-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cy3R9jA+aarFoCEA/9jTUKb5aBMa5ovUYyhAITHjNTyfuvP32MjnGWMJfXLygR0E vbY87OAx75eRt0JfP2pViA== 0000950130-96-000564.txt : 19960223 0000950130-96-000564.hdr.sgml : 19960223 ACCESSION NUMBER: 0000950130-96-000564 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 27 CONFORMED PERIOD OF REPORT: 19960222 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960222 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACC CORP CENTRAL INDEX KEY: 0000783233 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 161175232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14567 FILM NUMBER: 96524185 BUSINESS ADDRESS: STREET 1: 400 W AVE CITY: ROCHESTER STATE: NY ZIP: 14611 BUSINESS PHONE: 7169873000 MAIL ADDRESS: STREET 1: 400 WEST AVE CITY: NEW YORK STATE: NY ZIP: 14611 FORMER COMPANY: FORMER CONFORMED NAME: AC TELECONNECT CORP DATE OF NAME CHANGE: 19870129 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): February 22, 1996 ---------------------------- ACC Corp. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 0-14567 16-1175232 ---------------------------- ------------ ------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 400 West Avenue, Rochester, New York 14611 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (716) 987-3000 --------------------------- Not Applicable - ------------------------------------------------------------------------------- (Former name or former address, if changed since last report) Exhibit Index Appears at Page 6 - 2 - ITEM 5. OTHER EVENTS - ----------------------- As used herein, unless the context otherwise requires, the "Company" and "ACC" refer to ACC Corp. and its subsidiaries, including ACC Long Distance Corp. ("ACC U.S."), ACC TelEnterprises Ltd., the Company's 70% owned Canadian subsidiary ("ACC Canada"), and ACC Long Distance UK Ltd. ("ACC U.K."). In this Form 8-K references to "dollar" and "$" are to United States dollars, references to "Cdn. $" are to Canadian dollars, references to "(Pounds)" are to English pounds sterling, the terms "United States" and "U.S." mean the United States of America and, unless the context otherwise requires, its states, territories and possessions and all areas subject to its jurisdiction, and the terms "United Kingdom" and "U.K." mean England, Scotland and Wales. The Company's Registration Statement on Form S-3 to be filed by the Company with the Securities and Exchange Commission (the "Commission") on or about the date hereof (the "Registration Statement") is incorporated herein in its entirety by reference, including, without limitation, the following portions of the Prospectus included therein: Risk Factors ("Risk Factors"); Management's Discussion and Analysis of Financial Condition and Results of Operations ("Management's Discussion and Analysis"); and Report of Independent Public Accountants, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Changes in Shareholders' Equity, Consolidated Statements of Cash Flow and Notes to Consolidated Financial Statements of the Company (collectively, the "Consolidated Financial Statements"). Certain of the information contained or incorporated by reference in this Form 8-K, including under Management's Discussion and Analysis, including information with respect to the Company's plans and strategies for its business and related financing, are forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see "Recent Losses; Potential Fluctuations in Operating Results," "Dependence on Transmission Facilities-Based Carriers and Suppliers," "Regulation," "Competition," "Need for Additional Capital," "Risks of Growth and Expansion," "Risks Associated with International Operations," "Dependence on Effective Information Systems," "Risks Associated With Acquisitions, Investments and Strategic Alliances," "Technological Changes," "Dependence on Key Personnel," "Risks Associated with Financing Arrangements; Dividend Restrictions," "Holding Company Structure," "Potential Volatility of Stock Price," "Anti-takeover Provisions" and "Shares Eligible for Future Sale; Registration Rights" included under the caption "Risk Factors" in the Prospectus contained in the Registration Statement incorporated herein by reference and the Company's periodic reports filed with the Commission. - 3 - A copy of the Registration Statement, which contains the Risk Factors, Management's Discussion and Analysis and Consolidated Financial Statements of the Company is attached hereto as Exhibit 99.24. On May 22, 1995, Mr. Aab, the Company's Chairman of the Board and then Chief Executive Officer, entered into a Participation Agreement with Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P. and Chisholm Partners II, L.P. (collectively, the "Fleet Investors") in connection with purchase by the Fleet Investors of $10 million in aggregate principal amount of 12% convertible subordinated notes of the Company, which notes were subsequently converted into 10,000 shares of Series A Preferred Stock. The Participation Agreement requires Mr. Aab to notify the Fleet Investors and the Company of certain proposed transfers of his Class A Common Stock of the Company and, if any of the Fleet Investors elect to participate in the proposed transaction, Mr. Aab is required to obtain the agreement of the purchaser to acquire from any participating Fleet Investor, at the same price and on the same terms offered to Mr. Aab, a pro rata portion of the shares proposed to be purchased from Mr. Aab. The Participation Agreement does not apply to certain transfers of shares by Mr. Aab, including pursuant to a public offering registered under the Securities Act of 1933, as amended (the "Act"), pursuant to Rule 144 adopted under the Act, certain charitable transfers and transfers resulting from any foreclosure upon shares which have been pledged, and the transfer restrictions are extinguished if Mr. Aab ceases to be a director or employee of the Company or if the Series A Preferred Stock and certain warrants issued to the Fleet Investors are no longer outstanding. During 1994 and early 1995, the Company initiated efforts to obtain new telecommunications software programs from AMBIX Systems Corp. ("AMBIX"), a software development company. The Company's Chairman of the Board and then Chief Executive Officer, Richard T. Aab, was a controlling shareholder of AMBIX during such period. In May of 1995, anticipating material agreements with AMBIX and desiring to eliminate a conflict of interest situation, all of the common shares owned by Mr. Aab in AMBIX were placed in escrow under the direction of a Special Committee of the Company's Board of Directors with the option of the Special Committee to authorize the Company to accept the transfer and delivery of the shares in exchange for the release or indemnification of Mr. Aab of his personal guarantee of certain obligations of AMBIX to its lender and the substitution of the Company as the guarantor of such obligations. The Special Committee, its outside consultants and the Company's management then proceeded to review and evaluate the software technology and the terms and conditions of proposed transactions with AMBIX. On February 21, 1996, pursuant to approval of the Special Committee, a software license agreement was entered into by and between the Company and AMBIX Acquisition Corp., which is the purchaser of AMBIX's intellectual property and other assets and is an affiliate of AMBIX. Immediately prior thereto, the shares of AMBIX held in escrow were returned to AMBIX and the related party nature of the Company's relationship with AMBIX was thereby extinguished. In connection with the return of Mr. Aab's shares to AMBIX, the Company paid approximately $200,000 to AMBIX's lender to release Mr. Aab's personal guarantee of certain obligations of AMBIX to its lender. Such benefit to Mr. Aab was the only consideration he received from the Company for the return of his shares to AMBIX, and, to the Company's knowledge, Mr. Aab did not receive any additional consideration from AMBIX for the return of his shares nor did he receive any cash distributions from AMBIX during his ownership of such shares. - 4 - For an aggregate consideration of $1.8 million (including the payment by the Company of certain obligations of AMBIX to its lender) paid to or for the benefit of AMBIX or AMBIX Acquisition Corp., the Company in return has received a perpetual right to use the newly developed telecommunications software programs. In making a business judgment as to the amount of such consideration, the Special Committee considered a number of factors including, among other matters, the opinion of its independent software consultants with respect to the estimated cost of developing the major software program covered by the license, the recommendations of management of the Company who were experienced with oversight responsibilities for the development of software programs, and the known benefit to the Company of the software programs as demonstrated by their preliminary testing and use by the Company. The Company does not know the full costs incurred by AMBIX in developing the software programs. The software programs and the Company's license to use them are considered by the Company to be material and integral to its operations. During 1995 the Company paid AMBIX $1.2 million, of which $700,000 relating to the purchase of certain hardware and acquisition of certain software licenses, was capitalized and recorded on the balance sheet as a component of property, plant and equipment, and $500,000 relating to software development was expensed. During 1994 the Company paid AMBIX $132,000, all of which related to software development which was expensed. The Company anticipates that it will attempt to negotiate and enter into an arrangement with AMBIX Acquisition Corp. to provide maintenance and support for the software programs. There can be no assurance that the Company will negotiate or enter into any such arrangements or regarding the terms thereof. Copies of the agreements between the Company and AMBIX or AMBIX Acquisition Corp., and the letter agreement between the Company and Mr. Aab relating to his interest in AMBIX, are attached hereto as Exhibits 99.5, 99.6, 99.7 and 99.8. On January 19, 1996, subject to obtaining shareholder approval, the Company's Board of Directors adopted a Non-Employee Directors' Stock Option Plan (the "Directors Stock Option Plan"), and Messrs. Bennett, Estey, Tessoni and Van Degna each received options to purchase 5,000 shares of Class A Common Stock at an exercise price of $23.00 per share pursuant to the Directors Stock Option Plan. The Directors Stock Option Plan provides for annual grants of options to purchase 5,000 shares of Class A Common Stock at an exercise price equal to 100% of the fair market value of the stock on the date of grant, which options vest at the first anniversary of the date of grant. The maximum number of shares with respect to which options may be granted under the Directors Stock Option Plan is 250,000, subject to adjustment for stock splits, stock dividends and the like. A copy of the Directors Stock Option Plan is attached hereto as Exhibit 99.1. ITEM 7. FINANCIAL STATEMENTS AND EXHIBIT - ---------------------------------------------- See Exhibit Index - 5 - SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACC Corp. Dated: February 22, 1996 By:/s/ David K. Laniak ----------------------- David K. Laniak Chief Executive Officer - 6 - EXHIBIT INDEX ------------- Exhibit Number Title or Description Location - ------- -------------------- -------- 3.1 By-Laws of the Company, as amended through December 13, 1995 23.1 Consent of Arthur Andersen LLP 99.1 ACC Corp. Non-Employee Directors' Stock Option Plan 99.2 Release and Settlement Agreement between the Company and Francis Coleman, dated December 29, 1995 99.3 Form of Employment Continuation Incentive Agreement 99.4 Warrant to Purchase 7,500 Shares of Class A Common Stock dated October 30, 1995 99.5 Software License Agreement dated March 30, 1995 by and between AMBIX Systems Corp. and the Company 99.6 Software License Agreement dated February 21, 1996 between AMBIX Acquisition Corp. and the Company 99.7 Bill of Sale from AMBIX Systems Corp. to the Company dated February 6, 1996 99.8 Letter Agreement dated April 27, 1995 between the Special Committee of the Board of Directors of the Company and Richard T. Aab 99.9 Lease dated January 25, 1994 between the Hague Corporation and the Company, as modified by a Lease Modification Agreement No. 1 dated May 31, 1994 and a Lease Modification Agreement No. 2 dated May 31, 1994, relating to the Company's leased premises located at 400 West Avenue, Rochester, New York - 7 - 99.10 Amended and Restated Lease Agreement dated March 1, 1994 between ACC Long Distance Inc./Interurbains ACC Inc. and Coopers & Lybrand relating to the leased premises located at 5343 Dundas Street West, Etobicoke, Ontario, Canada 99.11 Underlease Agreement dated December 23, 1993 between ACC Long Distance UK Limited, IBM United Kingdom Limited, and the Company relating to the leased premises located on the tenth floor at The Chiswick Centre 414 Chiswick High Road, London, England 99.12 Underlease Agreement dated June 6, 1995 between ACC Long Distance UK Limited, IBM United Kingdom Limited, and the Company relating to the leased premises located on the first floor at The Chiswick Centre 414 Chiswick High Road, London, England 99.13 Supplemental Lease Agreement dated June 3, 1994 between ACC Long Distance UK Limited, IBM United Kingdom Limited, and the Company relating to the leased premises located on the ninth floor at The Chiswick Centre 414 Chiswick High Road, London, England 99.14 Contingent Interest Agreement dated July 21, 1995 in favor of First Union National Bank of North Carolina and Shawmut Bank of Connecticut, N.A. 99.15 Leasehold Mortgage dated July 21, 1995 between the Company and First Union National Bank of North Carolina relating to the leased premises located at 400 West Avenue, Rochester, New York 99.16 Leasehold Mortgage dated July 21, 1995 between the Company and First Union National Bank of North Carolina relating to the leased premises located at Suite 206, State Tower Building, 109 South Warren Street, Syracuse, New York - 8 - 99.17 Leasehold Mortgage dated July 21, 1995 between the Company and First Union National Bank of North Carolina relating to the leased premises located at Suite 2200, Suite 204 and Suite 205, State Tower Building, 109 South Warren Street, Syracuse, New York 99.18 Mortgage of Leasehold Interest dated July 21, 1995 between the Company and ACC Long Distance Inc./Interurbains ACC Inc. relating to the leased premises located at 5343 Dundas Street West, Etobicoke, Ontario, Canada 99.19 Pledge Agreement dated July 21, 1995 by the Company in favor of First Union National Bank of North Carolina 99.20 Pledge Agreement dated July 21, 1995 by ACC National Long Distance Corp. in favor of First Union National Bank of North Carolina 99.21 Security Agreement dated July 21, 1995 between the Company, certain Domestic Subsidiaries of the Company and First Union National Bank of North Carolina 99.22 Trademark Security Agreement dated July 21, 1995 between the Company and First Union National Bank of North Carolina 99.23 License Agreement dated July 1, 1993 between Hudson's Bay Company and ACC Long Distance Inc. 99.24 Registration Statement on Form S-3 of the Company to be filed with the Securities and Exchange Commission on or about the date hereof EX-3.1 2 BY LAWS OF ACC CORP. DATED 12/13/95 Exhibit 3.1 As amended by action of the Board of Directors of this Corporation on December 13, 1995 /s/ Thomas P. Young -------------------------------------- Thomas P. Young, Acting Secretary BYLAWS OF ACC CORP. (a Delaware corporation) ARTICLE I STOCKHOLDERS Section 1.01 Annual Meeting. The Annual Meeting of the stockholders -------------- of this Corporation, for the purpose of electing Directors and transacting such other business as may come before the meeting, shall be held on such date, at such time and at such place as may be designated by the Board of Directors. Section 1.02 Special Meetings. Special Meetings of the stockholders ---------------- may be called at any time by the Chairman of the Board, or by the Chief Executive Officer, or by the President and Chief Operating Officer, or by a majority of the entire Board of Directors acting with or without a meeting. Special Meetings may be called for any purpose(s); however, the business transacted at any such Special Meeting shall be confined to the purposes set forth in the notice thereof. Section 1.03 Place of Meetings. Meetings of stockholders shall be ----------------- held at such place as the person or persons calling the meetings shall decide, unless the Board of Directors decides that a meeting shall be held at some other place and causes the notice thereof to so state. Section 1.04 Notices of Meetings. Unless waived, a written, printed, ------------------- or typewritten notice of each Annual or Special meeting, stating the date, hour and place and the purpose or purposes thereof shall be delivered or mailed to each stockholder of record entitled to vote or entitled to notice, not more than 60 days nor less than 10 days before any such meeting. If mailed, such notice shall be directed to a stockholder at his or her address as the same appears on the records of the Corporation. Notice shall not be required to be given to any stockholder who submits a signed waiver of notice, in person or by proxy, whether before or after such meeting. The attendance of any stockholder at a meeting - 2 - without protesting, prior to the conclusion of the meeting, the lack of notice of such meeting, shall constitute a waiver of notice by him or her. If a meeting is adjourned to another time or place and such adjournment is for 30 days or less and no new record date is fixed for the adjourned meeting, no further notice as to such adjourned meeting need be given if the time and place to which it is adjourned are fixed and announced at such meeting. If, however, such adjournment exceeds 30 days or if, after the adjournment, a new record date is fixed for the adjourned meeting, a notice of such adjourned meeting must be given to each stockholder of record entitled to vote at such meeting. In the event of a transfer of shares after notice has been given and prior to the holding of the meeting, it shall not be necessary to serve notice on the transferee. Such notice shall specify the place where the stockholders list will be open for examination prior to the meeting if required by Section 1.08 hereof. Section 1.05 Fixing Date for Determination of Stockholders of Record. ------------------------------------------------------- In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. If the Board shall not fix such a record date, (i) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the date next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and (ii) in any case involving the determination of stockholders for any purpose other than notice of or voting at a meeting of stockholders, the record date for determining stockholders for such purpose shall be the close of business on the day on which the Board of Directors shall adopt the resolution relating thereto. Determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 1.06 Organization. At each meeting of the stockholders, the ------------ Chairman of the Board, or in the absence of the Chairman of the Board, the Chief Executive Officer, or in the absence of both the Chairman of the Board and the Chief Executive Officer, the President and Chief Operating Officer, or, in the absence of all such officers, a Chairman chosen by a majority in interest of the stockholders present in person or by proxy and entitled to vote, shall act as Chairman, and the Secretary of the Corporation, or, if the Secretary of the Corporation not be present, the Assistant Secretary, or, in the absence of both such officers, any person whom the Chairman of the Meeting shall appoint, shall act as Secretary of the Meeting. Section 1.07 Quorum. A stockholders' meeting duly called shall not ------ be organized for the transaction of business unless a quorum is present. Except as otherwise expressly provided by law, the Certificate of Incorporation or these Bylaws, the presence in - 3 - person or by proxy of holders of record of shares of stock of the Corporation entitling them to exercise at least a majority of the voting power of the Corporation shall constitute a quorum for such meeting. The stockholders present at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. If a meeting cannot be organized because a quorum has not attended, a majority in voting interest of the stockholders present may adjourn, or, in the absence of a decision by the majority, any officer entitled to preside at such meeting may adjourn the meeting from time to time to such time (not more than 30 days after the previously adjourned meeting) and place as they (or he/she) may determine, without notice other than by announcement at the meeting of the time and place of the adjourned meeting. At any such adjourned meeting at which a quorum is present any business may be transacted which might have been transacted at the meeting as originally called. Section 1.08 List of Stockholders. The Secretary of the Corporation -------------------- shall prepare and make a complete list of the stockholders of record as of the applicable record date entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number and class or series of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. This list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The Corporation shall be entitled for all purposes to rely on the address for any stockholder appearing on the records of its duly appointed transfer agent(s), unless a stockholder shall specifically file with the Secretary of the Corporation a written request that notices intended for such stockholder be mailed to a different address, in which case all notices shall be mailed to the address specified in such request. Section 1.09 Order of Business and Procedure. The order of business ------------------------------- at all meetings of the stockholders and all matters relating to the manner of conducting the meeting shall be determined by the Chairman of the Meeting, whose decisions may be overruled only by majority vote of the stockholders present and entitled to vote at the meeting in person or by proxy. Meetings shall be conducted in a manner designed to accomplish the business of the meeting in a prompt and orderly fashion and to be fair and equitable to all stockholders, but it shall not be necessary to follow any manual of parliamentary procedure. Section 1.10 Voting. ------ (a) Each stockholder of any class or series of the capital stock of the Corporation shall, at each meeting of the stockholders, be entitled to such number of votes for each such share of capital stock as provided by the Certificate of Incorporation with respect to each such class or series of capital stock as shall have been held by and registered - 4 - in the name of such stockholder on the books of the Corporation on the date fixed pursuant to these Bylaws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting, except as may otherwise be provided by statute or the Certificate of Incorporation. (b) Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. (c) Any such voting rights may be exercised by the stockholder entitled thereto in person or by such stockholder's proxy appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized and delivered to the Secretary of the Meeting in sufficient time to permit the necessary examination and tabulation thereof before the vote is taken; provided, however, that no proxy shall be valid after the expiration of three years after the date of its execution, unless the stockholder executing it shall have specified therein the length of time it is to continue in force. At any meeting of the stockholders at which a quorum is present, all matters, except as otherwise expressly required by law, the Certificate of Incorporation or these Bylaws, shall be decided by the vote of a majority of the shares present in person or by proxy and entitled to vote thereat and thereon. The vote at any meeting of the stockholders on any questions need not be by ballot, unless so directed by the Chairman of the Meeting or required by the Certificate of Incorporation; provided, however, that with respect to the election of -------- Directors, any stockholder shall have the right to demand that such vote be taken by written ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by such stockholder's proxy, as the case may be, and it shall state the number of shares voted. Each proxy shall be revocable at the pleasure of the person executing it, or of such person's personal representative(s) or assign(s), except as otherwise provided by statute. The authority of the holder of a proxy to act shall not be revoked by the incompetence or death of the stockholder who executed the proxy unless, before the authority is exercised, valid and sufficient written notice of an adjudication of such incompetence or of such death is received by the Secretary of the Corporation. Section 1.11 Inspectors. The Board of Directors, in advance of any ---------- meeting of the stockholders, may appoint one or more inspectors to act at the meeting. If inspectors are not so appointed, the person presiding at the meeting may appoint one or more inspectors. If any person so appointed fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the person presiding thereat. The inspectors so appointed shall determine the number of shares outstanding, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies and shall receive votes, ballots, waivers, releases, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, waivers, releases, or consents, determine - 5 - and announce the results and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated and of the vote as certified by them. ARTICLE II BOARD OF DIRECTORS Section 2.01 General Powers of Board. The powers of the Corporation ----------------------- shall be exercised, its business and affairs conducted, and its property controlled by the Board of Directors, except as otherwise provided by the law of Delaware or in the Certificate of Incorporation. Each Director shall be at least 21 years of age. Section 2.02 Number of Directors. The number of Directors of the ------------------- Corporation shall not be less than three, with the exact number of Directors to be such number as may be set from time to time by resolution adopted by affirmative vote of a majority of the entire Board of Directors; provided, -------- however, that no decrease in the size of the Board shall serve to reduce the - ------- term of any Director then in office. As used in these Bylaws, the term "entire Board" means the total number of Directors which the Corporation would have if there were no vacancies. The initial number of Directors and the persons appointed as the initial Directors shall be as selected by the incorporator. Section 2.03 Election of Directors. At each Annual Meeting of the --------------------- stockholders, and except as may otherwise be provided by the Certificate of Incorporation, Directors shall be elected by a plurality of the votes cast by the holders of shares of the Corporation's capital stock entitled to vote thereon for a term of one year, and shall hold office until the election and qualification of their successors, or until their earlier resignation or removal. Section 2.04 Nominations. Nominations for the election of Directors ----------- may be made by the Board of Directors or a committee thereof or by any stockholder entitled to vote for the election of Directors. Section 2.05 Resignations. Any Director of the Corporation may ------------ resign at any time by giving written notice to the Chairman of the Board, the Chief Executive Officer, the President and Chief Operating Officer or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. - 6 - Section 2.06 Vacancies. In the event that any vacancy shall occur in --------- the Board of Directors, whether because of death, resignation, removal, newly created directorships resulting from any increase in the authorized number of Directors, the failure of the stockholders to elect the whole authorized number of Directors, or for any other reason, such vacancy shall be filled by the vote of a majority of the Directors then in office, although less than a quorum. A Director elected to fill a vacancy shall hold office until the next Annual Meeting of stockholders for the election of Directors, and until the election and qualification of his or her successor. Section 2.07 Removal of Directors. Any or all of the Directors may -------------------- be removed for cause or without cause only by a majority vote of all outstanding shares of stock. Section 2.08 Place of Meeting, etc. The Board of Directors may hold --------------------- any of its meetings at the principal office of the Corporation or at such other place or places as the Board of Directors may from time to time designate. Directors may participate in any regular or special meeting of the Board of Directors or of any committee thereof by means of conference telephone or similar communications equipment pursuant to which all persons participating in any such meeting can hear each other and such participation shall constitute presence in person at any such meeting. Section 2.09 Regular Meetings. A Regular Meeting of the Board of ---------------- Directors shall be held following each Annual Meeting of Stockholders for the purpose of organizing the Corporation's affairs and the transaction of such other business as may properly come before such meeting. Other Regular Meetings of the Board of Directors may be held at such intervals and at such time as shall from time to time be determined by the Board of Directors. Once such determination has been made and notice thereof has been once given to each person then a member of the Board of Directors, such Regular Meetings may be held at such intervals and at the time(s) and place(s) so designated without further notice being given. Section 2.10 Chairman of the Board. At the regular meeting of the --------------------- Board of Directors held following each Annual Meeting of the stockholders, the Board shall elect one of its members as Chairman of the Board, to serve at the pleasure of the Board. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors. The Chairman of the Board shall also perform such duties and may exercise such other powers as from time to time may be assigned by these Bylaws or by the Board of Directors. Section 2.11 Special Meetings. Special meetings of the Board of ---------------- Directors may be called at any time by the Chairman of the Board, by the Chief Executive Officer, by the President and Chief Operating Officer, or by a majority of Directors then in office, to be held on such day and at such time as shall be specified by the person or persons calling the meeting. - 7 - Section 2.12 Notice of Meetings. Notice of each Special Meeting or, ------------------ where required, each Regular Meeting of the Board of Directors shall be deemed properly given to each Director either: (a) when mailed by first class mail, postage prepaid, to each Director, addressed to him or her at his or her residence or usual place of business, at least two days before the day on which such meeting is to be held; or (b) when sent to him or her at such address by telegraph, cable, telex, telecopier, facsimile or other similar means, or when delivered to him or her personally, or when given to him or her by telephone or other similar means, in any event at least 24 hours before the time at which such meeting is to be held. Such notice shall specify the place, date and time of the meeting; however, except as otherwise specifically required by these Bylaws, notice of any Regular or Special Meeting of the Board of Directors need not state the purpose or purposes of such meeting and, at any such meeting duly held, any business may be transacted. At any meeting of the Board of Directors at which every Director shall be present, even though without such notice, any business may be transacted. Any acts or proceedings taken at a meeting of the Board of Directors not validly called or convened may be made valid and fully effective by ratification at a subsequent meeting that has been validly called or convened. A written waiver of notice of a Special or Regular Meeting, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed the equivalent of such notice, and attendance of a Director at any meeting shall constitute a waiver of notice of such meeting except when the Director attends the meeting and prior to or at the commencement thereof protests the lack of proper notice to him or her, or that the meeting is not lawfully called or convened. Section 2.13 Quorum and Voting. At all meetings of the Board of ----------------- Directors, the presence of a majority of the Directors then in office shall constitute a quorum for the transaction of business; provided, however, that -------- ------- such number may not be less than one-third of the entire Board. Except as otherwise required by law, the Certificate of Incorporation, or these Bylaws, the vote of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. At all meetings of the Board of Directors, each Director shall have one vote. Section 2.14 Committees. The Board of Directors may appoint an ---------- Executive Committee, an Audit Committee, an Executive Compensation Committee, a Nominating and Organizational Development Committee, a Strategic Planning Committee and any other committee of the Board of Directors, each to consist of three or more Directors of the Corporation. Each such committee shall have and may exercise all of the powers and authority of the Board of Directors necessary and appropriate to the carrying out of its functions, except that no such ------ committee shall have the power or authority: (a) To amend the Certificate of Incorporation or these Bylaws; (b) To adopt an agreement of merger or consolidation; - 8 - (c) To recommend to the stockholders the sale, lease or exchange of all or substantially all the Corporation's property and assets; (d) To recommend to the stockholders a dissolution of the Corporation or a revocation of a dissolution; nor (e) To declare a dividend or to authorize the issuance of stock unless the resolution creating such committee expressly so provides. The Executive Committee of the Board shall have the power and authority to act in lieu of the full Board of Directors as may be necessary in the intervals between Board meetings and as otherwise requested by the full Board, except as otherwise specifically circumscribed by the Delaware General Corporation Law, the Corporation's Certificate of Incorporation or these Bylaws. The Audit Committee of the Board shall periodically review the Corporation's auditing practices and procedures, make recommendations to management or to the Board of Directors as to any changes to such practices and procedures deemed necessary from time to time to comply with applicable auditing rules, regulations and practices, and recommend independent auditors for the Corporation to be elected by the stockholders. This Committee shall at all times consist solely of Directors who are not also employees or officers of the Corporation. The Executive Compensation Committee of the Board shall meet from time to time to set and review the compensation and benefits payable to the Corporation's officers and other senior executives, and, acting under the terms of the Corporation's Employee Long Term Incentive Plan and the Corporation's Employee Stock Purchase Plan, shall have exclusive authority to administer said Plans in all respects in accordance with their terms. This Committee shall at all times consist solely of Directors who are not also employees or officers of the Corporation. The Nominating and Organizational Development Committee of the Board shall meet from time to time to review the qualifications of and recommend to the Board the names of candidates both (1) to stand for election as Directors of the Corporation and (2) to fill vacancies that occur on the Board of Directors, as well as to develop long range management succession plans for the Corporation and to review the qualifications of and make recommendations to the Board of the names of candidates for Chief Executive Officer of the Corporation. The Chief Executive Officer shall be an ex officio member of this Committee. ---------- The Strategic Planning Committee of the Board shall meet from time to time to develop and review the Corporation's long range strategic business plans and goals and to recommend the same to the Board as necessary for approval and implementation. The Chairman of the Board shall be the Chairman of this Committee. - 9 - Each such committee shall serve at the pleasure of the Board of Directors and shall be subject to the control and direction of the Board of Directors. In the absence of any member of any such committee, the members thereof present at any meeting may appoint a member of the Board of Directors previously designated by the Board of Directors as a committee alternate to act in the place of such absent member. Any such committee shall keep written minutes of its meetings and report the same to the Board of Directors at the next Regular Meeting of the Board of Directors. Section 2.15 Compensation. The Board of Directors may, by resolution ------------ passed by a majority of those in office, fix the compensation of Directors for service in any capacity and may fix fees for attendance at meetings and may authorize the Corporation to pay the traveling and other expenses of Directors incident to their attendance at meetings, or may delegate such authority to a committee of the Board of Directors. The Board of Directors shall fix the compensation of all officers of the Corporation who are appointed by the Board of Directors. The Board of Directors may authorize the Chief Executive Officer or the President and Chief Operating Officer to fix the compensation of such assistant and subordinate officers and agents as either of them is authorized to appoint and remove. Section 2.16 Action by Consent. Any action required or permitted to ----------------- be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or such committee. Section 2.17 Director Emeritus. From time to time, the Board may in ----------------- its discretion designate a Director who elects to retire from the Board, on or after reaching age 70, as a Director Emeritus. A Director Emeritus shall be invited to attend all Board meetings as an ex officio member of the Board ---------- without a vote and shall be entitled to receive the annual retainer fees then paid to the Directors of this Corporation, until reaching age 75. ARTICLE III OFFICERS Section 3.01 General Provisions. The officers of the Corporation ------------------ shall be the Chief Executive Officer, the President and Chief Operating Officer, such number of Vice Presidents as the Board of Directors may from time to time determine, a Secretary and a Treasurer. Any person may hold any two or more offices and perform all the duties thereof. The Board of Directors may also elect a Chief Financial Officer, a Controller and such other officers as it may determine. - 10 - Section 3.02 Election, Terms of Office, and Qualification. The -------------------------------------------- officers of the Corporation named in Section 3.01 of this Article III shall be elected by the Board of Directors for an indeterminate term and shall hold office at the pleasure of the Board of Directors. Section 3.03 Additional Officers, Agents, etc. In addition to the -------------------------------- officers mentioned in Section 3.01 of this Article III, the Corporation may have such other officers or agents as the Board of Directors may deem necessary and may appoint, each of whom shall hold office for such period, have such authority and perform such duties as may be provided in these Bylaws as the Board of Directors may from time to time determine. The Board of Directors may from time to time delegate to the Chief Executive Officer or the President and Chief Operating Officer the power to appoint any subordinate officers or agents and prescribe the powers and duties thereof. In the absence of any officer of the Corporation, or for any other reason the Board of Directors may deem sufficient, the Board of Directors may delegate the powers and duties of such officer, in whole or in part, to any other officer, or to any Director. Section 3.04 Removal. Any officer of the Corporation may be removed, ------- either with or without cause, at any time, by resolution adopted by the Board of Directors at any meeting. Any officer appointed not by the Board of Directors but by an officer or committee to which the Board of Directors shall have delegated the power of appointment may be removed, with or without cause, by the Board of Directors, by the committee that or superior officer (including successors) who made the appointment, or by any committee or officer upon whom such power of removal may be conferred by the Board of Directors. Section 3.05 Resignations. Any officer may resign at any time by ------------ giving written notice to the Board of Directors, or to the Chairman of the Board, the Chief Executive Officer, the President and Chief Operating Officer, or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.06 Vacancies. A vacancy in any office because of death, --------- resignation, removal, disqualification, or otherwise, shall be filled in the manner prescribed in these Bylaws for regular appointments or elections to such office. - 11 - ARTICLE IV DUTIES OF THE OFFICERS Section 4.01 Chief Executive Officer. The Chief Executive Officer ----------------------- shall have general charge of and be primarily responsible for the conduct of the business of the Corporation, including long-range planning and strategic analyses of the Corporation's future growth and direction, and subject to the Board's approval, establishing the general business policies and goals of the Corporation. During the absence or disability of the Chairman of the Board, the Chief Executive Officer shall preside at all meetings of the stockholders and of the Board of Directors. Except where by law the signature of the President and Chief Operating Officer is required, the Chief Executive Officer shall possess the same power as the President and Chief Operating Officer to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. During the absence or disability of the President and Chief Operating Officer, the Chief Executive Officer shall exercise all the powers and discharge all the duties of the President and Chief Operating Officer. The Chief Executive Officer shall also perform such duties and may exercise such other powers as from time to time may be assigned by these Bylaws or by the Board of Directors. Section 4.02 President and Chief Operating Officer. The President ------------------------------------- and Chief Operating Officer shall, subject to the control of the Board and the Chief Executive Officer, have general supervision of the day-to-day operation and administration of the business of the Corporation, together with such other duties and such other powers as from time to time may be assigned by the Board of Directors or the Chief Executive Officer. He shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these Bylaws, the Board of Directors, or the Chief Executive Officer. In the absence or disability of both the Chairman of the Board and of the Chief Executive Officer, the President and Chief Operating Officer shall preside at all meetings of the shareholders and the Board of Directors. Section 4.03 Vice Presidents. The Vice Presidents shall perform such --------------- duties as are conferred upon them by these Bylaws or as may from time to time be assigned to them by the Board of Directors, the Chief Executive Officer or the President and Chief Operating Officer. Any one of the Vice Presidents may be designated by the Board of Directors as an Executive Vice President, and the Board may also from time to time designate one or more of the Vice Presidents as Senior Vice Presidents in the exercise of its sole discretion. At the request of the Chief Executive Officer, in the absence or disability of the President and Chief Operating Officer, the Executive Vice President shall perform all the duties and have all the powers of the President and Chief Operating Officer. If there be no Executive Vice President, the Vice President designated by the Board of Directors shall - 12 - perform such duties and exercise such functions. Each Vice President shall have such other powers and duties as may from time to time be properly prescribed by the Board of Directors, the Chief Executive Officer, or the President and Chief Operating Officer. Section 4.04 Treasurer. The Treasurer shall keep correct and --------- complete books and records of account for the Corporation. Subject to the control and supervision of the Board of Directors and the Chief Executive Officer, or such other officer as any of them may designate, the Treasurer shall establish programs for the provision of the capital required by the Corporation, including negotiating the procurement of capital and maintaining adequate sources for the Corporation's current borrowings from lending institutions. He shall maintain banking arrangements to receive, have custody of and disburse the funds and securities of the Corporation. He shall invest the funds of the Corporation as required, and establish and coordinate policies for investment in pension and other similar accounts due the Corporation. The Treasurer shall have such other powers and duties as may from time to time be properly prescribed by the Board of Directors, the Chief Executive Officer, the President and Chief Operating Officer, or the Chief Financial Officer. Section 4.05 Secretary. The Secretary shall attend all meetings of --------- the Board of Directors and of the stockholders, and shall record all votes in the Minutes of all such proceedings in a book to be maintained for such purpose. The Secretary shall give or cause to be given a notice of all meetings of stockholders and of the Board of Directors. The Secretary shall be the custodian of the seal of the Corporation and shall affix the seal to any instrument when authorized by the Board of Directors. The Secretary shall keep all the documents and records of the Corporation, as required by law or otherwise, in a proper and safe manner. The Secretary shall have such other powers and duties as may from time to time be properly prescribed by the Board of Directors, the Chief Executive Officer or the President and Chief Operating Officer. Section 4.06 Chief Financial Officer. The Board of Directors may ----------------------- appoint a Chief Financial Officer. Subject to the control and supervision of the Board of Directors and the Chief Executive Officer, the Chief Financial Officer shall have general charge of establishing and overseeing all financial and accounting policies and matters of the Corporation. The Chief Financial Officer shall also have such other powers and duties as may from time to time be properly prescribed by the Board of Directors or the Chief Executive Officer. Section 4.07 Controller. The Board of Directors may appoint a ---------- Controller. Subject to the control and supervision of the Board of Directors, the Chief Executive Officer, or such officer as either of them may designate, the Controller shall establish, coordinate and administer an adequate plan for the financial control of operations, including profit planning, programs for capital investing and for financing, sales forecasts, expense budgets and cost standards, together with the necessary procedures to effectuate such plans. The Controller shall compare performance with operating plans and standards and shall report and interpret the results of operations to all levels of management. - 13 - ARTICLE V INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 5.01 Mandatory Indemnification. The Corporation shall ------------------------- indemnify any officer or Director of the Corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceedings, whether civil, criminal, administrative or investigative (including, without limitation, any action threatened or instituted by or in the right of the Corporation), by reason of the fact that he is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, trustee, officer, employee or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. A person claiming indemnification under this Section 5.01 shall be presumed, in respect of any act or omission giving rise to such claim for indemnification, to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal matter, to have had no reasonable cause to believe his conduct was unlawful, and the termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, rebut such presumption. Section 5.02 Court-Approved Indemnification. Anything contained in ------------------------------ these Bylaws or elsewhere to the contrary notwithstanding: (a) The Corporation shall not indemnify any officer or Director of the Corporation who was a party to any completed action or suit instituted by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, trustee, officer, employee or agent of another Corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, in respect of any claim, issue or matter asserted in such action or suit as to which he shall have been adjudged to be liable for gross negligence or intentional misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability, and in view of all the circumstances of the case, he is fairly and reasonably entitled to such indemnity as such Court of Chancery or such other court shall deem proper; and - 14 - (b) The Corporation shall promptly make any such unpaid indemnification as is determined by a court to be proper as contemplated by this Section 5.02. Section 5.03 Indemnification for Expenses. Anything contained in ---------------------------- these Bylaws or elsewhere to the contrary notwithstanding, to the extent that an officer or Director of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 5.01, or in defense of any claim, issue or matter therein, he shall be promptly indemnified by the Corporation against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs) actually and reasonably incurred by him in connection therewith. Section 5.04 Determination Required. Any indemnification required ---------------------- under Section 5.01 and not precluded under Section 5.02 shall be made by the Corporation only upon a determination