of: (a) the occurrence of any default under, or breach of, any provision of Article 8 or 9 accompanied by a certificate specifying the nature of such default or breach, the period of existence thereof and the action that the Company has taken or proposes to take with respect thereto; and (b) any (i) material default or event of default under any material Contractual Obligation, of the Company or any of its Subsidiaries, or (ii) material dispute, litigation, investigation, proceeding or suspension which may exist at any time between the Company or any of its Subsidiaries and any Governmental Authority; each accompanied by a statement setting forth details of the occurrence referred to therein and stating what action the Company proposes to take with respect thereto. 8.7 Issue Taxes. The Company shall pay, or cause to be paid, all documentary and similar taxes levied under the laws of any applicable jurisdiction in connection with the issuance of the Preferred Shares and the Warrants and the execution and delivery of the other agreements and documents contemplated hereby and any modification of the Preferred Shares or the Warrants or such other agreements and documents and will hold the Investors harmless, without limitation as to time, against any and all Liabilities with respect to all such taxes. 8.8 Reservation of Shares. (a) The Company shall at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue or delivery upon conversion of the Preferred Shares as provided in the Certificate of Designation, such number of shares of Common Stock as shall then be issuable or deliverable upon the conversion of all outstanding Preferred Shares. Such shares of Common Stock shall, when issued or delivered in accordance with the Certificate of Designation, be duly and validly issued and fully paid and non-assessable. The Company shall issue the Common Stock into which the Preferred Shares are convertible upon the proper surrender of the Preferred Shares in accordance with the provisions of the Certificate of Designation and shall otherwise comply with the terms thereof. (b) The Company shall at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue or delivery upon exercise of the Warrants as provided therein, the Warrant Shares. Such Warrant Shares shall, when issued or delivered in accordance with the Warrants, be duly and validly issued and fully paid and non-assessable. The Company shall issue the Warrant 32 38 Shares upon the proper surrender of a notice in accordance with the provisions of the Warrants and shall otherwise comply with the terms thereof. 8.9 Inspection. (a) The Company will permit, and will cause each of its Subsidiaries to permit, representatives of the Investors to visit and inspect any of its properties, to examine its corporate, financial and operating records and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with their respective officers and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably requested, upon reasonable advance notice to the Company. (b) The Investors and any Holder which is an Affiliate of any of the Investors expressly agrees that any confidential information relating to the Company and its Subsidiaries obtained (i) in negotiation and execution of this Agreement, (ii) during any inspection pursuant to Section 8.9(a), (iii) pursuant to Section 8.1(c) or 8.10, (iv) from the Company or any of its Subsidiaries or representatives thereof which is clearly marked "Confidential" on the first or cover page thereof or (v) in conducting its due diligence investigation of the Company prior to the execution of this Agreement, (collectively, the "Information") shall be kept confidential by the Investors and such Affiliate, and that they shall use their best efforts to cause any person designated pursuant to Section 8.10 to attend meetings of the Board of Directors to keep all Information confidential. The term "Information" shall not include any information which (i) at the time of disclosure or thereafter is generally available to or known by the public (other than as a result of its disclosure by the Investors or such Affiliate), (ii) was available to the Investors or such Affiliate on a non-confidential basis prior to disclosure to the Investors or such Affiliate by the Company, (iii) becomes available to the Investors or such Affiliate on a non-confidential basis from a Person who is not to the Investors' or such Affiliate's knowledge otherwise bound by a confidentiality agreement with the Company, or (iv) has been independently developed by the Investors or its Affiliates. Notwithstanding the foregoing, the Investors and their Affiliates may disclose Information to: (i) their advisors, representatives, agents, partners or employees, with the understanding that such parties are bound by the agreement of the disclosing party in this Section 8.9(b) and (ii) any prospective transferee of the Preferred Shares or the Warrants or of an interest in the Investors or in a successor fund sponsored by Brown Brothers Harriman & Co. if such transferee enters into a confidentiality agreement having substantially the same terms as this Section 8.9(b). 