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LOUIS HAUThe pair hope to start a new company using some of the phone company's technology and personnel.
TAMPA - Troubled phone company Z-Tel Technologies Inc. said Wednesday that its chairman, chief executive and co-founder, Gregg Smith, as well as chief technology officer Charles McDonough have resigned their posts.
The pair are planning to start a new company and are in talks with Z-Tel to arrange a transfer of some company assets and personnel.
Company officials said the split followed a lengthy disagreement over how Z-Tel should balance its resources between developing new products and servicing existing operations.
Smith and McDonough have also relinquished their seats on Z-Tel's board. Senior vice president and chief financial officer Trey Davis was named acting chief executive and executive vice president, while senior vice president Frank Grillo was named acting chief operating officer and executive vice president. Davis will remain CFO.
Z-Tel corporate counsel Andrew Graham said the transfer of assets to Smith and McDonough's new venture may involve the licensing or sale of intellectual property that Z-Tel also would retain the right to use.
Smith, McDonough, Davis and Grillo could not be reached for comment.
In a statement released Wednesday, Grillo said, "We believe Z-Tel has a bright future. We expect our proposed arrangement with Gregg Smith and Chuck McDonough will enable us to focus more resources on our core business without abandoning the technology we have developed."
While Graham said Smith's departure was voluntary, there was speculation in some quarters Wednesday that he was forced out by Boston investment bank Brown Brothers Harriman, the largest holder of the company's preferred shares.
Z-Tel said Wednesday that it entered into a $15-million credit line agreement with the 1818 Fund III LP, a private-equity fund managed by Brown Brothers. Under the deal, the 1818 Fund will lend Z-Tel $5-million immediately and may extend an additional $10-million in loans later.
Graham declined to comment on whether Smith's departure was a condition for securing the new Brown Brothers credit line, which had been in the works for months.
Z-Tel board members Lawrence Tucker and Andrew Cowen, both of whom are senior executives at Brown Brothers, did not return phone calls.
Needham & Co. telecommunications analyst Vik Grover said he doubted Smith would have voluntarily left Z-Tel, especially given his recent optimism about the company's efforts to transform itself into a provider of Internet-based phone services.
"It leaves a lot of questions unanswered," Grover said. "I just think that this could have been handled a lot better."
The management changes were approved during a special board meeting Tuesday, Graham said. The reshuffle comes as Z-Tel's lowly Nasdaq-listed stock faces delisting and as the company continues to pile up quarterly lossses as it attempts a painful transition in its business model.
Z-Tel's primary focus has been to provide competitive phone services to residents and businesses by leasing access to the traditional copper-wire networks owned by Verizon Communications and other major phone carriers.
But a federal court ruling this year overturned regulations requiring these carriers to lease access to their networks at regulated rates.
The court ruling, and the Bush administration's decision not to appeal it, effectively torpedoed Z-Tel's business model, prompting Smith to steer the company toward a new focus on providing Internet-based phone services. In a candid assessment filed July 27 with the Securities and Exchange Commission, Smith acknowledged that the transition would be difficult but concluded that "we're going to be a lot better off for it."
Graham reaffirmed Wednesday that the company still sees its future in Internet-based services. He said Smith's departure was the result of long-standing differences between Smith and some executives and board members about the company's continued commitment to research and development.
While Smith believed that developing new technologies for enhanced phone services was important to the company's long-term health, other executives and some board members felt the company should focus more on the marketing and operation of existing services, Graham said.
Z-Tel's shares closed Wednesday at 40 cents a share, down 17 cents or 30 percent. On July 28, the Nasdaq Stock Market informed the company that it had failed for 10 consecutive days to meet the listing requirement of maintaining a minimum market capitalization of $35-million. If the company is not in compliance by Friday, Nasdaq is expected to determine that the company's stock should be delisted. The company will have the right to appeal the decision.
Louis Hau can be reached at 813 226-3404 or hau@sptimes.com