that such indemnification of the officer or Director is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 5.01. Such determination may be made only (a) by a majority vote of a quorum consisting of Directors of the Corporation who were not and are not parties to any such action, suit or proceedings, or (b) if such a quorum is not obtainable or if a majority of a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders, or (d) by the Court of Chancery of the State of Delaware or (if the Corporation is a party thereto) the court in which such action, suit or proceeding was brought, if any. Any such determination may be made by a court under division (d) of this Section 5.04 at any time (including, without limitation, any time before, during or after the time when any such determination may be requested of, be under consideration by or have been denied or disregarded by the disinterested Directors under division (a) or by independent legal counsel under division (b) or by the stockholders under division (c) of this Section 5.04); and no failure for any reason to make any such determination, and no decision for any reason to deny any such determination, by the disinterested Directors under division (a) or by independent legal counsel under division (b) or by stockholders under division (c) of this Section 5.04 shall be evidence in rebuttal of the presumption recited in Section 5.01. Any determination made by the disinterested Directors under division (a) or by independent legal counsel under division (b) of this Section 5.04 to make indemnification in respect of any claim, issue or matter asserted in an action or suit threatened or brought by or in the right of the Corporation shall be promptly communicated to the person who threatened or brought such action or suit, and within twenty days after receipt of such notification such person shall have the right to petition the Court of Chancery of the State of Delaware or the court in which such action or suit was brought, if any, to review the reasonableness of such determination. Section 5.05 Advances for Expenses. Expenses (including, without --------------------- limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs) incurred in defending any action, suit or proceeding referred to in Section 5.01 shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding to or on - 15 - behalf of the officer or Director promptly as such expenses are incurred by him, but only if such officer or Director shall first agree, in writing, to repay all amounts so paid in respect of any claim, issue or other matter asserted in such action, suit or proceeding in defense of which he shall not have been successful on the merits or otherwise: (a) If it shall ultimately be determined as provided in Section 5.04 that he is not entitled to be indemnified by the Corporation as provided under Section 5.01; or (b) If, in respect of any claim, issue or other matter asserted by or in the right of the Corporation in such action or suit, he shall have been adjudged to be liable for gross negligence or intentional misconduct in the performance of his duty to the Corporation, unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability, and in view of all the circumstances, he is fairly and reasonably entitled to all or part of such indemnification. Section 5.06 Article V Not Exclusive. The indemnification provided ----------------------- by this Article V shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under the Certificate of Incorporation or any Bylaw, agreement, vote of stockholders or disinterested Directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an officer or Director of the Corporation and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 5.07 Insurance. The Corporation may purchase and maintain --------- insurance on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Directors, trustee, officer, employee, or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the obligation or the power to indemnify him against such liability under the provisions of this Article V. Section 5.08 Certain Definitions. For purposes of this Article ------------------- V, and as examples and not by way of limitation: (a) A person claiming indemnification under this Article V shall be deemed to have been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 5.01, or in defense of any claim, issue or the matter therein, if such action, suit or proceeding shall be terminated as to such person, with or without prejudice, without the entry of a judgment or order against him, without a conviction of him, without the imposition of a fine upon him and without his payment or agreement to pay any amount in settlement thereof (whether or not any such termination is based upon a - 16 - judicial or other determination of the lack of merit of the claims made against him or otherwise results in his vindication); and (b) References to an "other enterprise" shall include employee benefit plans; references to a "fine" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a Director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such Director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" within the meaning of that term as used in this Article V. Section 5.09 Venue. Any action, suit or proceeding to determine a ----- claim for indemnification under this Article V may be maintained by the person claiming such indemnification, or by the Corporation, in the Court of Chancery of the State of Delaware. The Corporation and (by claiming such indemnification) each such person consent to the exercise of jurisdiction over its or his person by the Court of Chancery of the State of Delaware in any such action, suit or proceeding. Section 5.10 Contractual Nature. The foregoing provisions of this ------------------ Article V shall be deemed to be a contract between the Corporation and each Director and officer who serves in such capacity at any time while this Section 5.10 is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. ARTICLE VI SHARES AND THEIR TRANSFER Section 6.01 Certificate for Shares. Every owner of one or more ---------------------- shares in this Corporation shall be entitled to a certificate, which shall be in such form as the Board of Directors shall prescribe, certifying the number and class of shares in the Corporation owned by such person. When such certificate is countersigned by an incorporated transfer agent or registrar, the signature of any of said officers may be facsimile, engraved, stamped or printed. The certificates for the respective classes of such shares shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the Chairman of the Board, the Chief Executive Officer, the President and Chief Operating Officer, or a Vice President and by the Secretary or the Treasurer. A record shall be kept of the name of the person, firm, or corporation owning the shares represented by each such - 17 - certificate and the number of shares represented thereby, the date thereof and in case of cancellation, the date of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled and no new certificate or certificates shall be issued in exchange for any existing certificates until such certificates shall have been so canceled. In case any officer who has signed, or whose facsimile signature has been placed upon a certificate, shall have ceased to be such officer before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if such person were such officer at the date of issue. Section 6.02 Lost, Destroyed or Mutilated Certificates. If any ----------------------------------------- certificates for shares in this Corporation become worn, defaced, or mutilated but are still substantially intact and recognizable, the Directors, upon production and surrender thereof, shall order the same canceled and shall issue a new certificate in lieu of same. The holder of any shares in the Corporation shall immediately notify the Corporation if a certificate therefor shall be lost, destroyed, or mutilated beyond recognition, and the Corporation may issue a new certificate in the place of any certificate theretofore issued by it which is alleged to have been lost or destroyed or mutilated beyond recognition. Unless otherwise provided by the Board of Directors or an officer of the Corporation, the owner of the certificate which has been lost, destroyed, or mutilated beyond recognition, or his legal representative, shall give the Corporation a bond in such sum and with such surety or sureties as may be required to adequately indemnify the Corporation against any claim that may be made against it on account of the alleged loss, destruction, or mutilation of any such certificate. The Board of Directors may, however, in its discretion, refuse to issue any such new certificate pending the resolution of any legal proceedings involving such certificate or the loss, destruction or mutilation thereof. Section 6.03 Transfers of Shares. Transfers of shares in the ------------------- Corporation shall be made only on the books of the Corporation by the registered holder thereof, his or its legal guardian, executor, or administrator, or by his or its attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or with a transfer agent appointed by the Board of Directors, and on surrender of the certificate or certificates for such shares properly endorsed or accompanied by properly executed stock powers (and any requested signature guarantees) and evidence of the payment of all taxes imposed upon such transfer. The person in whose name shares stand on the books of the Corporation shall, to the full extent permitted by law, be deemed the owner thereof for all purposes as regards the Corporation, and the Corporation shall not be bound to recognize any equitable or other claim or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by statute. Section 6.04 Stock Ledgers. The stock ledgers of the Corporation ------------- containing the names and addresses of the stockholders and the number of shares held by them respectively shall be maintained at the principal offices of the Corporation, or, if there - 18 - be a transfer agent, at the office of such transfer agent as the Board of Directors shall determine. Section 6.05 Regulations. The Board of Directors may make such rules ----------- and regulations as it may deem expedient and not inconsistent with these Bylaws concerning the issue, transfer, and registration of certificates for shares in the Corporation. It may appoint one or more transfer agents or one or more registrars, or both, and may require all certificates for shares to bear the signature of either or both. ARTICLE VII FINANCES Section 7.01 Dividends. Subject to any statutory provisions, --------- dividends upon the capital stock of the Corporation may be declared by the Board of Directors, payable on such dates as the Board of Directors may designate. Section 7.02 Reserves. Before the payment of any dividend, there may -------- be set aside out of the funds of the Corporation available for dividends, such sum or sums as the Board of Directors may from time to time in its absolute discretion deem proper as a reserve to meet contingencies or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board shall deem conducive to the interests of the Corporation. The Board of Directors may modify or abolish any such reserve in the manner in which it was created. Section 7.03 Bills, Notes, etc. All checks or demands for money and ----------------- notes or other instruments evidencing indebtedness or obligations of the Corporation shall be made in the name of the Corporation and shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. ARTICLE VIII DIVISIONS Section 8.01 Creation of Divisions. The Board of Directors may from --------------------- time to time create Divisions of the Corporation as operational units of the Corporation, and may set apart to such Divisions such aspects or portions of the business, affairs and properties of the Corporation as the Board of Directors may from time to time determine. - 19 - Section 8.02 Division Officers. The Board of Directors of the ----------------- Corporation may appoint as officers of a Division a President, one or more Vice Presidents, a Secretary, a Treasurer and any other officers, all of whom shall serve at the pleasure of the Board of Directors. The same person may hold two or more offices of a Division, and any person holding an office of a Division may also be elected an officer of the Corporation. The officers and all other persons who shall serve a Division in the capacities set forth in this Article are hereby appointed agents of the Corporation with the powers and duties herein set forth; provided, however, that the authority of said agents shall be limited to matters related to the properties, business and affairs of the Division and shall not extend to any other portion of the properties, business and affairs of the Corporation. The Board of Directors may from time to time authorize the Chief Executive Officer or the President and Chief Operating Officer of the Corporation to appoint and remove all such Divisional officers and agents and to prescribe their respective powers and duties. Section 8.03 Division President. The President of a Division shall ------------------ be the Chief Executive Officer of the Division and shall have the responsibility for the general management of the affairs of the Division, subject to the direction of the Board of Directors and the President and Chief Operating Officer of the Corporation. He shall see that all orders, instructions, policies and resolutions of the Board of Directors, the Chief Executive Officer and the President and Chief Operating Officer of the Corporation relating to the business and affairs of the Division are carried into effect. Section 8.04 Division Secretary. The Division Secretary shall have ------------------ the custody of such books and papers, shall maintain such records and shall have such other powers and duties as may from time to time be properly prescribed by the Board of Directors, the Chief Executive Officer and the President and Chief Operating Officer of the Corporation and by the Division President. Section 8.05 Division Treasurer. Subject to the direction of the ------------------ Treasurer of the Corporation and the Division President, the Division Treasurer shall have custody of the funds and securities of the Division, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Division, shall deposit all monies and other valuable effects in the name and to the credit of the Division in such depositories as may be designated by the Board of Directors and shall have such other powers and duties as may from time to time be properly prescribed by the Board of Directors, the Chief Executive Officer, the President and Chief Operating Officer of the Corporation and by the Division President. - 20 - ARTICLE IX SEAL Section 9.01 Seal. The Board of Directors may provide a corporate ---- seal, which shall be circular and contain the name of the Corporation engraved around the margin and the words "corporate seal," the year of its organization, and the word "Delaware." ARTICLE X AMENDMENTS Section 10.01 Power to Amend. These Bylaws may be adopted, altered, -------------- amended or repealed by the affirmative vote of the holders of at least 80% of the issued and outstanding shares of this Corporation's Common Stock. The Board of Directors shall also have the power to adopt, alter, amend or repeal these Bylaws by a majority vote of the entire Board of Directors at any meeting thereof, subject to the right of the holders of this Corporation's Class A Common Stock to adopt, alter, amend or repeal these Bylaws as aforesaid. EX-23.1 3 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 6, 1996 (except with respect to the matters discussed in Notes 10 and 11.A., as to which the dates are February 20, 1996 and February 8, 1996, respectively) incorporated by reference in this Form 8-K into ACC Corp.'s previously filed Form S-8 (Registration Statements No. 33-30817, No. 33-36546, No. 33-52174, No. 33-87056, and No. 33-75558) and into the Form S-3 filed on the date hereof. Arthur Andersen LLP Rochester, New York, February 22, 1996 EX-99.1 4 ACC CORP. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Exhibit 99.1 ACC CORP. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN As Adopted on January 19, 1996 1. Purpose. The purpose of this Non-Employee Directors' Stock ------- Option Plan (the "Plan") is to secure for ACC CORP., a Delaware corporation (the "Company"), and its shareholders the benefits of the incentive inherent in increased stock ownership by members of the Company's Board of Directors (the "Board") who are not also employees of the Company or any of its subsidiaries (a "Non-Employee Director"). Options to purchase shares of the Company's Class A Common Stock, $.015 par value, or such other shares as are substituted pursuant to Paragraphs 5(e) or 5(f) below (the "Common Stock"), shall be granted to Non- Employee Directors of the Company pursuant to the terms of this Plan. 2. Eligibility. Each Non-Employee Director shall be eligible to ----------- receive grants of non-qualified stock options in accordance with the specific provisions of Paragraph 4 below ("Options"). The adoption of this Plan shall not be deemed to give any Director any right to be granted an Option to purchase Common Stock except to the extent and upon such terms and conditions consistent with this Plan as may be determined by the Executive Compensation Committee of the Board (the "Committee"). 3. Limitation on Aggregate Shares. The maximum number of shares ------------------------------ of Common Stock with respect to which Options may be granted under this Plan and which may be issued upon the exercise thereof shall not exceed, in the aggregate, 250,000 shares, subject to adjustment pursuant to Paragraph 5(e) below; provided, however, that if any Options granted under this Plan expire unexercised or are cancelled, terminated or forfeited in any manner without the issuance of Common Stock thereunder, the shares with respect to which such Options were granted shall resume the status of being available for issuance under this Plan. Such shares of Common Stock may be either authorized and unissued shares, treasury shares or a combination thereof, as the Committee shall determine. 4. Terms and Conditions of Options. Options granted under this ------------------------------- Plan shall be subject to such terms and conditions and evidenced by written agreements in such form as shall be determined from time to time by the Committee and shall in any event be subject to the terms and conditions set forth in this Plan. In the event of any conflict between a written agreement and the Plan, the terms of the Plan shall govern. (a) Options to Current Directors. Each Non-Employee Director as of ---------------------------- January 19, 1996 shall receive, as of such date, an Option (an "Initial Option") to purchase 5,000 shares of Common Stock. - 2 - (b) Annual Options. Each year on the date of the Annual Meeting of -------------- the Company's Shareholders (the "Annual Meeting"), commencing with the 1996 Annual Meeting, each Non-Employee Director elected at such meeting shall automatically receive an Option to purchase 5,000 shares of Common Stock. (c) Option Price. The Option price per share of Common Stock shall be ------------ 100% of the "Fair Market Value" of a share of Common Stock as of the date of grant (the "Option Price"). The Fair Market Value of the Common Stock on any given date means (i) the Closing Price quoted for the Company's Common Stock in the National Association of Securities Dealers Automated Quotation System ("Nasdaq System") National Market List on the last business day immediately preceding the date of grant of the Option; or (ii) if there are no reported sales on such date, then the mean between the closing high bid and low asked prices as reported by the Nasdaq System for such date (or, if not so reported, then as reported for that date by the system then regarded as the most reliable source of such quotations); or (iii) if there are no reported sales or quotations, as the case may be, on the given date, the value determined pursuant to (i) or (ii) using the reported sale prices or quotations on the last previous date on which so reported; or (iv) if none of the foregoing clauses apply, the fair market value as determined in good faith by the Committee. (d) Term of Options. Each Option shall be exercisable for ten --------------- years and one day after its date of grant. (e) Exercise of Options. Options shall be exercised by written notice ------------------- to the Company (to the attention of the Treasurer of the Company) accompanied by payment in full of the Option Price with respect to the number of Options being exercised. Payment of the Option Price may be made, at the discretion of the Non-Employee Director: (i) in cash (including check, bank draft or money order); (ii) by delivery of Common Stock already owned for at least six months by the Non-Employee Director, which shall be valued at the Fair Market Value thereof on the date of exercise; or (iii) by delivery of a combination of cash and Common Stock; provided, however, that the Committee may, in the exercise of its discretion, require the Option Price to be paid in cash. (f) Rights as a Shareholder. No Non-Employee Director shall have any ----------------------- rights as a shareholder with respect to any shares covered by an Option until the date a stock certificate for such shares is issued to him or her. Except as otherwise provided herein, no adjustments shall be made for dividends or distributions of other rights for which the record date is prior to the date such stock certificate is issued. 5. Additional Provisions. --------------------- (a) Conditions and Limitations on Exercise. The Initial Options -------------------------------------- granted hereunder shall be exercisable in full immediately upon their date of grant. All other Options granted hereunder shall be exercisable in full ("vest") on the first anniversary of their date of grant. Notwithstanding the foregoing, (i) no Option shall be exercisable prior to - 3 - the adoption of the Plan by the Company's shareholders at the Company's 1996 Annual Meeting, as provided in Paragraph 9 below, and (ii) no shares of Common Stock issuable upon the exercise of an Option may be sold, assigned, pledged or otherwise transferred for a period of six months after the later to occur of (x) the adoption of the Plan by the Company's shareholders and (y) the grant of the Option, as specified in Rule 16b-3 (or other period of time specified in such rule as it may be amended from time to time) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (b) Termination of Service as a Director. Any vested Option shall be ------------------------------------ exercisable during the holder's term as a Director of the Company in accordance with its terms and, except if the Director is removed from office for cause, shall remain exercisable for one year following the date of his/her termination of service as a Director regardless of the reason therefor, including, but not limited to, his/her resignation or retirement from the Board, disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), or death, subject to the earlier expiration of the term of such Option as defined in Paragraph 4(d) above. (c) Registration and Compliance with Laws and Regulations. It shall ----------------------------------------------------- be a further condition to any exercise of an Option and the purchase of shares of Common Stock pursuant thereto that the Company's counsel be satisfied that the issuance of such shares will be in compliance with the Securities Act of 1933, as amended, and any other laws applicable thereto, and the Company shall be entitled to receive such other information, assurances, documents, representations or warranties as it or its counsel may reasonably require with respect to such compliance. Additionally, if deemed necessary by Company counsel, appropriate restrictive legends may be placed on any certificate for shares received by an optionee pursuant to the exercise of an Option and the Company may cause stop transfer orders to be placed against such certificate(s). The Committee may at any time impose any limitations upon the exercise of an Option or the sale of the Common Stock issued upon exercise of an Option that, in the Committee's discretion, are necessary or desirable in order to comply with Section 16 of the Exchange Act and the rules and regulations thereunder. (d) Nontransferability of Options. Options may not be transferred, ----------------------------- assigned, pledged or hypothecated (whether by operation of law or otherwise) other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order, as defined by Section 414(p) of the Code, Section 206(d)(3)(B) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules thereunder, and, during the lifetime of the person to whom they are granted, may be exercised only by such person (or his or her guardian or legal representative). (e) Adjustment for Change in Common Stock. If the outstanding Common ------------------------------------- Stock is hereafter changed by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination, exchange of shares, or the like, or dividends payable in shares of the Common Stock or other securities or assets, an appropriate adjustment shall be made by the Committee in the aggregate number of shares - 4 - available under the Plan, in the number of shares subject to Options to be granted thereafter pursuant to Paragraphs 4(a) and 4(b), and in the number of shares and price per share subject to outstanding Options. Any adjustment in the number of shares shall apply proportionately to only the unexercised portion of any Option granted hereunder. If fractions of a share would result from any such adjustment, the adjustment shall be revised to the next higher whole number of shares. (f) Change in Control of the Company. All unvested Options then -------------------------------- outstanding under this Plan shall automatically become exercisable in full upon the occurrence of any of the following events, each of which shall be deemed a "change in control" of the Company: (1) a merger or other business combination approved by the Company's shareholders; (2) the acquisition by a third party of more than 50% of the total outstanding shares of the Company's Common Stock; or (3) a change in the composition of the Company's Board of Directors such that a majority of the Board consists of Directors other than the incumbent Directors and the nominees of the incumbent Directors; provided, however, that in all -------- events the Committee shall have the discretion to determine that a particular transaction does not constitute a "change in control" for purposes of this subparagraph. In the event of a change in control of the Company, the Options may be assumed by the successor corporation or a parent of such successor corporation or substantially equivalent options may be substituted by the successor corporation or a parent of such successor corporation. However, if the successor corporation does not assume the Options or substitute options, then, if not exercised prior to the effective date of the change in control of the Company, the value of each unexercised Option, as measured by (i) the difference between the Fair Market Value of the Company's Common Stock as of the date that is five trading days prior to the effective date of the change in control less the Option Price of each Option, multiplied by (ii) the number of shares of Common Stock covered by each such Option, shall be paid in cash to the Option holder no later than the effective date of the change in control of the Company, and each such Option shall thereupon be cancelled. (g) Liquidation or Dissolution. In the event of the liquidation or -------------------------- dissolution of the Company, the Options shall terminate immediately prior to the liquidation or dissolution if not exercised prior to such date. (h) Taxes. The Company shall, to the extent it is required to do so ----- under applicable federal, state or local rules or regulations, withhold (or secure payment from the Non-Employee Director in lieu of withholding) the amount of all withholding and other taxes due with respect to the exercise of any Options under this Plan, and the Company may defer such issuance unless indemnified to its satisfaction. To satisfy such obligations, the Company shall withhold that number of shares issuable pursuant to the exercise of any Option hereunder as shall have a Fair Market Value (as of the date of exercise) equal to the amounts required to be withheld, unless the Non-Employee Director shall first pay the Company the amount of such obligations in cash or by surrendering to the Company previously-acquired shares of Common Stock that have such a Fair Market Value. - 5 - 6. Administration. This Plan shall be administered by the -------------- Committee. It is intended that the Plan will constitute a "formula plan" within the meaning of Rule 16b-3 under the Exchange Act. The provisions of the Plan and of any Option agreement made pursuant to the Plan will be interpreted and applied accordingly. The Committee shall have full power to construe and interpret this Plan and Options granted hereunder, to establish and amend rules for its administration and to correct any defect or omission and to reconcile any inconsistency in this Plan or in any Option granted hereunder to the extent the Committee deems desirable to carry this Plan or any Option granted hereunder into effect. All actions taken and interpretations and determinations made by the Committee in good faith shall be final and binding upon the Company, all Non-Employee Directors who have received grants under the Plan and all other interested parties. 7. Termination and Amendment of Plan. At any time the Committee --------------------------------- may suspend or terminate this Plan and make such changes or amendments as it deems advisable; provided, however, that all such changes and amendments are -------- made in compliance with Rule 16b-3 of the Exchange Act (as such rule may be amended from time to time); that no such change or amendment shall be effective without the prior approval of the shareholders of the Company that would: (i) except as provided in Paragraph 5(e) hereof, increase the maximum number of Shares for which Options may be granted under this Plan; (ii) change the eligibility requirements for those entitled to participate in this Plan; or (iii) materially increase the benefits accruing to participants in this Plan; and further provided, that Paragraphs 4, 5(a) and 5(b) shall not be amended more ---------------- than once every six months (other than to comply with the federal securities laws, the Code, or ERISA). No Options shall be granted hereunder after January 19, 2006. Notwithstanding any termination of the Plan, the terms of the Plan shall continue to apply to Options granted prior to any such termination. 8. Notices. Notices required or permitted to be made under the ------- Plan shall be sufficiently made if personally delivered to the Non-Employee Director or sent by regular mail addressed (a) to the Non-Employee Director's address as set forth in the books and records of the Company, or (b) to the Company or the Committee at the principal office of the Company clearly marked "Attention: Executive Compensation Committee." 9. Effective Date of Plan. The Plan shall be effective as of ---------------------- January 19, 1996, provided that the adoption of the Plan shall have been approved by the Company's shareholders at the Company's 1996 Annual Meeting. If the Plan is not so approved by the Company's shareholders, the Plan and all Options granted hereunder shall automatically terminate. 10. Governing Law. The Plan, all Options granted hereunder and ------------- all actions taken hereunder shall be governed by and construed in accordance with the laws of the State of Delaware. EX-99.2 5 RELEASE AND SETTLEMENT AGREEMENT DATED 12/29/95 Exhibit 99.2 December 29, 1995 Francis D.R. Coleman, Esq. 7132 Gillis Road Victor, New York 14564 Dear Mr. Coleman: Upon your acceptance of the terms and conditions set forth in this Release and Settlement Agreement ("Agreement"), ACC Corp. ("ACC") will provide you with the specified consideration. For purposes of this Agreement, "ACC" shall also mean and include any subsidiary or affiliate of ACC Corp. Your signing of this Agreement is an acknowledgment that pursuant to this Agreement, you have received, or will receive, benefits from ACC to which you were not otherwise entitled, the receipt and sufficiency of which you acknowledge by signing this Agreement. This Agreement is intended to settle fully and finally all claims, controversies, disputes and other matters between you and ACC, its officers, directors, employees and agents. Effective as of December 21, 1995, your employment with ACC ended. You will thereafter no longer be authorized to act on behalf of ACC or to incur any expenses or obligations in the name of ACC. As of December 21, 1995, no other payment will be due to you from ACC, except as expressly provided for in this Agreement. 1. SEVERANCE PACKAGE: ------------------ (a) SALARY: ------- In consideration of your release, your covenants and the other terms of this Agreement, ACC will, upon the effective date of this Agreement, pay you the sum of $165,000, representing one year's salary of $130,000 plus an additional sum of $35,000. ACC will pay $9,500 of the foregoing amount into your account under ACC's 401(k) Plan. The balance will be paid directly to you. This payment is and shall be treated as severance pay, and shall be paid in the same manner and in the same amounts as the salary that you received for the year immediately preceding the termination of your employment. ACC shall withhold from your severance pay federal, state, local and FICA taxes. No - 2 - taxes, except FICA, will be withheld with respect to the $9,500 contributed to your 401(k) account. This severance pay includes all your accrued vacation pay. (b) BENEFITS: --------- ACC will make an additional contribution to your 401(k) account in the amount of $3,900 (3% of your total base salary of $130,000). In lieu of your health/dental insurance, cellular telephone allowance, long distance allowance, officer reimbursement allowance and all other employee benefits of any nature, including disability insurance, ACC shall pay to you the sum of $13,800. Said payment shall be reported to the applicable taxing authorities as compensation to the same extent as it had been previously (with $6,100 being the total cost for one year of COBRA coverage equivalent to the health/dental coverage you now have, $2,400 cellular telephone allowance, $300 long distance allowance and $5,000 officer reimbursement allowance and compensation for disability insurance premiums). (c) SUPPLEMENTARY BENEFITS: ----------------------- In addition to the foregoing benefits set forth in subparagraph (b) above, you will be entitled to the following benefits without regard to any new employment you may obtain: i. Outplacement Allowance of $15,000, payable upon the effective date of this Agreement ii. Annual incentive plan - 1995 - $52,000.00 payable upon the effective date of this Agreement iii. Transfer of Company Car (Volvo) - Prior to 12/27/96, the Company will buy out the existing lease and purchase the 1995 Volvo company car for you. Until such time as that buy-out is accomplished, ACC will continue to pay the lease, insurance and service payments in place at this time. The decision as to when prior to 12/27/96 the buy-out will be accomplished shall rest exclusively with ACC iv. Accelerated vesting of all current unvested stock options that would otherwise have vested through 1/3/97. These options will vest as of the effective date of this Agreement and you may exercise them at any time through March 31, 1996. (See attached Schedule "A.") (d) ENTIRE PACKAGE: --------------- You acknowledge and represent that you have received or will receive pursuant to this Agreement all compensation, both monetary and - 3 - non-monetary, including but not limited to wages, bonuses, benefits, overtime pay, supplements, vacation and holiday pay, sick pay, disability pay and all other sums of money, stock options, stock appreciation rights or similar rights to which you are entitled from ACC through December 21, 1995, except as may be specifically set forth or provided for in this Agreement. This Agreement shall not operate to waive any benefits due to you as a result of retirement, the New York Workers' Compensation Law and the New York Unemployment Insurance Law. You will also be reimbursed for authorized expenses incurred before December 21, 1995. (e) PAYMENT: -------- All payments required by ACC shall be made on the eighth (8th) day (or first business day thereafter) after your execution and delivery of this Agreement. 2. RETURN OF PROPERTY: ------------------- Upon your receipt of the sums set forth in paragraph 1(a) above, you will return all property and materials which belong to ACC (whether or not such materials were prepared by ACC) and which are in your possession or over which you exercise any control, including, but not limited to all proprietary documents, data, records, computer hardware, computer software and documentation, notebooks, or other information pertaining to ACC's business and operations, and you agree not to keep copies thereof in any form. ACC will make available such non-confidential records and documents as you may reasonably request from time to time as may be necessary for you to file any tax returns, applications, or reports or to respond to any litigation in which you may be involved against third parties. Notwithstanding the foregoing, for the sum of $1.00 you may purchase from ACC your (i) personal computer equipment; (ii) Casio and software; and (iii) dictaphone. 3. FUTURE CONDUCT: --------------- (a) FUTURE CONDUCT: --------------- Except to the extent required by law, you agree that you will not, at any time after the date hereof, disclose to any person, corporation, partnership or other entity whatsoever any non-public business plans, procedures, pricing and marketing structure and strategies, programs, forms, confidential information, trade secrets or other data and information relating to ACC learned by you at any time during your employment with ACC. - 4 - (b) CONFIDENTIALITY: ---------------- Except to the extent required by law, you understand and agree that as a condition of the payment and agreements described in this Agreement, the terms of this Agreement shall be kept confidential by you, except that you may disclose the terms of this Agreement to your spouse, attorney and/or accountant if he or she also agrees to keep this Agreement and its terms confidential. (c) DISPARAGEMENT: -------------- You and ACC agree to refrain from making any statements, whether verbal or written, which disparage you or ACC or any subsidiary or affiliate thereof, its employees, management, products, policies or services. (d) RE-EMPLOYMENT: -------------- You covenant and agree at any time after the date of this Agreement, not to apply for or otherwise seek employment with ACC or any wholly-owned subsidiary or affiliate thereof and do hereby waive any and all rights you may have to do so. 4. MISCELLANEOUS: -------------- (a) Notwithstanding the release provided in paragraphs 5(a) and (b) below, if either party breaches this Agreement, the other party retains all rights or remedies provided in law or in equity by reason of said breach. (b) You acknowledge that this is our entire agreement and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect thereto, including any rights of the parties under the Employment Continuation Incentive Agreement in effect on the date of your termination, but does not supersede the agreements between you and ACC concerning indemnification. You further acknowledge that the headings in this Agreement are for convenience only and have no bearing on the meaning of this Agreement. (c) This Agreement shall not in any way be construed as an admission by ACC that it or its officers, directors, employees or advisors have acted wrongfully with respect to you or that you have any rights whatsoever against ACC, its officers, directors employees, or advisors. Similarly, this Agreement shall not in any way be construed as an admission by you of any wrongdoing. - 5 - (d) You have consulted with the law firm of Sullivan & Cromwell, New York, New York, regarding this Agreement before signing it. (e) You have carefully read and fully understand all the terms of this Agreement and are freely and voluntarily entering into this Agreement without coercion. In addition, you have been given a draft of this Agreement and will have at least twenty-one (21) days to consider its terms although you may sign it at any time during the 21 day period. You have carefully considered the terms set forth in this Agreement. You understand that this Agreement may be revoked by you within seven (7) days of its execution by you and that this Agreement shall not become effective or enforceable until this revocation period has passed. 5. RELEASES: --------- (a) As a material inducement to ACC to enter into this Agreement and in consideration for the above, you agree to forever release, acquit, covenant not to sue and discharge ACC, and its subsidiaries, affiliates, employees, officers, representatives, attorneys, directors and shareholders and their predecessors, successors and assigns from and against any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses of any nature whatsoever, known or unknown, suspected or unsuspected and all claims for attorney's fees, costs, disbursements, and expert witness fees which you now have, own or hold or claim to have, own or hold or which you owned or claimed to have owned or held, including, but not limited to those relating to or arising out of: (1) your employment with ACC; (2) your termination of employment with ACC; (3) claims relating to wages, payments and benefits except as excluded herein; (4) the New York Labor Law, the New York State Human Rights Law, the New York State Lawful Activities Act (section 201-d of the New York Labor Law), Section 740 of the New York Labor Law ("Whistleblower Statute"), Title VII of the Civil Rights Act of 1964, Title IX of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Equal Pay Act, the Employee Retirement Income Security Act of 1974, the Age Discrimination in Employment Act of 1967, as amended, the Older Workers Benefit Protection Act of 1990, the Rehabilitation Act of 1973, the Fair Labor Standards Act, the Occupational Safety and - 6 - Health Act, the Americans with Disabilities Act, Federal Executive Order 11246 and all amendments thereto, the Family and Medical Leave Act, New York Civil Rights Law (S)(S) 70-a, and all regulations pertaining to all such laws; (5) any other federal, state or local law, rule or regulation; and (6) all tort claims and all claims of wrongful or unjust termination, defamation, prima facie tort, breach of or interference with contract, promissory estoppel, intentional infliction of emotional distress or breach of any express or implied covenant of good faith and fair dealings. You agree that ACC shall not have any obligation to you other than as set forth in this Agreement or as set forth in any employee benefit plan in which you are a participant for any other monies or benefits including, but not limited to, salary, benefits, bonus, or vacation or any obligation set forth in any agreement of employment or other agreement with ACC, whether such agreement shall be express or implied. Provided, however, that this release shall not affect or diminish your rights, as a matter of law or contract, to indemnification from ACC. (b) As a material inducement to you to enter into this Agreement and in consideration for the above, ACC and its subsidiaries and affiliates agree to forever release, acquit, covenant not to sue and discharge you, and your predecessors, successors and assigns from and against any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses of any nature whatsoever, known or unknown, suspected or unsuspected and all claims for attorney's fees, costs, disbursements, and expert witness fees which ACC now has, owns or holds or claims to have, own or hold or which ACC owned or claimed to have owned or held, including, but not limited to those relating to or arising out of: (1) your employment with ACC; (2) your termination of employment with ACC; (3) claims relating to wages, payments and benefits except as excluded herein; (4) the New York Labor Law, the New York State Human Rights Law, the New York State Lawful Activities Act (section 201-d of the New York Labor Law), Section 740 of the New York Labor Law ("Whistleblower Statute"), Title VII of the Civil Rights Act of 1964, Title IX of the - 7 - Civil Rights Act of 1964, the Civil Rights Act of 1991, the Equal Pay Act, the Employee Retirement Income Security Act of 1974, the Age Discrimination in Employment Act of 1967, as amended, the Older Workers Benefit Protection Act of 1990, the Rehabilitation Act of 1973, the Fair Labor Standards Act, the Occupational Safety and Health Act, the Americans with Disabilities Act, Federal Executive Order 11246 and all amendments thereto, the Family and Medical Leave Act, New York Civil Rights Law (S)(S) 70-a, and all regulations pertaining to all such laws; (5) any other federal, state or local law, rule or regulation; and (6) all tort claims and all claims of wrongful or unjust termination, defamation, prima facie tort, breach of or interference with contract, promissory estoppel, intentional infliction of emotional distress or breach of any express or implied covenant of good faith and fair dealings. 6. ERISA CONTINGENCIES/COMPLIANCE: ------------------------------- (a) Nothing herein contained, and no action taken pursuant to this Agreement by either party hereto, shall create, or be construed to create, a trust of any kind, or a fiduciary relationship between ACC and you or any other employee except as provided below. (b) In the event that this Agreement is deemed to be a welfare benefit plan under the Employee Retirement Income Security Act of 1974 ("ERISA"), then: (1) ACC is hereby designated as the named fiduciary under the Agreement. The named fiduciary shall have authority to control and manage the operation and administration of the Agreement, and it shall be responsible for establishing and carrying out any funding policy and method consistent with the objectives of the Agreement; (2) ACC shall make all determinations as to eligibility rights and benefits under the Agreement as to any individual other than you. Any decision by ACC denying a claim by an employee for benefits under the Agreement shall be stated in writing and delivered or mailed to such employee. Such decision shall set forth the specific reasons for the denial, written to the best of ACC's ability in a manner that may be understood without legal counsel. In addition, ACC shall afford a reasonable opportunity to such employee for a full and fair review of the decision denying such claims; - 8 - (3) Subject to the foregoing, ACC shall have full power and authority to interpret, construe and administer the Agreement as it may apply to individuals other than you. The interpretation and construction of the Agreement by ACC, and any action taken under it, shall be binding and conclusive upon all parties in interest other than you. No officer, director, or employee of ACC shall, in any event, be liable to any person for any action taken or omitted to be taken in connection with the interpretation, construction or administration of the Agreement with respect to individuals other than you, so long as such action or omission to act is made in good faith. (4) All parties to the Agreement or claiming any interest under the Agreement other than you shall be bound by such amendments or termination. (5) Provided that no interpretation, amendment or termination of this Agreement shall reduce or affect in any way your rights hereunder, ACC shall have the right to terminate any plan created by this Agreement at any time as it may apply to anyone other than you. Please review this Agreement carefully. Please consult with your attorney, if you wish. We would like it returned to us signed by no later than the 22nd day after it is provided to you. If you do not return it to us, signed, by that date, we shall assume that you have elected not to accept the terms and conditions of this Agreement. Your signature below indicates your acceptance of this Agreement and shall cause this Agreement to be binding upon you, your heirs, representatives and assigns. Your signature shall also signify that you have read and understood the Agreement, have reviewed it with your attorney or have elected not to do so. Very truly yours, ACC Corp. By: /s/ David K. Laniak ------------------------ Accepted and Agreed to on this 29th day of December, 1995. /s/ Francis D.R. Coleman - ------------------------------ Francis D.R. Coleman - 9 - Schedule "A" ------------ The following schedule sets forth those options that currently are unvested but that, as of the effective date of this Agreement, will be vested: 1996 Stock Option Vesting Schedule ----------------------------------
Shares Granted Grant Date Grant Price 96 Vesting 12,300 01/03/95 14.75 3,075 7,500 06/03/92 10.9167 1,875 7,500 11/30/92 18.75 1,875 25,000 08/11/94 14.75 6,250 ------ 13,075 97 Vesting 12,300 01/03/95 14.75 3,075 ------ 16,150
EX-99.3 6 CONTINUATION INCENTIVE AGREEMENT Exhibit 99.3 SCHEDULE OF EMPLOYMENT CONTINUATION INCENTIVE AGREEMENTS -------------------------------------------- ACC Corp. has executed or will execute Employment Continuation Incentive Agreements ("Agreements") with a number of its officers. Some officers have executed Agreements with a one year term, while others have executed Agreements with a six month term. The provisions of these two Agreements differ only with respect to the term which mentioned in paragraphs 2, 4, 6, 9 and 13. The Agreement with a term for one year is attached hereto. The selection of officers to receive Agreements with a one year term are based on several criteria: (a) minimum of one year service; (b) performance is judged to be above expectations; (c) loss of officer introduces high risk to the organization. All other officers not meeting all three criteria were or will be extended the Agreement with a six month term./1/ The schedule that follows lists the name and title of each officer who has executed an Agreement, the type of Agreement executed and the date when the Agreement was executed.