33 39 8.10 Board Representation. (a) The Company shall promptly cause two vacancies to be created on its Board of Directors (by increasing the number of members of the Board of Directors or otherwise) and at the Initial Closing shall cause two persons designated by the Fund (unless, after customary investigation of such persons' qualifications, the Board of Directors reasonably determines in good faith that either or both of such persons is not qualified or acceptable under standards applied fairly and equally to all nominees) to be selected to fill such vacancies. One of the persons designated by the Fund may, at the Fund's written election, be designated by an Additional Investor, but in no case shall the Holders of Preferred Stock collectively designate more than two persons to serve on the Board of Directors. Such designees shall serve until the next succeeding annual meeting of stockholders of the Company to be held after such election. (b) Commencing with such next succeeding annual meeting of stockholders of the Company referred to in Section 8.10(a), (i) so long as the Fund holds 50% of the shares of Preferred Stock or Common Stock issued or issuable upon conversion of the Preferred Shares (whether or not the Preferred Shares have been converted) acquired by it under this Agreement, the Fund shall be entitled to designate two directors to the Company's Board of Directors (one of whom at the Fund's written election may be designated by an Additional Investor) or (ii) so long as the Fund holds 25% of the shares of Common Stock issued or issuable upon conversion of the Preferred Shares (whether or not such shares have been converted) acquired by it under this Agreement, the Fund shall be entitled to designate one director to the Company's Board of Directors, and, in either case, at relevant future annual meetings of the stockholders of the Company, a successor to replace any such director upon expiration of his or her term. The Company shall cause such designees (unless, after customary investigation of any such person's qualifications, the Board of Directors reasonably determines in good faith that such person is not qualified or acceptable under standards applied fairly and equally to all nominees) to be included in the slate of nominees recommended by the Board to the Company's stockholders for election as directors, and the Company shall use its reasonable best efforts to cause the election of such designees, including voting all shares for which the Company holds proxies (unless otherwise directed by the stockholder submitting such proxy) or is otherwise entitled to vote, in favor of the election of such person. Notwithstanding the foregoing, if the Fund has not designated a person pursuant to Section 8.10(a), or if the Fund is entitled to designate a director or directors to the Company's Board of Directors by virtue of the first sentence of this Section 8.10(b) and the Fund does not designate at least one director to the Company's Board of Directors, the Fund shall be entitled to receive all notices and materials distributed to the members of the Board of Directors of the Company, and to designate one person who shall be entitled to attend all meetings of the Board of Directors and committees thereof and to receive minutes of all such meetings upon preparation thereof. 34 40 (c) In the event any designee of the Fund (or at the Fund's written election, by an Additional Investor) shall cease to serve as a director for any reason, other than by reason of the Fund not being entitled to designate a designee as provided in Section 8.10(a) or 8.10(b), the Company shall use its reasonable best efforts to cause the vacancy resulting thereby to be filled by a designee of the Fund (or at the Fund's written election, by an Additional Investor). 8.11 Registration and Listing. If any shares of Common Stock required to be reserved for purposes of conversion of the Preferred Shares as provided in the Certificate of Designation or for purposes of exercise of the Warrants as provided therein require registration with or approval of any Governmental Authority under any Federal or state or other applicable law before such Common Stock may be issued or delivered upon such conversion or exercise, the Company will endeavor in good faith and as expeditiously as possible to cause such Common Stock to be duly registered or approved, as the case may be, unless such registration or approval is required solely because of a breach of the Investors' representation contained in Section 6.5. So long as the Common Stock is quoted on the NASDAQ or listed on any national securities exchange, the Company, if permitted by the rules of such system or exchange, will quote or list and keep quoted or listed on such system or exchange, upon official notice of issuance, all Common Stock issuable or deliverable upon conversion of the Preferred Shares and exercise of the Warrants. 