ONE YEAR AGREEMENTS: - -------------------- TITLE NAME DATE EXECUTED ----- ---- ------------- Chief Operating Officer Arunas A. Chesonis 9/20/89 Chief Financial Officer Michael R. Daley 7/15/92 President USLD Michael L. LaFrance 2/24/94 President TelEnterprises Steve Dubinik 8/4/94 President UK Ltd. Christopher Bantoft 7/7/95 V.P. Operations TelEnterprises Maggs Barrett 1/1/94 Finance Director UK Ltd. Raj Raithatha 7/7/95 General Counsel UK Ltd. Michael Taylor 7/3/95 Commercial Svcs. Director - UK Ltd. Mae Squier - Dow 7/27/92 Corporate General Counsel Daniel Venuti 1/26/94 SIX MONTH AGREEMENTS: - --------------------- TITLE NAME DATE EXECUTED ----- ---- ------------- Controller Sharon L. Barnes 10/12/94 V.P. Human Resources George H. Murray 8/22/94 V.P. Finance - ACC Corp. John J. Zimmer 7/28/92 V.P. Sales & Marketing - USLD Jack Baron unexecuted as of this date V.P. Carrier Sales Tab Hebert 11/10/94 V.P. Finance - USLD Michael Tubre unexecuted as of this date V.P. Operations Alex Volta unexecuted as of this date V.P. & General Manager - ANTC Richard Ottalagana unexecuted as of this date Controller - TelEnterprises Felicity Guest 8/4/94 V.P. Sales - TelEnterprises Stuart MacMillan 1/96 Corporate Counsel - TelEnterprises Barry Singer 4/28/94 Director of Marketing John Bush 1/96 Director of Facility Planning Joe LaBell 8/21/92 Director of Engineering & Operations Richard Padulo 8/19/92 Assistant Corporate Counsel Sarah Ayer-Gudell 7/23/92 Assistant to the Chairman & CEO Amy L. Cave 7/14/92 Operations Director - UK Ltd. David Conner 4/5/95
- -------------------- /1/ Further, although there are slight variations to these agreements by country (i.e., Canada and the United Kingdom), the basic terms of these agreements are the same as those executed in the United States and attached hereto. EMPLOYMENT CONTINUATION INCENTIVE AGREEMENT (ONE YEAR) AGREEMENT made by and between ACC CORP., with its principal executive offices at 400 West Avenue, Rochester, New York 14611, and ________________________, residing at ____________________________________________________, ("Employee"). R E C I T A L S: - - - - - - - - WHEREAS, the Employee is either commencing employment or has been a key employee of ACC Corp. and/or of one or more of its subsidiaries; and WHEREAS, the business environment in which ACC Corp. and its subsidiaries operate is an extremely competitive and constantly changing one, often involving mergers, acquisitions, hostile takeovers and corporate restructurings that can occur with little notice; and WHEREAS, in view of this business environment and in view of the valuable contributions that the Employee makes or will make to the business of the Company (as defined below), ACC Corp. desires, through this Agreement, to provide some measure of security to the Employee as an incentive to the Employee to become or remain a key employee of the Company (as defined below) and to labor diligently on its behalf; NOW, THEREFORE, in consideration of the mutual promises contained herein, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: - 2 - 1. DEFINITIONS. The following terms shall have the following ----------- meanings in this Agreement: (a) "Acquiring Entity" shall mean any entity, whether a corporation, ---------------- partnership, joint venture, etc., that, as a result of a Change In Control, either directly or indirectly has effective control over the business plans, direction and operations of ACC Corp. This term shall also include any subsidiaries or related entities over which the Acquiring Entity has control, and shall also include any entity that, within one year following a Change In Control of ACC Corp., acquires control over the entity that acquired control of ACC Corp. (b) "Benefits" shall mean any and all employee benefits, both taxable -------- and non-taxable, including but not limited to: life, health and dental insurance; automobile allowance or leased automobile; cellular telephone; officer's reimbursement fund; relocation reimbursement fund; long distance calling allowance, payment of professional association dues, fees, and licenses; 401(k) Plan matching contributions, or the equivalent dollar value of each such employee benefit. If required by the context, Benefits shall also mean the value or cost to the Company of such Benefits. The term "Benefits" does not include any amounts deemed Compensation, nor the continuation of any disability, health, dental or life insurance coverage beyond the terms of the policies for such insurance as the same may exist on the effective date of an Event of Termination. (c) "Change In Control" shall mean a change in control of ACC Corp. of a ----------------- nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 as in effect on the - 3 - date of this Agreement or, if in the future Item 6(e) is no longer in effect, any regulations issued by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 which serve similar purposes; provided that, without limitation, a Change In Control shall be deemed to have occurred if and when: (x) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than the Employee, is or becomes a beneficial owner, directly or indirectly, of securities of ACC Corp. representing a majority of the combined voting power of ACC Corp.'s then outstanding securities (excluding, however, the transfer of any shares beneficially owned by the Employee); or (y) individuals who were members of the Board of Directors of ACC Corp. immediately prior to a meeting of the shareholders of ACC Corp. involving a contest for the election of Directors shall not constitute a majority of the Board of Directors following such election. The effective date of any such Change in Control shall be the closing date of the transaction that results in the Change in Control. The terms of this subparagraph (c) shall also apply to any change in control of any entity that acquires control of an Acquiring Entity within one year following the acquisition by the Acquiring Entity of control of ACC Corp. (d) "Company" shall mean ACC Corp. and/or any of its subsidiaries and/or ------- affiliates as the same may exist from time to time anywhere in the world, regardless of the laws under which incorporated. (e) "Compensation" shall mean the Employee's salary, accrued bonuses, if ------------ any, and any stock options held by or awards granted to Employee under the Company's - 4 - Employee Long-Term Incentive Plan or other stock option or similar Company plan in effect from time to time, but shall exclude any Benefits. (f) "Disability" shall mean the Employee's total inability, due to a ---------- mental or physical illness, incapacity or injury, to render his/her full-time services to the Company for any period of 60 consecutive days or, if longer, such period of time as is necessary for the Employee to be deemed "totally disabled" within the meaning of any long-term disability insurance provided by the Company and covering the Employee. (g) "Event of Termination" shall mean the termination of Employee's -------------------- employment, whether due to a Termination For Cause, a Termination Without Cause, a Change In Control or a Voluntary Termination of Employment by Employee, such that Employee is no longer employed by the Company. (h) "Termination For Cause" shall mean that the Company, in its sole --------------------- discretion, terminates Employee's employment due to Employee's personal dishonesty (in relation to his/her employment and duties with the Company), incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation or final cease and desist order, the penalty for which constitutes a felony under applicable law; or any breach of Paragraphs 6 or 7 of this Agreement. For purposes of this paragraph 1(h), no act or failure to act on Employee's part shall be considered "intentionally done" or "willfully done" unless done or omitted to be done by Employee in bad faith and without reasonable belief that such act or omission was in the best interests of the Company. Notwithstanding the foregoing, Employee shall not be deemed to have been Terminated For Cause unless and - 5 - until there shall have been delivered to him/her a copy of a resolution duly adopted by the affirmative vote of a majority of the entire Board of Directors of ACC Corp. (or, in the event that Employee is a Director of ACC Corp., then by the affirmative vote of a majority of the non-employee Directors of ACC Corp. then in office) at a meeting of the ACC Corp. Board of Directors duly called and held for that purpose (after reasonable notice to Employee and an opportunity for Employee, together with his/her counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Employee was guilty of conduct set forth in this paragraph 1(h) and specifying the particulars thereof in reasonable detail. (i) "Termination Without Cause" shall mean that the Company, in its sole ------------------------- discretion, terminates the Employee's employment not for any reason that would constitute a Termination For Cause, nor as a result of any Change In Control, nor as a result of a Voluntary Termination of Employment by the Employee. (j) "Voluntary Termination of Employment by the Employee" shall mean --------------------------------------------------- that the Employee, at his/her volition, leaves his/her employment with the Company not under a circumstance involving a Termination Without Cause, a Termination For Cause, nor a Change In Control. 2. VOLUNTARY TERMINATION OF EMPLOYMENT BY EMPLOYEE. In the event ----------------------------------------------- of a Voluntary Termination of Employment by the Employee, he/she shall not be entitled to receive any payments hereunder. Under such circumstances, the Employee shall only be entitled to receive: (a) his/her accrued but unpaid salary and any other nonforfeitable Compensation and Benefits accrued as of the effective date of such Event of Termination; and (b) for the one year period following the effective date of Employee's Voluntary - 6 - Termination of Employment, Employee will be deemed to be an "employee" of the Company for purposes of any stock option or similar plans of the Company then in effect, and any stock options that Employee holds under any such plan(s) on the effective date of his/her Voluntary Termination of Employment will continue to vest and be exercisable in accordance with their terms for such one year period. 3. TERMINATION OF EMPLOYMENT FOR CAUSE. In the event that the ----------------------------------- Employee's employment is Terminated For Cause, he/she shall not be entitled to receive any payments hereunder. Under these circumstances, the Employee shall only be entitled to receive his/her accrued but unpaid salary and any other nonforfeitable Compensation and Benefits accrued as of the effective date of such Event of Termination. 4. TERMINATION OF EMPLOYEE'S EMPLOYMENT WITHOUT CAUSE. In the -------------------------------------------------- event that the Company terminates Employee's employment Without Cause, the Employee shall be entitled to receive his/her then-current Compensation and Benefits for one year following the effective date of such Event of Termination; provided, however, that the Employee is and at all times hereunder remains in - -------- compliance with Paragraph 7 hereof. For purposes of this Paragraph 4, the term "Compensation" shall also include the payment (in a lump sum at the end of such year or in equal monthly installments over the course of the next succeeding year, at the Company's election and in either case without interest) of the pro- rated amount of the bonus, if any, that Employee would receive for the calendar year in which this Event of Termination occurs as determined under the Company's Annual Incentive Plan as established by the Executive Compensation Committee of the Company's Board of Directors in advance for that calendar year; such amount to be pro-rated by multiplying the - 7 - amount of such bonus for the full year by a fraction the numerator of which is the number of months worked by the Employee during that calendar year through the effective date of this Event of Termination and the denominator of which is 12. Such payments shall be made on the Company's normal payroll schedule, except that at any time during such one year period, Employee may give notice to - ----------- the Company or an Acquiring Entity, as the case may be, requesting payment of the remaining amount of his/her Compensation and Benefits in a lump sum payment, which request the Company or the Acquiring Entity may, at their sole discretion, agree to or reject. If this request is agreed to by the Company or the Acquiring Entity, as the case may be, then such lump sum payment shall be paid to Employee within 30 days following receipt of such notice, subject to the Company's receipt of an executed release from the Employee, substantially in the form attached as Exhibit A hereto, prior to the payment of any such lump sum payment. In any event, should Employee commence other employment within such one year period, he/she shall promptly notify the Company or the Acquiring Entity of such event and the Company or the Acquiring Entity may at its option, within 30 days following receipt of such notice, pay the Employee the remaining amount of his/her Compensation and Benefits in a lump sum payment. If the Employee's employment is Terminated Without Cause at any time within one year following a Change in Control, such termination shall automatically be deemed to be a Termination in the Event of a Change in Control, and the Employee shall be entitled to all rights set forth in Paragraph 5 hereof. If Employee should commence other employment with an entity that the Company deems a competitor as described in subparagraph 6(c) below, then the Company shall have the right to stop further payment of any and all Compensation and Benefits that may be - 8 - payable to the Employee hereunder. Further, in the event of Employee's Termination Without Cause, for so long as Employee is receiving payments of his/her Compensation and Benefits under the terms of this Paragraph 4, Employee will continue to be deemed an "employee" of the Company in all respects (e.g., for life and health insurance, income tax and other such purposes) and any options that Employee holds on the effective date of his/her Termination Without Cause under any stock option plan of the Company will continue to vest and be exercisable in accordance with their terms. At such time as all payments under this Paragraph cease for whatever reason, Employee will no longer be deemed an "employee" of the Company for any such purposes. 5. TERMINATION OF EMPLOYEE'S EMPLOYMENT IN THE EVENT OF A CHANGE ------------------------------------------------------------- IN CONTROL. If, in connection with preparing for, or within one year following, - ---------- a Change In Control: (i) the Employee's employment with the Company or the Acquiring Entity is Terminated Without Cause by the Company or the Acquiring Entity; or (ii) the Employee resigns his/her employment with the Company or with the Acquiring Entity upon the occurrence of any of the following: (a) A significant change in the nature or scope of Employee's employment duties or authority including, but not limited to, without Employee's prior written consent assigning Employee duties inconsistent with his/her status within the Company or substantially altering Employee's duties and responsibilities so as to render his/her position to be of less dignity, responsibility or scope; - 9 - (b) Employee being required by the Company or the Acquiring Entity, as a condition of employment, to take up permanent residence outside of or to spend more than 25% of his/her time in any location that is more than a 50 mile radius from the Rochester, New York metropolitan area (except for required travel on Company business to an extent substantially consistent with Employee's customary business travel obligations); (c) A reduction in Employee's Compensation or Benefits as in effect on the execution date hereof or as the same may be increased from time to time, excluding, however, (i) reductions in bonuses paid from year to year when such bonuses are based upon objective performance criteria (e.g., ---- increases in earnings per share, return on equity, etc.) established in advance by the Board of Directors or Executive Compensation or comparable Committee of the Board of ACC Corp. or an Acquiring Entity, as the case may be; and (ii) proportional across-the-board Compensation or Benefits reductions similarly affecting all executives and/or key employees of the Company or the Acquiring Entity, as the case may be; provided, however, that in no event shall Employee's Compensation be reduced below its current annual amount as in effect on the execution date hereof without Employee's prior written consent; (d) Failure to grant Employee an annual salary increase reasonably necessary to maintain such salary as comparable to salaries - 10 - of key employees holding positions equivalent to Employee's in the industry in which the Company's then-principal business activity is conducted; (e) Failure by the Company or an Acquiring Entity, as the case may be, to continue in effect any compensation plan, program or arrangement in which Employee then participates unless an equitable arrangement reasonably acceptable to Employee and embodied in an ongoing substitute or alternative plan, program or arrangement has been made with respect to such plan, or the failure to continue Employee's participation therein; (f) Any material reduction by the Company or an Acquiring Entity, as the case may be, of any of the Benefits enjoyed by Employee under any of the Company's pension, retirement, profit sharing, savings, life insurance, medical, health and accident, disability or other employee benefit plans, programs or arrangements as in effect from time to time, the taking of any action by the Company or an Acquiring Entity, as the case may be, that would directly or indirectly materially reduce any of such Benefits or deprive Employee of any such Benefits, or the failure by the Company or an Acquiring Entity, as the case may be, to provide Employee with the number of paid vacation days to which he/she is entitled on the basis of years of service with the Company in accordance with its normal vacation policy; provided, however, that this subparagraph shall not apply to any proportional across-the-board reduction or action similarly affecting all - 11 - executives and/or key employees of the Company or an Acquiring Entity, as the case may be; (g) Failure of the Company to obtain a satisfactory agreement from any Acquiring Entity to assume and agree to perform this Agreement; then the Employee shall be entitled to receive his/her then-current Compensation and Benefits as were in effect immediately prior to any such Change In Control for one year following the effective date of such resignation or Termination Without Cause; provided, however, that the Employee is and at all times -------- hereunder remains in compliance with Paragraph 7 hereof. For purposes of this Paragraph 5, the term "Compensation" shall also include the payment (in a lump sum by the end of such year or in equal monthly installments over the course of the next succeeding year, at Employee's election and in either case without interest) of the amount of the bonus that Employee would receive for the full calendar year in which this Event of Termination occurs based on the "Maximum" amount of such bonus as determined under the Company's Annual Incentive Plan as established by the Executive Compensation Committee of the Company's Board of Directors in advance for that calendar year. Such payments shall be made on the normal payroll schedule of the Company or the Acquiring Entity, as the case may be, except that at any time during such one year period, Employee shall have the ----------- right, upon notice to the Company or an Acquiring Entity, as the case may be, to elect to be paid the remaining amount of his/her Compensation and Benefits in a lump sum payment, which the Company or the Acquiring Entity must then pay to Employee within 30 days following receipt of such notice, subject to receipt by the Company or the Acquiring - 12 - Entity of an executed release from the Employee, substantially in the form attached as Exhibit A hereto, prior to the payment of such lump sum payment. In no event shall the compensation to which the Employee is entitled under this Paragraph be less than the greater of (i) Employee's then-current Compensation and Benefits as were in effect immediately prior to the effective date of such resignation or Termination Without Cause, or (ii) Employee's then-current Compensation and Benefits as were in effect immediately prior to the date of the Change In Control. Additionally, Employee shall be entitled to receive the same treatment with respect to any options that he/she may hold under the ACC Corp. Employee Long- Term Incentive Plan at the time that such a Change In Control occurs as that accorded to other similarly situated key employees of the Company regardless of whether they remain employees of the Company or the Acquiring Entity or are deemed to be Terminated due to a Change In Control. 6. COVENANT NOT TO COMPETE. Employee hereby covenants and agrees ----------------------- that, while employed by the Company during the term of this Agreement, and for one year following a Termination For Cause or a Voluntary Termination of Employment by the Employee: (a) He/she will not, for himself/herself or on behalf of any other person, firm, partnership or corporation call upon any customer of the Company for the purpose of soliciting or providing to such customer any products or services which are the same as or substantially similar to those provided to customers by the Company. For purposes of this Agreement, "Customers of the Company" shall include, but not be limited to, all customers - 13 - contacted or solicited by the Company or the Employee within twelve months prior to any termination of this Agreement; (b) Employee will not, directly or through another person or entity, for himself/herself or on behalf of any other person, firm, partnership or corporation, directly or indirectly, seek to persuade any director, officer, or employee of the Company to discontinue that individual's status or employment with the Company; and (c) Employee will not, directly or indirectly, alone or as an employee, independent contractor of any type, partner, officer, director, creditor, substantial (i.e., 5% or greater) stockholder or holder of any option or right to become a substantial stockholder in any entity or organization, engage (i) within the Company's principal geographic area(s) of operation or (ii) in substantial and direct competition with any other business operation actively conducted by the Company, in any business pertaining to the sale, distribution, manufacture, marketing, production or provision of products or services similar to or in competition with any products or services produced, designed, manufactured, sold, distributed or rendered, as the case may be, by the Company; nor for the same period of time, within the same areas and under the same conditions as previously set forth, shall the Employee advance credit, lend money, furnish quarters or give advice, directly or indirectly, to any person, corporation or business entity of any kind (other than the Company) which is engaged in any such business or operation, nor shall he/she, directly or indirectly, ship or cause to be shipped or have any part in the shipping of such products to any point within said areas for the purposes of resale; provided, however, that nothing contained in this paragraph shall prevent the Employee from investing in corporate securities which are traded on a - 14 - recognized stock exchange. It shall not be a breach or a threat of a breach of subparagraphs 6(b) or 6(c) of this Agreement for Employee to explore or seek employment, including employment with a business of a type described in this subparagraph, for him or herself. (d) If any of the restrictions on competitive activities contained in this Paragraph 6 shall for any reason be held by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, such restrictions shall be construed so as to thereafter be limited or reduced to be enforceable to the extent compatible with applicable law as it shall then exist; it being understood that by the execution of this Agreement the parties hereto regard such restrictions as reasonable and compatible with their respective rights and expectations. (e) Additionally, if any conduct prohibited by this Paragraph 6 is approved by ACC Corp.'s Board of Directors, then such conduct shall not constitute a breach of this Agreement. 7. TRADE SECRETS; NON DISPARAGEMENT. Except as may be required -------------------------------- by his/her employment with the Company, the Employee will not at any time or in any manner, directly or indirectly, divulge, disclose or communicate to any person, firm, corporation, organization or entity any information concerning matters affecting or relating to the services, marketing, contractual relationships, long range plans, products, processes, formulas, inventions, discoveries, devices or other business of the Company or of its customers. The Employee will likewise hold inviolate and keep secret all knowledge or information acquired by him/her concerning the names of the Company's customers, their addresses, the prices the Company obtains or has obtained from them for its goods or - 15 - services, all knowledge or information acquired by him/her concerning the products, formulas, processes, methods of manufacture and distribution and all other trade secrets of such customers. In addition, the Employee shall make no disclosure, directly or indirectly, of any financial information, contractual relationships, policies, past or contemplated future actions or policies of the Company, personnel matters, marketing or sales data, technical data or specifications and written or oral communications of any sort of the Company or any of its customers which have not previously been disclosed to the general public with the Company's consent or without first obtaining the consent of the Company for such disclosure. Upon the occurrence of any Event of Termination, the Employee or his/her representatives shall immediately deliver to the Company all notes, notebooks, letters, papers, drawings, memos, communications, blueprints or other writings or data relating to the business of the Company or its customers. Additionally, Employee shall not in any way publicly disparage the Company at any time or he/she shall not be entitled to receive payment of any further Compensation and Benefits otherwise payable hereunder. Likewise, neither the Company nor any Acquiring Entity shall in any way publicly disparage the Employee at any time. (For purposes of this Agreement, however, the commencement of any legal proceedings involving matters such as Employee's performance, conduct, etc., shall not constitute "disparagement.") 8. INJUNCTIVE RELIEF. ----------------- (a) Because the Employee shall acquire by reason of his/her employment and association with the Company an extensive knowledge of the Company's trade secrets, customers, procedures, and other confidential information, the parties hereto recognize that - 16 - in the event of a breach or threat of breach by the Employee of the terms and provisions contained in Paragraphs 6 or 7 hereof, compensation alone to the Company would not be a adequate remedy for a breach of those terms and provisions. Therefore, it is agreed that in the event of a breach or threat of a breach of the provisions of Paragraphs 6 or 7 by the Employee, the Company shall be entitled, in addition to (i) terminating further payment of any Compensation and Benefits that may be payable to the Employee hereunder and (ii) provable damages, to an immediate injunction from any court of competent jurisdiction restraining the Employee from committing or continuing to commit a breach of such provisions without the showing or proving of actual damages. Any preliminary injunction or restraining order shall continue in full force and effect until any and all disputes between the parties regarding this Agreement have been finally resolved on the merits by settlement or by a court of law. (b) In the event of a breach or threat of a breach of the provisions of Paragraphs 6 or 7 by the Employee, the Company can, upon ten days' advance notice to Employee, terminate further payment of any and all Compensation and Benefits that may be payable to the Employee hereunder, regardless of whether the Company seeks or obtains injunctive relief under subparagraph 8(a) above. 9. SPECIAL PROVISIONS IN EVENT OF DISABILITY OR DEATH. -------------------------------------------------- (a) During the term hereof, in the event that the Employee becomes Disabled as defined in this Agreement, but for meeting the requirement that such a condition persist for a minimum of 60 consecutive days, then the Company agrees that it will not, except in a situation constituting a Termination For Cause, terminate the Employee's - 17 - employment or otherwise act so as to deprive the Employee of his/her eligibility to receive benefits under any Company-provided disability insurance policy. In all such circumstances, however, the Company retains the right to Terminate the Employee For Cause, at any time. (b) If the Employee is Terminated Without Cause after he/she begins receiving disability insurance payments under any Company-provided disability insurance policy, then he/she shall also be entitled to receive the one year of Compensation and Benefits payable in the event of a Termination Without Cause, limited, however, to the net amount, if any, by which such termination payments, - ------- ------- on a monthly basis, exceed the monthly benefits payable to the Employee under such disability insurance policy. (c) In the event that the Employee is Terminated Without Cause while Disabled as described in subparagraph (b) above, or in the event that the Employee dies during the term hereof, then the Employee or his/her estate, as the case may be, shall be entitled to the following benefit. Upon the occurrence of either such event, all unexercised stock options that the Employee may hold on that date under ACC Corp.'s Employee Long-Term Incentive Plan shall automatically be deemed fully exercisable for a period of one year following the occurrence of such event, subject, however, to the original term of the option grant(s), if shorter (the "Exercisability Period"). If at any time or from time to time during this Exercisability Period the Employee or his/her estate, as the case may be, desires to exercise any of such stock options, then he/she or his/her estate shall so notify ACC Corp., stating specifically the number of options being exercised, and shall comply with the other requirements of such Plan in effecting such exercise(s). - 18 - (d) The provisions of this Paragraph 9 shall not apply, except as provided above in this Paragraph 9, in the event that any Event of Termination under this Agreement shall first occur. Additionally, the Employee shall only be entitled to receive the Benefits provided by this Paragraph 9 if he/she is and at all times hereunder remains in compliance with Paragraphs 6 and 7 hereof. 10. SUPERSEDING OF OTHER OUTSTANDING EMPLOYMENT OR CONTINUATION ----------------------------------------------------------- AGREEMENTS. Upon its execution, this Agreement shall be in full force and - ---------- effect and shall automatically supersede any prior employment agreements or prior Employment Continuation Incentive Agreements then in effect between the Company and the Employee. Each party hereto also hereby waives and releases any claims it may have against the other arising under any such agreement that is superseded hereby. However, if the Employee is a party to an Indemnification Agreement with ACC Corp., that agreement is unaffected by this Paragraph and remains in full force and effect in accordance with its terms. 11. TERM. The term of this Agreement shall begin on the later to ---- occur of the date of execution hereof or the date on which the Employee commences his/her full-time employment with the Company (the "Effective Date") and shall terminate on the last day of the calendar month which is twelve calendar months following the month in which the Effective Date falls, unless further extended as follows: Commencing on the last day of the calendar month next following the month in which the Effective Date falls, and on the last day of each succeeding calendar month thereafter, the term of this Agreement shall automatically be extended, without further action by either party hereto, for one additional month unless one party provides the other with at least 30 days notice that it does not wish to - 19 - extend the term of this Agreement. In the event that such termination notice is given, this Agreement shall then terminate on the last day of the calendar month that is twelve calendar months following the date such notice is effective. The undersigned Employee who is a party to this Agreement shall have the sole discretion to deem a termination of this Agreement by the Company or an Acquiring Entity, as the case may be, to constitute a Termination Without Cause hereunder, unless all such Agreements with all key employees are collectively and simultaneously terminated. No rights to receive any Compensation or Benefits accrued under this Agreement shall be extinguished by its termination. 12. AUTOMATIC RESIGNATION. By signing this Agreement, the --------------------- Employee specifically agrees that without further action on the part of either party hereto, upon the occurrence of any Event of Termination hereunder, the Employee shall automatically be deemed to have resigned as an officer and director of ACC Corp. and all of its subsidiaries and affiliates. 13. SURVIVAL. The provisions of Paragraph 6, Covenant Not To -------- --------------- Compete, shall survive for one year following any Termination For Cause or - ------- Voluntary Termination of Employment by the Employee; the provisions of Paragraph 7, Trade Secrets, shall indefinitely survive the termination of this Agreement, ------------- and the provisions of Paragraphs 8, Injunctive Relief, and 15, General Terms, ----------------- ------------- shall survive the termination of this Agreement for so long as necessary to enable the Company to enforce any of the provisions of Paragraphs 6, 7 or 8 hereof. 14. BASE SALARY AND BENEFITS. During the term of this Agreement, ------------------------ the Employee's Compensation shall not be reduced, nor shall the Employee's Company-provided - 20 - Benefits be reduced, except as part of a Company-wide proportional reduction of Compensation or of such Benefits for all key employees of the Company. 15. GENERAL TERMS. ------------- (a) Notices. Any notice required or desired to be given hereunder shall ------- be in writing and shall be deemed to have been duly given (i) upon hand delivery, or (ii) on the third day following delivery to the U.S. Postal Service as certified mail, return receipt requested and postage prepaid, or (iii) on the first day following delivery to a recognized overnight courier service, fee prepaid, return receipt or other confirmation of delivery requested. Any such notice shall be delivered or directed to a party at its address previously set forth in this Agreement or to such other address as a party may specify by notice given to the other party hereto in accordance with the provisions of this paragraph. (b) Binding Effect. This Agreement and the rights and obligations -------------- contained herein shall be binding upon and inure to the benefit of the Company, its successors and assigns, including any Acquiring Entity, and upon the Employee, his/her legal representatives, heirs and distributees. (c) Modifications; Waiver. Any modification or waiver of this Agreement --------------------- must be in writing and signed by both parties to be effective. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. No course of dealing between the parties hereto will be deemed effective to modify, amend or discharge any part of this Agreement or the rights or obligations of either party hereunder. - 21 - (d) Entire Agreement. This Agreement contains the entire understanding ---------------- between the parties hereto and supersedes any prior understanding, memoranda or other written or oral agreements between them respecting the within subject matter. There are no representations, agreements, arrangements or understandings, oral or written, between the parties relating to the subject matter of this Agreement which are not fully expressed herein. (e) Partial Invalidity. The invalidity or unenforceability of any ------------------ particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. (f) Applicable Law. This Agreement shall be construed and enforced in -------------- accordance with the laws of the State of New York applicable to contracts made and to be performed wholly within New York State, without giving effect to conflict of laws principles. (g) Jurisdiction and Venue. In the event that any legal proceedings are ---------------------- commenced in any court with respect to any matter arising under this Agreement, the parties hereto specifically consent and agree that the courts of the State of New York and/or the Federal Courts located in the State of New York shall have jurisdiction over each of the parties hereto and over the subject matter of any such proceedings, and the venue of any such action shall be in Monroe County, New York and/or the U.S. District Court for the Western District of New York. (h) Headings. The headings contained in this Agreement are inserted for -------- convenience only and do not constitute a part of this Agreement. - 22 - (i) Counterparts. This Agreement may be executed in more than one ------------ counterpart, each one of which will be deemed an original and all of which shall constitute one and the same instrument. (j) Assignment. The Employee may not assign any of his/her rights, ---------- duties or obligations hereunder without the prior written consent of ACC Corp. However, ACC Corp. may assign any of its rights, duties or obligations hereunder to any of its subsidiaries or affiliates from time to time in its sole discretion. (k) Remedies. All rights and remedies of the Company or the Employee, -------- whether provided for herein or by operation of law, are cumulative and may be exercised singularly or concurrently, and the exercise of any such remedy shall not be deemed an election of remedies so as to preclude the election of any other remedy. (l) Named Fiduciary. The Board of Directors of ACC Corp. or of an --------------- Acquiring Entity, as the case may be, is hereby designated as the named fiduciary ("Named Fiduciary") under this Agreement. The Named Fiduciary shall have authority to operate and administer this Agreement, and it shall be responsible for establishing and carrying out a funding policy, if any, and method consistent with the objectives of this Agreement. (m) Claims Procedure. The Named Fiduciary shall make all determinations ---------------- regarding disputes between the Company or the Acquiring Entity, as the case may be, and the Employee as to the Employee's rights under this Agreement. Any such determination by the Named Fiduciary shall be stated in writing and delivered or mailed to the Employee or his/her estate, as the case may be, within 30 days following the Company or the Acquiring Entity becoming aware of such dispute. This communication shall set forth the specific - 23 - reason(s) for the determination, written to the best of the Named Fiduciary's ability in a manner that can be understood without legal or actuarial counsel. In addition, the Named Fiduciary shall afford a reasonable opportunity to the Employee or his/her estate, as the case may be, for a full and fair review of the determination. If Employee or his/her estate disagrees with the determination, or any part thereof, or if a determination is not received by the Employee or his/her estate within the 30 day period set forth above, then Employee or his/her estate may seek judicial relief. (n) Disputes. Notwithstanding anything to the contrary contained -------- herein, in the event of a dispute over Employee's entitlement to or level of Compensation and/or Benefits under this Agreement, the Company or the Acquiring Entity, as the case may be, shall be required to commence and continue providing to the Employee until final resolution of such dispute all Compensation and Benefits contemplated by Paragraph 5 hereof as if there were no dispute; provided, however, that Employee is and at all times hereunder remains in - -------- compliance with Paragraph 7 hereof. Neither the Company nor the Acquiring Entity shall have any right to require Employee or his/her estate, as the case may be, to repay or reimburse the Company or the Acquiring Entity for any Compensation or Benefits received by the Employee. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of ___________________, 199_. - 24 - EMPLOYEE: ACC CORP. _______________________________ By: __________________ Name Title: _______________ - 25 - EXHIBIT A [Date] [Name and Address of Employee] Dear_________________: You and ACC Corp. (the "Company") are parties to an Employment Continuation Incentive Agreement ("ECIA") dated ___________, 199_. You have requested a lump-sum payment of all remaining Compensation and Benefits (as those terms are defined in your ECIA) payable to you under the terms of your ECIA, pursuant to either Paragraph 4 or Paragraph 5 thereof. In consideration for the receipt of such lump-sum payment from the Company, you hereby agree to the following: 1) This Agreement is intended to settle fully and finally all claims, controversies, disputes and other matters between you and the Company. Accordingly, as a material inducement to the Company to enter into this Agreement and in consideration for the above lump-sum payment, you agree to forever release, acquit and discharge the Company, and its employees, officers, representatives, attorneys, directors and shareholders and their predecessors, successors and assigns from and against any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses of any nature whatsoever, known or unknown, suspected or unsuspected and all claims for attorney's fees, costs, disbursements, and expert witness fees which you now have, own or hold or claim to have, own or hold or which you owned or claimed to have, own or hold, including, but not limited to those relating to or arising out of: (a) your employment with the Company; (b) your termination of employment with the Company; (c) claims relating to wages, payments and benefits except as set forth herein; (d) the New York Labor Law, the New York State Human Rights Law, the New York State Lawful Activities Act, Title VII of the Civil Rights Act of 1964, Title IX of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Equal Pay Act, the Employee Retirement Income Security Act of 1974, the Age Discrimination in Employment Act of 1967, as amended, the Older Workers Benefit Protection Act of 1990, the Rehabilitation Act of 1973, the Fair Labor Standards Act, the - 26 - Occupational Safety and Health Act, the Americans with Disabilities Act, Federal Executive Order 11246 and all amendments thereto, the Family and Medical Leave Act, New York Civil Rights Law (S)(S) 70-a, and all regulations pertaining to all such laws; (e) any other federal, state or local law, rule or regulation; and (f) all tort claims and all claims of wrongful or unjust termination, defamation, prima facia tort, breach of or interference with contract, promissory estoppel, intentional infliction of emotional distress or breach of any express or implied covenant of good faith and fair dealings. You agree that the Company shall not have any obligation to you other than as set forth in your ECIA for any other monies or benefits including, but not limited to, salary, benefits, bonus, or vacation or any obligation set forth in any agreement of employment or other agreement with the Company, whether such agreement may be express or implied. 2. This Agreement shall not in any way be construed as an admission by the Company that it or its officers, directors or employees have acted wrongfully with respect to you or that you have any rights whatsoever against the Company or its officers, directors or employees. This Agreement shall not in any way be construed as an admission by you of any wrongdoing. 3. If you breach this Agreement, you acknowledge that all monies to be paid by the Company hereunder shall immediately cease, and you shall immediately return all monies paid pursuant to this Agreement and your ECIA. These rights are in addition to all other rights or remedies provided to the Company in law or in equity by reason of your breach. 4. You are hereby advised of your right to consult with an attorney before signing this Agreement and acknowledge that you have been given the opportunity to consult with an attorney before signing it. Further, you acknowledge that, as this Agreement was an Exhibit to your ECIA at the time you signed your ECIA, you have had a draft of this Agreement for more than 21 days to review it and consider its terms. Additionally, you understand that you can revoke this Agreement at any time within seven days following your execution of it, by written revocation notice to the Company sent certified mail, return receipt requested. Therefore, you understand and agree that the Company will not make any payment of the lump-sum you have hereby requested until 28 days have passed from the date the Company receives this Agreement signed by you. - 27 - Your signature below indicates your acceptance of this Agreement and shall cause this Agreement to be binding upon you, your heirs, representatives and assigns. Your signature shall also signify that you have read and understand the Agreement, and that you either have reviewed it with your attorney or have elected not to do so. Very truly yours, ACC Corp. By: ____________________ Title: _________________ Accepted and Agreed to on this __________ day of __________________________________, 199_ _________________________ Employee EX-99.4 7 PURCHASE WARRANT DATED 10/30/95 Exhibit 99.4 PURCHASE WARRANT 7,500 SHARES OF ACC CORP. $.015 PAR VALUE CLASS A COMMON STOCK FOR VALUE RECEIVED, ACC Corp. , a Delaware corporation (the "Company"), hereby grants to Peter H. Meyer (the "Holder"), the right, subject to the further terms and conditions set forth herein, to purchase from the Company 7,500 whole, fully paid and nonassessable shares (the "Shares") of its $.015 par value Class A Common Stock at a purchase price per Share of $18.75 (the "Purchase Price"). This Warrant shall be fully exercisable on its date of issuance and in all events shall expire and be of no further force or effect at the earlier of the time when it has been exercised with respect to all Shares which the Holder is entitled to purchase hereunder or 11:59 P.M., New York City time, on October 31, 1999 (the "Expiration Date"). The number and character of the Shares and the Purchase Price are subject to adjustment as hereinafter provided. As used herein, this "Warrant" means and includes this Warrant and any Class A Common Stock purchase warrant of the Company hereafter issued in substitution for or in replacement of this Warrant or to evidence to continuing effect of any part of this Warrant after any partial exercise hereof: 1. EXERCISE. This Warrant may be exercised in whole, or in part from time to time, by the Holder by delivering this Warrant together with an executed Subscription Agreement in the form annexed hereto as Exhibit A to the Company or such person as the Company may have appointed as warrant agent, as its principal office ( or at the office of the agency maintained for such purpose), accompanied by payment by certified or bank check payable to the order of the Company, in an aggregate amount equal to the per share Purchase Price as then adjusted multiplied by the number of Shares as to which this Warrant is then being exercised. The Company or such agent shall cancel this Warrant on any such exercise, and if such exercise is partial, shall issue and deliver to the Holder a new Warrant upon the same terms as contained herein with respect to the unexercised portion of this Warrant. Anything in this Warrant to the contrary notwithstanding, this Warrant may not be exercised after the Expiration Date and may be exercised only with respect to whole Shares. The Company will, or will direct its transfer agent to, issue a certificate or certificates for the number of fully paid and nonassessable Shares as to which this Warrant is so exercised, and in lieu of any fractional shares to which the Holder would otherwise be entitled, pay cash equal to such fraction multiplied by the Purchase Price as then adjusted, as soon as practicable after any exercise of this Warrant, and in any event within five business days thereafter, at the Company's expense (including the payment by it of any applicable issue taxes), in the name of, and deliver the same to, the Holder (on payment by the Holder of any applicable transfer taxes). Notwithstanding the proceeding paragraph, any Shares as to which this Warrant is exercised shall be deemed issued on and as of the date of such exercise in accordance with the first paragraph of this Section and the Holder shall thereupon be deemed to be the owner of record thereof. All shares issued pursuant to any exercise of this Warrant shall be "restricted securities" within the meaning of the Securities Act of 1933, as amended (the "Act") and the rules and regulations thereunder, and shall bear the standard restrictive legend under the Act. Upon any exercise of this Warrant, the Holder shall also execute the form of representation letter attached as Exhibit B hereto making the representations regarding the status of the Shares contained therein. 