8.12 Private Offering. In the event the Company proposes to sell Common Stock in an offering not required to be registered under the Securities Act, it will give the Investors at least 20 Business Days prior notice. If any of the Investors elects by written notice to the Company within 15 Business Days after receipt of such notice, it may participate in the sale (under the same terms and conditions as set out in such offering), by including in such sale in place of an equal number of shares of Common Stock to be sold by the Company, such aggregate number of shares of Common Stock as is equal to the product obtained by multiplying (i) the number of shares of Common Stock proposed to be sold by the Company by (ii) a fraction (A) the numerator of which is the number of shares of Common Stock into which the Preferred Shares held by such Investor have heretofore been or may be converted and (B) the denominator of which is the sum of (x) the amount of such numerator and (y) the total number of shares of Common Stock outstanding at such time. The provisions of this Section 8.12 shall not apply to issuances of Common Stock in connection with: (1) acquisitions by the Company, (2) the exercise of options or conversion of convertible securities and (3) services rendered to the Company. 8.13 Additional Registration Rights. The Company shall not provide any registration rights with respect to its securities which are superior or inconsistent with those granted under the Registration Rights Agreement. 35 41 ARTICLE 9 NEGATIVE COVENANTS The Company hereby covenants and agrees with the Investors, any Affiliate of the Investors, and any Holder so long as such Person holds any Preferred Shares or Warrants, that without the prior consent of such Person in accordance with Section 11.4: 9.1 Consolidations and Mergers. The Company shall not merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whenever acquired), except the Company may consolidate or merge with or into, or sell all or substantially all of its assets to, any Person if: (a) The corporation or partnership formed by such consolidation or surviving such merger or the Person which acquires all or substantially all of the assets of the Company shall be (after giving effect to such transaction) a Solvent corporation or partnership organized or formed, as the case may be, and existing under, the laws of the United States, any state thereof, or the District of Columbia and shall expressly assume in writing all of the obligations of the Company under this Agreement, the Preferred Shares, the Warrants and the Registration Rights Agreement; (b) immediately after giving effect to such transaction, no default under, or breach of, provisions of Article 8 and 9 exists; and (c) the Company shall have furnished to the Holders (i) an opinion of counsel satisfactory to a majority in interest of the Holders addressing the matters (other than Solvency) set forth in clause (a) above and (ii) the certificate of the Chief Financial Officer of the Company to the effect that such transaction has been consummated in compliance with the foregoing requirements; provided that nothing in this Section 9.1 shall affect the rights of any Holder under this Agreement, the Preferred Shares, the Warrants or the Registration Rights Agreement. 9.2 Transactions with Affiliates. The Company shall not, and shall not permit any of its Subsidiaries to, enter into any transaction with any Affiliate of the Company or of any such Subsidiary, except on terms no less favorable to the Company or such Subsidiary than those the Company or such Subsidiary would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such subsidiary; provided that any transaction approved by a majority of the independent directors of the Company shall be conclusively deemed to be on such terms. 9.3 No Inconsistent Agreements. Neither the Company nor any of its Subsidiaries shall enter into any loan or other agreement, or enter into any amendment 36 42 or other modification to any currently existing agreement, which by its terms restricts or prohibits the ability of the Company to pay dividends on the Preferred Stock, to issue Common Stock upon conversion of the Preferred Stock in accordance with the Certificate of Designation and this Agreement or to issue the Warrant Shares; provided, however, that the foregoing shall not prevent the Company from entering into loan or other agreements that contain restrictions on the ability of the company to pay dividends on the Preferred Stock either (i) during the existence of an event of default under such agreements or (ii) if such payment or repurchase would, although not in itself a breach of any covenant in any such agreement, result in the occurrence of a default or event of default arising from a breach by the Company of one or more covenants regarding the financial condition of the Company so long as, on the date such agreement is entered into, (x) the terms of any such covenants would not prohibit such payment on such date and (y) the Company does not reasonably anticipate that any of the terms of such covenants is likely to be breached during the term of such agreement as a result of such payment of dividend. 