2. ADJUSTMENTS. (a) STOCK DIVIDENDS, SPLITS, ETC. The number of Shares that may be purchased on exercise of this Warrant and the Purchase Price therefor shall be proportionately increased or decreased, as the case may be, for any stock dividend, stock split, combination, subdivision or other changes made with respect to the Class A Common Stock of the Company at any time prior to the Expiration Date. An adjustment made pursuant to this paragraph shall, in the case of a stock dividend or distribution, be made as of the record date therefor and, in the case of subdivision or combination, be made as of the effective date thereof. (b) REORGANIZATION, RECAPITALIZATION, CONSOLIDATION, MERGER OR SALE OF ASSETS. In the event of any reorganization or recapitalization of the Company or in the event of the Company consolidates with or merges into another corporation or transfers all or substantially all of its assets to another entity, the Holder, at any time after the consummation of such event, upon the exercise of this Warrant and payment of the Purchase Price as provided herein, shall be entitled to receive the stock to which the Holder would have been entitled on such consummation if the Holder had exercised this Warrant immediately prior thereto. In such case, the terms of this Warrant shall survive the consummation of any such event and shall be applicable to the shares of stock receivable on the exercise of this Warrant after such consummation. 3. NOTICES OF RECORD DATES, ETC. The Company shall mail or cause to be mailed to the Holder all notices specifying any record date for shareholders of its Class A Common Stock with respect to any dividend, distribution or right, or with respect to any shareholder meeting to be held at which a vote is to be taken for the purpose of approving any reorganization, recapitalization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding up of the affairs of the Company. The Company also shall provide to the Holder all reports that it normally provides to its shareholders. 4. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and, in the case of any such loss, theft or destruction, on delivery of a bond or other indemnity reasonably satisfactory to the Company, or, in the case of any such mutilation, or surrender and cancellation of this Warrant, the Company shall issue a new Warrant, of like tenor in lieu of such lost, stolen, destroyed or mutilated Warrant. 5. TRANSFERS. The Holder represents by his acceptance hereof that the Holder shall transfer or assign this Warrant only in accordance with all of the requirements of the Act or an applicable exemption from registration thereunder. The Company shall cause to be kept a register of the Holder of this Warrant (the "Warrant Register"). In the event of any transfer permitted by this Section, the Company shall or shall cause its agent to register the transfer or assignment on its Warrant Register on surrender of this Warrant, duly endorsed, or accompanied by a written instrument or instruments of transfer in form reasonably satisfactory to the Company, duly executed by the Holder or by the duly appointed legal representative or attorney-in-fact hereof. On any such registration of transfer, the Company shall issue a new Warrant or Warrants, of like tenor, in lieu of the transferred or assigned Warrant. Notwithstanding the foregoing provisions of this Section, this Warrant may be surrendered to the Company, together with a written request for exchange, and thereupon the Company shall issue and exchange therefor one or more new Warrants, of like tenor as requested by Holder, and the Company shall cancel this Warrant on such surrender for exchange. In no event, however, will the Company be required to effect any registration of transfer, assignment or exchange that would result in the issuance of a fraction of a share. For purposes of this Warrant, the term "Holder" shall refer to all persons who any time are listed in the Warrant Register as holding a Warrant representing any portion of the rights hereunder. 6. RESERVATION OF SHARES. The Company shall at all times reserve, for the purpose of issuance on exercise of this Warrant, such number of its duly authorized and unissued and/or treasury shares of Class A Common Stock or such class or classes of capital stock or other securities as shall from time to time be sufficient to comply with this Warrant. If, at anytime, the authorized and unissued and/or treasury shares of Class A Common Stock or such other class or classes of capital stock or other securities are not sufficient for the exercise of this Warrant, the Company shall take such corporate action as may in the opinion of its counsel be necessary to increase its authorized and unissued and/or treasury shares of Class A Common Stock or such other class or classes of capital stock or other securities to such number as shall be sufficient for that purpose. 7. SURVIVAL. All agreements, covenants, representations and warranties herein shall survive the execution and delivery of this Warrant and any investigation at any time made by or on behalf of any party hereto and the exercise, sale and purchase of this Warrant and the Class A Common Stock issuable on exercise hereof. 8. SHAREHOLDER RIGHTS. This Warrant shall not entitle the Holder, as such, to any voting rights or other rights as a shareholder of the Company, or to any other rights except the rights stated herein. 9. NOTES. All demands, notices, consents and other communications to be given hereunder shall be in writing and shall be deemed duly given when delivered personally or three days after being mailed by certified first class mail, postage prepaid, return receipt requested, properly addressed, if to the Company at: 400 West Avenue, Rochester, New York 14611, or if to the Holder, at its address set forth above. The Company and the Holder may change their respective addresses at any time or times by notice given hereunder to the other. 10. AMENDMENTS; WAIVERS; TERMINATIONS; GOVERNING LAW; HEADINGS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change waiver, discharge or termination is sought. The corporation laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its shareholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and interpreted in accordance with the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule of any jurisdiction. The headings of the Warrant are for convenience of reference only and are not part of this Warrant. Dated: October 30, 1995 ACC CORP. --------------------------- Witness: /s/ Catherine St. George By: /s/ David K. Laniak ------------------------- ---------------------- Secretary: /s/ Francis Coleman Title: CEO ----------------------- ------------------- EXHIBIT A. SUBSCRIPTION (To be completed and signed only on an exercise of the Warrant.) TO ACC CORP.: The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _____ shares of the Class A Common Stock of ACC CORP. to which such Holder is entitled thereunder, and herewith makes payment of $_______ therefor in cash or by certified or official bank check. The undersigned hereby requests that the Certificate(s) for such shares be issued in his name and delivered to the following address: If the foregoing Subscription evidences an exercise of the within Warrant to purchase fewer than all of the Shares to which the undersigned is entitled under such Warrant, please issue a new warrant, of like tenor, for remaining Shares in his name, and deliver the same to the same address as set forth above. Dated: ________, 19 . (Name of Holder) ___________________________ (Signature of Holder or Authorized Signatory) EXHIBIT B TO: ACC CORP. 400 West Avenue Rochester, New York 14611 Gentlemen: In connection with the issuance to me of ______ shares of the Class A Common Stock (the "Shares") of ACC CORP. (the "Company"), I hereby represent to the Company that all of the Shares are being acquired by the undersigned for my own investment account and not with a view to, or for resale in connection with, any distribution of the Shares nor with any intention of dividing my participation with others. I understand that the Shares have not been registered under the Securities Act of 1933, as amended, (the "Act") by reason of a specific exemption under the provisions of the Act which depends upon my representations contained in this letter and that you are relying on such representations as a condition precedent to permitting the issuance of the Shares to me. I also understand that any sales made by me publicly under Rule 144 can only be made after I have held the Shares for two years, and then only in limited quantities and only under the terms and conditions of said Rule; and that any other public resale of the Shares may require registration under the Act or compliance with an exemption from the registration requirements of the Act. I agree that the Shares my not be transferred unless and until the Company shall have been informed of the proposed transfer and: 1. A registration statement with respect to the Shares shall be effective under the Act, and I shall have furnished satisfactory proof of compliance with any other applicable law; or 2. I have obtained an opinion of counsel, in form and content satisfactory to the Company and its counsel, that no violation of the Act or any other applicable law will be involved in such transfer, and/or such other documentation in connection therewith as counsel for the Company may in its reasonable discretion require as a condition precedent in order to make a determination that the transfer will involve no such violation. I agree that appropriate legends may be placed on any certificates delivered to me representing the Shares in order to give notice of the transfer restrictions set forth in this letter and that the Company may cause stop transfer orders to be placed on my account. I further acknowledge and agree that neither the Company nor any of its agents, officers or directors have made any representations concerning the Company or its prospects and that I have based my decision to acquire the Company's stock upon information furnished to me by persons other than the Company, its officers, directors or agents. In consideration of the transfer of the Shares to me, I hereby agree to indemnify and hold harmless the Company, its officers, directors, employees and agents, from and against any and all liability, losses, damages, expenses and attorneys' fees which any of them may hereafter incur, suffer or be required to pay by reason of the falsity of, or my failure to comply with, any representations contained in this letter. Very truly yours, _________________________ (Signature of Holder) (Date) EX-99.5 8 SOFTWARE LICENSE AGREEMENT DATED 3/30/95 Exhibit 99.5 AMBIX SYSTEMS CORP. SOFTWARE LICENSE AGREEMENT FOR Implementation of Components of the Ambix Global Vista Telemanagement Framework AMBIX SYSTEMS CORP. 400 West Ave. Rochester, New York 14611 Version 10.006 A. McIntosh March 22, 1995 SOFTWARE LICENSE AGREEMENT AGREEMENT between Ambix Systems Corp. of 400 West Ave, Rochester, New York ("Ambix") and ACC Corp., its current majority-owned subsidiaries, ACC TelEnterprises Ltd., and each of its current majority-owned subsidiaries, and the successors and assigns of each of the foregoing "Customer"), with its principal office and place of business at 400 West Ave., Rochester, New York 14611. RECITALS -------- I. Ambix has developed certain computer and systems software in which it possesses copyrights and/or rights in the nature of trade secrets and confidential know-how. II. Ambix and Customer desire to enter into a License Agreement for such computer and systems software. NOW, THEREFORE the parties agree as follows: 1. Ambix hereby licenses and Customer agrees to license from Ambix under the terms and conditions contained herein the Software, as defined in Schedules I and II attached hereto. 2. Customer agrees to abide by the terms and conditions contained in this Agreement. 3. The following schedules are part of the Agreement: SCHEDULE I: License Agreement Definitions, Terms and Conditions. SCHEDULE II: "The Software": Statement of Intent, Overview of Components and Look and Feel, Data Model Descriptions, and Milestones. SCHEDULE III: Locations and entities of installation and use. SCHEDULE IV: Delivery SCHEDULE V: Fees and Payments SCHEDULE VI: Escrow Agreement and Agency 4. Customer acknowledges that it has read and agrees to all terms and conditions set forth in this Agreement and the attached Schedules. IN WITNESS WHEREOF the parties have executed this Software License Agreement as of the dates below: AMBIX SYSTEMS CORP CUSTOMER: Authorized Officer Authorized Officer By: /s/ Andrew P. McIntosh BY: /s/ Arunas A. Chesonis --------------------------- ----------------------------- TITLE: President TITLE: President ------------------------- ----------------------------- DATE: March 30, 1995 DATE:March 30, 1995 -------------------------- ----------------------------- SCHEDULE 1 ---------- GENERAL TERMS - ------------- 1.0 DEFINITIONS. When used in this Agreement, the capitalized terms listed ----------- below shall have the following meanings: 1.1 "CODE" shall mean computer programming code. If not otherwise specified, Code shall include only object code and not source code. (a) "Object Code" shall mean code which is directly machine readable and executable by a computer after suitable processing and is in a form that is not generally understandable by humans. (b) "Source Code" shall mean code other than Object Code and related system documentation, comments, and procedural code which may be printed out or displayed in a form readable and understandable by a human programmer of ordinary or pertinent skill. 1.2 "DOCUMENTATION" shall mean user manuals and other written materials that relate to particular Code, including materials useful for design (for example, logic descriptions, flow charts, class definitions, principles of operation, and the like), and machine readable text or graphic files subject to display or printout. 1.3 "ENHANCEMENTS" shall mean changes or additions to Code and related Documentation available in all new releases that improve functions/classes/objects, add new functions/classes/objects or improve performance by changes in system coding without changes to current overall system architecture. Further, ENHANCEMENTS as defined under this Agreement shall pertain solely to those components of the Global Vista system herein licensed by Customer, regardless of any availability of new features, components, classes or objects to other Ambix customers, and do not pertain to any components or features not licensed by Customer. 1.4 "SOFTWARE" shall mean the computer software, including Code as defined above, set forth in Schedule II and licensed hereunder, including any Enhancements as may be provided under this Agreement and any supplements or addendums hereto. 2.0 LICENSE OF SOFTWARE. Ambix grants and Customer accepts a personal, ------------------- perpetual, non-exclusive, non-transferable and non-sublicensable license to use the computer software programs described in Schedule II attached hereto ("the SOFTWARE"). The Software is licensed solely for Customer's own use for the purposes as set forth in Schedule II at the locations and by the business entities set forth in Schedule III. Except as set forth in Schedule II and Schedule III, use of the Software in any manner other than as set forth herein and use of the Software by third parties for any purpose whatsoever, are expressly prohibited. This license shall be for an indefinite duration, subject to termination as provided herein. Customer acknowledges, understands and agrees that the Software is not hereby sold to Customer; and Customer does not by virtue of this Agreement acquire any ownership rights in the Software or the intellectual property (including copyrights, trademarks, trade secrets and know-how) embodied in the Software or in any accompanying Documentation. 3.0 DELIVERY. Pursuant to Schedule IV, Ambix shall deliver the Software on, or -------- as soon thereafter is practical, to Customer's requested delivery date, at the location designated by Customer. Customer shall be responsible for assisting Ambix in the installation of the Software and shall provide all equipment, supplies, personnel and computer resource necessary to complete such installation. Ambix shall not be responsible for delays or failure of installation resulting directly or indirectly from causes beyond the reasonable control of Ambix. 4.0 LICENSE FEE. Customer shall pay and Ambix shall accept the amount(s) set ----------- forth in Schedule V in full payment for this license to use the Software. In addition, Customer shall pay or reimburse Ambix for all shipping and handling charges and all taxes or assessments of any government in the nature of taxes, however designated, relating to this license of the Software; including, but not limited to, sales, use, privilege, excise, withholding, value-added, or property taxes; excluding, however, taxes based upon the net income of Ambix. 5.0 TERMS OF PAYMENT. Ambix shall bill Customer for the amount(s) as set forth ---------------- in Schedule V and Customer shall pay such amount(s) as billed. Ambix shall assess and the Customer shall pay a late payment fee of one and one-half percent (1.5%) per month on all past due amounts together with all costs of collection, including reasonable attorney's fees with respect to any collection efforts by Ambix for amounts due to it hereunder. This provision excludes however any late payment fee for the final installment payment withheld by Customer until Acceptance of the Software in accordance with the provisions of Section 13. 6.0 RIGHT TO AUDIT. Ambix may, at Ambix's cost, from time to time during -------------- Customer's normal business hours, have one of its employees or representatives confIRM at Customer's offices that Customer is in compliance with the terms and conditions of this Agreement. In addition, Ambix may from time to time perform an on-line audit of the Global Vista system to assess Customer's compliance with Intellectual Property, copyright and trade secret provisions of this Agreement. Customer may, at Customer's cost, from time to time during Ambix's normal business hours, have one of its employees or representatives confirm at Ambix's offices, from Ambix's records, the amounts due Customer as Royalty Fees from Ambix. After each such audit, Customer shall promptly provide Ambix with a detailed calculation of any amounts due Customer if the amount claimed by Customer shall differ from that previously calculated and paid by Ambix. 7.0 DOCUMENTATION. Ambix shall provide Customer with Documentation for the ------------- Software. Customer may copy all or any part of the Documentation provided that such copies shall be solely for Customer's own use at Customer's own facilities at the locations permitted in Schedule III. Customer shall reproduce on all such copies all copyright, trademark, trade secret, and/or proprietary rights notices or legends which were on the copies delivered to Customer by Ambix. 8.0 SOFTWARE SUPPORT. For so long as this License Agreement shall remain in ---------------- effect and so long as Customer has complied with all of its terms and conditions, Ambix shall provide Customer with any Enhancements (defined in Section 1.3 of this Agreement) to the Software and related Documentation necessary to use the software with these enhancements. Such enhancements when made to the software (as defined in Schedule II, "the Software") will not include significant re-writes of the Software. Upon request, Ambix will provide additional support by telephone and/or on-site consultation at Customer's expense (as defined in any Support Services Agreement between the parties). Customer shall pay Ambix's then prevailing charges for the time spent in servicing such Software, including portal to portal travel time and reasonable transportation, food, and lodging expenses. 9.0 TRAINING. If requested by Customer, Ambix shall provide training in the -------- use of the Software for Customer's personnel. Ambix will provide such training at mutually agreeable times and at mutually agreeable locations, subject to the availability of Ambix personnel. Customer shall pay Ambix's then-current standard charges for training and shall reimburse Ambix for reasonable travel, lodging, and food expenses incurred in providing such training at locations other than those used by Ambix for such purposes. Ambix shall submit a separate invoice to Customer for training services which invoice shall be paid in accordance with the payment terms contained in Schedule I (above) Section 5. 10.0 CONFIDENTIALITY AND NON-DISCLOSURE OF INTELLECTUAL PROPERTY. Customer ----------------------------------------------------------- acknowledges that Ambix has expended substantial effort and incurred great expense in designing and developing the Software and Documentation. Customer further acknowledges that the Software and Documentation incorporates information, concepts, ideas, know-how, techniques, and functional characteristics which are confidential and constitute proprietary information and trade secrets of Ambix. Customer agrees and covenants the following: (10.1) it will hold the Software and Documentation in the strictest confidence and will not assign, license, sublicense, market, transfer, or otherwise disclose all or any portion of the Software or Documentation to any person or entity without the prior written consent of Ambix, which may be withheld in Ambix's sole discretion, except in accordance with Section 18.b; (10.2) it will take all reasonable steps to prevent inadvertent or unauthorized disclosure, transfer, or reproduction in any form of the Software or Documentation; (10.3) it will notify its employees and agents of the confidentiality of the Software and Documentation as well as notify its employees of the prohibitions on disclosure, transfer, and reproduction contained herein; (10.4) it will make its best effort short of litigation, to identify those employees or agents who may become cognizant of intellectual property of Ambix and request those employees or agents to sign an employee-employer Confidentiality Agreement (10.5) it will make Source Code, if Source Code is provided by Ambix, of the Software available only to those of its employees who are required to use such Source Code in order to perform the duties of their employment with Customer; and (10.6) it will not remove or alter any copyright, trademark, trade secret and/or proprietary rights notice and/or legend placed on the Software and/or Documentation by Ambix, and will reproduce all such notices and/or legends on all copies (including partial copies) of the Software or Documentation. Customer shall immediately notify Ambix of any breach of the confidentiality of the Software or Documentation and shall assist Ambix in any efforts to control or prosecute any such breach. 11.0 MODIFICATION OF SOFTWARE. Customer may request modifications to the ------------------------ Software for reasonable purposes consistent with Schedule II of this Agreement including modifications to merge the Software with other software programs or systems which incorporate the Software into an overall business or information systems process. Customer shall pay Ambix its then-current fees for any modification. Customer may not modify or cause to be modified the Software except as assisted by Ambix. Any modifications made in violation of this Agreement shall belong to Ambix. Any modified version of the Software, or any system which incorporates the Software in modified form, just as in its original form as defined under this Agreement, shall be for Customer's own use as specified under this Agreement in Schedules II and III. The modified version or newly merged version of the Software shall remain subject to all of the terms and conditions of this Agreement. In addition to the notices required by Section 10 of Schedule I (above), Customer shall include the following notice in both machine readable form and on all Documentation for the modified version of the Software or merged system comprising any part or all of the Software: "This program or system includes information, concepts, ideas, know- how, and techniques which are confidential and constitute proprietary information and trade secrets of Ambix Systems Corp. of Rochester, New York and are protected by copyright or pending copyright; @ 1995 Ambix Systems Corp." In the event this Agreement is terminated, the Software shall be completely removed from any system containing the software and from any information systems process using the Software, whether as a modified program or modified system integrating Ambix programs in modified or unmodified form. and treated as if permission to modify had never been granted and all copies of all Documentation shall be returned to Ambix. 12.0 WARRANTY. Ambix warrants that it is the rightful owner of the Software -------- and that it has the right to license the Software to Customer. After completion of the Acceptance test outlined in Section 13, and while Customer continues to license the Software, Ambix warrants that the Software will be free of programming errors which significantly affect the performance of the Software from the standards and specifications contained in Schedule II. Further, upon Customer signing a Software Support Agreement, and as part of this Support Agreement and at no additional charge to Customer, Ambix will immediately correct any programming errors reported to Ambix. Ambix's only obligation under this Warranty shall be to amend, revise, modify, or replace the Software at Ambix's then-current rates for programming and support services. The warranty contained in this Section 12 shall apply to unmodified versions of the Software, and Ambix makes no warranty as to any version of the Software modified by anyone other than Ambix. Amendment, revision, modification, or replacement of the Software will be performed at Customer's request at Ambix's then-current rates for such services, subject to availability of Ambix personnel. AMBIX MAKES NO OTHER WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, AS TO ANY MATTER WHATSOEVER, AND DISCLAIMS ALL SUCH WARRANTIES INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 13.0 ACCEPTANCE. Customer will use the software during the thirty (30) ---------- business days immediately following installation (the "Acceptance Period") of the Software to determine whether or not it conforms to the functional and performance specifications attached as Schedule II (the "Specifications"). Any failures of the Software to conform to the Specifications discovered by Customer, during the Acceptance Period, will be reported promptly to Ambix. Ambix will immediately make any corrections necessary to make the Software conform with the Specifications. Upon satisfactory completion of the Acceptance Testing process, Customer shall provide Ambix with written notification of acceptance and shall pay to Ambix the final $44,000 monthly installment payment. 14.0 LIMITATION OF LIABILITY. Ambix's liability under this Agreement for ----------------------- damages, regardless of the form of action, shall be limited to money damages which shall not exceed the total amount paid by Customer for the License granted hereunder. This shall be Customer's exclusive remedy. In no event shall either party be liable for any loss of product, loss of profit, loss of use or any other actual, special, incidental, consequential damages, or other damages of any kind whether foreseeable or unforeseeable, resulting from or arising out of the license or use of the Software, even if such party shall have been advised of possibility of such loss or damages. 15.0 INTELLECTUAL PROPERTY INFRINGEMENT. If notified promptly in writing of ---------------------------------- any action (and all prior claims relating to such action) brought against Customer, based on a claim that the Customer's use of the Software infringes a United States patent, copyright, trademark or a trade secret (hereafter collectively "intellectual property rights") of a third party, Ambix will defend such action at its expense and pay the costs and damages awarded in any such action. Ambix will have the sole control of the defense of any such action and all negotiations for its settlement or compromise. At any time during the course of any litigation arising out of a claim of infringement of an intellectual property right, or if, in Ambix's opinion, the intellectual property or any part thereof is likely to become the subject of a claim of infringement, Ambix will, at its sole option and at its expense, either procure for Customer the right to continue using the Software, replace or modify the same with a compatible, functionally equivalent, non-infringing product, or grant Customer a full refund of the License Fees specified in Schedule V, and accept its return. The depreciation will be an equal amount per year over the lifetime of the Software as established by Ambix. Ambix will not have any liability to Customer under any provision of this paragraph if the infringement, or claim thereof, is based upon (a) the use of the Software in combination with other software not furnished by Ambix; or (b) the use of other than the latest supportable version of the Software made available to Customer. Customer will hold Ambix harmless from and against any expense, cost, damage, judgment, or loss or other liability of any kind, for infringement of any intellectual property right which result from Ambix's compliance with Customer's designs, specifications, instructions or from the use of the Software as altered or modified by anyone other than Ambix. Customer is obligated hereby to promptly notify Ambix of any instance of infringement or attempted infringement upon the intellectual property rights of Ambix which comes to Customer's attention. The foregoing states the entire liability of Ambix with respect to infringement of an intellectual property right by the Software or any part thereof or by its operation. 16.0 TERMINATION OF LICENSE. The license granted to Customer hereunder may be ---------------------- terminated by Ambix upon not less than two months (2 months) notice if Customer fails to perform any of its material obligations or duties under this Agreement, unless within such period Customer cures such failure. If however, Customer cannot in good faith cure such failure within the two month period, then Customer must commence cure immediately and continue to diligently pursue such cure of any such failure(s). Upon termination of this Agreement, Customer shall immediately cease using the Software and, at the option of Ambix, Customer shall destroy or return to Ambix all tangible forms of the Software and the Documentation and Customer shall erase the Software from all storage media in which it has been installed or copied. Within (30) thirty days after termination of this Agreement, Customer shall certify to Ambix in writing that it has destroyed or delivered to Ambix all tangible forms of the Software and that it has erased the Software from all storage media. 17.0 EXPORT REGULATIONS. Customer agrees, regardless of permissions granted by ------------------ Ambix, not to export, either directly or indirectly, any Ambix Software or systems incorporating such Software without first obtaining any required license to export or re-export from the United States Government or appropriate foreign government as may be required and to comply with all United States and international export regulations as applicable. 18.0 MISCELLANEOUS. ------------- 18.A Binding Effect. This Agreement shall be binding upon and inure -------------- to the benefit of the parties hereto, their personal representatives, and permitted successors and assigns. 18.B No Assignment. Customer may not assign nor sublicense this ------------- Agreement, in whole or in part, without the prior written consent of Ambix, which may be withheld in Ambix's sole discretion. Customer may without the prior written consent of Ambix assign its fights under this Agreement so far as those rights constitute part of the sale, merger, consolidation, reorganization or transfer of any part of Customer's business or assets in which the Software is used. Any assignee of Customer shall have all of the rights and obligations set forth in this Agreement. 18.C Entire Agreement. This Agreement contains the entire ---------------- understanding between or among the parties hereto and supersedes any prior understanding, memoranda or other written or oral agreements between or among any of them with respect to the Agreement's subject matter. There are no representations, agreements, arrangements or understandings, oral or written, between or among any of the parties relating to the subject matter of this Agreement which are not fully expressed herein. 18.D Modifications or Waiver. No modification or waiver of this ----------------------- Agreement or any part of this Agreement shall be effective unless in writing and signed by the party or parties sought to be charged therewith. No waiver of any breach of condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. No waiver of any breach or condition of this Agreement by or with respect to any party hereto shall be deemed to be a waiver of the same breach or condition with respect to any other party hereto. No course of dealing between or among any of the parties hereto will be deemed effective to modify, amend, or discharge any part of this Agreement or the rights or obligations of any party hereunder. 18.E No Third Party Beneficiary. None of the provisions of this -------------------------- Agreement shall be for the benefit of, or enforceable by, any person or entity not a party hereto. 18.F Partial Invalidity. If any provision of this Agreement shall be ------------------ held invalid or unenforceable by competent authority, such provision shall be construed so as to be limited or reduced to be enforceable to the maximum extent compatible with the law as it shall then appear. The total invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. 18.G Notices. Any notice or other communication required or ------- permitted under this Agreement shall be in writing and shall be deemed to have been duly given (a) upon hand delivery, or (b) on the third day following delivery to the U.S. Postal Service as certified or registered mail, return receipt requested and postage prepaid, or (c) on the first day following delivery to a nationally recognized U.S. or foreign overnight courier service, fee prepaid, return receipt requested or other confirmation of delivery requested, or (d) when telecopied or sent by facsimile transmission if an additional notice is also given under (a), (b), and (c) above within three days thereafter. Any such notice or communication shall be delivered or directed to a party at its address set forth below or at other address as may be designated by a party in a notice given to all other parties hereto in accordance with the provisions of this section. Notice to Ambix shall be sent to... Ambix System Corp. 400 West Ave, Rochester, New York 14611 Attn: Andrew McIntosh, President Notice to ACC CORP shall be sent to... ACC Corp. 400 West Ave. Rochester, New York 14611 Attn: Arunas Chesonis, Chief Operating Officer 18.H Governing Law. This Agreement shall be governed by, and ------------- construed in accordance with, the laws of the United States and the State of New York without reference to any New York conflict or choice of law principle. 18.I Jurisdiction and Venue. In the event that any legal proceedings ---------------------- are commenced in any court with respect to any matter arising under this Agreement, the parties hereto specifically consent and agree that: 18.1.a the courts of the State of New York and/or the United States Federal Courts located in the State of New York shall have exclusive jurisdiction over each of the parties hereto and over the subject matter of any such proceedings; and 18.1.b the venue of any such action shall be in Monroe County, New York and/or the United States District Court for the Western District of New York. 18.J Injunctive Relief. In the event of a breach or threatened ----------------- breach of any of the terms of Sections 10, 11 or 15 of this Agreement, Ambix shall be entitled to an injunction restraining Customer from committing any breach of this Agreement without showing or proving any actual damages and without diminishing any other right or remedy which Ambix may have at law or in equity to enforce the provisions of this Agreement. Customer waives any right it may have to require Ambix to post a bond or other security with respect to obtaining or continuing any injunction or temporary restraining order, and releases Ambix and its officers, directors, and shareholders from, and waives any claim to, damages against them which Customer may have with respect to Ambix obtaining any injunction or restraining order pursuant to this Agreement. 18.K Effect of Termination. Unless otherwise specifically agreed in --------------------- writing, the terms of Sections 10, 11, 14, 15, and 18(all) shall survive any termination, cancellation, repudiation or rescission of this Agreement by either party for a period of three years after termination, whether or not for cause, and under such circumstances either party may continue to enforce such terms as if this Agreement were otherwise in full force and effect. In addition, the terms of SECTION 6.0 shall remain in effect for a period of one (1) year after termination. 18.L Confidentiality. Except as contemplated by this Agreement or as --------------- necessary to carry out the transactions contemplated by this Agreement, the terms of this Agreement, and all information or documents furnished by any party to the other, shall be kept confidential by the party to whom furnished and shall not be otherwise used or disclosed by the recipient except to recipient's accountants or attorneys, or as may be required by law, without the prior written consent of the other party. If this transaction is not consummated, each party shall return to the other all such documents furnished hereunder, including all copies, and shall continue to keep confidential, and neither use nor disclose, any such information. 18.M Expenses of Parties. All expenses involved in the preparation, ------------------- authorization, execution and delivery of this Agreement, including, without limitation, all fees and expenses of agents, representatives, counsel, and accountants, shall be borne solely by the party that incurred same. 18.N Headings. The headings contained in this Agreement are inserted -------- for convenience only and do not constitute a part of this Agreement. 18.O Fair Meanings. This Agreement shall be construed according to ------------- its fair meaning. The language used shall be deemed the language chosen by the parties hereto to express their mutual intent, and no presumption or rule of strict construction will be applied against any party hereto. 18.P Gender. Whenever the context may require, any pronoun used ------ herein shall include the corresponding masculine, feminine or neuter forms and the singular of nouns, pronouns and verbs shall include the plural and vice versa. 18.Q Counterparts. This Agreement may be executed in several ------------ counterparts, each of which shall be deemed an original, and all of said counterparts together shall constitute but one and the same instrument. 18.R Further Assurances. The parties hereto shall execute and ------------------ deliver any and all additional writings, instruments and other documents and shall take all such further actions as shall be reasonably required to effect the terms and conditions of this Agreement. 19.0 SOURCE CODE DEPOSIT. Concurrently with each delivery of software to ------------------- Customer, Ambix shall deposit a copy of the Source Code to the version of the Software then being delivered to Customer with the Escrow Agent named in Schedule VI. Such Source Code shall be held and delivered by the Escrow Agent in accordance with the terms and conditions of the Escrow Agreement which forms Schedule VI of this Agreement. Ambix shall pay all industry comparable fees of the Escrow Agent. Upon request, Customer may compare and verify each deposit of Source Code to ensure that it corresponds to the Object Code version of the Software then being delivered to Customer. Such comparison and verification shall take place upon not less than two business days notice, and shall be performed at such place and by such persons as Customer shall reasonably designate according to all terms and conditions of this Agreement. Customer may elect at its option to retain a third party consultant to perform comparison and verification of the Software, upon first having such consultant execute a confidentiality agreement with Customer regarding the Software. 20.0 RIGHT OF DEMONSTRATION ON CUSTOMER PREMISES: Ambix, upon reasonable ------------------------------------------- notice to Customer, may have access to Customer's operations facilities for purposes of demonstrating the use of the Software to prospective customers of Ambix. During the term of this Agreement, such visits will be limited to once per month unless otherwise agreed by the parties. During such visits, Customer at its sole option may withhold information it deems proprietary from any visitors. Ambix will take precautions not to disturb or incumber the operations during such visits. Customer agrees to make an employee available to answer questions should questions arise during a site visit. SCHEDULE V ---------- LICENSE FEES AND PAYMENTS - ------------------------- 1.0 License Fees for NetOps Application Components and Data Models 1.1 A total of $328,540.00 to be paid in monthly installments through the implementation of NetOps Phase II. The final monthly installment payment of $44,000 will be withheld until acceptance of the Software in accordance with the provisions contained in Schedule I, Section 13. 2.0 Royalty return payments to ACC from Ambix. 2.1 For a period of five years after the Acceptance of the Software, Customer shall be entitled to receive royalty payments from Ambix based upon all revenues derived from parties other than Customer from the sale of the Software (NetOps components) licensed in this Agreement ("Ambix Revenue"). During this period, Ambix shall pay to Customer a royalty in the amount equal to fifteen percent (15%) of all such Ambix Revenue within thirty days of receipt by Ambix. This royalty shall be paid at the rate of 15% of sales until such time at which Ambix has paid to ACC a total equal to the sum paid to Ambix by ACC in implementation and license fees for NetOps programs licensed under this Agreement. At the conclusion of Phase II, this sum will be $328,540.00 (U.S.). If within the five year royalty period Ambix should pay to ACC an amount in royalty payments equal to the amount that Ambix has received from ACC in implementation and license fees of NetOps programs, then at that time Ambix shall continue to pay to ACC royalty fees in amounts equal to seven percent (7%) of Ambix Revenue until such time as Ambix has paid to ACC a total aggregate sum of one million dollars ($1,000,000.00 U.S.) in royalty fees. Except for accrued but unpaid royalty fees, Ambix's obligation to pay royalty fees to ACC terminates five years from the acceptance date of the Software, or at such time is Ambix has paid to ACC a total aggregate sum of one million dollars in royalty fees. Ambix Systems Corp. Customer Signed: /s/ Andrew P. McIntosh Signed: /s/ Arunas A. Chesonis ---------------------------- ---------------------------- Date: March 30, 1995 Date: March 30, 1995 ------------------------------- --------------------------------- EX-99.6 9 SOFTWARE LICENSE (FEB 21 1996) AMBIX & THE CO. EXHIBIT 99.6 SOFTWARE LICENSE AGREEMENT BY AND BETWEEN AMBIX ACQUISITION CORP. AND ACC CORP. FEBRUARY 21, 1996 SOFTWARE LICENSE AGREEMENT THE PARTIES ----------- AGREEMENT between Ambix Acquisition Corp. ("Ambix") of 400 West Ave., Rochester, New York 146111, and ACC Corp. ("ACC"), with its principal office and place of business at 400 West Ave., Rochester, New York 14611. RECITALS -------- I. Ambix has developed and owns certain computer and systems software in which it possesses copyrights and/or rights in the nature of trade secrets and confidential know-how. This Software is referred to herein as the "Software." II. Ambix and ACC desire to enter into a License Agreement for the Software on the terms and conditions set forth herein. NOW, THEREFORE the parties agree as follows: 1. Ambix hereby licenses and ACC agrees to license from Ambix under the terms and conditions contained herein, the Software, as defined in Schedule II attached hereto. 2. Each party agrees to abide by the terms and conditions contained in this Agreement. 3. The following schedules are part of this Agreement: SCHEDULE I: License Agreement Definitions, Terms and Conditions. SCHEDULE II: "The Software" 4. ACC acknowledges that it has read and agrees to all terms and conditions set forth in this Agreement and the attached Schedules. IN WITNESS WHEREOF the parties have executed this Software License Agreement this 21th day of February, 1996. AMBIX ACQUISITION CORP. ACC CORP. By:/s/ Andrew P. McIntosh By:/s/ David K. Laniak ---------------------- -------------------- Andrew P. McIntosh David K. Laniak President Chief Executive Officer - 2 - SCHEDULE 1 ---------- GENERAL TERMS - ------------- 1.0 DEFINITIONS. When used in this Agreement, the capitalized terms listed ----------- below shall have the following meanings: 1.1 "AFFILIATE" shall mean any majority-owned subsidiary of ACC or any joint venture entity, whether in corporate or partnership form, in which ACC owns or controls, directly or indirectly, fifty percent or more of the aggregate stock or other interest entitled to vote on general decisions reserved to the stockholders, partners, or other owners of such entity, provided that any such entity shall be deemed an AFFILIATE for so long, and only so long, as ACC continues to hold such interest and only so long as any such entity owns and operates a business or businesses substantially similar to ACC's line(s) of business as conducted at any time during the term of this Agreement. 1.2 "CODE" shall mean computer programming code pertaining solely to the SOFTWARE. If not otherwise specified, CODE shall include only OBJECT CODE and not SOURCE CODE. (a) "OBJECT CODE" shall mean code which is directly machine readable and executable by a computer after suitable processing and is in a form that is not generally understandable by humans. (b) "SOURCE CODE" shall mean code other than Object Code and related system documentation, comments, and procedural programming statements which may be printed out or displayed in a form readable and understandable by a human programmer of ordinary or pertinent skill. 1.3 "DELIVERABLE" shall mean any tangible material procured or prepared by Ambix and delivered or licensed to ACC pursuant to this Agreement, including the SOFTWARE and DOCUMENTATION. 1.4 "DERIVATIVE WORK" shall have the meaning set forth in the Copyright Act (Title 17 U.S.C. (S) 101 et seq.). AMBIX shall own all DERIVATIVE WORKS as described in Section 11. 1.5 "DOCUMENTATION" shall mean user manuals and other written materials that relate to the SOFTWARE, CODE, or other DELIVERABLE, including materials useful for design (for example, logic descriptions, flow charts, class definitions, principles of operation, and the like). 1.6 "ENHANCEMENTS" shall mean changes or additions to CODE and related DOCUMENTATION made available by Ambix to Ambix - 3 - customers in new releases that improve functions/classes/objects, add new functions/classes/objects or improve performance by changes to previously released CODE without changes to system architecture, general design methodology or method of execution of the object code (e.g. single-threaded or multiple- threaded). Further, ENHANCEMENTS as defined under this Agreement shall pertain to improvements upon, or new releases to, the SOFTWARE and do not refer to any components, classes or objects licensed to any other Ambix customer which are not licensed by ACC pursuant to this Agreement. 1.7 "ERROR" shall mean any error, problem, or defect resulting from (1) an incorrect functioning of the SOFTWARE, or (2) an incorrect or incomplete statement or diagram in the DOCUMENTATION, if such an error, problem, or defect renders the SOFTWARE inoperable, causes the SOFTWARE materially to (i) fail to meet the applicable SPECIFICATIONS or the acceptance criteria therefor, (ii) be inaccurate or incomplete in any material respect, or (iii) cause incorrect functions to occur when any such materials are used. 1.8 "IP RIGHTS" shall mean all intellectual property rights, including inventions, discoveries, improvements, copyrights, patents, trade secrets, trademarks, and other proprietary rights that are embodied in or used in connection with the SOFTWARE, the DOCUMENTATION, or other DELIVERABLE. 