9.4 Issuance of Preferred Stock. The Company shall not issue any Preferred Stock except pursuant to this Agreement. ARTICLE 10 DISPOSITIONS 10.1 Dispositions by Smith. (a) If D. Gregory Smith ("Smith") at any time or from time to time proposes or agrees to sell or transfer to a Person or a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) of Persons, any shares of Common Stock held by him, and so long as the Fund and all Holders that are Affiliates of the Fund hold collectively at least five percent of the Common Stock issued or issuable upon conversion of the Preferred Stock, Smith shall give written notice of such proposed sale to the Fund within 15 Business Days prior to the date of such sale, which notice shall state the price and other terms of the proposed transaction and shall state the number of shares proposed to be sold; provided, however, that the provisions of this Section 10.1(a) shall not apply to the sale or transfer of any shares of Common Stock held by Smith unless the sum of such shares plus all other shares of Common Stock sold or transferred by Smith during the period from the Closing Date to the date of the proposed sale or transfer of such share shall be equal to or greater than 25% of the number of shares of Common Stock held by Smith on the date hereof (assuming the exercise of all options held by Smith). So long as the Fund and all Holders that are Affiliates of the Fund hold collectively at least five percent of the Common Stock issued or issuable upon conversion of the Preferred Stock, the Fund and each such Holder may, upon giving written notice thereof to Smith within ten Business Days after receipt of the notice provided for in the first sentence of this Section 10.1, participate 37 43 in such sale on the same terms and conditions as those offered by Smith to such third party or parties, by including in such sale in place of an equal number of shares of Common Stock held by Smith (excluding any shares with respect to which the provisions of this Section 10.1(a) shall not apply in accordance with the preceding sentence hereof) such aggregate number of shares of Common Stock as is equal to the product obtained by multiplying (i) the number of shares of Common Stock proposed to by sold by Smith by (ii) a fraction (A) the numerator of which is the number of shares of Common Stock into which the Preferred Shares held by the Fund and each such Holder have theretofore been converted or may be converted and (B) the denominator of which is the sum of (x) the amount of such numerator and (y) 7,345,800 (which number shall be adjusted appropriately for any subdivision, combination, reclassification or similar event with respect to the Common Stock). (b) Notwithstanding anything to the contrary in this Agreement, including Section 10.1(a) hereof, the provisions of this Section 10.1 shall not apply to any sale or transfer by Smith of any shares of Common Stock (i) to (A) a spouse, (B) any of his lineal descendants, (C) a partnership or trust set up for the benefit of one or more of such persons or (D) any entity controlled by Smith; provided, however, that any proposed sale or transfer by any of such transferees shall be deemed to be a sale or transfer by Smith for purposes of this Section 10.1, or (ii) pursuant to a transaction intended to be a charitable contribution. (c) The provisions of this Section 10.1 shall terminate upon the death or disability of Smith or if Smith is no longer either an officer or director of the Company. The term "disability" shall mean, with respect to Smith, that due to physical or mental infirmity, whether total or partial, Smith is permanently unable to perform his usual duties for the Company. 10.2 Dispositions by the Fund. (a) Except as set forth below, until the earlier to occur of (i) the first anniversary of the Closing Date, (ii) the date on which the Fund and all Holders that are Affiliates of the Fund collectively cease to own at least five percent of the Common Stock issued or issuable upon conversion of the Preferred Stock, (iii) the occurrence of a Change of Control and (iv) the occurrence of a breach with respect to any of the covenants set forth in Sections 8.8, 8.9, 8.10, 8.11, 8.12 and 8.13 or Article 9, which breach remains uncured ten Business Days after written notice is provided to the Company (the "Transfer Restriction Period"), the Fund shall not transfer or sell any derivative security with respect to or otherwise dispose of its Common Stock, Preferred Shares or Warrants. (b) Notwithstanding anything in this Section 10.2 to the contrary, the Fund may, at any time and from time to time, sell or otherwise transfer Common Stock or Preferred Shares (i) pursuant to an exchange offer or a tender offer 38 44 not opposed by a majority of the Company's Board of Directors, (ii) pursuant to any all cash