1.9 "LICENSE FEE" shall mean the fee referred to in Section 4.0. 1.10 "SOFTWARE" shall mean the computer software, including OBJECT CODE as defined above, set forth in Schedule II and licensed hereunder, including any ENHANCEMENTS, modifications to, and other DERIVATIVE WORKS of, the SOFTWARE as provided under this Agreement. SOFTWARE shall include any applicable CODE. 1.11 "SPECIFICATIONS" shall mean the detailed design and functional specifications related to the design and performance of the SOFTWARE and any other DELIVERABLE hereunder. 2.0 LICENSE OF SOFTWARE. (a) Ambix grants and ACC accepts a personal, ------------------- perpetual, non-exclusive license to use the SOFTWARE pursuant to the terms of this Agreement. Such license is granted to ACC for its own use at an ACC-site location as designated by ACC, and at any AFFILIATE or AFFILIATE-site location as designated by ACC, and for purposes substantially similar to the business of ACC. The license is for a term commencing on the date hereof and extending for an indefinite period, subject to termination by Ambix pursuant to Section 16. ACC acknowledges and agrees that the SOFTWARE is not hereby sold to ACC and that ACC does not by virtue of this Agreement acquire any ownership - 4 - rights in the SOFTWARE or the IP RIGHTS (including copyrights, trademarks, trade secrets and know-how) embodied in the SOFTWARE, the CODE or in any accompanying DOCUMENTATION. (b) ACC shall have the right to grant sublicenses in the SOFTWARE and other DELIVERABLES to its AFFILIATES pursuant to written sublicense agreements, provided: (I) ACC provides Ambix with prior written notice of each sublicense, and delivers a copy of the sublicense agreement to Ambix promptly after the same is executed (provided that ACC may delete any information which is confidential or proprietary to ACC from such sublicense); (II) Under the terms of the sublicense agreement, the sublicensee is barred from transferring or further sublicensing the SOFTWARE without the prior written consent of Ambix (which Ambix may withhold in its sole discretion); the sublicense contains provisions comparable to Section 10, 11, 14, and 15 hereof and grants Ambix audit rights comparable to those set forth in Section 6 hereof; and otherwise such sublicense grants to the sublicensee no rights more extensive than those granted to ACC hereunder. (III) The term of such sublicense is made co-extensive with the term of this Agreement and subject to earlier termination by Ambix in the event the sublicensee ceases to be an AFFILIATE of ACC and at that time fails to execute a separate license agreement and a support and maintenance agreement with Ambix; and (IV) ACC either includes the sublicensee in its then current support and maintenance agreement with Ambix or causes the sublicensee to enter into a separate support and maintenance agreement for the SOFTWARE. (c) Ambix will deposit with ACC all SOURCE CODE and all DOCUMENTATION and other materials useful or necessary to facilitate the use by ACC or its contractors of the SOURCE CODE as described in Section 19. If Ambix reasonably cannot perform its obligations under this Agreement as provided in Section 16, Ambix grants to ACC the license and right to use the SOURCE CODE of any or all SOFTWARE pursuant to the terms of this Agreement, and "SOFTWARE" (as defined herein) shall include both OBJECT CODE and SOURCE CODE. Should ACC exercise its rights to use the SOURCE CODE, all provisions of this Agreement remain in effect with respect to limitations upon commercial transfer, licensing, sub-licensing and disclosure of IP RIGHTS. ACC's use of the SOURCE CODE shall include all rights and uses reasonably necessary to maintain, support, modify, and enhance the SOFTWARE and to develop new works or DERIVATIVE WORKS from the SOFTWARE and other DELIVERABLES. - 5 - (d) If there is a good faith dispute between Ambix and ACC whether Ambix has not performed as provided in Section 16, ACC shall be entitled to exercise its rights under Section 2.0(c) with respect to the SOURCE CODE. If it is determined in the resolution of such dispute that Ambix had performed and will continue to perform all of its obligations in this Agreement, ACC shall return the SOURCE CODE and related DOCUMENTATION to the repository identified in Section 19; however, if it is determined that Ambix cannot perform, ACC's right to use the SOURCE CODE under Section 2.0(c) continues. 3.0 DELIVERY. Ambix shall deliver the SOFTWARE and other DELIVERABLES on, or --------- as soon thereafter as is practical, ACC's requested delivery date and to the locations designated by ACC. ACC shall be responsible for assisting Ambix in the installation of the SOFTWARE and shall provide all on-site equipment, supplies, personnel and computer resource necessary to complete such installation. Ambix shall not be responsible for delays or failure of installation resulting directly or indirectly from causes beyond the reasonable control of Ambix. 4.0 LICENSE FEE. ACC shall pay and Ambix shall accept a one time LICENSE FEE ------------ in the amount of $1,600,000 in full payment for this license to use the SOFTWARE and other DELIVERABLES and all other rights granted hereunder. In addition, ACC shall pay or reimburse Ambix for all shipping and handling charges and all taxes, assessments, fees or charges of any kind imposed by any government, however designated, relating to this license of the SOFTWARE; including, but not limited to, sales, use, privilege, excise, withholding, value-added, or property taxes; excluding, however, taxes based upon the net income of Ambix. 5.0 TERMS OF PAYMENT. ACC shall pay Ambix immediately upon execution of this ----------------- Agreement. 6.0 RIGHT TO AUDIT. Ambix may, at Ambix's cost, from time to time (but not --------------- more than twice in any calendar year) during ACC's or an AFFILIATE's normal business hours, have one of its employees or representatives confirm at ACC's offices, or the offices of any AFFILIATE, that ACC is in compliance with the terms and conditions of this Agreement, including performing an on-line audit of the SOFTWARE and its related databases to assess compliance with IP RIGHTS, copyright and trade secret provisions of this Agreement. 7.0 DOCUMENTATION. At the time of the delivery of the applicable SOFTWARE, -------------- Ambix shall provide ACC with DOCUMENTATION - 6 - for each application or other component or module of the SOFTWARE. ACC may copy and create DERIVATIVE WORKS from all or any part of the DOCUMENTATION provided that (a) such items shall be solely for ACC or the applicable AFFILIATE's own use at ACC's own facilities or the facilities of an AFFILIATE, and (b) such items shall be created only in connection with changes in the applicable SOFTWARE or for ease of use and instruction with the SOFTWARE. ACC or AFFILIATE shall reproduce on all such copies all copyright, trademark, trade secret, and/or proprietary rights notices or legends which were on the copies delivered to ACC or AFFILIATE by Ambix. 8.0 SOFTWARE SUPPORT. For so long as this License Agreement shall remain in ----------------- effect, Ambix shall provide ACC with support and maintenance of the SOFTWARE under a separate agreement. Except as otherwise subject to a fixed fee agreement (as planned for the SOFTWARE), ACC shall pay Ambix's then prevailing charges for the time spent in servicing such SOFTWARE, including portal to portal travel time and reasonable transportation, food, and lodging expenses. Such charges shall not be greater than the amounts charged by Ambix to its most favored customer for similar or comparable services. 9.0 TRAINING. If requested by ACC, Ambix shall provide training in the use of --------- the SOFTWARE for ACC's personnel for up to fifteen (15) days. Thereafter, Ambix will provide such training at mutually agreeable times, at mutually agreeable locations (subject to the availability of Ambix personnel), and at mutually agreed rates. 10.0 IP RIGHTS AND CONFIDENTIALITY. ACC acknowledges that Ambix has expended ------------------------------ substantial effort and incurred great expense in designing and developing the SOFTWARE and DOCUMENTATION. ACC further acknowledges that the SOFTWARE and DOCUMENTATION incorporate information, concepts, ideas, know-how, techniques, and functional characteristics which are confidential and constitute proprietary information and trade secrets of Ambix. Ambix acknowledges that it has and will learn of and about confidential business, financial, operating, and technical information of ACC and its AFFILIATES, which could include patents, copyrights, trade secrets and other proprietary rights. Each party therefore acknowledges that it will become privy to the confidential information ("CONFIDENTIAL INFORMATION") of the other. 10.1 The recipient of such CONFIDENTIAL INFORMATION of the discloser covenants and agrees the following: - 7 - (a) the recipient will hold the CONFIDENTIAL INFORMATION in the strictest confidence and will not assign, license, sublicense, market, transfer, or otherwise disclose all or any portion of the CONFIDENTIAL INFORMATION to any person or entity without the prior written consent of the discloser, which may be withheld in the discloser's sole discretion, except in accordance with Section 18.B or as permitted under this Agreement; (b) the recipient will take all reasonable steps to prevent inadvertent or unauthorized disclosure, transfer, or reproduction in any form of the CONFIDENTIAL INFORMATION; (c) the recipient will notify its employees and agents of the confidentiality of the CONFIDENTIAL INFORMATION as well as notify its employees of the prohibitions on disclosure, transfer, and reproduction contained herein; (d) the recipient will make its best effort to identify those employees or agents who may become cognizant of the CONFIDENTIAL INFORMATION of the discloser and request those employees or agents to sign an employee-employer Confidentiality Agreement; (e) the recipient will not remove or alter any copyright, trademark, trade secret and/or proprietary rights notice and/or legend placed on the CONFIDENTIAL INFORMATION by the discloser, and will reproduce all such notices and/or legends on all copies (including partial copies) of the CONFIDENTIAL INFORMATION. The recipient shall immediately notify the discloser of any breach of the confidentiality of the CONFIDENTIAL INFORMATION and shall assist the discloser in any efforts to control or prosecute any such breach; and (f) All right, title, and interest to the IP RIGHTS remain with Ambix. ACC obtains only the license and other rights as specified herein with respect to the SOFTWARE and the other DELIVERABLES subject to all the terms and conditions hereof. 10.2 Notwithstanding anything in this Section 10 to the contrary, the confidentiality provisions shall not apply to any CONFIDENTIAL INFORMATION which (a) enters the public domain through no fault of the recipient, (b) is observable based on the operation of any OBJECT CODE, (c) was developed by the recipient without reliance on such CONFIDENTIAL INFORMATION, (d) was disclosed to the recipient by a third party with no known obligation to the discloser to keep it confidential, or (e) in the good faith belief of the recipient should be disclosed pursuant to operation of law, regulation, or order or rule of any court or governmental agency; provided that in the last instance, - 8 - the recipient shall notify the discloser before such disclosure and cooperate in good faith to limit such disclosure. 10.3 Ambix represents and warrants that it possesses all the rights, licenses, or other authority to use all IP RIGHTS reasonably necessary or desirable to conduct its business as presently conducted and to grant ACC the license and other rights herein. Ambix has not received any notice with respect to any alleged infringement or unlawful or improper use of any IP RIGHT or other intellectual property owned or alleged to be owned by others, and Ambix has no knowledge of any infringement (or suspected infringement) of any of the IP RIGHTS. Ambix has no any knowledge of any claim asserted by any other person or entity with respect to the use of any IP RIGHT, and Ambix knows of no valid basis for any such claim. No director, officer or employee of Ambix has any interest in any IP RIGHT, all of which are free and clear of any lien, security interest, claim or encumbrance of any kind. 10.4 Exhibit A sets forth the form and placement of the proprietary legends and trademark and copyright notices displayed in or on the SOFTWARE. In no instance has the eligibility of the SOFTWARE or any component thereof for protection under applicable patent,copyright, or other law protecting proprietary rights been forfeited to a third party or the public domain by omission of any required notice or any other action or inaction. 10.5 Ambix has used its best efforts to keep Ambix's trade secrets secret, with disclosures being made on a need-to-know basis. As far as Ambix knows there has been no violation of this policy, and all Ambix employees and contractors have been advised of the policy. The SOURCE CODE, DOCUMENTATION, and all other trade secrets and confidential information of Ambix related to the SOFTWARE (1) have at all times been maintained in confidence and (2) have been disclosed only to Ambix employees and contractors in connection with the performance of their duties to Ambix. 10.6 All personnel, including employees, agents, consultants, and contractors, who have contributed to or participated in the conception and development of the IP RIGHTS (including any component thereof), the DOCUMENTATION, or the SOFTWARE on behalf of Ambix either (1) have been party to a "work-for-hire" arrangement with Ambix, in accordance with applicable law, that has accorded Ambix full, effective, exclusive, and original ownership of all tangible and intangible property thereby arising (including IP RIGHTS), or (2) have executed appropriate instruments of assignment in favor of Ambix as assignee that have conveyed to Ambix full, effective, exclusive, and original ownership of all tangible and intangible property thereby arising (including IP RIGHTS). - 9 - 10.7 Ambix has validly and effectively obtained the right and license to use, copy, modify, and distribute any third-party programming and materials contained in or used in connection with the SOFTWARE. Except as identified in Exhibit B, the SOFTWARE, the DOCUMENTATION, and the other DELIVERABLES contain no other programming or materials in which any third party may claim superior, joint, or common ownership, including any right or license, nor do they contain derivative works of any programming or materials not owned in their entirety by Ambix. 11.0 MODIFICATION OF SOFTWARE. ACC may request from Ambix modifications to or ------------------------- DERIVATIVE WORKS of the SOFTWARE, including modifications or new versions of the SOFTWARE to merge with other software programs or systems, thereby incorporating the SOFTWARE into an overall business or information systems process. ACC shall negotiate in good faith with Ambix to prepare such ENHANCEMENTS, modifications, versions, or other DERIVATIVE WORKS, of the SOFTWARE. If ACC and Ambix cannot agree on terms for such services, ACC shall be free to seek others to perform such work who may use the SOURCE CODE and other DELIVERABLES for such purpose. As a condition to any such work, any third party contractor shall agree to keep the SOURCE CODE and other DELIVERABLES confidential and shall agree not to use or disclose the intellectual property embodied in the SOURCE CODE in competition with either ACC or Ambix. Further, any such modifications to, or other DERIVATIVE WORKS of, the SOFTWARE shall belong to Ambix. Any modified version of the SOFTWARE, or any system which incorporates the SOFTWARE in modified form, just as in its original form as defined under this Agreement, shall be for ACC or its AFFILIATE's own use as specified under this Agreement. The modified version, the newly merged version, or other DERIVATIVE WORK of the SOFTWARE shall remain subject to all of the terms and conditions of this Agreement. In addition to the notices required by Section 10 of Schedule I (above), ACC or AFFILIATE shall include the following notice in both machine readable form and on all DOCUMENTATION for the modified version of the SOFTWARE or merged system comprising any part or all of the SOFTWARE: "This program or system includes information, concepts, ideas, know-how, and techniques which are confidential and constitute proprietary information and trade secrets of Ambix Acquisition Corp. of Rochester, New York and are protected by copyright. (C) 1995 Ambix Acquisition Corp." In the event this Agreement is terminated for ACC's default, after any permitted transition period, the SOFTWARE shall be completely removed from any system containing the SOFTWARE and - 10 - from any information systems process using the SOFTWARE, whether as a modified program or modified system integrating Ambix programs in modified or unmodified form, and treated as if permission to modify had never been granted and all copies of all DOCUMENTATION shall be returned to Ambix. 12.0 WARRANTY. Ambix warrants that it is the rightful owner of the SOFTWARE --------- and DOCUMENTATION and that it has the right to license the same to ACC. During the term of this license, Ambix warrants that the SOFTWARE will be free of ERRORS. Ambix further warrants that the SOFTWARE will not contain any CODE that would disable or impair its operation. Ambix, at its expense, will immediately correct any ERRORS reported to Ambix. Ambix's only other obligation under this Warranty shall be to amend, revise, modify, or replace the SOFTWARE at Ambix's then-current rates for programming and support services, unless Ambix and ACC have an agreement for a fixed-price or other reimbursement for such services, in which case the latter agreement shall control. ACC agrees that Ambix shall have no other liability of any kind, whether actual, direct, indirect, consequential or otherwise. The warranty contained in this Section 12 shall apply to Ambix versions of the SOFTWARE, and Ambix makes no warranty as to any version of the SOFTWARE to the extent modified by anyone other than Ambix. Subject to Ambix's warranty obligations or the terms of another agreement with ACC for maintenance, support, or other development services, amendment, revision, modification, or replacement of the SOFTWARE will be performed at ACC's request at Ambix's then- current rates for such services, subject to availability of Ambix personnel. AMBIX MAKES NO OTHER WARRANTIES. WHETHER EXPRESS, IMPLIED OR STATUTORY, AS TO ANY MATTER WHATSOEVER, AND DISCLAIMS ALL SUCH WARRANTIES INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 13.0 ACCEPTANCE. ACC will use the SOFTWARE during the sixty (60) business days ----------- immediately following installation (the "ACCEPTANCE PERIOD") of the SOFTWARE to determine whether or not it conforms to the SPECIFICATIONS and is free from any ERROR. Any failure of the SOFTWARE to conform to the SPECIFICATIONS or to be free from ERROR discovered by ACC, during the Acceptance Period, will be reported promptly to Ambix. Ambix will immediately make any corrections necessary to make the SOFTWARE conform with the SPECIFICATIONS and to be free from ERROR. The SOFTWARE shall be deemed accepted by ACC upon completion of such sixty (60) business day period, unless Ambix shall have been provided written notice by ACC of the failure of the SOFTWARE, setting forth the particular matters in which the SOFTWARE so fails to conform. Following receipt of any such notice, the SOFTWARE shall be deemed accepted upon the correction of any such - 11 - non-conformity by Ambix and the lapse of a similar sixty-day period without a report to Ambix by ACC. 14.0 LIMITATIONS OF AMBIX'S LIABILITY. Ambix's liability under this Agreement --------------------------------- for damages, regardless of the form of action, shall be limited to money damages which shall not exceed the total amount paid by ACC for the License and other rights granted hereunder. This shall be ACC's exclusive remedy. In no event shall Ambix be liable for any loss of product, loss of profit, loss of use or any other actual, special, incidental, consequential damages, or other damages of any kind whether foreseeable or unforeseeable, resulting from or arising out of the license or use of the SOFTWARE, even if Ambix shall have been advised of possibility of such loss or damages. 15.0 INTELLECTUAL PROPERTY INFRINGEMENT. If notified promptly in writing of ----------------------------------- any action brought against ACC or any AFFILIATE based on a claim that ACC or any AFFILIATE's use of the SOFTWARE or other DELIVERABLE infringes the IP RIGHTS of a third party, Ambix will defend such action at its expense and pay the costs, expenses (including attorneys' fees, whether incurred as the result of such action or a claim to enforce this Agreement), and damages awarded in any such action. Ambix will have the sole control of the defense of any such action and all negotiations for its settlement or compromise, except that if any right of ACC hereunder shall be limited as the result of such settlement or compromise, ACC shall have the right to approve such settlement or compromise, but such approval cannot be unreasonably withheld. At any time during the course of any litigation arising out of a claim of infringement of an IP RIGHT, or if, in Ambix's opinion, an IP RIGHT or any part thereof is likely to become the subject of a claim of infringement, Ambix will, at its sole option and at its expense, either procure for ACC the right to continue using the DELIVERABLE, replace or modify the same with a compatible, functionally equivalent, noninfringing product, or grant ACC a full refund of the LICENSE FEE paid herewith, and accept its return. Ambix will not have any liability to ACC under any provision of this paragraph to the extent the infringement, or claim thereof, is based upon (a) the use of the SOFTWARE in combination with other software not furnished by Ambix; or (b) the use of other than the latest supportable version of the DELIVERABLE made available to ACC. ACC will hold Ambix harmless from and against any expense, cost, damage, judgment, or loss or other liability of any kind, for infringement of any IP RIGHT to the extent it results from Ambix's compliance with ACC's designs, specifications, instructions or from the use of the DELIVERABLE as altered or modified by anyone other than Ambix. - 12 - ACC is obligated hereby to promptly notify Ambix of any instance of infringement or attempted infringement of any IP RIGHTS of Ambix which comes to ACC's attention. The foregoing states the entire liability of Ambix with respect to infringements of an IP RIGHT by a DELIVERABLE or any part thereof or by its operation. 16.0 TERMINATION FOR FAILURE TO PERFORM. The rights and obligations of the ----------------------------------- parties if the other party defaults or otherwise fails to perform its obligations hereunder shall be governed by this Section 16. 16.1 The license granted to ACC hereunder may be terminated by Ambix upon not less than sixty (60) days written notice if ACC fails to perform any of its material obligations or duties under this Agreement, unless within such period ACC cures such failure. If ACC cannot in good faith cure such failure, other than monetary defaults, within the sixty (60) day period, then ACC shall be given an additional thirty (30) days in which to cure, provided that ACC must commence cure immediately and continue to diligently pursue such cure of any such failure(s). Upon termination of this Agreement, ACC shall immediately cease using the SOFTWARE and, at the option of Ambix, ACC shall destroy or return to Ambix all tangible forms of the SOFTWARE and the DOCUMENTATION and ACC shall erase the SOFTWARE from all storage media in which it has been installed or copied; provided, however, if ACC notifies Ambix in writing within 30 days after the expiration of any permitted cure period hereunder, ACC shall have a transition period not to exceed one year from the date of such notice in which to shift from using the SOFTWARE and other DELIVERABLES to new software or other computer system. During such transition period, ACC shall pay the support and maintenance fees, and Ambix shall continue to provide support and maintenance. Within (30) thirty days after termination of this Agreement, ACC shall certify to Ambix in writing that it has destroyed or delivered to Ambix all tangible forms of the SOFTWARE and that it has erased the SOFTWARE from all storage media. ACC shall upon request by Ambix permit Ambix such access as shall be necessary for Ambix to verify to its satisfaction that ACC has complied with the foregoing requirements. 16.2 If Ambix (a) reasonably cannot perform its obligations under this Agreement or does not provide support and maintenance for the SOFTWARE, (b) does not enter into an agreement for the development of ENHANCEMENTS, DERIVATIVE WORKS, modifications, or new versions of the SOFTWARE or other DELIVERABLE requested by ACC pursuant to Section 11, or (c) makes an assignment for the benefit of creditors, or commences or has commenced against it any proceeding in bankruptcy, insolvency, or reorganization pursuant to bankruptcy laws, laws of debtor's - 13 - moratorium, or similar laws, Ambix shall deliver the most current version of the SOURCE CODE to ACC, and ACC shall have the right to use, modify, and create DERIVATIVE WORKS of, the SOURCE CODE and other DELIVERABLES provided that ACC continues to observe the obligations contained in Sections 2, 6, 10, 15, and 17. 17.0 EXPORT REGULATIONS. ACC agrees, regardless of permissions granted by ------------------- Ambix, not to export, either directly or indirectly, any SOFTWARE or systems incorporating the SOFTWARE without first obtaining any required license to export or re-export from the United States Government or appropriate foreign government as may be required and to comply with all United States and international export regulations as applicable. 18.0 MISCELLANEOUS. -------------- 18.A Binding Effect. This Agreement shall be binding upon and inure -------------- to the benefit of the parties hereto, their personal representatives, and permitted successors and assigns. 18.B Assignment. Either party may, without the prior written consent ---------- of the other, assign its rights under this Agreement so far as those rights constitute part of the sale, merger, consolidation, reorganization, or transfer of substantially all of the assigning party's business or assets. 18.C Entire Agreement. This Agreement, the related maintenance and ---------------- support agreement between the parties, and the Software License Agreement, dated March 30, 1995, between ACC and Ambix Systems Corp. (the "NetOps Agreement"), contain the entire understanding between or among the parties and supersede any prior understanding, memoranda or other written or oral agreements between or among any of them with respect to the Agreement's subject matter. To the extent there are conflicts, ambiguities, or inconsistencies between this Agreement and the NetOps Agreement, the terms and conditions of this Agreement shall control. There are no representations, agreements, arrangements or understandings, oral or written, between or among any of the parties relating to the subject matter of this Agreement which are not fully expressed herein. 18.D Modifications or Waiver. No modification or waiver of this ----------------------- Agreement or any part of this Agreement shall be effective unless in writing and signed by the party or parties sought to be charged therewith. No waiver of any breach of condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. No waiver of any breach or condition of this Agreement by or with respect to any party hereto shall be deemed to be a waiver of the same breach or condition with respect to - 14 - any other party hereto. No course of dealing between or among any of the parties hereto will be deemed effective to modify, amend, or discharge any part of this Agreement or the rights or obligations of any party hereunder. 18.E No Third Party Beneficiary. None of the provisions of this -------------------------- Agreement shall be for the benefit of, or enforceable by, any person or entity not a party hereto, except an AFFILIATE. 18.F Partial Invalidity. If any provision of this Agreement shall be ------------------ held invalid or unenforceable by competent authority, such provision shall be construed so as to be limited or reduced to be enforceable to the maximum extent compatible with the law as it shall then appear. The total invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. 18.G Notices. Any notice or other communication required or permitted ------- under this Agreement shall be in writing and shall be deemed to have been duly given (a) upon hand delivery, or (b) on the third day following delivery to the U.S. Postal Service as certified or registered mail, return receipt requested and postage prepaid, or (c) on the first day following delivery to a nationally recognized U.S. or foreign overnight courier service, fee prepaid, return receipt requested or other confirmation of delivery requested, or (d) when telecopied or sent by facsimile transmission if an additional notice is also given under (a), (b), or (c) above within three days thereafter. Any such notice or communication shall be delivered or directed to a party at its address set forth below or at other address as may be designated by a party in a notice given to all other parties hereto in accordance with the provisions of this section. Notice to Ambix shall be sent to: Ambix Acquisition Corp. 400 West Ave. Rochester, New York 14611 Attn: Andrew McIntosh, President Notice to ACC shall be sent to: ACC Corp. 400 West Ave. Rochester, New York 14611 Attn: Mr. David K. Laniak, Chief Executive Officer - 15 - 18.H Governing Law. This Agreement shall be governed by, and ------------- construed in accordance with, the laws of the United States and the State of New York without reference to any New York conflict or choice of law principle. 18.I Jurisdiction and Venue. In the event that any legal proceedings ---------------------- are commenced in any court with respect to any matter arising under this Agreement, the parties hereto specifically consent and agree that: 18.I.a the courts of the State of New York and/or the United States Federal Courts located in the State of New York shall have exclusive jurisdiction over each of the parties hereto and over the subject matter of any such proceedings; and 18.I.b the venue of any such action shall be in Monroe County, New York and/or the United States District Court for the Western District of New York. 18.J Injunctive Relief. In the event of a breach or threatened ----------------- breach of any of the terms of Sections 2, 10, 11, 15 or 17 of this Schedule I by a party, the other party shall be entitled to an injunction restraining the breaching party from committing any breach of this Agreement without showing or proving any actual damages and without diminishing any other right or remedy which the nonbreaching party may have at law or in equity to enforce the provisions of this Agreement. The breaching party waives any right it may have to require the nonbreaching party to post a bond or other security with respect to obtaining or continuing any injunction or temporary restraining order, and releases the nonbreaching party and its officers, directors, and shareholders from, and waives any claim to, damages against them which the breaching party may have with respect to the breaching party's obtaining any injunction or restraining order pursuant to this Agreement. All out-of-pocket expenses incurred by the nonbreaching party in a successful application for an injunction shall be borne by the breaching party, including without limitation, all fees and expenses for agents, representatives, counsel and accountants. 18.K Effect of Termination. Unless otherwise specifically agreed in --------------------- writing, the terms of Sections 6, 10, 11, 14, 15, 16, 17 and 18 shall survive any termination, cancellation, repudiation or rescission of this Agreement by either party for a period of three years after termination, whether or not for cause, and under such circumstances either party may continue to enforce such terms as if this Agreement were otherwise in full force and effect. 18.L Confidentiality. Except as contemplated by this Agreement or as --------------- necessary to carry out the transactions contemplated by this Agreement, the terms of this Agreement, and all information or documents furnished by any party to the other, - 16 - shall be kept confidential by the party to whom furnished and shall not be otherwise used or disclosed by the recipient except to recipient's accountants or attorneys, or as may be required, in the good faith judgment of the disclosing party, by law or rule or regulation of any governmental agency, without the prior written consent of the other party. If this transaction is not consummated, each party shall return to the other all such documents furnished hereunder, including all copies, and shall continue to keep confidential, and neither use nor disclose, any such information. 18.M Headings. The headings contained in this Agreement are inserted -------- for convenience only and do not constitute a part of this Agreement. 18.N Fair Meaning. This Agreement shall be construed according to ------------ its fair meaning. The language used shall be deemed the language chosen by the parties hereto to express their mutual intent, and no presumption or rule of strict construction will be applied against any party hereto. 18.O Gender. Whenever the context may require, any pronoun used ------ herein shall include the corresponding masculine, feminine or neuter forms and the singular of nouns, pronouns and verbs shall include the plural and vice versa. 18.P Counterparts. This Agreement may be executed in several ------------ counterparts, each of which shall be deemed an original, and all of said counterparts together shall constitute but one and the same instrument. 18.Q Further Assurances. The parties hereto shall execute and ------------------ deliver any and all additional writings, instruments and other documents and shall take all such further actions as shall be reasonably required to effect the terms and conditions of this Agreement. 19.0 SOURCE CODE DEPOSIT WITH ACC. ACC shall provide at its headquarters a ---------------------------- fireproof vault or safe reasonably satisfactory to Ambix to serve as ACC's depository for the SOURCE CODE and related DOCUMENTATION. Immediately upon execution of this Agreement, and thereafter each time a new release of the SOURCE CODE is made executable into OBJECT CODE (whether or not made available in a commercial release) or as ACC may request but not more than twice per calendar year, Ambix shall deliver to ACC a complete copy of all SOFTWARE in both OBJECT CODE and SOURCE CODE form and with all applicable DOCUMENTATION and other tools and materials (e.g., proprietary workbenches, compilers, lists of third party software, etc.), which a reasonably skilled programmer would find necessary or useful to maintain, support, enhance, and create DERIVATIVE WORKS from the SOFTWARE (the - 17 - foregoing are referred to as the "SOURCE MATERIAL"). ACC shall deposit the SOURCE MATERIAL into such vault or safe for safekeeping, and such deposit shall be witnessed by a representative of Ambix, if requested. ACC shall have the right, but not more than twice per year, to engage a consultant to verify the accuracy of the SOURCE MATERIAL, provided such consultant executes a confidentiality agreement with ACC regarding the SOURCE MATERIAL. Except for such verification and as otherwise contemplated by the terms of this Agreement, ACC shall keep the SOURCE MATERIAL in the vault or safe at all times. If ACC removes the SOURCE MATERIAL to exercise its rights under this Agreement, ACC shall continue to observe its obligations under Sections 2, 10, 11, and 15 of this Agreement. 20.0 RIGHT OF DEMONSTRATION ON ACC PREMISES. Upon reasonable notice and with -------------------------------------- the mutual agreement of ACC, Ambix may have access to ACC's operations facilities for purposes of demonstrating the use of the SOFTWARE to prospective customers of Ambix. During such visits, ACC at its sole option may withhold information it deems proprietary from any visitors. Ambix will take precautions not to disturb or encumber the operations during such visits. ACC agrees to make an employee available to answer questions should questions arise during a site visit. 21.0 COMMISSION. Ambix shall pay ACC a commercially reasonable and customary ----------- commission upon the sale or license by Ambix or any affiliate of any system which uses a significant portion of the CODE or any DERIVATIVE WORK thereof. - 18 - SCHEDULE II: THE SOFTWARE 1.0 Intermediation SOFTWARE (Installed at ACC Corp.) Full design and operational documentation is already developed. Intermediation is the automated or semi-automated process of acquiring Call Data Records and other data records from telephone switches. This system includes both general purpose data communications SOFTWARE as well as SOFTWARE which embodies special knowledge of DSC switches and the operating software of DSC which controls those switches. The SOFTWARE written in C++, using object-oriented design and programming methods with easily maintainable class hierarchies and identificatory declaration and enumeration of all data types. Current Version operates on commercially available Sun MicroSystems micro computers under the Solaris operating system. 2.0 Rating SOFTWARE (Installed in ACC UK Long Distance Ltd) Full design and operational documentation is already developed. 3.0 RIT Call Accounting SOFTWARE (Installed for RIT) Currently being documented to customer specifications. 4.0 Network Operations SOFTWARE (In Beta Test) Currently being documented to customer specification. 5.0 Graphic User Interface Class Library (to be placed in escrow) Full design and implementation documentation is proprietary. 6.0 Network Modeling SOFTWARE (final development stage) Full design and implementation documentation is proprietary. 7.0 Various ADABASE natural programs (installed in ACC UK Long Distance Ltd). Already documented and delivered. EX-99.7 10 BILL OF SALE FROM AMBIX SYSTEMS TO THE CO. EXHIBIT 99.7 BILL OF SALE Seller: Ambix Systems Corp. February 6, 1996 400 West Avenue Rochester, NY 14611 Buyer: ACC Corp. 400 West Avenue Rochester, NY 14611 Hardware and software modifications to configure the Ambix rates to the ACC UK Long Distance Ltd. billing systems. $221,000 Ambix "Net Ops" Application, Version 1.0, release 1.0. $310,470 Software modifications to configure the Ambix rates for RIT call processing, and RIT call processing system (Version 1.0, Release 1.0, modification level 0). $176,000 Ambix "AIA" Intermediation System (Version 2.0, Release 1.3, modification level 2). $ 65,000 -------- TOTAL $772,470 ======== Acknowledgement: Seller, Ambix Systems Corp., a New York corporation, having its principal place of business at 400 West Avenue, Rochester, NY 14611, in consideration of the above amounts, does hereby sell, assign, and transfer to Buyer, ACC Corp., the indefinite right to use the above property (Object code only) the Seller further acknowledges that all amounts due Seller from the Buyer related to the above have been received prior to December 31, 1995. Buyer acknowledges that the above object code and related systems have substantially met the conditions for approval and acceptance for their intended use by Buyer subject to the terms of acceptance set forth in Section 13 of a Software License Agreement between each company dated on or about February 6, 1996. ATTEST: /s/ Andrew McIntosh /s/ David K. Laniak - ------------------------- ----------------------- Andrew McIntosh, President David K. Laniak Ambix Systems Corp. Chief Executive Officer ACC Corp. EX-99.8 11 LTR AGREE. BET. COMPANY & RICHARD T. AAB EXHIBIT 99.8 Rochester April 27, 1995 Mr. Richard T. Aab 29 Woodstone Rise Pittsford, New York 14534 Re: Proposal/Ambix Systems, Inc. Dear Mr. Aab: The Special Committee (the "Committee") has reviewed the proposal, dated April 13, 1995, submitted by you to the Committee with respect to the disposition of your interest in Ambix Systems, Inc. ("Ambix"). The Committee is pleased that your proposal recognizes the need and desirability of disposing of your interest in Ambix because of your interest in and duties to ACC Corp. (the "Corporation"). The Committee also appreciates the difficult decision you have been asked to make and your cooperation in this matter. The Committee would like, however, to suggest certain modifications to your proposal in the event you decide to transfer your interests to the Corporation and to reach an understanding with you on such changes in order to resolve the pending matters. The purpose, therefore, of this letter is to set forth our mutual understanding as to the manner of disposition of your interest in Ambix to the Corporation and the resolution of any subsequent issues related thereto as follows: All interests transferred All of your ownership rights and to the Corporation: interests in Ambix will be assigned - ------------------- and transferred to the Corporation for nominal consideration in the manner provided for herein as soon as practicable after your execution and delivery of a copy of this letter agreement. Based on your proposal dated April 13, 1995, it is contemplated that the Corporation will receive a 67% interest in and to all of the issued and outstanding shares of capital stock of Ambix free and clear of all encumbrances and restrictions on transfer; all of your ownership rights and interests in and to the capital stock of Ambix will be referred to hereinafter as the "Shares." (It is anticipated with respect to debt obligations of Ambix to you and in connection with the transfer of Shares to the Corporation that (i) you will convert all debt obligations of Ambix to you into capital stock and that such resulting shares along with all of the other shares of Ambix capital stock that you own of record or beneficially will be the shares transferred to the Corporation; or (ii) your rights, if any, to convert Ambix debt obligations into shares of capital stock will be transferred to the Mr. Richard T. Aab April 27, 1995 Page 2 Corporation and may be exercisable by the Corporation at any time without restriction; or (iii) you will release and discharge Ambix of all of its debt obligations to you.) Escrow: The documents executed and delivered - ------- by you to effect the transfer of the Shares will be held in escrow by counsel to the Committee or by independent escrow agent, as mutually determined by you and the Committee. The documents will remain in escrow pending the Committee's completion of its due diligence as to whether the Corporation should accept the transfer and delivery of the Shares. The Committee will examine with respect to Ambix, among other things, the corporate records, shareholder agreements and arrangements, financial statements, quality performance of its products and services, markets, status of technology and intellectual property rights and other matters deemed relevant by the Committee to its decision as to whether to accept the transfer and delivery of the Shares. During the escrow period, you agree to take such further action, execute and deliver such further documents, instruments and agreements and furnish such information, as may be necessary or desirable in connection with the Committee's due diligence, its consideration as to whether to accept delivery of the Shares and the proper transfer of the Shares to the Corporation. The Committee shall also be entitled to vote or direct the voting of the Shares during the escrow period for all purposes. Guaranty: In the event the Corporation elects - -------- to accept delivery of the Shares, the Corporation will guarantee loans to Ambix by M&T Bank up to approximately $400,000 and will cause you to be released from your current personal guarantee to M&T Bank for such loans or will fully indemnify you and hold you harmless with respect to your guarantee. Dealings with Ambix: Upon delivery of the Shares in escrow - ------------------- and the bona fide disposition of all of your interest in Ambix in accordance therewith, the Corporation in the prudent judgment of its management may work with Ambix (in addition to or separate from any other vendors with which management so chooses to work) to resolve the current and anticipated software issues and concerns in the United Kingdom. The understanding of the Special Committee is that any Mr. Richard T. Aab April 27, 1995 Page 3 arrangements with Ambix will be at minimal cost to the Corporation and without any liability to the Corporation until such time as management has satisfied itself that the Ambix software performs properly. At such time, management, by prior agreement with Ambix, will have the opportunity to exercise the Corporation's rights to complete the terms of a contractual arrangement with Ambix relating to the Corporation's needs in the United Kingdom at a price and on other terms and conditions thereupon considered to be satisfactory and fair to the Corporation and as approved by the Committee. Nonacceptance In the event the Committee elects not - -------------- to accept delivery of the Shares for of Delivery of Shares: any reason, then the Shares may be - --------------------- disposed of in a manner approved by the Committee after consultation with you. In the event the Shares are returned to you, then any proposals for additional business with Ambix after such date may not be entered into by the Corporation unless and until you have otherwise disposed of your interest in Ambix in a bona fide manner approved by the Committee. Acceptance of Upon acceptance by the Committee of - ------------- the delivery of the Shares, then Delivery of Shares: subsequent dealings with Ambix shall - ------------------ be left to the prudent judgment of management unless there is thereafter any personal interest in Ambix by you or any other officer or employee of the Corporation. If the proposal set forth in this letter meets with your approval and agreement, then would you please sign where indicated below and return a duly executed copy of this letter to the Special Committee. Very truly yours, SPECIAL COMMITTEE /s/ David K. Laniak By: _____________________________ David K. Laniak Chairman of the Special Committee Mr. Richard T. Aab April 27, 1995 Page 4 ACCEPTED AND AGREED TO: /s/ Richard T. Aab __________________________ Richard T. Aab Dated: May 15, 1995 EX-99.9 12 LEASE DATED 1/25/94 Exhibit 99.9 LEASE LANDLORD THE HAGUE CORPORATION TENANT ACC CORP. DATE: JANUARY 25, 1994 TABLE OF CONTENTS -----------------
Page ---- TERM SHEET............................................... T-1 1. DEFINITIONS......................................... 1 2. PREMISES............................................ 3 3. RIGHT OF FIRST REFUSAL.............................. 4 4. TERM OF LEASE; COMPLETION OF IMPROVEMENTS........... 5 5. EXTENSION OF TERM................................... 6 6. RENT, ADDITIONAL RENT............................... 7 7. COMPLIANCE WITH LAWS/USE OF PREMISES................ 9 8. SERVICES AND UTILITIES.............................. 9 9. PARKING............................................. 11 10. ACCESS TO THE PREMISES.............................. 12 11. COMMON AREA MAINTENANCE............................. 12 12. IMPROVEMENTS........................................ 13 13. REPAIRS............................................. 13 14. RIGHT OF ENTRY BY LANDLORD.......................... 14 15. INDEMNIFICATION..................................... 14 16. INSURANCE........................................... 15 17. SUBROGATION......................................... 16 18. LIENS AND ENCUMBRANCES.............................. 16 19. HOLDING OVER........................................ 16 20. ASSIGNMENT AND SUBLETTING........................... 17 21. DEFAULT AND RE-ENTRY................................ 18 22. CONDEMNATION........................................ 20 23. DESTRUCTION OF LEASED PREMISES...................... 21 24. PROPERTY TAXES...................................... 21 25. QUIET ENJOYMENT..................................... 23 26. SUBORDINATION....................................... 23 27. ESTOPPEL CERTIFICATE BY TENANT...................... 24 28. CONSENT BY LANDLORD................................. 24 29. HAZARDOUS SUBSTANCES................................ 25 30. MICROWAVE DISHES, RADIO ANTENNAS and OTHER TRANSMISSION/RECEIVING EQUIPMENT.............. 26 31. BROKERS............................................. 26 32. NOTICES............................................. 26 33. RELATIONSHIP........................................ 27 34. COMPLETE AGREEMENT.................................. 27 35. AUTHORITY FOR EXECUTION............................. 28 36. BINDING EFFECT...................................... 28 37. EXECUTION........................................... 28 38. RULES............................................... 28 39. FORCE MAJEURE....................................... 29 40. AMERICANS WITH DISABILITIES ACT OF 1990............. 29
-i- 41. MEMORANDUM OF LEASE................................. 31 42. CONTINGENT ON SPECIAL USE PERMIT.................... 31 43. SECURITY............................................ 31
-ii- Exhibit - ------- A Buildings B Premises C Confirmation of Commencement Date and Termination Date D Janitorial Services E Estoppel Certificate F Landlord's Work -iii- TERM SHEET ----------
Basic Lease Provisions - ---------------------- 1. Date: January 25, 1994 2. Landlord: The Hague Corporation Suite 400, 39 State Street Rochester, New York 14614 3. Tenant: ACC Corp. 4. Section 1(b) Building Address: 400 West Avenue Rochester, NY 14614 5. Section 1(d) Business Hours: 8:00 a.m. - 5:00 p.m. Monday through Friday 8:00 a.m. - 12:00 p.m. Saturday 6. Section 1(g) Floors: Parts of 2nd and 3rd Floors in Buildings 1, 2, 16, 16A 7. Section 1(h) Exhibits: A, B, C, D, E, F, G. 8. Section 1(k) Tenant's Percentage Share: 27.24% for Property Taxes and Operating Expenses, except 62% for Operating Expenses of snow removal and 50% security costs. 9. Section 2 Premises -------- Rentable Square Feet: 76,000; Tenant shall be provided 2500 square feet of contiguous space on the 2nd floor at no additional Base Rent or Additional Rent charges. Buildings --------- Rentable Square Feet: 266,292 (for Tenant's Percentage share calculation of Operating Expenses except for snow removal and security costs, for which the Rentable square feet for Tenant's Percentage share of security costs calculation shall be 112,952) 10. Section 3 Term Commencement Date: 5/1/94 Rent Commencement Date: 7/1/94 11. Section 3 Term Expiration Date: 6/30/04
T-1 - 2 - 12. Section 4 Extended Term Commencement Date: 7/1/04 13. Section 4 Extended Term Expiration Date: 6/30/09 14. Section 5(a) Base Rent: $507,682.00/yr. years 1-2 (based on $7.00 p.s.f.) $616,471.00/yr. years 3-5 (based on $8.50 p.s.f.) $688,997.00/yr. years 6-10 (based on $9.50 p.s.f.) Monthly Installment Amount: $42,306.83/mo. years 1-2 $51,372.58/mo. years 3-5 $57,416.42/mo. years 6-10 15. Section 6 Extended Term Base Rent: $761,523.00/yr. (based on $10.50 p.s.f.) $63,460.25/mo. 16. Section 7 Use: general office use and related telecommunications use (see Lease) 17. Section 8 Parking: Landlord to provide 3 spaces per 1,000 square feet of the Premises; 150 initially 18. Section 32 Broker: None 19. Paragraph 33 Landlord's Address for Notice: Suite 400, 39 State Street Rochester, New York 14614 Tenant's Address for Notice: 400 West Avenue Rochester, New York Additional Provisions: See Exhibits "F" & "G" - Landlord's Work, Tenant's Plans Landlord's Work: Those items of work set forth in Exhibit "F"
T-2 - 3 - IN WITNESS WHEREOF, Landlord and Tenant have executed the Lease to which this Term Sheet is attached by signing and dating this Term Sheet and the first page of the Lease. TENANT: LANDLORD: ACC CORP. THE HAGUE CORPORATION By: /s/ Michael R. Daley By: /s/ David M. Flaum ------------------------------ ------------------------------- Its: VP - Finance Its: President ------------------------------ ------------------------------- T-3 - 4 - LANDLORD -------- STATE OF NEW YORK ) COUNTY OF MONROE ) The foregoing instrument was acknowledged before me this 25th day of January, 1994, by DAVID M. FLAUM, President of THE HAGUE CORPORATION, a New York corporation, on behalf of the corporation. /s/ Marcia A. Benwitz --------------------- Notary Public TENANT ------ STATE OF NEW YORK ) COUNTY OF MONROE ) The foregoing instrument was acknowledged before me this 25th day of January, 1994, by MICHAEL R. DALEY, of ACC CORP., a Delaware corporation, on behalf of the corporation. /s/ Marcia A. Benwitz --------------------- Notary Public T-4 LEASE ----- THIS LEASE, dated as of the 25th day of January, 1994, between THE HAGUE CORPORATION, a New York Corporation with offices for the transaction of business located at Suite 400, 39 State Street, Rochester, New York 14614 (herein called "Landlord") and ACC CORP., a Delaware corporation with offices for the transaction of business located at 39 State Street, Rochester, New York 14614 (herein called "Tenant"). W I T N E S S E T H: Landlord hereby leases to Tenant, and Tenant hereby takes and hires from Landlord, the Premises as defined in Paragraph 1(g) below, for the term and subject to the terms, covenants, agreements and conditions hereinafter set forth, to each and all of which Landlord and Tenant hereby mutually agree. 1. DEFINITIONS ----------- Unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified: (a) "Additional Rent" shall mean any payment due Landlord under the terms of this Lease except for Base Rent and Extended Term Rent. All remedies applying to the non-payment of Base Rent and Extended Term Rent shall be applicable to Additional Rent. (b) "Buildings" shall mean all of the buildings and the land and other real property in the parcel more particularly described on Exhibit "A" hereto, excluding Lot J, all easements and rights of way affecting Tenant's Premises, and all other improvements on or appurtenances to said parcel, as presently exist and may change from time to time. (c) "Business Day" shall mean Monday through Friday and Saturday [only as noted in (d) below], but excludes the following holidays or the days on which the holidays are designated for observance: New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. (d) "Business Hours" shall be the hours of 8:00 a.m. to 5:00 p.m. Monday through Friday, and 8:00 a.m. to 12:00 p.m. Saturday. (e) "Calendar Year" shall mean any period during the Initial Term or any Extended Term of this Lease commencing on January 1 and ending on the next following December 31. - 2 - (f) "Common Areas" shall mean all interior and exterior common areas, including, but not limited to, parking areas, driveways, building's signs, landscaping, paving, sidewalks, hallways, stairways, escalators, elevators, common entrances, lobbies, restrooms and other similar public areas and access ways. (g) "Premises" shall mean the following: (i) the portion of the Buildings 1, 2, 16, and 16A located on parts of the second and third floor(s), which is outlined on the floor plan attached hereto as Exhibit "B"; (ii) all fixtures, improvements and other property now installed or located in the Premises plus any improvements described in Section 4(b); and (iii) together with the appurtenances including the right to use the Common Areas. (h) This "Lease" shall mean and include this instrument, the Term Sheet, Landlord's Worksheet, Exhibits A, B, C, D, E, F and G and all other Exhibits, if any, made a part of this Lease. (i) "Operating Expenses" shall mean any and all of Landlord's costs and expenses paid or incurred in operating, managing and maintaining the Common Areas, as defined in Section 1(f) of this Lease, for each Lease Year or partial Lease Year, as determined by Landlord in accordance with generally accepted accounting principles, consistently applied, including by way of illustration and not limitation: insurance premiums pursuant to Section 16 of this Lease, water, sewer, electrical and other utility charges (e.g., lighting in the Common Area parking lots) other than the separately billed electrical and other charges, if any, paid by Tenant as provided in this Lease; service and other charges incurred in the maintenance of the elevator; refuse disposal, snow removal, cleaning and other janitorial services; tools and supplies; repair costs, landscape maintenance costs; security services in the Common Areas (if any); license, permit and inspection fee(s); Landlord's cost of wages and related employee benefits payable for the maintenance and operation of the Common Areas; and in general all other costs and expenses which would, under generally accepted accounting principles, be regarded as operating and maintenance costs and expenses for the Common Areas. (j) "Property Taxes" shall mean the total of all real property taxes and currently due installments of assessments, special or otherwise, levied upon, or with respect to or reasonably allocable to the Buildings, imposed by any taxing authority having jurisdiction. Property Taxes also shall include all taxes, levies and charges which may be assessed, levied or imposed in replacement of or in addition to all or any part of ad valorem real property taxes as revenue sources, and which in whole or in part are measured or calculated by, based upon or allocable to the Buildings, the leasehold estate of Landlord or Tenant, or the rent and other charges payable hereunder, and shall include sewer and water charges, pollution, pure water, and other environmental control charges, if any. - 3 - If Landlord shall enter into any payment in lieu of tax or other similar agreement with any taxing entity, in lieu of or as a substitute in whole or part for any Property Taxes, such payments shall be deemed included in Property Taxes. (k) "Rent Commencement Date" shall mean the date Tenant's Base Rent and Additional Rent shall commence being due and owing, which will be July 1, 1994 or two months after delivery of possession of the Premises to Tenant with Landlord's Work substantially completed. (l) "Tenant's Percentage Share" shall mean the percentage figure which is equal to the rentable square footage of the Premises divided by the rentable square footage of the Buildings. Initially, such percentage shall be 27.24% for Property Taxes and Operating Expenses (based on 72,526 rentable square feet of the Premises), except that it shall be 62% for Tenant's share of snowplowing costs and 50% for Tenant's share of security services. (m) "Term Sheet" shall mean the terms set forth in the foregoing paragraphs delineated as "Term Sheet," which terms are hereby incorporated in this Lease as if set forth in full. In the event of any conflict between any provision of the Term Sheet and this Lease, the Lease shall control. 2. PREMISES -------- (a) Landlord has caused the Premises to be measured by architects, David R. Cassara & Associates, and the Premises contain approximately 72,526 rentable square feet. Either party may at any time prior to the Rent Commencement Date cause the Premises to be measured, at the cost of the electing party, and if the area of the Premises as so measured, is more or less than the number of square feet set forth above, then the Base Rent and Additional Rent charges payable herein shall be adjusted in proportion to the square footage of the Premises as so measured. Tenant represents that Tenant is familiar with the condition of the Premises. Tenant shall accept possession of the Premises subject to the completion of Landlord's work as described in this Lease in Exhibit "F". Tenant has received and reviewed Landlord's environmental and engineering studies and surveys for the Buildings, prior to the execution of this Lease, to make independent assessments of the issues contained therein. Tenant and its agents, employees and invitees have the non-exclusive right with others designated by Landlord to the free use of the Common Areas and the land on which the Buildings is located for the Common Areas' intended and normal purpose, subject to Landlord's reasonable regulation. Landlord may change the Common Areas if the - 4 - changes do not materially and unreasonably interfere with Tenant's access to the Premises or use of them. 3. RIGHT OF FIRST REFUSAL ---------------------- (a) Receipt of Offer; Exercise. -------------------------- If at any time from and after the date hereof the Landlord shall receive a bona fide offer from a third party ("Lease Offer") to lease any part of or all of the remainder of the second floor of buildings 16 and 16A and not included in the Demised Premises ("Adjacent Space") as shown on Exhibit A which Lease Offer the Landlord shall desire to accept, the Landlord will immediately notify Tenant pursuant to Section 3 of this Lease of all the terms and conditions of the Lease Offer, enclosing a copy of the Lease Offer, and Tenant shall have the right or option for a period of thirty (30) days after receipt of such notice to elect to lease the Adjacent Space for the same consideration and upon the same terms and conditions set forth in this Lease. Such election shall be in writing and shall be delivered to the Landlord either personally or by certified or express mail before the end of the thirty (30) day period. (b) Failure to Exercise Right. ------------------------- If such election shall not be exercised within the thirty (30) day period, the Landlord shall have the right to lease the Adjacent Space to any tenant but only upon the terms and conditions set forth in the Lease Offer and within one (1) year of the receipt of the notice by Tenant. (c) Failure of Landlord to Lease. ---------------------------- If the Adjacent space is not leased as provided in 3(b) above, then upon the receipt of any further Lease Offer which the Landlord desires to accept, the provisions of Section 3(a) hereof shall be and remain effective. (d) Compliance. ---------- It is agreed that an Affidavit by the Landlord's attorney, showing compliance with the provisions hereof with a copy of the Lease Offer attached and a failure on the part of Tenant to exercise this first refusal option shall be sufficient proof that this option is terminated. - 5 - 4. TERM OF LEASE; COMPLETION OF IMPROVEMENTS ----------------------------------------- (a) The term of this Lease (hereinafter referred to as the "Initial Term") shall commence on May 1, 1994 or the date of delivery of possession of the Premises to Tenant with Landlord's Work substantially complete as certified by the supervisory engineer of Tenant set forth in (b) below, and, unless sooner terminated as hereinafter provided, shall end on June 30, 2004 (hereinafter, respectively, the "Term Commencement Date" and the "Term Expiration Date"). Notwithstanding the above, Tenant's Base Rent and Additional Rent obligations shall commence on July 1, 1994 or 2 months following the date of delivery of possession of the Premises to Tenant with Landlord's Work substantially complete. Landlord shall deliver the Premises free from all tenancies and occupancies and free from all suits, complaints, reports, notices or orders with respect to violations of any federal, state, municipal, or other governmental laws and regulations. On the expiration date, or earlier termination date of this Lease, Tenant shall quit and surrender the Premises, broom clean, and in good condition and repair, excepting only reasonable wear and tear, together with all alterations, fixtures, installations and improvements which may have been made in or attached on or to the Premises, or the Buildings (as provided for elsewhere in this Lease), except for damages caused by fire or other casualty or the elements, and except for improvements, installations, etc., which Tenant is required to remove in accordance with other provisions of this Lease. Upon surrender, Tenant may remove any of its trade fixtures, provided that it repairs any structural damage to the Premises, or Buildings, as the case may be, caused by such removal. (b) Prior to the Term Commencement Date, Landlord shall construct or install in the Premises the improvements to be constructed or installed by Landlord, at Landlord's cost and expense, as set forth in the Term Sheet in accordance with plans and specifications to be attached hereto as Exhibit "F" (It is understood by Tenant and Landlord that after the execution of this Lease, the Landlord will furnish the plans and specifications which will be attached hereto as Exhibit "F" upon approval of the supervisory engineer of Tenant as set forth below.) The improvements shall be completed in a good and workmanlike manner and comply with all applicable laws, ordinances, rules and regulations of government authority. Landlord agrees to expend not less than $2.4 million dollars for improvements and alterations to be completed in accordance with the plans and specifications to be attached hereto as Exhibit "F" above described. To the extent that $2.4 million is not expended for such improvements and alterations, the Base Rent set forth in Section 6 of this Lease shall be reduced and prorated proportionately by the amount of the difference between actual expenditures and the sum of $2.4 million over the first six (6) years of the Lease Term. A supervisory engineer designated by Tenant and selected by the Special Committee of Tenant shall, at Tenant's sole cost and expense, audit and monitor the expenditures of Landlord for the purposes of determining and certifying the total dollar amount expended by Landlord for the improvements and alterations set forth in Exhibit "F" attached hereto. Landlord shall fully cooperate in furnishing all information needed by the supervisory engineer of Tenant for the purposes of said engineer's certification to the Special Committee. - 6 - This Lease is contingent upon approval by the supervisory engineer of Tenant, within a reasonable period of time following receipt, of plans and specifications to be furnished by Landlord and to be attached hereto as Exhibit "F" as above described. Said Supervisory engineer shall be authorized to review and monitor the work being performed by the Landlord, its agents and contractors, and said supervisory engineer shall report to the Special Committee with respect to the compliance of the work being performed in accordance with said plans and specifications to be attached hereto as Exhibit "F", and, where required, that a certificate of occupancy from the City of Rochester has been issued. The supervisory engineer of Tenant shall have the authority to approve substantial completion of the Premises prior to commencement of the Lease term, provided that a "punch list" of items remaining to be performed by Landlord has been approved by said supervisory engineer, and a completion date has been agreed upon by both the supervisory engineer and Landlord for completion of all items on said "punch list". (c) Tenant agrees to perform or cause to be performed all other work necessary for the completion of the Premises, at Tenant's cost and expense, including those items set forth in the Term Sheet, in a good and workmanlike manner and in compliance with all applicable laws, ordinances, rules and regulations of Landlord and of governmental authorities, and in accordance with plans and specifications submitted and approved by Landlord. Such plans shall be annexed hereto as Exhibit "G". (d) Landlord and Tenant agree, upon demand of the other, to execute a declaration in the form attached hereto as Exhibit C and made a part hereof by reference, expressing the Term Commencement Date and Term Expiration Date. 5. EXTENSION OF TERM BEYOND INITIAL TERM ------------------------------------- Provided: Tenant shall not be in default of any material terms or conditions of this Lease beyond any applicable cure periods; this Lease is in full force and effect; and Tenant is in possession of the Premises, Tenant shall have the option to extend this Lease (hereinafter the "Extended Term") commencing July 1, 2004 and, unless sooner terminated as herein provided, ending on June 30, 2009 (hereinafter, respectively, the "Extended Term Commencement Date" and the "Extended Term Expiration Date") by giving Landlord written notice of its intention to do so at least six (6) months prior to the end of the Initial Term, upon the same terms and conditions as herein stated and at the rental rate of $10.50 per square foot of the Premises ("Extended Term Base Rent"). 5(A). EARLY TERMINATION OF INITIAL TERM --------------------------------- Provided Tenant shall not be in default of any of the material terms or conditions of this Lease beyond any applicable cure periods, Tenant shall have the option to terminate this Lease effective the end of any month after the end of the 61st month of the - 7 - Initial Term, by giving Landlord written notice of its intention to do so at least six (6) months in advance of the applicable termination date. The payment due Landlord by Tenant required to exercise an early termination of this Lease shall be reduced by twenty percent (20%) for terminations effective the seventy-fourth (74th) month of the term of this Lease, and an additional twenty percent (20%) after each twelve (12) month period thereafter. To be effective, Tenant must forward to Landlord, at the time of any such election, payment equal to twelve (12) months' Base Rent together with an additional payment equal to the Additional Rent for the immediately preceding twelve months, both subject to the cumulative percentage annual reduction referred to in this section. Such notice of termination shall not be effective unless accompanied by said payments. Notwithstanding anything to the contrary contained in this section, Tenant shall not be required to make any early termination payment if Tenant terminates this Lease pursuant to Sections 8 or 13 of this Lease. 6. RENT, ADDITIONAL RENT --------------------- (a) Tenant shall pay to Landlord throughout the Initial Term and Extension Term, if any, of this Lease, as rental for the Premises, the Base Rent as follows: Base Rent: $507,682.00/yr. years 1-2 (based on $7.00 p.s.f.) $616,471.00/yr. years 3-5 (based on $8.50 p.s.f.) $688,997.00/yr. years 6-10 (based on $9.50 p.s.f.) Monthly Installment Amount: $42,306.83/mo. years 1-2 $51,372.58/mo. years 3-5 $57,416.42/mo. years 6-10 Extended Term Base Rent: $761,523.00/yr. (based on $10.50 p.s.f.) $63,460.25/mo. in the manner and on the terms specified in this Lease, without deduction or set-off, and without prior notice or demand. Notwithstanding the above, Base Rent for the initial two (2) months of the term shall be waived. (b) Tenant shall pay, as Additional Rent to Landlord, throughout the Initial and Extension Term, if any, of this Lease, Tenant's Percentage Share (as determined in accordance with Section 1(1)) of this Lease) of Operating Expenses and Property Taxes, (as - 8 - such terms are defined in this Lease), in the manner and on the terms specified in this Lease, without deduction or setoff, and without prior notice or demand. Notwithstanding any of the above provisions, Landlord represents that Tenant's Additional Rent for Property Taxes and operating expenses shall not exceed the sum of $1.25 per square foot for Lease Year 1 and $1.60 per square foot for Lease Year 2, exclusive of janitorial costs for Tenant's Premises (which are detailed in Section 8 of this Lease) and Security Costs (which are detailed in Section 43 of this Lease). Any increase in the amount of Property Taxes based upon any improvements or additions made by future tenants to the Buildings shall not be included in determining Tenant's share of Property Taxes. Tenant's Percentage Share of Property Taxes shall be payable on the later of the last day of the month in which Landlord renders a statement for same, or thirty days after Tenant's receipt of such statement. A copy of the property tax bill for the Property Taxes submitted to Landlord shall be conclusive evidence of the Property Taxes levied against the property. Tenant's Percentage Share of Operating Expenses shall be payable in monthly installments, at the time and in the manner payments of Base Rent are made. For the initial Lease Year, Landlord shall bill Tenant an amount reasonably estimated to equal Tenant's pro-rata share of Operating Expenses for the first Lease Year. Within 60 days after the end of the first Lease Year, Landlord shall determine the actual Operating Expenses for that period. Any excess amounts paid by Tenant shall be refunded by Landlord, and any shortfalls shall be paid by Tenant with the next due installment of base rent. Thereafter, Tenant's pro-rata share of Operating Expenses shall be paid in equal and consecutive monthly installments, at the time and in the manner payment of Base Rent are made, and shall be based on the actual year's payments, with reasonable estimates for increases. Provided Tenant is not in default of any of the material terms and conditions of this Lease, Tenant shall have the right, on reasonable advance notice to Landlord, to review Operating Expenses upon which Tenant's percentage share have been calculated. The Operating Expenses shall be subject to audit by Tenant for a period of two (2) lease years after the lease year in question, after which time Landlord's statement shall be final and conclusive. Such audit shall be conducted at Tenant's sole expense. (c) The installment of the Base Rent first due for the Initial Term of the Lease shall be paid by Tenant to Landlord on the Rent Commencement Date. Base Rent shall be paid to Landlord on or before the first day of each and every successive calendar month after the Rent Commencement Date month during the Initial Term and any Extension Term of this Lease. In the event the Rent Commencement Date is other than the first day of a calendar month or the Term Expiration Date is other than the last day of a calendar month, then the monthly Rent first due for the first and last fractional months of the Initial Term or any applicable Extended Term shall be prorated by multiplying the monthly Rent by a fraction, the numerator of which is the number of days of the partial month included in the - 9 - Initial Term or any applicable Extended Term and the denominator of which is the total number of days in the full calendar month. (d) Rent shall be paid to Landlord at Landlord's address for notices hereunder or to such other person or entity or at such other place as Landlord may from time to time designate in writing. 7. COMPLIANCE WITH LAWS/USE OF PREMISES ------------------------------------ The Premises shall be used by Tenant for general office use, as well as use for telecommunications operations and related services (including, but not limited to, transmissions, switching, and testing) for a telephonic switching center and voice, data and other telecommunications services, including also the use of data processing equipment required for the successful operation of such center and services, as well as the use of various transmission mediums including, but not limited to, fiber optic, metallic, and radio transmission mediums, including the installation of any business system or systems necessary or incident to the support of such switching and/or transmission systems and services, including facilities for the maintenance, storage, and repair of such transmission systems and services, as well as all other business uses of Tenant incident to Tenant's use of the Premises, all subject to governmental regulations, as applicable. During the Initial Term and any Extended Term of the Lease, Landlord and Tenant shall comply with all governmental regulations regarding Tenant's use and occupancy of the Premises and the Buildings. 8. SERVICES -------- Landlord agrees to furnish to the Premises and/or Buildings the following utilities and services: (a) heating and cooling units required for the use and occupation of the Premises during normal Business Days and Business Hours which Landlord represents can be operated at temperature levels sufficient to maintain interior temperatures as set forth in Exhibit "F" (subject to the precision air references in Exhibit "F") (Landlord's Work) compatible with normal standards of comfort, together with necessary control devices to regulate the same in the Premises; (b) hot and cold water suitable for drinking, lavatory, toilet and ordinary cleaning purposes; (c) gas and electricity suitable for the intended use of the Premises; (d) janitorial services in and about the Premises, pursuant to specifications set out in Exhibit D attached hereto and made a part hereof by reference; and elevator service. Additionally, Landlord shall manage, operate and administer the Buildings of which the Premises are a part. At Landlord's cost and expense, Landlord shall cause separate water, electric, steam, and gas meters to be installed for the Premises. Tenant shall be responsible for maintaining the meters and for paying, before delinquency, all utility bills for the Premises. - 10 - Tenant shall have the right from time to time, subject to Landlord's reasonable approval, at Tenant's sole expense, to install additional connection lines for its telecommunication operation, systems, and services, as defined in Section 7 above, and to perforate foundation or other walls (provided such perforation does not affect the structural integrity of the building and/or Buildings of Landlord of which the Premises form a part), and continue said connections to the Premises, provided that such connections are safely and properly installed, do not adversely interfere with any other services and utilities which Landlord provides to other Tenants; further provided that said connections comply with all state and municipal codes and any other governmental requirements, and further provided that Landlord receives and approves, without any unreasonable delay, all of Tenants plans for such work. Tenant shall be responsible for installing such connections in a safe, proper and workmanlike manner, and Tenant shall hold Landlord harmless and indemnity Landlord for any liabilities of any kind resulting from such installation and use of such lines, etc. Nothing herein shall be deemed to imply a right of access through another Tenant's premises. In the event that the connections, lines and receiving devices for Tenant's business operations and systems, as defined in Section 6 above, are interfered with by the Landlord, its agents, employees or servants, the Landlord shall correct the interference within two (2) business days of receipt of notice of such interference from the Tenant. In the event that the Landlord is unable or unwilling to correct the interference, the Tenant may terminate the Lease and all Rent shall abate as of the date of termination. Any termination of the Lease by the Tenant must be exercised within sixty (60) days of the date of the notice informing the Landlord of the interference or else the right of termination shall be deemed to have been waived by the Tenant. The Tenant shall vacate the Premises within sixty (60) days of the date of termination of the Lease. As of that date which the Tenant vacates the Leased Premises, the Lease shall be null and void and neither party shall have any liability or responsibility to the other. Notwithstanding the above, Tenant shall be responsible for any heating and cooling equipment requirements for computer rooms, equipment rooms and other special, non-general office areas. Tenant shall maintain and operate the heating and cooling units properly. Tenant may operate the heating and cooling units before and after normal Business Days and Business Hours, provided Tenant is responsible for the payment of all utilities incurred as a result of such use. Tenant shall pay to Landlord, as Additional Rent, for the janitorial services set forth in Exhibit D, the sum presently estimated at $.52 per square foot of the Premises per year, in equal and consecutive monthly installments of $3,142.80 due and payable at the time and in the manner Base Rent and Extended Term Rent, if any, are due and payable. Said sum shall be increased or decreased to reflect increases or decreases in the cost to Landlord for janitorial services. Tenant, on at least sixty (60) days' written notice to Landlord, may - 11 - elect to provide janitorial services for the Premises, in which case: (i) the charge for such services billed to Tenant by Landlord shall discontinue effective the latter of sixty (60) days after notice is received by Landlord or when Landlord is no longer responsible to provide and pay for said janitorial services for the Premises; and (ii) Tenant warrants and represents that the replacement janitorial services in Exhibit D, provide them in a commercially reasonable manner, and provide them solely at Tenant's cost and expense; and (iii) Tenant shall provide Landlord with a copy of the executed service contract with Tenant's janitorial service for the Premises for the period such services are rendered/to be rendered; and (iv) Tenant agrees to indemnify and hold Landlord harmless from and against any and all claims, damages, suits, etc. of any kind whatsoever related in any way to the contracting with or performance of services by Tenant's janitorial services; and (v) Tenant shall provide Tenant's janitorial service's insurance certificate naming Tenant and Landlord as additional insureds with coverages reasonably acceptable to Landlord. Landlord shall be liable for, and Tenant shall be entitled to, a reduction in Rent or any applicable Extended Term Rent due hereunder by reason of Landlord's failure to provide such utilities and services resulting from the negligent or willful misconduct of Landlord or its employees. Any failure or delay within Landlord's control which shall materially adversely affect Tenant's business or prohibit Tenant's use of the Premises for a continuous period exceeding seventy-two (72) hours, excluding weekends and holidays, shall be subject to an abatement of Rent by the percentage of the Premises reasonably deemed unusable, and this abatement shall continue until Landlord shall cause the same to be repaired and the Premises become usable by Tenant. Landlord shall not be responsible for any failure or delay outside of its control such as a failure of a public utility to provide services to the Buildings. Except as specifically provided for in this Lease, Landlord shall not be liable for any interruption or failure in the supply of utilities services to the Premises unless the interruption or failure is caused by Landlord's negligence or willful misconduct. If the interruption or failure is caused by Landlord's willful misconduct, and as a result thereof Tenant is unable to conduct business at the Premises, Landlord's liability shall be limited to the actual damages incurred by Tenant, but not for any consequential or incidental damages. 9. PARKING ------- Landlord shall provide to Tenant access to common parking facilities including, initially, 150 parking spaces for Tenant's use. Parking spaces shall be provided as follows: 3 spaces per 1,000 square feet of the Premises. Tenant acknowledges that Landlord will provide Tenant up to a total of 240 spaces (based on 3 per 1,000 square feet of the Premises), but that construction of any spaces over the initial 150 shall be subject to advance notice by Tenant and availability of paving weather. - 12 - 10. ACCESS TO THE PREMISES ---------------------- Tenant and its employees shall have access to the Premises twenty-four (24) hours a day, seven (7) days a week. During non-Business Hours Landlord may restrict access to only those individuals designated by Tenant to Landlord. Landlord may require such individuals to show a badge or identification card issued by Tenant. 11. COMMON AREA MAINTENANCE ----------------------- Landlord shall use reasonable diligence to maintain or cause to be maintained the Common Areas. Landlord shall operate, manage, equip, light, repair and maintain each Common Area for its intended purpose. Tenant, its agents, customers, employees and invitees, shall have the non-exclusive right in common with Landlord and all others to whom Landlord has granted or may hereafter grant rights to use the Common Areas subject to such reasonable rules and regulations as Landlord may from time to time impose. Landlord shall be solely responsible for compliance with all Applicable Laws, including, but not limited to, the Americans with Disabilities Act and any regulations promulgated thereunder, with respect to the Common Areas. Landlord shall not make any changes to the access, parking configuration, or design of the common areas at the time of the execution of this Lease, which materially, adversely affects access to or visibility from the Premises, without the express written consent of Tenant. Notwithstanding any of the other terms contained in this paragraph or in the definition of Operating Expenses under Term Sheet 9.2. the Tenant reserves the right, upon sixty (60) days' written notice to Landlord, to elect to provide its own snowplowing for its designated parking area, in which case (i) the charge for such services billed to Tenant by Landlord shall discontinue effective the latter of sixty (60) days after notice is received by Landlord or when Landlord is no longer responsible to provide and pay for said snowplowing services for the Premises; and (ii) Tenant warrants and represents that the snowplowing services which it will provide will be done solely at Tenant's sole cost and expense; and (iii) Tenant shall provide Landlord with a copy of the executed Service Contract with Tenant's snowplowing contractor for the period such services are rendered/to be rendered; and (iv) Tenant agrees to indemnify and hold Landlord harmless from and against any and all claims, damages, suits, etc. of any kind whatsoever related in any way to the contracting with or performance of services by Tenant's snowplowing services; and (v) Tenant shall provide Tenant's contractor's insurance certificate naming Tenant and Landlord as additional insureds with coverage reasonably acceptable to Landlord. To the extent that future tenants use the designated parking area. Landlord shall provide snowplowing services, and Tenant will receive a pro-rata reduction for the cost of said snowplowing services. - 13 - 12. IMPROVEMENTS ------------ Except for the initial improvements to the Premises pursuant to Exhibits F and G, Tenant, at Tenant's sole expense, may make, with the consent of Landlord, non-structural alterations and improvements to the interior of the Premises and shall retain title to anything it may place or install in the Premises, including, without limitation, drapes, furniture, counters, shelving, fixtures, work stations, removable partitions, equipment or business machines. Tenant shall give notice to Landlord of all proposed alterations and improvements to the interior of the Premises at least twenty (20) days prior to the commencement of any such work for Landlord's review and comments, which approval shall not be unreasonably withheld or delayed. If Landlord fails to consent or otherwise comment to Tenant within fifteen (15) days after receipt of Tenant's complete plans and specifications, Tenant may proceed with such work as if Landlord had consented. All such work by Tenant shall be performed in a good and workmanlike manner and in accordance with all applicable codes and regulations. Except as otherwise provided elsewhere in this Lease, at the expiration or termination of this Lease as herein provided, Tenant may remove all such improvements, excluding permanent Leasehold improvements, fixtures, and wiring, piping, etc., installed and paid for by Tenant in accordance with this Lease, and deliver the Premises to Landlord in as near as reasonably possible to the condition as of the date of possession, except for ordinary wear and tear. Any improvements or alterations (see Section 30, for example) by Tenant not in the Premises shall be removed by Tenant, and the Buildings shall likewise be repaired. If Tenant leaves any such removable items on the Premises after termination of its occupancy without the written consent of Landlord, they shall at the option of Landlord become the property of the Landlord, or Landlord may cause such items to be removed, at Tenant's sole cost and expense. 13. REPAIRS ------- Landlord shall maintain the Buildings in a good state of repair, including, but not limited to: (a) repairs and replacements to the structural portions of the Buildings, including the roof foundation and exterior walls of the Buildings, (b) repairs and replacements necessitated by Landlord's acts or negligence, (c) damage or destruction caused by fire or any other perils that normally are insured under extended coverage endorsements issued in the area where the Premises are located, whether or not due to Tenant's negligence, (d) repairs and replacements to the parking lot areas and landscaped areas, and (e) repairs and replacements, though non-structural, necessitated by Landlord's acts or negligence, (f) repairs and replacements directly resulting from Landlord's failure to repair as required hereunder and (g) repairs and replacements caused by ordinary wear and tear to the Common Areas. - 14 - Except as otherwise provided in Section 23 hereof, in the event a repair or replacement cannot be accomplished by Landlord within a period of ninety (90) days from the date of notice from Tenant, or in the event Landlord fails to complete the repair or replacement within a period of ninety (90) days from the date of notice from Tenant, Tenant may, at its option, either (i) prior to completion of any such repair or replacement, cancel this Lease by giving Landlord written notice, and thereafter neither party shall have any rights, duties or obligations hereunder, or (ii) Tenant may take such steps as may be necessary to cure Landlord's default, in which event Tenant shall be entitled to recover from Landlord the monies so reasonably expended by Tenant together with reasonable interest thereon from the date such monies were expended by Tenant until the date paid. Notwithstanding the foregoing, if the nature of Landlord's obligation is such that more than ninety (90) days are required for performance, Landlord shall not be in default if Landlord commences performance within such ninety (90) day period and thereafter diligently proceeds to completion. Notwithstanding the above, if Tenant cannot reasonably, substantially operate Tenant's business from the Premises because of a failure of repair or replacement by Landlord for a period of 150 days or more from the date Landlord commences performance, then Tenant can terminate this Lease on ten (10) days' written notice to Landlord, after such 150 days. 14. RIGHT OF ENTRY BY LANDLORD -------------------------- Landlord and its agent may enter the Premises during Business Hours to inspect the same; to make repairs, alterations, improvements or additions or to perform such maintenance as required by the Lease or advisable to preserve the integrity, safety and good order of part or all of the Premises or the Buildings. Entry by Landlord is conditioned upon Landlord giving at least twenty-four (24) hours advance notice to a Manager of Tenant located at the Premises, except in an emergency; promptly finishing any work for which it entered; and causing the least practical interference to Tenant's business. In the event Landlord enters the Premises in an emergency without advance notice to Tenant, Landlord shall promptly thereafter notify a Manager of Tenant located at the Premises of the reason for such entry and the corrective or necessary action taken with respect to such emergency. 15. INDEMNIFICATION --------------- Landlord shall indemnity and save harmless Tenant and its parent, subsidiaries and affiliates and their respective officers, directors, employees and agents (herein collectively referred to as the "Indemnitees") from and against any and all suits, liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including reasonable attorneys' fees, which may be imposed upon or incurred by or asserted against Indemnitees as a result of or arising out of Landlord's failure to perform any covenant or agreement required to be performed by Landlord under this Lease Agreement or caused by the negligence or willful misconduct of Landlord, its agents or employees. - 15 - Tenant shall indemnify and save harmless Landlord, its officers, directors, employees and agents, from and against any and all suits, liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including reasonable attorneys' fees, which may be imposed upon or incurred by or asserted against Landlord by reason of any occurrence caused by the negligence or willful misconduct of Tenant, its agents, employees, directors, servants, contractors or invitees which arises out of Tenant's lease of the Premises and its operations thereon. Notwithstanding the foregoing two paragraphs of this Section 15, Landlord and Tenant release each other from any claims either party ("Injured Party") has against the other to the extent the claim is covered by the insurance the Injured Party is required to carry under Section 15 of the Lease 16. INSURANCE --------- Landlord during the Initial Term of this Lease and any applicable Extended Term of this Lease shall insure the Buildings, including improvements, by means of an insurance policy covering at least the perils of fire, lightning, explosion, windstorm, hail, smoke, aircraft damage, vehicular damage, riot, civil commotion and vandalism in the amount of the full replacement value of the Buildings (exclusive of the cost of excavation, foundations and footings), as the value may exist from time to time. Landlord shall, at Tenant's request, furnish a certificate of insurance evidencing the above coverage. Such certificate shall contain a clause that such policy and the coverage evidenced thereby shall be primary with respect to any policies carried by Tenant, and that any coverage carried by Tenant shall be excess insurance. Tenant, during the Initial Term of this Lease and any applicable Extended Term of this Lease, shall keep its personal property and trade fixtures in the Premises insured for at least the perils of fire, lightning, explosion, windstorm, hail, smoke, aircraft damage, vehicular damage, riot, civil commotion and vandalism. Such certificate shall contain a clause that such policy and the coverage evidenced thereby shall be primary with respect to any policies carried by Landlord, and that any coverage carried by Landlord shall be excess insurance. Each party shall maintain during the Initial Term of this Lease and any applicable Extended Term of this Lease commercial general liability insurance (which includes, but is not limited to, contractual liability coverage) covering claims for bodily injury and property damage occurring on, in or about the Premises, with limits of at least $2,000,000 combined single limit per occurrence. Each policy or a certificate therefor required under this Section 16 shall name the other party as an additional insured as respects the Premises and the provisions of Section 15 of this Lease, and shall contain an agreement by the insurer that such policies - 16 - shall not be canceled without at least thirty (30) days' prior written notice to the other party. Certificates evidencing such policies shall be delivered by Tenant to Landlord and by Landlord to Tenant upon the other party's written request. All policies required herein shall be procured from insurance companies licensed in the state where the Premises are located and shall be listed in the current "Best's Insurance Guide" as possessing a minimum policyholder's rating of "A" and a financial category no lower than "VI" ($25 million to $50 million of adjusted policyholder's surplus). 17. SUBROGATION ----------- Each party releases and waives on behalf of itself and on behalf of the insurers of such party's property, any and all claims and any rights of subrogation of any such insurer against the other party, its employees and agents for loss (other than loss or damage resulting from the willful act of such other party, its employees and agents) sustained from any peril to property required to be insured against herein, whether or not such insurance is actually in force, or from any peril to property actually insured against, though not required to be under this Lease. The policies of the respective parties shall contain an express waiver of subrogation to this effect. 18. LIENS AND ENCUMBRANCES ---------------------- Tenant shall promptly pay for all improvements installed on the Premises by Tenant and shall cause no mechanic's or construction lien to be imposed on the Premises, provided, however, that if Tenant shall, in good faith, contest any charge of a laborer, mechanic, subcontractor or materialman, Tenant may contest such charge after paying the claimed amount into an escrow account to protect Landlord from any adverse decision. 19. HOLDING OVER ------------ It is expressly understood by Tenant that Tenant's right to possession of the Premises under this Lease shall terminate on the expiration or earlier termination of the Initial Term or, if applicable, any Extended Term, and should Tenant continue thereafter to remain in possession Landlord shall be entitled to the benefits of all provisions of law with respect to summary recovery of possession from a holdover Tenant. Tenant shall indemnify and save harmless Landlord from any claim, damage, expense, cost or loss, which Landlord may incur by reason of such holding over, including, without limitation, any claim of a succeeding Tenant, or any loss by Landlord with respect to a lost opportunity to re-lease the Premises. - 17 - Any holding over by Tenant beyond the Initial Term or, if applicable, any Extended Term, shall give rise to a tenancy from month to month at a monthly rent equal to one hundred fifty percent (150%) of the monthly Rent during the last year of the Initial Term or applicable Extended Term, and all other provisions of this Lease shall continue. 