tender offer made by any Person for all of the issued and outstanding Common Stock, (iii) pursuant to the Registration Rights Agreement, (iv) to any of the Fund's Affiliates, or (v) to the Fund's limited partners pursuant to a pro rata distribution; provided, however, that any Affiliates (or limited partners) of the Fund to which such securities are transferred shall agree to be bound by all of the transfer restrictions set forth in this Section 10.2. (c) Except as otherwise provided in Section 10.2(b), any securities transferred by the Fund shall not thereafter be subject to the provisions of this Section 10.2. ARTICLE 11 MISCELLANEOUS 11.1 Survival of Provisions. All warranties, representations and covenants made by the Company in or under this Agreement shall be considered to have been relied upon by the Investors and shall survive the execution and delivery of this Agreement and the issuance to the Investors of the Preferred Shares and the Warrants, regardless of any investigation made by the Investors or on their behalf. All warranties, representations and covenants made by the Investors or on their behalf shall survive the execution and delivery of this Agreement and the issuance to the Investors of the Preferred Shares and the Warrants. Except as otherwise set forth in Article 8 or 9, all of the representations and warranties made herein and each of the provisions of Articles 5, 6, 7 and 11 shall survive the execution and delivery of this Agreement, any investigation by or on behalf of the Investors or any Affiliate, acceptance of the Preferred Shares and the Warrants and payment therefor, payment or prepayment of the Preferred Shares and the Warrants upon redemption or otherwise, conversion of the Preferred Shares and exercise of the Warrants or termination of this Agreement; provided that the representations and warranties set forth in Articles 5 and 6 shall expire and terminate upon the earlier of (i) conversion of all of the Preferred Stock into Common Stock and the exercise of all of the Warrants for Common Stock and (ii) the second anniversary of the later of (x) the Initial Closing or (y) any Additional Closing. 11.2 Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery: 39 45 (a) if to the Fund at the following address: The 1818 Fund III, L.P. c/o Brown Brothers Harriman & Co. 59 Wall Street New York, New York 10005 Telecopier No.: (212) 493-8429 Attention: Lawrence C. Tucker with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Telecopier No.: (212) 757-3990 Attention: Marilyn Sobel, Esq. (b) if to the Company at the following address: Z-Tel Technologies, Inc. 6091 South Harbour Island Boulevard Suite 220 Tampa, Florida 33602 Telecopier No.: (813) 273-6861 Attention: Jeffrey H. Kupor, Esq. with a copy to: King & Spalding 191 Peachtree Street Atlanta, Georgia 30303 Telecopier No.: (404) 572-5100 Attention: Andrew Tebbe All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. 11.3 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. Each of the Investors may assign any of its rights under this Agreement only to any of its Affiliates; provided that any such Affiliate (including any limited partner) 40 46 agrees to be bound by the provisions in this Agreement. The Company may not assign any of its rights under this Agreement without the written consent of the Investors. Except as provided in Article 7, no Person other than the parties hereto is intended to be a beneficiary of this Agreement, the Preferred Shares, the Warrants or the Registration Rights Agreement. Nothing in this Section 11.3 shall prohibit the Investors from transferring Common Stock, Preferred Shares, Warrants or Subordinated Notes to any person nor shall anything in this Section affect any Holder's rights under the Registration Rights Agreement. 11.4 Amendment and Waiver. No failure or delay on the part of the Company or the Investors in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company or the Investors at law, in equity or otherwise. Any amendment, supplement, modification or termination of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given and shall be effective only when signed in writing by or on behalf of holders of at least 50% of the Common Stock issued and issuable upon conversion of the Preferred Shares (whether or not converted) (it being understood that the terms of this Agreement may be waived or amended with the written consent of holders of at least 50% of the Common Stock issued and issuable upon conversion of the Preferred Shares (whether or not converted)). Except where notice is specifically required by this Agreement, no notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. 11.5 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 11.6 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 11.7 Determinations. Except where any provision expressly requires that a determination be reasonable or a consent not be unreasonably withheld, or be subject to qualifications to similar effect, all determinations to be made by the Company, the Investors or any Holder hereunder in its opinion or judgment or with its approval or otherwise shall be made by it in its sole discretion. 