20. ASSIGNMENT AND SUBLETTING ------------------------- Provided Tenant is not in material default of this Lease, Tenant may assign this Lease, sublet the Premises or permit any other party to occupy the Premises provided Landlord consents to same in writing, which consent shall not be unreasonably withheld or delayed. Notwithstanding the preceding sentence, Tenant may, without the prior approval of Landlord, assign this Lease or sublet the Premises or any portion thereof to any corporation or entity which controls, is controlled by, or is under common control with Tenant, or to any corporation resulting from the merger or consolidation with Tenant, or to any person or entity which acquires substantially all of the assets of Tenant; provided that no such assignment or sublease shall act as a release of Tenant from any of the provisions, covenants and conditions on the part of Tenant to be kept or performed under this Lease. No transfer or subletting, including one to which Landlord has consented, shall be effective unless and until: A. Tenant gives notice thereof to Landlord; and B. The transferee, assignee or sublessee shall deliver to Landlord: (i) a written agreement in the form and substance reasonably satisfactory to Landlord pursuant to which the transferee, assignee or sublessee assumes all of the obligations and liabilities of Tenant under this Lease; and (ii) a copy of the assignment, agreement or sublease. The withholding of consent by Landlord shall not be deemed unreasonable if: (i) the creditworthiness of the proposed assignee or sub- tenant is unsatisfactory, in Landlord's reasonable opinion; (ii) the proposed use and operation of the Premises by the proposed assignee or sublessee is, in the reasonable opinion of the Landlord, not compatible with the character and use of the Buildings; and - 18 - (iii) such assignment or subletting would violate any provisions of any other lease with Landlord in the Buildings, or with any financial or insurance obligations of Landlord with respect to the Buildings. The granting of consent by Landlord to any assignment or subletting shall apply only to the specific transaction thereby authorized and shall not relieve Tenant from the requirement of obtaining prior written consent of Landlord to any further assignment or sublease, nor shall the granting of consent in one instance imply or confer any right or obligation to grant consent again. 21. DEFAULT AND RE-ENTRY -------------------- If, during the term of this Lease, Tenant shall: (a) fail to pay any installment of the Rent or Extended Term Rent as and when the same becomes due and payable, and such default shall continue for a period of ten (10) Business Days following Landlord's written notice of same, or (b) default in its performance of or compliance with any of the other agreements, terms or conditions of this Lease, and such default shall continue for a period of thirty (30) Business Days after notice by Landlord to Tenant; provided that if the nature of Tenant's obligation is such that more than thirty (30) Business Days are required for performance, Tenant shall not be in default if Tenant commences performance within the thirty (30) Business Day period and thereafter diligently proceeds to completion; (c) transfer this Lease or Tenant's interest therein in violation of Section 20 of this Lease; then Landlord may at its option, by written notice to Tenant, terminate this Lease effective the date of the giving of such notice, on which the Initial Term or any applicable Extended Term of this Lease shall terminate; and thereupon, on such date, unless such default shall have been cured, all rights of Tenant under this Lease shall terminate in all respects as if the date fixed in such notice were the date originally fixed in this Lease for the termination or expiration thereof. This Lease and the term are expressly subject to conditional limitation that upon the happening of any one or more of the aforementioned events of default, Landlord, in addition to the other rights and remedies it may have, shall have the right to immediately declare this Lease terminated and the term ended, in which event, all of the right, title and - 19 - interest of Tenant hereunder shall wholly cease and expire upon receipt by Tenant of a notice of termination. Tenant shall then quit and surrender the Premises to Landlord in the manner and under the conditions as provided for under this Lease, but Tenant shall remain liable as hereinafter provided. If this Lease is terminated as aforesaid, Tenant nevertheless covenants and agrees notwithstanding any entry or re-entry by Landlord whether by summary proceeding, termination or otherwise, to pay and be liable for on the days originally fixed herein for the payment thereof, amounts equal to the several installments of Base Rent (and Extended Term Rent, if any) and any other rents and charges called for under this Lease, as they would, under the terms of this Lease, become due if this Lease had not been terminated or Landlord had not entered or re-entered as aforesaid, and whether the Premises be relet or remain vacant in whole or in part or for a period less than the remainder of the term, and for the whole thereof. Landlord shall use reasonable efforts to attempt to relet the Premises. However, this shall not be construed as a condition precedent of leasing other space in the Buildings. In the event the Premises be relet by Landlord, Tenant shall be entitled to a credit (but not in excess of the Base Rent, and Extended Term Rent, if any) and any other rent and charges due pursuant to the terms of this Lease in the net amount received by Landlord in reletting the Premises after deduction of all expenses and costs incurred or paid as aforesaid in reletting the Premises and collecting the rent in connection therewith. In the event Landlord commences any proceedings for the recovery of possession of the Premises or to recover for non-payment of Base Rent (or Extended Term Rent, if any), or other rent and charges due pursuant to the terms of this Lease, Tenant shall not interpose any non-compulsory counterclaim in any such proceeding. This may not, however, be construed as a waiver of Tenant's right to assert such claim in any separate action or actions initiated by Tenant. Further, Tenant expressly waives any right to trial by jury in consideration of Landlord entering into this agreement with Tenant. In the absence of any written agreement to the contrary, if Tenant should remain in occupancy of the Premises after the expiration, termination or any renewal of this Lease, it shall so remain as a Tenant, from month to month, and all provisions of this Lease applicable to such tenancy, shall remain in full force and effect, except that the Base Rent shall be an amount equal to 1.5 times the Base Rent then in effect for the Premises. No failure by Landlord to insist upon the strict performance of any covenant, agreement, term or condition of this Lease or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term and condition, and this Lease shall continue in full force and affect with respect to any other then existing or subsequent breach thereof. - 20 - Each right and remedy of Landlord provided for in this Lease shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease or now or hereafter existing at law or in equity by statute or otherwise. 22. CONDEMNATION ------------ The term "Taking" shall mean a taking during the Initial Term or any applicable Extended Term of this Lease of all or part of the premises as the result of condemnation or eminent domain. The term "Date of Taking" shall mean the date on which the condemning authority is entitled to possession. In the event of a Taking of either the fee of, or the temporary use of, or a perpetual easement upon, all of the Premises, this Lease shall expire as of the Date of Taking. In the event of a Taking of either the fee of, or the temporary use of, or a perpetual easement upon, less than all of the Premises, this Lease shall continue in full force and effect for the remainder of the Premises, except that the Rent or any applicable Extended Term Rent shall be reduced by an amount proportionate to the total area of the Premises so taken as against the total area demised hereunder; provided that if Tenant shall reasonably determine that the remaining portions of the Premises cannot be suitably used for its intended purposes, and shall forward a notice to Landlord of such determination within thirty (30) days after the Date of Taking, this Lease shall expire as of the Date of Taking, and Tenant shall promptly vacate the Premises. Landlord reserves the right to make a claim directly to the condemning authority for damages sustained by Landlord as a result of such Taking. Further, Landlord shall refund to Tenant any unearned Rent paid in advance as of the Date Tenant vacates the Premises due to Taking and all of Tenant's liability hereunder shall cease from and after the date Tenant vacates the Premises. Tenant shall be entitled to make a separate claim directly to the condemning authority for damage sustained by Tenant due to such Taking, including but not limited to, compensation for the value of the unamortized cost of improvements paid for by Tenant, personal property of Tenant, and Tenant's lost good will and relocation costs. Each party shall seek its own award, at its own expense, and neither shall have any right to the award made to the other. Nothing herein shall prevent Tenant from recovering directly from the condemning authority any damages sustained by Tenant due to such Taking. - 21 - 23. DESTRUCTION OF LEASED PREMISES ------------------------------ If the Premises shall be totally destroyed by fire, casualty, or other cause or happening, or if any lawful authority shall order demolition or removal of the Buildings or Premises, so as to render them unfit for Tenant's proposed use, then this Lease shall terminate as of the date of such destruction and all of Tenant's liability hereunder shall cease from and after such date and any unearned Rent paid in advance by Tenant to Landlord shall be refunded to Tenant. If the Buildings or Premises shall be partially destroyed by fire, casualty, demolition, removal or other cause or happening, or be declared unsafe by any lawful authority, then they shall be promptly restored or made safe by Landlord and a just portion of the Rent or any applicable Extended Term Rent specified shall abate until they shall have been restored and put in proper condition for Tenant's use and occupancy, except that Landlord shall not be required to expend any sums in excess of the net proceeds of any insurance policy carried by Landlord, and if such sums, in Landlord's reasonable opinion, are inadequate to rebuild or restore the Buildings or Premises, then Landlord may elect not to rebuild or restore and this Lease shall terminate on five (5) days written notice from Landlord. Landlord shall notify Tenant promptly, and no later than forty-five (45) days after any such partial destruction, if Landlord elects to terminate this Lease because of a determination of inadequate insurance proceeds. If the Buildings or Premises shall not be restored or made safe within one hundred twenty (120) days after partial destruction or declaration of unsafe condition, then Tenant, at its option, may cancel and terminate this Lease in its entirety, and all of Tenant's liability hereunder shall cease from and after the date of such destruction or declaration of unsafe condition and any unearned Rent or Extended Term Rent paid in advance by Tenant to Landlord shall be refunded to Tenant. 24. PROPERTY TAXES -------------- (a) Landlord will pay in the first instance all Property Taxes (as such term is defined in Section 1(j)) of this Lease) which may be levied or assessed by any lawful authority against land or improvements constituting the Buildings and adjacent land for parking and landscaping. The amounts required to be paid by Landlord pursuant to any payment in lieu of tax agreement entered into with a taxing authority having jurisdiction over the Buildings shall be considered for the purposes of this Lease to be included within the definition of Property Taxes. (b) During the term of this Lease, Tenant shall pay to Landlord, as Additional Rent, Tenant's pro-rata share of all Property Taxes. Tenant's initial pro-rata share shall be 27.24% of the Property Taxes as of the first day of the Rent Commencement Date. - 22 - Tenant's pro-rata share of Property Taxes shall be payable on the last day of the month in which Landlord render's a statement of Tenant's pro-rata share for any Property Taxes for which Landlord has received a bill, or 30 days after Tenant's receipt of such statement, whichever shall occur later. A copy of the appropriate bill for the Property Taxes submitted to Landlord shall be conclusive evidence of the property taxes levied against the buildings. (c) Landlord may in good faith seek a reduction in the assessed valuation (for Property Tax purposes) of the Buildings or any portion thereof by administrative or legal proceeding. Tenant shall pay to Landlord Tenant's pro- rata share of Landlord's reasonable costs for said proceedings, including counsel fees, appraisal fees and other similar expenses, within twenty (20) days after Tenant's receipt of a statement from Landlord therefore. Tenant's initial pro-rata share of such costs shall be 27.24% (based on 72,526 rentable square feet). Landlord shall reimburse Tenant for Tenant's pro-rata share of any refund of Property Taxes (after deducting any unpaid portion of Tenant's pro- rata share of Landlord's cost for such proceedings) resulting from any proceeding for which Tenant has paid Tenant's pro-rata share of Property Taxes. (d) Tenant may elect, at its sole expense, to contest any reassessment affecting the Premises or any tax, levy or special assessment on the Premises, and Landlord agrees to cooperate in such action or contest to the extent Landlord's participation may be necessary, but without any cost to Landlord. If such contesting results in a reduction of Property Taxes on the Buildings or a refund, Landlord shall share pro-rata in such refund and pay a pro-rata share of Tenant's expenses in obtaining such refund or reduction. Nothing herein contained shall be construed, however, to permit Tenant to withhold payment of Property Taxes during the pendency of any such review, it being understood that Tenant must pay taxes pursuant to this Lease. (e) Should any alteration or improvement performed by or for Tenant during the term of this Lease cause an increase in assessment, Tenant shall pay to Landlord the full cost of all Property Taxes resulting from such increase in assessment. Any amount paid separately hereunder by Tenant to Landlord shall be in addition to any amounts paid by Tenant pursuant to the above. Any increase in the amount of Property Taxes based upon any improvements or additions made by future tenants to the Buildings shall not be included in determining Tenant's share of Property Taxes. (f) Should any governmental taxing authority acting under any present or future law, ordinance or regulation, levy, assess or impose a tax, excise, surcharge or assessment upon or against the rent payable by Tenant to Landlord, or upon or against the Common Areas, whether by way of substitution for or in addition to any existing Property Tax or otherwise, such amount shall be deemed included in the term "Property Taxes" as used in this Lease. - 23 - (g) Tenant shall have the right, upon reasonable advance notice, to review Landlord's calculations pertaining to estimated Property Taxes, and actual annual Operating Expenses and Property Taxes, and the books and records supporting such calculations at the offices of Landlord. 25. QUIET ENJOYMENT --------------- (a) Tenant, subject to the terms and provisions of this Lease and on payment of the rent and other charges due and owing pursuant to this Lease, and observing, keeping and performing all of the terms and provisions of this Lease on its part to be observed, kept and performed, shall lawfully, peaceably and quietly have, hold and enjoy the Premises during the Initial Term and any applicable Extended Term hereof on and after the commencement of this Lease without hinderance or rejection by any persons lawfully claiming under Landlord, but it is understood and agreed that this covenant, and any all other covenants of Landlord contained in this Lease shall be binding upon Landlord and its successors only with respect to breaches occurring during its and the respective ownership of Landlord's interest hereunder. (b) With respect to any services to be furnished by Landlord to Tenant, Landlord shall in no event be liable for failure to furnish the same when prevented from doing so by strike, lock-out, breakdown, accident, order or regulation of or by any governmental authority, or failure of supply, or inability by the exercise of reasonable diligence to obtain supplies, parts or employees necessary to furnish such services, or because of war or other emergency, or for any cause beyond Landlord's control. In no event shall Landlord ever be liable to Tenant for any indirect or consequential damages by reason of Landlord's breach or default of the terms of this Lease. 26. SUBORDINATION ------------- Except as set forth in this Section 26, this Lease shall at all times be and remain subject and subordinate to the lien of all mortgages, ground leases and deeds of trust on all or any portion of the Buildings and/or Premises. If Tenant is not in default hereunder, Landlord shall cause: (a) Any party holding a mortgage, ground lease or deed of trust on any portion of the Buildings or Premises as of the date hereof to execute and deliver to Tenant, a non-disturbance agreement in a form agreeable to Landlord and Tenant pursuant to which the holder of such mortgage or deed of trust will agree not to disturb the possession of Tenant under this Lease upon any foreclosure or exercise of power of sale under such mortgage, ground lease or deed of trust, if Tenant is not then in default - 24 - thereunder, and that the mortgagee, ground lessor, beneficiary or other person claiming under such mortgage, ground lease or deed of trust will accept the attornment of Tenant thereafter, as long as Tenant is not then in default; and (b) Any party acquiring a mortgage, ground lease or deed of trust on any portion of the Buildings or Premises after the date hereof to execute and deliver to Tenant a commercially reasonable non- disturbance agreement within thirty (30) days of such party's acquiring such mortgage, ground lease or deed of trust pursuant to which the holder of such mortgage, ground lease or deed of trust will agree not to disturb the possession of Tenant under this Lease upon any foreclosure or exercise of power of sale under such mortgage, ground lease or deed of trust, if Tenant is not then in default thereunder, and that the mortgagee, beneficiary or other person claiming under such mortgage, ground lease or deed of trust will accept the attornment of Tenant thereafter, as long as Tenant is not then in default. Tenant agrees that as to the mortgagee, ground lessor beneficiary or any other person claiming under a mortgage or deed of trust to which Tenant has subordinated to Landlord's interest under this Lease, Tenant will recognize such mortgagee, ground lessor beneficiary or other person as its Landlord under the provisions of this Lease, provided that such mortgagee, ground lessor beneficiary or other person, during the period in which it shall be in possession of the Premises, and thereafter its successors in interest, shall assume all of the obligations of Landlord hereunder and shall have executed and delivered the non- disturbance agreement referred to above. 27. ESTOPPEL CERTIFICATE BY TENANT ------------------------------ Upon not less than thirty (30) days' prior written notice by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an estoppel certificate in substantially the form attached hereto as Exhibit E and made a part hereof by reference. 28. CONSENT BY LANDLORD ------------------- Landlord covenants with Tenant that any consent or approval required of Landlord herein shall not be withheld or delayed unreasonably. - 25 - 29. HAZARDOUS SUBSTANCES -------------------- Landlord has provided Tenant with copies of Landlord's environmental reports of the condition of the Buildings, and to the best of Landlord's knowledge and belief, there are no present hazardous or toxic substances at the Buildings which require remedial action. If hazardous or toxic substances or contaminants are discovered in, on or beneath the land or in or on any improvements located on the land of which the Premises is a part, unless placed or caused to be placed by Tenant, its employees, servants or its agents (in which case Tenant shall promptly cause the removal and other necessary remedial action at Tenant's sole cost) Landlord, at Landlord's cost, shall promptly perform appropriate remedial action, to be completed in any event within sixty (60) days of the identification of the contamination. Upon failure so to complete, Tenant shall have the right, without further cost or obligation, to terminate this Lease upon written notice to Landlord stating the effective date of termination, and all of Tenant's liability hereunder shall cease from and after the date of termination and any unearned Rent or Extended Term Rent paid in advance by Tenant to Landlord shall be refunded to Tenant. Landlord also agrees to hold harmless, indemnify and defend Tenant, and any services of Tenant with equipment and/or materials within the Premises, for any damage to said equipment, property and/or persons, involved in the administration, maintenance and operating of said equipment, as well as injuries to said persons or property caused by any hazardous or toxic substances at the Buildings (unless placed or caused to be placed by Tenant, its employees, servants or agents) and/or caused by Landlord's remedial activities in regard to said hazardous or toxic substances as set forth above. Tenant shall not use, store, or bring into the Premises any "hazardous and toxic substances" other than in accordance with applicable law and regulations. For purposes of this section, "hazardous and toxic substances" includes, without limit, any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances or related materials defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, the Hazardous Materials Transportation Act, as amended, the New York State Environmental Conservation Law, the Resource Conservation and Recovery Act, as amended, and in the regulations adopted and publications promulgated pursuant thereto. Tenant shall not use any equipment or devices which cause or create health risks or hazards as presently known or as determined in the future other than in accordance with applicable law and regulations. Tenant agrees to hold Landlord harmless, indemnify and defend Landlord from and against any claims, actions, suits, etc. made by reason of Tenant's installation and/or use of any such equipment or devices. - 26 - 30. MICROWAVE DISHES, RADIO ANTENNAS AND OTHER TRANSMISSION/RECEIVING EQUIPMENT -------------------------------------- Tenant shall have the right to install a microwave dish, radio antenna, or any other form of transmission or receiving equipment incident to Tenant's use as defined in Section 7 above on the roof of the Buildings at Tenant's sole cost and expense. The installation, size and location of such dish, radio antenna, or any other form of transmission or receiving equipment incident to Tenant's use as defined in Section 7 above shall meet the reasonable requirements of Landlord and comply with all governmental requirements (local, state and federal), but prior to any such installation, such specifications and location shall be reviewed and approved by Landlord. Tenant shall in no event be charged any rent for the maintenance of such microwave dish, radio antenna, or any other form of transmission or receiving equipment incident to Tenant's use as defined in Section 6 above on the roof of the Buildings, and shall remove such microwave dish, radio antenna, or any other form of transmission or receiving equipment incident to Tenant's use as defined in Section 6 above at the expiration (or earlier termination) of the Lease, and repair any damage caused. Tenant is solely responsible for the maintenance and repair of any microwave dish, radio antenna, or any other form of transmission or receiving equipment incident to Tenant's use as defined in Section 7 above, and Tenant shall be responsible for any damage or deterioration to the Building caused by the installation, operation and use of such equipment. Tenant shall indemnify and hold Landlord and its officers, directors, employees, agents and invitees harmless from and against any and all suits, liabilities, claims, damages, charges and expenses of any kind whatsoever, including reasonable attorneys' fees, which may be imposed upon or incurred by or asserted against Landlord, its officers, directors, employees, agents and invitees as a result of or arising out of Tenant's installation, use and operation of the microwave dish, radio antenna, or any other form of transmission or receiving equipment incident to Tenant's use as defined in Section 6 above. 31. BROKERS ------- Landlord and Tenant hereto represent and warrant to each other that it has dealt with no broker or agent in connection with the negotiations or the consummation of this Lease or any arrangements with respect thereto. 32. NOTICES ------- All notices provided for or desired to be sent by the parties shall be in writing, and shall be deemed to have been fully given when deposited in the United States mail, certified or registered, postage prepaid, or by prepaid overnight mail delivery service providing written evidence of delivery, and addressed as follows: - 27 - to Tenant at: 400 West Avenue, Rochester, New York, or to such other place as Tenant may from time to time designate in a notice to Landlord; with a copy to: Underberg & Kessler, Attn: Frank Crego, Esq., 1800 Lincoln First Tower, Rochester, New York 14604; to Landlord at: Suite 400, 39 State Street, Rochester, New York 14614, or to such other place as Landlord may from time to time designate in a notice to Tenant. All notices personally delivered shall be deemed received on the date of delivery. The date of notice by certified mail shall be deemed to be the date of certification thereof. The date of notice by overnight mail service shall be the date the airbill is signed by the recipient. 33. RELATIONSHIP ------------ The relationship between the parties hereto is solely that of landlord and tenant and nothing contained herein shall constitute or be construed as establishing any other relationship between the parties, including, without limitation, the relationship of principal and agent, employer and employee or parties engaged in a partnership or joint venture. Without limiting the foregoing, it is specifically understood that neither party is the agent of the other and neither is in any way empowered to bind the other to use the name of the other in connection with the construction, maintenance or operation of the Premises, except as otherwise specifically provided herein. 34. COMPLETE AGREEMENT ------------------ It is hereby mutually agreed and understood that this Lease contains all agreements, promises and understandings between Landlord and Tenant and that no verbal or oral agreements, promises or understandings shall or will be binding upon either the Landlord or Tenant in any dispute, controversy or proceeding at law, and any addition, variation or modification to this Lease shall be void and ineffective unless in writing signed by the parties hereto. If any term or provision of this Lease or the application thereof to any person or circumstance is, to any extent, invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. - 28 - 35. AUTHORITY FOR EXECUTION ----------------------- (a) If Landlord signs as a corporation, the person or persons executing this Lease on behalf of Landlord do hereby covenant and warrant that Landlord is a fully authorized and existing corporation, that Landlord has and is qualified to do business in the state where the Premises are located, that the corporation has full right and authority to enter into this Lease, and that the person or persons signing on behalf of the corporation were authorized to do so. If Landlord signs as a partnership, the person or persons executing the Lease on behalf of Landlord do hereby covenant and warrant that Landlord is a valid and existing partnership and that the person or persons so executing and initialing as required in this Section 35 have authority to do so on behalf of Landlord in accordance with the Partnership Agreement, and that this Lease is binding upon Landlord in accordance with its terms and enforceable against the assets of the partnership and the general partners, individually. (b) This Lease shall not be binding upon the Tenant unless the Term Sheet is executed and the first page of Landlord's Worksheet and the first page of this Lease Agreement is initialed by the President, a Vice President, Secretary or an Assistant Secretary of the Tenant, or by any other person to whom authority to execute or initial any such instrument shall be delegated in writing by any of such officers. 36. BINDING EFFECT -------------- The covenants and agreements contained in this Lease are binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors, legal representatives and assigns. 37. EXECUTION --------- Landlord and Tenant have executed this Lease by signing and dating the Term Sheet, and by initialling the first page of this Lease Agreement. 38. RULES ----- Tenant, its employees and invitees, shall comply with the reasonable rules of Landlord, posted from time to time, provided: (a) Tenant is given at least ten (10) days' advance notice of such changes; (b) they are for the safety, care, order, or cleanliness of the Common Areas; - 29 - (c) they do not unreasonably and materially interfere with Tenant's conduct of its business or Tenant's use and enjoyment of the Premises; and (d) they do not require payment of additional moneys. 39. FORCE MAJEURE ------------- The period of time during which either party is prevented or delayed in any performance or the making of any improvements or repairs or fulfilling any obligation under this Lease, other than the payment of Base Rent, Extended Term Rent, or any other rent or charges due pursuant to this Lease, due to unavoidable delays caused by fire, catastrophe, strikes or labor trouble, civil commotion, Acts of God, the public enemy, governmental prohibitions or regulations or inability to obtain materials by reason thereof, or any other causes beyond such party's reasonable control, shall be added to such party's time for performance, and such parties shall have no liability by reason of such delay. 40. AMERICANS WITH DISABILITIES ACT OF 1990 --------------------------------------- The Landlord represents and warrants that: A. Landlord and the property of which the Premises form a part are in compliance with the Americans With Disabilities Act of 1990, 42 U.S.C. (S)(S) 12101 et seq. (1992), as amended, and with all applicable rules and regulations promulgated pursuant to the Act, hereinafter referred to as the "ADA". B. Covenants and agrees with the Tenant that, so long as this Tenant leases the Premises, the Landlord will: 1. Not cause or permit any activity to take place on or in the property of which the Premises form a part in violation of the ADA; 2. Promptly comply with any and all amendments to the ADA affecting the Landlord and the property of which the Premises may form a part; 3. Notify Tenant in writing of any violations of the ADA and will forward to Tenant such additional information as to any violations as required by Tenant; 4. Remedy all violations of the ADA on the property of which the Premises form a part, in a timely manner, and in accordance with all applicable requirements of the ADA, at the sole cost of the Landlord. - 30 - If the Landlord fails to remedy such violations or otherwise fails to comply with the regulations within a reasonable period of time, considering the circumstances, the Tenant may declare this Lease to be terminated upon thirty (30) days written notice to Landlord. C. Notwithstanding anything to the contrary in this Section 40, Tenant covenants and agrees with Landlord that, during the entire term of this Lease and any extensions thereof: (i) Tenant shall notify Landlord in writing of any violations of the ADA and will forward to Landlord such additional information as to any violations as required by Landlord; (ii) Tenant shall remedy all violations of the ADA in the Premises, including Tenant's entrance, in a timely manner and in accordance with all applicable requirements of the ADA, at the sole costs of Tenant; and (iii) Tenant shall comply with all ADA requirements applicable to the Premises, and Tenant agrees to indemnify, defend and hold harmless Landlord from any and all liabilities, claims, damages, penalties, expenditures, losses, or charges, including but not limited to, all costs of investigation, monitoring, legal representation, remedial response, removal, restoration or permit acquisition, which may now or in the future be undertaken, suffered, paid, awarded, assessed, or otherwise incurred as a result of any noncompliance with the requirements of the ADA with respect to the Premises, or as a result of any investigation, monitoring, remedial response, or remedial work undertaken in the Premises. If the Tenant fails to remedy such violations or otherwise fails to comply with the regulations, Landlord may cause such remedial work to be done at Tenant's sole cost and expense, or declare this Lease in default. D. Landlord agrees to indemnify, defend and hold harmless Tenant from any and all liabilities, claims, damages, penalties, expenditures, losses, or charges, including but not limited to, all costs of investigation, monitoring, legal representation, remedial response, removal, restoration or permit acquisition, which may now or in the future be undertaken, suffered, paid, awarded, assessed, or otherwise incurred as a result of any noncompliance with the requirements of the ADA on the property of which the Premises form a part, or as a result of any investigation, monitoring, remedial response, or remedial work undertaken on the property of the Landlord of which the Premises form a part. - 31 - 41. MEMORANDUM OF LEASE ------------------- At the request of any party to this Lease, Landlord and Tenant shall execute a memorandum of lease containing such information as shall be required by the appropriate state statutes, and such other information as may reasonably be required. The requesting party shall, at its sole cost, record the memorandum of lease in the appropriate governmental offices for giving notice of interests in real property for the city or county, as the case may be, where the Property is located. 42. CONTINGENT ON SPECIAL USE PERMIT -------------------------------- This Lease is expressly contingent on the issuance of a Special Use Permit for the construction and operation of Tenant's office space. Landlord shall promptly apply for and diligently pursue such Special Use Permit to issuance. 43. SECURITY -------- Security coverage for the Buildings shall be 24 hours a day, 365 days per year with, at a minimum, one guard stationed at the new west entrance security station. Escort services to Tenant's employees vehicles in the parking lot will be provided upon request. Security services shall be provided at reasonably necessary levels as determined by Landlord. Security services shall be included in Operating Expenses, but Tenant's share of the costs of Security services shall be 50%. Landlord warrants and represents that the cost of said Security shall not exceed $.60 per square foot per year for Years 1 and 2. Notwithstanding any of the other terms contained in this paragraph or in the definition of Operating Expenses including the definitions under Term Sheet 9.2. the Tenant reserves the right, upon sixty (60) days' written notice to Landlord, to elect to provide its own security services for its Premises, in which case (i) the charge for such services billed to Tenant by Landlord shall discontinue effective the latter of sixty (60) days after notice is received by Landlord or when Landlord is no longer responsible to provide any pay for said security services for the Premises; and (ii) Tenant warrants and represents that the security services which it will provide will be done solely at Tenant's sole costs and expense; and (iii) Tenant shall provide Landlord with a copy of the executed Service Contract with Tenant's security agency for the period such services are rendered/to be rendered: and Iv) Tenant agrees to indemnify and hold Landlord harmless from the against any and all claims, damages, suits, etc. of any kind whatsoever related in any way to the contracting with or performance of said security services; and (v) Tenant shall provide Tenant's contractor's insurance certificate naming Tenant and Landlord as additional insureds with - 32 - coverage reasonably acceptable to Landlord. To the extent that future tenants require Tenant will receive a pro-rata reduction for the cost of said security services. - 33 - EXHIBIT A BUILDINGS: SEE ATTACHED PLANS - 34 - EXHIBIT B Page 1 of 2 PREMISES: [This Exhibit is described in Section 1(g) of this document.] - 35 - EXHIBIT B Page 2 of 2 [This Exhibit is described in Section 1(g) of this document.] - 36 - EXHIBIT C COMMENCEMENT DATE AGREEMENT --------------------------- An Agreement made this _____ day of _______________, 19__, by and between _______________ (hereinafter called "Landlord") and _______________ (hereinafter called "Tenant"). W I T N E S S E T H: WHEREAS, on _______________, 19__, Landlord and Tenant entered into a lease (the "Lease") relating to certain office premises located at _______________; and WHEREAS, the term of the Lease has commenced, pursuant to Section 3 of the Lease; and WHEREAS, the parties desire to confirm the Term Commencement Date and Term Expiration Date; NOW, THEREFORE, in consideration of the mutual covenants herein contained, Landlord and Tenant agree as follows: 1. The Term Commencement Date of the Lease is _______________. 2. Tenant's obligation to pay Rent under the Lease will commence on _______________. 3. The Term Expiration Date of the Lease is _______________, subject to the Lease provisions relating to default and termination. 4. The execution of this Agreement shall not constitute the exercise by Tenant of any option it may have to extend the term of the Lease. 5. The Lease is in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be duly executed on the date first above written. LANDLORD By: ---------------------------- - 37 - Its: ---------------------------- TENANT By: ---------------------------- Its: ---------------------------- - 38 - EXHIBIT D JANITORIAL SERVICES 1. Cleaning Services Performed Daily on Business Days: -------------------------------------------------- A. Dust tile flooring or vacuum carpeted areas. B. Empty and clean wastepaper baskets. C. Clean and disinfect drinking fountains and water coolers. D. Light dusting of furniture. E. The following cleaning services in the Premises including the lavatories, cafeteria and kitchen areas and in Common Areas: i. Empty wastepaper receptacles. ii. Sweep and wet mop flooring. iii. Clean and disinfect all fixtures and wash and polish mirrors and shelves. iv. Fill toilet tissue, soap and towel dispensers. F. Spot clean entrance doors. 2. Cleaning Services Performed Weekly on Business Days: --------------------------------------------------- A. Dust baseboards, chair rails, file cabinets and desk equipment. B. Machine buff resilient flooring. C. Remove smudges and scuff marks from all painted surfaces and glass partitions wherever possible. 3. Cleaning Services Performed Semi-annually on Business Days: ---------------------------------------------------------- A. Wash interior of all outside windows annually. (Exterior windows will be washed at least every six months.) B. Strip, as required, and wax all resilient flooring. - 39 - 4. Tenant understands that Landlord may substitute for any of the methods or devices set forth in this Exhibit D, other methods or devices which achieve comparable results. - 40 - EXHIBIT E ESTOPPEL CERTIFICATE -------------------- _______________, of _______________, the Tenant, gives this estoppel certificate to _______________, of _______________, the Purchaser. The Tenant has entered into a Lease dated _______________, with _______________, as Landlord, for the following space: . The Purchaser has requested the information and representations in this certificate with regard to the Lease because it wishes to acquire an interest in the property known as _______________, which includes the property that is the subject of the Lease. The Tenant acknowledges that the Purchaser intends to rely on the information and representations the Tenant makes in this certificate in Purchaser's acquisition of the property. The Tenant stated as follows: 1. A copy of all documents that constitute its Lease are attached to this certificate, and there are no understandings or verbal agreements that affect or amend the terms of the Lease. 2. The monthly Base Rent payments under the Lease are $__________, with Additional Rent due under the Lease as follows: . 3. The Lease term ends on _______________, with the following renewal options: _______________, all subject to the Lease provisions relating to default and termination. 4. To the best knowledge of Tenant, no notice has been received by Tenant of any default which has not been cured. 5. The Lease is in full effect. Dated: --------------------------- Tenant - 41 - EXHIBIT "F" LANDLORD'S WORK - 42 - EXHIBIT G SEE ATTACHED PLANS OF TENANT LEASE MODIFICATION AGREEMENT No. 1 THIS AGREEMENT, made this 31 day of May, 1994, by and between THE ------ HAGUE CORPORATION (hereinafter referred to as "Landlord") and ACC CORP. (hereinafter referred to as "Tenant"); WHEREAS, Landlord and Tenant are parties to a certain Lease Agreement dated January 25, 1994 (the "Lease") for premises (the "Premises") located in the buildings (the "Buildings") located at 400 West Avenue, Rochester, New York; and WHEREAS, Landlord and Tenant desire to modify the Lease; NOW, THEREFORE, in consideration of the above and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. Section 43 of the Lease, entitled "Security", shall be deleted in its entirety, and in its place the following shall be inserted: "43. Security- Security coverage at the Buildings shall be twenty-four (24) hours a day, three hundred sixty-five (365) days per year with, at a minimum, one guard posted at the security guard house in the parking lot area near Gate H, said guard house to be equipped with, surveillance monitors for the interior and exterior of Tenant's entryway to the Premises, electronic controls for Gate H, and a buzzer and telephone system for Tenant's employees to page the guard house from inside the entryway to Tenant's Premises. After business hours, Tenant's employees may request escort from the entrance to the Buildings to the parking lot. Security services shall be provided at reasonably necessary levels as determined by Landlord. Security services shall be included in Operating expenses (as such item is defined in the Lease), but Tenant's share of the costs of Security services shall be 50%" Landlord warrants and represents that the costs of said Security services shall not exceed $.60 per square foot for years 1 and 2 of the Lease term. 2. Tenant, in executing this Lease Modification Agreement, acknowledges that: (i) The Lease is modified only as indicated herein; - 2 - (ii) Tenant does not know of any default by Landlord of the terms, covenants or conditions of the Lease; (iii) As of the date of this Lease Modification Agreement, there are no existing set-offs, counterclaims or defenses against Landlord whatsoever to the enforcement of the provisions of the Lease or this Agreement; (iv) Tenant, to its knowledge, is not in default of the Lease beyond any applicable periods of grace and notice, nor does any set of any set of [sic] facts exist which, with the passage of time, would constitute a default. 3. As modified and amended hereby, the parties hereto hereby ratify and affirm the Lease. 4. This Agreement may not be modified or extended except in writing, signed by the parties hereto. 5. This Agreement contains the entire agreement of the parties hereto with respect to the matters contained herein. THE HAGUE CORPORATION By: /s/ David M. Flaum, President ------------------------------- Authorized Signatory ACC CORP. By: /s/ Michael R. Daley ------------------------------- Authorized Signatory LEASE MODIFICATION AGREEMENT NO. 2 THIS AGREEMENT, made this 31st day of May, 1995, by and between -------- THE HAGUE CORPORATION (hereinafter referred to as "Landlord") and ACC CORP. (hereinafter referred to as "Tenant"); WHEREAS, Landlord and Tenant are parties to a certain Lease Agreement dated January 25, 1994, as modified by a certain Lease Modification Agreement No. 1 dated May 31, 1994, (hereinafter collectively referred to as the "Lease"), for premises (hereinafter referred to as the "Premises") located in certain buildings (hereinafter referred to as the "Buildings") located at 400 West Avenue, Rochester, New York; and WHEREAS, Tenant has occupied the Premises effective July 1, 1994, following a substantial completion of Landlord's and Tenant's work; and WHEREAS, Landlord and Tenant desire to modify the Lease to reflect the rentable square footage and related rent and additional charges based on the rentable square footage of the Premises; NOW, THEREFORE, in consideration of the above and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. Item number 8 of the Term Sheet shall be modified by deleting the reference to "Section 1(k)" and changing it to "Section 1(l)", and by changing Tenant's Percentage Share from "27.24%" to "28.54%". 2. Item number 9 of the Term Sheet shall be modified by changing the rentable square feet from "72,526" to "76,000" or as per Exhibit "B". 3. Item number 10 of the Term Sheet shall be modified by changing the reference to "Section 3" to "Section 4", and by changing the Term Commencement Date from "5/1/94" to "7/1/94", and by changing the Rent Commencement Date from "7/1/94" to "9/1/94". 4. Item number 11 of the Term Sheet shall be modified by changing the reference to "Section 3" to "Section 4". 5. Item number 12 of the Term Sheet shall be modified by deleting the reference to "Section 4" and changing it to "Section 5". 6. Item number 13 of the Term Sheet shall be modified by changing the reference to "Section 4" to "Section 5". - 2 - 7. Item number 14 of the Term Sheet shall be modified as follows: by changing the reference to "Section 5(a)" to "Section 6(a)", and by changing the Base Rent and Monthly Installment Amount schedules to the following: Base Rent: $532,000.00/yr. years 1-2 (based on $7.00 p.s.f.) $646,000.00/yr. years 3-5 (based on $8.50 p.s.f.) $722,000.00/yr. years 6-10 (based on $9.50 p.s.f.) Monthly Installment Amount: $44,333.33/mo. years 1-2 $53,833.33/mo. years 3-5 $60,166.66/mo. years 6-10 8. Item number 15 of the Term Sheet shall be modified by changing the Extended Term Base Rent from $761,523.00 per year and $63,460.25 per month to $798,000.00 per year and $66,500.00 per month. 9. Item number 17 of the Term Sheet shall be modified by changing the reference to "Section 8" to "Section 9". 10. Section 1(k) of the Lease, at page 2, shall be changed by deleting the reference to "July 1" and inserting "September 1". 11. Section 1(l) of the Lease, at page 2, shall be modified by deleting the reference to "27.24%" on line 3, and "72,526" on line 4, and inserting "28.54%" and "76,000", respectively, or as per Exhibit "B". 12. Section 2(a) of the Lease, at page 3, shall be modified by deleting the reference to "72,526" and inserting "76,000", or as per Exhibit "B". 13. Section 4(a) of the Lease, at page 4, shall be modified by deleting the reference to "May" on line 2 and inserting "July", and by deleting the reference to "July" on the seventh line of the first paragraph and inserting "September". 14. Section 6(a) of the Lease, at page 6, shall be modified by deleting the Base Rent, Monthly Installment amount and Extended Term Base Rent schedules and replacing them with the following: - 3 - Base Rent: $532,000.00/yr. years 1-2 (based on $7.00 p.s.f.) $646,000.00/yr. years 3-5 (based on $8.50 p.s.f.) $722,000.00/yr. years 6-10 (based on $9.50 p.s.f.) Monthly Installment Amount: $44,333.33/mo. years 1-2 $53,833.33/mo. years 3-5 $60,166.66/mo. years 6-10 Extended Term Base Rent: $761,523.00/yr. (based on $10.50 p.s.f.) $63,460.25/mo. 15. Section 8 of the Lease, at page 9, shall be modified by deleting the number "$3,142.80" on the third line of the last paragraph, and inserting "$3,293.33" (referencing the monthly installment amount for janitorial services). 16. Section 9 of the Lease, at page 10, shall be modified by deleting the number "240" on the fourth line of the paragraph to "228". 17. Section 24 of the Lease, at page 19, shall be modified by deleting the reference to "27.24%" in Section 24(b), and inserting "28.54%" and also by deleting "27.24%" (based on 72,526 rentable square feet)" and inserting "28.54" (based on 76,000 rentable square feet)." in paragraph 24(c). 18. Annexed hereto as Exhibit 1 are copies of the pages in the Lease which show the changes made as agreed to above in the format of the original Lease, although such pages are not intended for insertion into the Lease. 