41 47 11.8 Governing Law. This Agreement has been negotiated, executed and delivered in the State of New York and shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of law. 11.9 Jurisdiction. Each party to this Agreement hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Agreement or any agreements or transactions contemplated hereby shall be brought only in the courts of the State of New York located in New York City or of the United States of America for the Southern District of New York and hereby expressly submits to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. Each party hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the address set forth in Section 11.2, such service to become effective 10 days after such mailing. 11.10 Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 11.11 Rules of Construction. Unless the context otherwise requires, "or" is not exclusive, and references to sections or subsections refer to sections or subsections of this Agreement. 11.12 Remedies. If a breach of this Agreement or the Certificate of Designation by the Company occurs and is continuing, any Holder may pursue any available remedy by proceeding at law or in equity to enforce the performance (including, without limitation, the specific performance) of any provision of this Agreement or the Certificate of Designation. Except as otherwise provided by law, a delay or omission by any Holder in exercising any right or remedy accruing upon any such breach shall not impair the right or remedy or constitute a waiver of or acquiescence in any such breach. No remedy is exclusive of any other remedy. All available remedies are cumulative. 11.13 Entire Agreement. This Agreement, together with the exhibits and schedules hereto, the Certificate of Designation, the Warrants and the Registration Rights Agreement, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than 42 48 those set forth or referred to herein or therein. This Agreement, together with the exhibits and schedules hereto, the Certificate of Designation, the Warrants and the Registration Rights Agreement supersede all prior agreements and understandings between the parties with respect to such subject matter. 11.14 Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement (including, without limitation, the representations and warranties of the Investors), the Certificate of Designation, the Warrants or the Registration Rights Agreement or any other document or instrument contemplated hereby or thereby, or where any provision hereof or thereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees, charges and disbursements in addition to any other available remedy. 11.15 Publicity. Except as may be required by applicable law or stock exchange rules, neither party hereto shall issue a publicity release or announcement or otherwise make any public disclosure concerning this Agreement or the transactions contemplated hereby, without prior approval by the other party hereto. If any announcement is required by law to be made by either party hereto, prior to making such announcement such party will deliver a draft of such announcement to the other party and shall give the other party an opportunity to comment thereon. 11.16 Expenses. The Company acknowledges and agrees that whether or not the transactions contemplated hereby are consummated, the Company shall reimburse the Investors for all reasonable consulting and legal fees and expenses and other charges of the Investors in connection with the negotiation, execution and delivery of this Agreement, the Preferred Shares, the Warrants and the Registration Rights Agreement and the purchase of the Preferred Shares (including, without limitation, all reasonable fees, disbursements and related charges of Paul, Weiss, Rifkind, Wharton & Garrison), (ii) reasonable out-of pocket expenses for attendance at meetings of the Board of Directors of the Company by the Fund's Directors and any representative, and (iii) any fees and expenses related to filing under the HSR Act. The Company agrees that it will make such reimbursements as such fees and expenses are incurred, upon request from the Investors. 43 49 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective representatives hereunto duly authorized as of the date first above written. Z-TEL TECHNOLOGIES, INC. By: /s/ D. Gregory Smith ------------------------------ Name: D. Gregory Smith ---------------------------- Title: CEO --------------------------- THE 1818 FUND III, L.P. By: Brown Brothers Harriman & Co., General Partner By: /s/ Lawrence C. Tucker ------------------------------ Name: Lawrence C. Tucker ---------------------------- Title: Partner --------------------------- The undersigned hereby agrees to be bound by and perform in accordance with Section 10.1 of this Agreement. /s/ D. Gregory Smith ---------------------------------- D. Gregory Smith 44