19. Exhibit "B" of the Lease is incorrect and shall be changed to reflect the inclusion of all of the second floor of buildings 16 and 16A, to become part of the demised premises. The revised Exhibit "B" shall be annexed to the Lease Agreement at a future date. 20. Tenant, in executing this Lease Modification Agreement acknowledges that the Lease is modified only as indicated herein, and that this agreement contains the entire agreement of the parties hereto with respect to the matters contained herein. THE HAGUE CORPORATION By: /s/ David M. Flaum, President -------------------------------- Authorized Signatory - 4 - ACC CORP. By: /s/ Michael R. Daley --------------------------- Authorized Signatory ACKNOWLEDGMENTS STATE OF NEW YORK ) COUNTY OF MONROE ) SS On this 31 day of May , 1995, before me personally came ------ ------------- David M. Flaum, to me personally known, who, being by me duly sworn, did depose and say that he resides at Rochester, New York; that he is the President of THE HAGUE CORPORATION, the corporation described in, and which executed the within Lease Modification Agreement as Landlord, and that the [sic] signed his name thereto by order of the board of directors of said corporation. /s/ Robert F. Redmond ---------------------------- Notary Public STATE OF NEW YORK) COUNTY OF MONROE) On this 31st day of May , 1995, before me personally came -------- ------------- - Michael R. Daley , to me personally known, who being by me duly sworn, did - ------------------ depose and say that (s)he resides at Rochester, NY ; that (s)he is the ----------------- ---- CFO of ACC CORP , the Corporation described in, and which executed - -------- ------------------ the within Lease Modification Agreement as Tenant, and that (s)he signed her/his name thereto by order of the directors of said corporation. /s/ Karen F. Ferrini ------------------------------ Notary Public EX-99.10 13 AMENDED LEASE AGREE 3/1/94 ACC & COOPERS EXHIBIT 99.10 AMENDED AND RESTATED LEASE BETWEEN COOPERS & LYBRAND LIMITED AS RECEIVER AND MANAGER FOR DUNDAS KIPLING II INC. Landlord - and - ACC LONG DISTANCE LTD. Tenant SUMMARY OF AMENDED AND RESTATED LEASE B E T W E E N: COOPERS & LYBRAND LIMITED AS RECEIVER AND MANAGER FOR DUNDAS KIPLING II INC. (hereinafter referred to as "Landlord") - and - ACC LONG DISTANCE LTD. (hereinafter referred to as "Tenant") ARTICLE I CERTAIN BASIC LEASE PROVISIONS 1.1 Certain Basic Lease Provisions The following are certain basic lease provisions which are part of, and are referred to in subsequent provisions of this Lease: (1) Tenant's Trade Name and Style: ACC LONG DISTANCE LTD. (2) Address of Tenant: 5343 Dundas Street West Suite 401 Etobicoke, Ontario Attention: President (3) Leased Premises: Part of the 4th floor and the entire 6th floor as more particularly described and defined in Schedule "B" of the Lease. (4) Rentable Area of the Premises: 7,858 square feet - 4th floor and 17,624 square feet - 6th floor (but subject to revision as per certification of the Landlord's Architect or Land Surveyor or space planner). (5) Fixturing Period: Nil days (6) Term: 10 years, commencing March 1, 1994, subject to one (1) right of renewal as provided for in the Lease at Rider No. 1. - 2 - (7) Permitted Use of Leased Premises: Office as per Section 8.01. (8) Minimum Rent: An annual minimum rent in equal monthly instalments in advance on the first day of each month as follow: Years 1, 2, 3 $10.50 per square foot Years 4, 5, 6 $12.50 per square foot Years 7, 8, 9, 10 $14.50 per square foot (9) Additional Rent: As provided for in Section 1.01. Also see Section 6.02. ARTICLE 2 SCHEDULES, RIDERS AND DEFINITIONS 2.1 Schedules The following schedules are annexed to and form part of the Lease: Schedule "A" - Legal Description of the Building Schedule "B" - Floor Plan Schedule "C" - Landlord's and Tenant's Work Schedule "D" - Rules and Regulations Schedule "E" - Indemnity Agreement 2.2 Riders The following riders are annexed to and form part of the Lease: Rider No. 1 - Option to Extend the Term Rider No. 2 - Free Rent Periods Rider No. 3 - Lease Cancellation Provisions Rider No. 4 - Option to Lease Additional Space Rider No. 5 - Payment for Leasehold Improvements -Sixth Floor Expansion Premises 2.3 Definitions In the Lease the defined terms set forth in Article I have the meanings therein indicated. TABLE OF CONTENTS ARTICLE I Definitions Section 1.01 - "Additional Rent".................. 2 Section 1.02 - "Architect"........................ 2 Section 1.03 - "Building"......................... 3 Section 1.04 - "Commencement Date"................ 3 Section 1.05 - "Common Facilities"................ 3 Section 1.06 - "Fixturing Period"................. 4 Section 1.07 - "Fourth Floor Expansion Premises".. 4 Section 1.08 - "Indemnitor"....................... 4 Section 1.09 - "Land Surveyor".................... 4 Section 1.10 - "Landlord"......................... 4 Section 1.11 - "Landlord's Work".................. 4 Section 1.12 - "Leasable Premises"................ 4 Section 1.13 - "Manager".......................... 4 Section 1.14 - "Minimum Rent"..................... 4 Section 1.15 - "Mortgagee"........................ 4 Section 1.16 - "Normal Business Hours"............ 5 Section 1.17 - "Original Premises"................ 5 Section 1.18 - "Parking Facilities"............... 5 Section 1.19 - "Person"........................... 5 Section 1.20 - "Premises"......................... 5 Section 1.21 - "Proportionate Share".............. 5 Section 1.22 - "Rent"............................. 5 Section 1.23 - "Rentable Area of the Premises".... 5 Section 1.24 - "Rentable Area of the Building".... 6 Section 1.25 - "Rental Year"...................... 6 Section 1.26 - "Rules and Regulations"............ 6 Section 1.27 - "Sixth Floor Premises"............. 6 Section 1.28 - "Sixth Floor Expansion Premises"... 6 Section 1.29 - "Tenant"........................... 7 Section 1.30 - "Tenant's Work".................... 7 Section 1.31 - "Term"............................. 7 Section 1.32 - "Usable Floor Area"................ 7 ARTICLE II Intent and Interpretation Section 2.01 - Net Lease.......................... 8 Section 2.02 - Obligations as Covenants........... 8 Section 2.03 - Headings........................... 8 Section 2.04 - Extended Meanings.................. 8 Section 2.05 - Partial Invalidity................. 9 Section 2.06 - Entire Agreement................... 9 Section 2.07 - Governing Law...................... 10 Section 2.08 - Time of the Essence................ 10 - ii - ARTICLE III Grant and Term Section 3.01 - Premises........................... 10 Section 3.02 - Use of Common Facilities........... 10 Section 3.03 - Commencement and Ending Date of the Term...................... 10 Section 3.04 - Failure of Tenant to Open.......... 11 Section 3.05 - Certificates....................... 11 Section 3.06 - Early Occupancy.................... 12 Section 3.07 - Acceptance of Premises............. 12 Section 3.08 - Tenant's Work...................... 12 ARTICLE IV Rent Section 4.01 - Covenant to Pay.................... 13 Section 4.02 - Minimum Rent....................... 13 Section 4.03 - Deposit............................ 14 Section 4.04 - Security Deposit................... 14 Section 4.05 - Rent Past Due...................... 15 ARTICLE V Taxes Section 5.01 - Taxes - Definition................. 15 Section 5.02 - Taxes Payable by the Landlord...... 16 Section 5.03 - Taxes Payable by the Tenant........ 16 Section 5.04 - Business Taxes and Other Taxes of Tenant.................. 17 Section 5.05 - Tenant's Indemnification With Respect to Taxes under Sections 5.01, 5.03 and 5.04.............. 18 Section 5.06 - Landlord's Taxes................... 19 Section 5.07 - Per Diem Adjustment................ 19 ARTICLE VI Building and Common Facilities - Control and Payment Section 6.01 - Control of the Building by the Landlord..................... 19 Section 6.02 - Tenant to Bear Share of Expense.... 21 Section 6.03 - Payment of Tenant's Share.......... 26 Section 6.04 - Landlord's Services................ 27 - iii - ARTICLE VII Utilities, Heating, Ventilating and Air Conditioning Section 7.01 - Charges for Utilities.............. 28 Section 7.02 - Lighting........................... 30 Section 7.03 - Heating, Ventilating and Air-Conditioning................. 31 Section 7.04 - After Hour Charges................. 31 ARTICLE VIII Use of the Premises Section 8.01 - Use of the Premises................ 31 Section 8.02 - Conduct of Business................ 32 Section 8.03 - Observance of Law.................. 34 ARTICLE IX Insurance and Indemnity Section 9.01 - Tenant's Insurance................. 35 Section 9.02 - Increase in Insurance Premiums..... 37 Section 9.03 - Cancellation of Insurance.......... 37 Section 9.04 - Insurance Risks.................... 38 Section 9.05 - Loss or Damage..................... 38 Section 9.06 - Landlord's Insurance............... 39 Section 9.07 - Indemnification of Landlord........ 40 ARTICLE X Maintenance, Repairs and Alterations Section 10.01 - Maintenance and Repairs by Tenant. 41 Section 10.02 - Landlord's Approval of Tenant's Repairs................ 41 Section 10.03 - Maintenance by Landlord........... 42 Section 10.04 - Repair on Notice.................. 43 Section 10.05 - Surrender of the Premises......... 44 Section 10.06 - Repair Where Tenant at Fault...... 44 Section 10.07 - Tenant Not to Overload Facilities. 44 Section 10.08 - Tenant Not to Overload Floors..... 45 Section 10.09 - Removal and Restoration by Tenant. 45 Section 10.10 - Notice by Tenant.................. 46 Section 10.11 - Tenant to Discharge all Liens..... 46 Section 10.12 - Signs and Advertising............. 47 Section 10.13 - Directory Board................... 48 - iv - ARTICLE XI Damage and Destruction and Expropriation Section 11.01 - Destruction of the Premises....... 48 Section 11.02 - Destruction of the Building....... 50 Section 11.03 - Expropriation..................... 51 Section 11.04 - Architect's Certificate........... 52 ARTICLE XII Assignment, Subletting and Change of Control Section 12.01 - Consent Required.................. 52 Section 12.02 - Conditions of Consent............. 55 Section 12.03 - No Advertising of Premises........ 56 Section 12.04 - Assignment by the Landlord........ 56 ARTICLE XIII Access and Alterations Section 13.01 - Right of Entry................... 57 ARTICLE IV Status Statement, Attornment and Subordination Section 14.01 - Status Statement.................. 58 Section 14.02 - Subordination and Attornment...... 59 Section 14.03 - Execution of Documents............ 59 Section 14.04 - Financial Information............. 60 ARTICLE XV Default and Landlord's Remedies Section 15.01 - Right to Re-Enter................. 60 Section 15.02 - Right to Relet.................... 62 Section 15.03 - Other Rights of the Landlord...... 63 Section 15.04 - Survival of Obligations........... 63 Section 15.05 - Expenses.......................... 63 Section 15.06 - Removal of Chattels............... 64 Section 15.07 - Waiver of Exemption from Distress. 64 Section 15.08 - Landlord May Cure Tenant's Default or Perform Tenant's Covenants....................... 64 Section 15.09 - Lien on Personal Property......... 65 Section 15.10 - Charges Collectible as Rent....... 65 Section 15.11 - Remedies Generally................ 66 - v - ARTICLE XVI Miscellaneous Section 16.01 - Rules and Regulations............. 66 Section 16.02 - Overholding - No Tacit Renewal.... 67 Section 16.03 - Successors........................ 67 Section 16.04 - Tenant Partnership................ 67 Section 16.05 - Waiver............................ 67 Section 16.06 - Accord and Satisfaction........... 68 Section 16.07 - Brokerage Commissions............. 68 Section 16.08 - No Partnership or Agency.......... 69 Section 16.09 - Agent............................. 69 Section 16.10 - Force Majeure..................... 69 Section 16.11 - Notices........................... 69 Section 16.12 - No Option......................... 70 Section 16.13 - Registration...................... 70 Section 16.14 - Compliance with The Planning Act.. 70 Section 16.15 - Metric Conversion................. 71 Section 16.16 - Limited Assets.................... 71 Section 16.17 - Bankruptcy and Insolvency Act..... 71 Section 16.18 - Parking Spaces.................... 71 Section 16.19 - Quiet Enjoyment................... 72 SCHEDULE A LEGAL DESCRIPTION OF THE BUILDING SCHEDULE B FLOOR PLAN SCHEDULE C LANDLORD'S AND TENANT'S WORK SCHEDULE D RULES AND REGULATIONS SCHEDULE E INDEMNITY AGREEMENT RIDER NO. 1 OPTION TO EXTEND THE TERM RIDER NO. 2 FREE RENT PERIODS RIDER NO. 3 LEASE CANCELLATION PROVISIONS RIDER NO. 4 OPTION TO LEASE ADDITIONAL SPACE RIDER NO. 5 PAYMENT FOR LEASEHOLD IMPROVEMENTS - SIXTH FLOOR EXPANSION PREMISES AMENDED AND RESTATED LEASE OFFICE LEASE THIS LEASE is dated the 1st day of March, 1994. IN PURSUANCE OF THE SHORT FORMS OF LEASES ACT B E T W E E N: COOPERS & LYBRAND LIMITED AS RECEIVER AND MANAGER FOR DUNDAS KIPLING II INC. (hereinafter called the "Landlord"), PARTY OF THE FIRST PART - and - ACC LONG DISTANCE LTD. (hereinafter called the "Tenant") PARTY OF THE SECOND PART WHEREAS the Landlord and Tenant entered into a lease dated the 1st day of August, 1991 (the "Original Lease") for premises comprised of 3,758 square feet of Rentable Area (the "Original Premises") on the 4th floor of the building (the "Building") municipally known as 5343 Dundas Street West, in the City of Etobicoke; AND WHEREAS the Landlord and the Tenant have entered into a lease amending agreement (the "First Lease Amending Agreement") made as of the 6th day of February, 1992 in respect of an additional 4,100 square feet of Rentable Area (the "Fourth Floor Expansion Premises") on the 4th floor of the Building; AND WHEREAS the Tenant has occupied an additional 7,946 square feet of Rentable Area on the 6th floor of the Building (the "Sixth Floor Premises") pursuant to a proposed second lease amending agreement (the "Second Lease Amending Agreement"); - 2 - AND WHEREAS the Landlord and Tenant have entered into a lease amending agreement made as of the 12th day of January, 1994 (the "January 1994 Lease Amending Agreement") pursuant to which, inter alia, the Landlord and the Tenant agreed that the Tenant would lease from the Landlord the balance of the 6th floor of the Building comprising approximately 9,678 square feet of Rentable Area (the "Sixth Floor Expansion Premises") and pursuant to which the term, the rental rate and other provisions in respect of the Original Premises, the Fourth Floor Expansion Premises and the Sixth Floor Premises, will be amended; AND WHEREAS the Landlord and Tenant have entered into an agreement with respect to Suite 606 of the Building pursuant to a letter agreement dated August 10, 1993, as amended by letter dated October 5, 1993, and as further amended pursuant to the January 1994 Lease Amending Agreement (collectively the "Suite 606 Agreement"); AND WHEREAS all of the conditions pursuant to the January 1994 Lease Amending Agreement have either been satisfied or waived by the parties; AND WHEREAS the parties are entering into this Amended and Restated Lease to incorporate the provisions of the Original Lease, the First Lease Amending Agreement, the Second Lease Amending Agreement referred to above and the January 1994 Lease Amending Agreement; NOW THEREFORE this agreement witnesseth that in consideration of the sum of Two Dollars ($2.00) and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto, the parties agree as follows: ARTICLE I Definitions The parties hereto agree that when used in this Lease or in any Schedule attached to this Lease the following words or expressions have the meaning hereinafter set forth. Section 1.01 - "Additional Rent" means any and all sums of money or charges required to be paid by the Tenant under this Lease (except Minimum Rent) whether or not designated as "Additional Rent" or whether or not payable to the Landlord or to any other person. Section 1.02 - "Architect" means the architect from time to time named by the Landlord. - 3 - Section 1.03 - "Building" means all those lands and premises located at 5343 Dundas Street West in the City of Etobicoke, in the Province of Ontario, which lands are more particularly described in Schedule "A" attached hereto, as such lands may be altered, expanded or reduced from time to time and the buildings, improvements, equipment and facilities erected thereon or situate from time to time therein. Section 1.04 - "Commencement Date" means that date defined in the provisions of Section 3.03 hereof. Section 1.05 - "Common Facilities" means (a) those areas, facilities, utilities, improvements, equipment and installations which, from time to time: (i) are not designated or intended by the Landlord to be leased to tenants of the Building; (ii) are designated by the Landlord to serve or benefit the Building, whether or not located within, adjacent to, or near the Building; (iii) are designated by the Landlord as part of the Common Facilities; (iv) are provided or designated (and which may be changed from time to time) by the Landlord for the use or benefit of the tenants, their employees, customers and other invitees in common with others entitled to the use or benefit thereof in the manner and for the purposes permitted by this Lease, excluding the Parking Facilities and excluding any elevator, garbage, compactor, entrance or other facilities designated from time to time by the Landlord for the exclusive use of any particular tenant or tenants of the Building. Without limiting the generality of the foregoing, Common Facilities includes any facilities shared by the Building and other buildings or lands, the roof and roof membrane, exterior wall assemblies including weather walls, exterior and interior structural elements and bearing walls in the buildings and improvements comprising the Building, and the foundations and footings of the Building; all entrances and exits thereto and all structural elements thereof; access roads; truck courts; driveways; truckways; delivery passages; manual, mechanical, electrical or automatically operated doors; package pick-up stations; loading docks and related areas; pedestrian sidewalks; landscaped and planted areas; foyers and lobbies; public seating and service areas; corridors; bus kiosks, if any, roadways and stops; equipment, furniture, furnishings and fixtures; first aid stations; stairways, escalators, ramps, moving sidewalks and elevators and other transportation equipment and systems; tenant common and public washrooms; electrical, telephone, meter, valve, mechanical, mail, storage, service and janitor rooms and galleries; music, fire prevention, security and communication systems; pylon and other general signs; columns; pipes; electrical, plumbing, drainage, lighting, ventilating, air conditioning, mechanical, and all other installations, equipment or services located in the Building or related thereto as well as the structures housing the same. - 4 - Section 1.06 - "Fixturing Period" means a period of Nil (0) days after the Landlord gives notice to the Tenant that the Landlord's Work is completed to such an extent that the Tenant's Work may be commenced. Section 1.07 - "Fourth Floor Expansion Premises" means that part of the Premises located on the 4th floor of the Building being composed of 3,930 square feet of Useable Floor Area and 4,100 square feet of Rentable Area, as shown outlined in blue on the plan attached as Schedule "B". Section 1.08 - "Indemnitor" means the Person who/which has executed or agreed to execute the Indemnity Agreement which is attached to this Lease as Schedule "E", if applicable, and includes without limiting the generality of the foregoing, the Indemnity Agreement executed by ACC TelEnterprises Ltd. and dated the 1st day of March, 1994. Section 1.09 - "Land Surveyor" means the accredited land surveyor from time to time named by the Landlord. Section 1.10 - "Landlord" means the Party of the First Part, and in any section of this Lease that contains exculpatory language in favour of the Landlord, "Landlord" also includes the directors, officers, servants, employees and agents of the Landlord. Section 1.11 - "Landlord's Work" means the work performed by the Landlord as described in the provisions of Schedule "C" hereto as Landlord's Work. Section 1.12 - "Leasable Premises" means those premises (including the Premises) in the Building which are leased to tenants or which are designated or intended by the Landlord from time to time to be leased or used and occupied by tenants, but shall not include any Common Facilities and shall also not include storage space in the Building leased to tenants or which is designated or intended by the Landlord from time to time to be leased or occupied by tenants for storage space in the Building. Section 1.13 - "Manager" means the Person retained by the Landlord from time to time to manage the Building, and until such time as it may be replaced means Oxford Development Group Inc. Section 1.14 - "Minimum Rent" means the annual rent payable by the Tenant pursuant to Section 4.02 hereof. Section 1.15 - "Mortgagee" means any mortgagee or hypothecary creditor (including any trustee for bondholders) of the Building or any part thereof, and any chargee or other secured creditor that holds the Building or any part of it as security but a - 5 - Mortgagee is not a creditor, chargee or security holder of a tenant of Leasable Premises. Section 1.16 - "Normal Business Hours" means the hours from 7:00 a.m. to 7:00 p.m. on Mondays to Fridays, and the hours from 9:00 a.m. to 1:00 p.m. on Saturdays, unless any such day is a statutory holiday in the Province of Ontario. Section 1.17 - "Original Premises" means that part of the Premises located on the 4th floor of the Building being composed of 3,419 square feet of Useable Floor Area and 3,758 square feet of Rentable Area, as shown outlined in red on the plan attached as Schedule "B". Section 1.18 - "Parking Facilities" means the underground levels of parking and other areas designated by the Landlord as parking areas, servicing the Building, but excludes the elevator lobbies on each of such levels. Section 1.19 - "Person" if the context allows, includes any person, firm, partnership or corporation, or any group of persons, firms, partnerships or corporations or any combination thereof. Section 1.20 - "Premises" means collectively the Original Premises, the Fourth Floor Expansion Premises, the Sixth Floor Premises and the Sixth Floor Expansion Premises. Section 1.21 - "Proportionate Share" means a fraction which has as its numerator the Rentable Area of the Premises, and as its denominator, the Rentable Area of the Building. Section 1.22 - "Rent" means all Minimum Rent and Additional Rent payable pursuant to this Lease. Section 1.23 - "Rentable Area of the Premises" means (i) where a tenant has leased or occupied an entire floor in the Building, all floor area measured from the inside face of the outer building glass surfaces and from the inside face of outer building masonry walls including the elevator lobby, service corridors, electrical rooms, telephone rooms, janitors' closets, men's and women's washrooms, mechanical rooms and vending areas, but shall exclude the lobby on the ground floor of the Building in the case of a ground floor tenant leasing or occupying such entire floor and shall exclude the elements of the Building that penetrate through the floor to areas below, such as stairs, elevator shafts, flues, stacks, pipe shafts and vertical ducts and their enclosing wall, provided that no deduction from Rentable Area shall be made for columns or projections necessary to the Building nor for any service areas which are for the specific use of a particular tenant, such as special stairs and/or elevators, or, (ii) where a floor is leased or occupied by - 6 - more than one (1) tenant, (except for a ground floor tenant), the Useable Floor Area of the Premises multiplied by a fraction, the numerator of which shall be the Rentable Area for that floor on which the Premises are located, determined as if the Tenant had leased the entire floor for its lease purposes and the denominator of which shall be the aggregate Useable Floor Area of the same floor assuming a full corridor design for the floor upon which the Premises are located, or, (iii) in the case of a ground floor tenant, where a floor is leased or occupied by more than one (1) tenant, the Useable Floor Area of the Premises plus a gross up factor based on assuming that the ground floor is a typical multi-tenanted floor for office usage with a full corridor design for such floor. The definitions in this paragraph are in accordance with the standard method for measuring floor area in office buildings as sanctioned by the Building Owners and Managers Association International (BOMA) as of June 21, 1989. Section 1.24 - "Rentable Area of the Building" means the aggregate of the individual Rentable Areas (measured in accordance with the method set out in Section 1.23) of all Leasable Premises within the Building. Section 1.25 - "Rental Year" means a period of time, the first Rental Year commencing on the first day of the Term hereof, and ending on the last day of the month of December immediately following. Each Rental Year thereafter shall consist of consecutive periods of twelve (12) calendar months, but the last Rental Year of the Term shall terminate on the expiration or earlier termination of this Lease. If, however, the Landlord considers it necessary or convenient for the Landlord's purposes, the Landlord may at any time and from time to time, by written notice to the Tenant, specify a date from which each subsequent Rental Year is to commence, and in such event, the then current Rental Year shall terminate on the day immediately preceding the commencement of such new Rental Year, and the appropriate adjustments shall be made between the parties. Section 1.26 - "Rules and Regulations" means the rules and regulations contained in Schedule "D" of this Lease and such amendments and additions thereto which may be adopted and promulgated by the Landlord from time to time, acting reasonably. Section 1.27 - "Sixth Floor Premises" means that part of the Premises located on the 6th floor of the Building as shown outlined in green on the plan attached as Schedule "B". Section 1.28 - "Sixth Floor Expansion Premises" means that part of the Premises located on the 6th floor of the Building as shown outlined in yellow on the plan attached as Schedule "B". - 7 - Section 1.29 - "Tenant" means the Party of the Second Part and is deemed to include the word "lessee" and any Person mentioned as Tenant in this Lease whether one or more. Section 1.30 - "Tenant's Work" means the work completed or to be completed by the Tenant, described in the provisions of Schedule "C" hereto. Section 1.31 - "Term" means the period of time described in Section 3.03 hereof, and any renewal or extension thereof, if applicable. Section 1.32 - "Usable Floor Area" means (i) where a tenant has leased or occupied an entire floor in the Building, the Rentable Area of the Premises, or, (ii) where a floor is leased or occupied by more than one (1) tenant, all floor area from the inside face of the outer building glass surfaces and from the inside face of the outer building masonry walls to the tenant's side of corridors and/or other permanent partitions and to the centre of partitions that separate the Premises from adjoining tenants' premises (whether occupied or not) but excluding elements of the Building that penetrate through the floor to areas below, such as stairs, elevator shafts, flues, pipe shafts, and vertical ducts and their enclosing walls. No deduction from Usable Floor Area shall be made for columns or projections necessary for the Building nor for any service areas which are for the specific use of a particular tenant, such as special stairs and/or elevators. The definitions in this paragraph are in accordance with the standard method of measuring floor area in office buildings as sanctioned by the Building Owners and Managers Association International (BOMA) as of June 21, 1989. SCHEDULES "A" - legal description "B" - sketch of the Premises outlined in red, blue, green and yellow, as applicable "C" - Landlord's Work and Tenant's Work "D" - Rules and Regulations "E" - Indemnity Agreement RIDERS No. 1 - Option to Extend the Term No. 2 - Free Rent Periods No. 3 - Lease Cancellation Provisions - 8 - No. 4 - Option to Lease Additional Space No. 5 - Payment for Leasehold Improvements - Sixth Floor Expansion Premises ARTICLE II Intent and Interpretation Section 2.01 - Net Lease The Tenant acknowledges and agrees that it is intended that this Lease is a completely carefree net lease to the Landlord, except as expressly herein set out, that during the Term the Landlord is not responsible for any costs, charges, expenses and outlays of any nature whatsoever arising from or relating to the Premises, or the use and occupancy thereof, or the contents thereof or the business carried on therein, and the Tenant shall pay all charges, impositions, costs and expenses of every nature and kind, extraordinary as well as ordinary and foreseen as well as unforeseen, relating to the Premises, the use and occupancy thereof, the contents thereof, and the business carried on therein, except as expressly herein set out. Section 2.02 - Obligations as Covenants Each obligation or agreement of the Landlord or the Tenant expressed in this Lease, even though not expressed as a covenant, is considered to be a covenant for all purposes. Section 2.03 - Headings The headings introducing Sections and Articles in this Lease are inserted for convenience of reference only and in no way define, limit, construe or describe the scope or intent of such Sections or Articles. Section 2.04 - Extended Meanings The words "hereof", "herein", "hereunder" and similar expressions used in any Section or subsection of this Lease relate to the whole of this Lease and not to that Section or subsection only, unless otherwise expressly provided. The use of the neuter singular pronoun to refer to any party is deemed a proper reference even though the party is an individual, a partnership, a corporation or a group of two or more individuals, partnerships or corporations. The necessary grammatical changes required to make the provisions of this Lease apply in the plural sense where there is more than one Landlord or Tenant or other party and to either corporations, associations, partnerships, or - 9 - individuals, males or females, shall in all instances be assumed as though in each case fully expressed. Section 2.05 - Partial Invalidity If for any reason whatsoever any term, covenant or condition of this Lease, or the application thereof to any person or circumstance, is to any extent held or rendered invalid, unenforceable or illegal, then such term, covenant or condition: (a) is deemed to be independent of the remainder of this Lease and to be severable and divisible therefrom and its invalidity, unenforceability or illegality does not affect, impair or invalidate the remainder of this Lease or any part thereof; and (b) continues to be applicable to and enforceable to the fullest extent permitted by law against any Person and circumstances other than those as to which it has been held or rendered invalid, unenforceable or illegal. Neither party is obliged to enforce any term, covenant or condition of this Lease against any Person, if, or to the extent by so doing, such party is caused to be in breach of any laws, rules, regulations or enactments from time to time in force. Section 2.06 - Entire Agreement This Lease and Schedules "A", "B", "C", "D" and "E" and Riders 1, 2, 3, 4 and 5 attached hereto form a part hereof together with the Rules and Regulations adopted and promulgated by the Landlord pursuant to Section 16.01 hereof, sets forth all the covenants, promises, agreements, conditions and understandings between the Landlord and the Tenant concerning the Premises and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them other than are herein set forth. This Lease, Schedules "A", "B", "C", "D" and "E" and Riders 1, 2, 3, 4 and 5 attached hereto and the Rules and Regulations adopted and promulgated by the Landlord pursuant to Section 16.01 hereof, supersede and replace the Original Lease, the First Lease Amending Agreement, the Second Lease Amending Agreement, the January 1994 Lease Amending Agreement and the Suite 606 Agreement, and any other proposals entered into in connection with the Premises or any part thereof; provided that nothing herein shall prejudice the Landlord in the event that any of the terms, conditions or covenants on the part of the Tenant to be performed pursuant to the Original Lease, the First Lease Amending Agreement, the Second Lease Amending Agreement, the January 1994 Lease Amending Agreement, and/or the Suite 606 Agreement, have not been complied with in full, to the date hereof, all of which rights and remedies are hereby - 10 - expressly reserved in favour of the Landlord. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding unless in writing and signed by the parties to be bound thereby. Section 2.07 - Governing Law This Lease shall be construed in accordance with and governed by the laws of the Province of Ontario. Section 2.08 - Time of the Essence Time is of the essence of this Lease and of every part hereof. ARTICLE III Grant and Term Section 3.01 - Premises In consideration of the rents, covenants and agreements herein contained on the part of the Tenant to be paid, observed and performed, the Landlord leases to the Tenant, and the Tenant leases from the Landlord, the Premises. The space enclosed by the boundaries of the Premises extends vertically from the top surface of the structural subfloor to the bottom surface of the structural ceiling and horizontally to the limits of the Rentable Area of the Premises determined in accordance with Section 1.23, but it is acknowledged and agreed that the Common Facilities which are within the space enclosed by the boundaries of the Premises do not form part of the Premises. Section 3.02 - Use of Common Facilities The use and occupation by the Tenant of the Premises includes the non- exclusive and non-transferable right or licence to use the Common Facilities in common with others entitled thereto for the purposes for which they are intended and during such hours as the Building may be open for business as determined by the Landlord from time to time, subject in each case to this Lease and to the Rules and Regulations. Section 3.03 - Commencement and Ending Date of the Term The Tenant shall have and hold the Premises for and during the Term which shall be, unless sooner terminated pursuant to the other provisions hereof, the period of ten (10) years, from and including the 1st day of March, 1994 (the "Commencement - 11 - Date") to and including the 29th day of February, 2004, subject to the provisions hereof relating to earlier termination. Section 3.04 - Failure of Tenant to Open The Tenant represents and warrants to the Landlord that it is in possession of that part of the Premises constituting the Original Premises, the Fourth Floor Expansion Premises and the Sixth Floor Premises. The Tenant covenants to take possession of that part of the Premises constituting the Sixth Floor Expansion Premises and to open such part of the Premises for business fully fixtured, stocked and staffed no later than March 1st, 1994, and in the event that the Tenant fails to do so, then the Tenant acknowledges that the Landlord shall have the right, notwithstanding the foregoing, to collect the Minimum Rent and Additional Rent in this Lease provided for each and every day that the Tenant shall fail to commence to do business as in this Lease provided. In addition to any and all other remedies in this Lease provided, the Landlord shall have the right, at its option, to terminate this Lease upon ten (10) days notice to the Tenant of its election to do so in the event the Tenant is in default of its covenant pursuant to this Section 3.04. Section 3.05 - Certificates (a) The Landlord and Tenant acknowledge that the Rentable Area and the Usable Area of the Original Premises, the Fourth Floor Expansion Premises and the Sixth Floor Premises have been certified and consist of the following: (i) Original Premises: Usable Floor Area - 3,419 square feet Rentable Area - 3,758 square feet (ii) Fourth Floor Expansion Premises: Usable Floor Area - 3,930 square feet Rentable Area - 4,100 square feet (iii) Sixth Floor Premises: Usable Floor Area -7,365 square feet Rentable Area - 7,946 square feet, and that such certificates are binding on the Landlord and the Tenant and form part of this Lease. (b) The Landlord agrees to provide at its expense a certificate from its space planner certifying in writing the Rentable Area of that part of the Premises constituting the Sixth - 12 - Floor Expansion Premises expressed in square feet; the Tenant shall be bound by such determination unless it shall within 30 days of receipt of such certificate give written notice of its challenge to such certification and, in such event, the Landlord and Tenant shall agree on an independent third party to determine the Rentable Area of that part of the Premises constituting the Sixth Floor Expansion Premises and, in the event there shall be a variation of 5% or more in the subsequent certificate, the costs of obtaining the certification shall be borne by the Landlord, and in every other case shall be borne by the Tenant. The purposes of such certification shall be for the purposes of calculating the Leasehold Improvement Allowance which the Landlord shall pay to the Tenant in connection with the Sixth Floor Expansion Premises, as provided for in the provisions of Rider No. 5, and for the purposes of calculating the Minimum Rent and the Additional Rent payable in respect of the Sixth Floor Expansion Premises. Section 3.06 - Early Occupancy If the Tenant begins to conduct business in all or any portion of the Sixth Floor Expansion (except for Suite 606) Premises before the Commencement Date, the Tenant shall pay to the Landlord on the Commencement Date a rental in respect thereof for the period from the date the Tenant begins to conduct business in all or any part of the Premises to the Commencement Date, which rental shall be that proportion of Rent for one calendar year which the number of days in such period is 365. Except where clearly inappropriate, the provisions of this Lease shall be applicable during such period. The Tenant shall not, however, conduct business from the Sixth Floor Expansion Premises before the Commencement Date without the Landlord's prior written approval except with respect to Suite 606 which shall be governed by the Suite 606 Agreement. Section 3.07 - Acceptance of Premises The Tenant acknowledges and agrees that the Premises including the Landlord's Work are in good and satisfactory condition and that all undertakings, if any, of the Landlord to alter, remodel or improve the Premises or the Building and all representations, if any, by the Landlord respecting the condition of the Premises or the Building have been fully satisfied and performed by the Landlord. Section 3.08 - Tenant's Work The Tenant agrees to undertake and install the Tenant's Work. - 13 - ARTICLE IV Rent Section 4.01 - Covenant to Pay The Tenant shall pay Rent as herein provided which obligation shall survive the expiration or earlier termination of this Lease. Section 4.02 - Minimum Rent The Tenant shall pay from and after the Commencement Date to the Landlord at the office of the Landlord, or at such other place designated by the Landlord, in lawful money of Canada, without any prior demand therefor and without any deduction, abatement, setoff or compensation whatsoever, as annual Minimum Rent, payable as outlined below, each instalment in advance on the first day of each and every month in the following periods, subject to the provisions of Rider No.2, Free Rent Periods, and Rider No.4, Option to Lease Additional Space: (a) From and including the 1st day of March, 1994, to and including the 28th day of February, 1997, as annual Minimum Rent, the sum of Two Hundred and Sixty-Seven Thousand, Five Hundred and Sixty- One Dollars ($267,561.00) payable in equal consecutive monthly instalments of Twenty-Two Thousand, Two Hundred and Ninety-Six Dollars and Seventy-Five Cents ($22,296.75) based on an annual Minimum Rent rate of Ten Dollars and Fifty Cents ($10.50) per square foot of Rentable Area of the Premises; (b) From and including the 1st day of March, 1997, to and including the 29th day of February, 2000, as annual Minimum Rent, the sum of Three Hundred and Eighteen Thousand, Five Hundred and Twenty- Five Dollars ($318,525.00) payable in equal consecutive monthly instalments of Twenty-Six Thousand, Five Hundred and Forty-Three Dollars and Seventy-Five Cents ($26,543.75) based on an annual Minimum Rent rate of Twelve Dollars and Fifty Cents ($12.50) per square foot of Rentable Area of the Premises; (c) From and including the 1st day of March, 2000, to and including the 29th day of February, 2004, as annual Minimum Rent, the sum of Three Hundred and Sixty-Nine Thousand, Four Hundred and Eighty-Nine Dollars ($369,489.00) payable in equal consecutive monthly instalments of Thirty Thousand, Seven Hundred and Ninety Dollars and Seventy-Five Cents - 14 - ($30,790.75) based on an annual Minimum Rent rate of Fourteen Dollars and Fifty Cents ($14.50) per square foot of Rentable Area of the Premises. As provided for in the provisions of Section 3.05, the Rentable Area of the Original Premises and the Fourth Floor Expansion Premises have been determined. When the Rentable Area of that part of the Premises constituting the Sixth Floor Premises together with the Sixth Floor Expansion Premises is certified pursuant to the provisions of Section 3.05 hereof, the Minimum Rent shall, if necessary, be adjusted accordingly as of the Commencement Date. If the Tenant has paid in excess of the amounts due on account of Minimum Rent as a result of such adjustment, the excess shall be credited by the Landlord against Rent, then or in the future owing by the Tenant under this Lease. If the amount the Tenant has paid is less than the amounts due as a result of the adjustment, the Tenant shall pay such additional amounts due within 30 days after demand therefor. Section 4.03 - Deposit The Tenant and Landlord acknowledge that the deposit paid by the Tenant pursuant to the Original Lease in the amount of Eight Thousand One Hundred and Sixty-Two Dollars ($8,162.00) (the "Deposit") was held without interest by the Landlord and was applied on account of the first month Minimum Rent as it fell due and Additional Rent as it fell due under the Original Lease and that there is no further credit owing to the Tenant in respect of the Deposit. Section 4.04 - Security Deposit The Tenant and Landlord acknowledge that the sum of Eight Thousand One Hundred and Sixty-Two Dollars ($8,162.00) paid by the Tenant to the Landlord as a security deposit (the "Security Deposit") pursuant to the Original Lease will continue to be held by the Landlord without liability or interest as security for the faithful performance by the Tenant of all the terms, covenants and conditions of this Lease by the Tenant to be kept, observed and performed. The Landlord shall not be required to keep the Security Deposit separate from its general funds. If at any time during the Term, the Rent or any other sums payable by the Tenant hereunder are overdue and unpaid, or if the Tenant fails to keep and perform any of the terms, covenants and conditions of this Lease to be kept, observed and performed by the Tenant, the Landlord at its option may, in addition to any and all other rights and remedies provided for in this Lease or by law, appropriate and apply the entire Security Deposit, or so much thereof as is necessary to compensate the Landlord for loss or damage sustained or suffered by the Landlord due to such breach on the part of the Tenant. If the entire - 15 - Security Deposit, or any portion thereof is appropriated and applied by the Landlord for the payment of overdue Rent or any other sums due and payable by the Tenant hereunder, then the Tenant shall, upon written demand of the Landlord forthwith remit to the Landlord a sufficient amount in cash to restore the Security Deposit to the original sum deposited, and the Tenant's failure to do so within five (5) days after receipt of such demand shall constitute a breach of this Lease. If the Tenant complies with all of the terms, covenants and conditions and properly pays all of the Rent and any other sums herein provided and payable by the Tenant, the Security Deposit shall be returned in full to the Tenant without interest within sixty (60) days after the end of the Term or any renewal thereof. The Landlord may deliver the Security Deposit to any purchaser of the landlord's interest in the Premises or in the Building, if such interest is sold and thereupon the landlord shall be discharged from any liability with respect to the Security Deposit. Section 4.05 - Rent Past Due If the Tenant fails to pay, when the same is due and payable, any Rent or any other amount payable by the Tenant under this Lease, such unpaid amounts shall bear interest (payable as Additional Rent) from the due date thereof to the date of payment at a rate per annum which is equal to four (4) percentage points in excess of the prime commercial lending rate (the "Prime Rate") per annum charged by any Canadian bank designated by the Landlord from time to time on loans made in Canadian funds to its most favoured commercial borrowers, calculated and compounded monthly, with any adjustment in such rate to be effective on the first day of the month next following such change in the Prime Rate. ARTICLE V Taxes Section 5.01 - Taxes - Definition "Taxes" means all taxes, rates, duties, and assessments (including local improvement taxes), impost charges or levies, whether general or special, that are levied, rated, charged or assessed against the Building or any part thereof from time to time (including, without limitation, the Common Facilities) by any lawful taxing authority, whether federal, provincial, municipal, school or otherwise, and any taxes or other amounts which are imposed in lieu of, or in addition to, any of the foregoing whether of the foregoing character or not or whether in existence at the Commencement Date or not, and any such taxes - 16 - levied or assessed against the Landlord or any owner on account of its ownership of or interest in the Building. Capital taxes shall be based on the amount of taxable paid up capital employed by the owner of the Building as at the 1st day of August, 1991. Section 5.02 - Taxes Payable by the Landlord The Landlord shall pay all Taxes which are levied, rated, charged or assessed against the Building or any part thereof subject to Sections 5.03, 5.04 and, 6.02 hereof. However, the Landlord may defer payment of any such Taxes, or defer compliance with any statute, law, by-law, regulation or ordinance in connection with levying of any such Taxes, in each case to the fullest extent permitted by law, so long as it diligently prosecutes any contest or appeal of any such Taxes and so long as the same does not result in forfeiture by the Tenant of its interest in this Lease or any disturbance of its right to quiet possession hereunder. Section 5.03 - Taxes Payable by the Tenant (a) The Tenant shall pay, as Additional Rent, in each and every year during the Term and within the times provided for by the taxing authorities, to the Landlord or to the taxing authorities as the Landlord may direct, and discharge, all Taxes that may be levied, rated, charged or assessed against the Premises and against all leasehold improvements situate at the Premises, or any part or parts thereof from time to time by any taxing authority whether federal, provincial, municipal, school or otherwise. The Tenant agrees to provide the Landlord upon receipt by the Tenant with a copy of any separate tax bills, and separate notices of assessments for and in respect of the Premises and all leasehold improvements situate at the Premises. In addition, the Tenant shall pay to the Landlord, on demand, as Additional Rent, in each Rental Year, the Tenant's Proportionate Share of the Taxes assessed against the lands described in Schedule "A" and the Common Facilities. (b) In the event that there shall not be a separate assessment for Taxes made against the Premises, the Landlord may, at its option, with each tax bill it receives, make an allocation of Taxes on a reasonable and equitable basis between the lands described in Schedule "A", the Common Facilities, the Leasable Premises, the different components of the Leasable Premises and other premises available for leasing which do not constitute part of the Leasable Premises and as between the Leasable Premises, the different components of the Leasable Premises and the Premises, and as between the assessment relating to the leasehold improvements made to the Premises and those made to other Leasable Premises and such other premises, and the Landlord shall be entitled to charge an administration fee of fifteen per cent (15%) of the amount of such Taxes so allocated to the Tenant. - 17 - The Tenant shall pay its share of Taxes so allocated against the Premises by the Landlord together with the share of such administration charge within ten (10) days after demand therefor by the Landlord and the Tenant in addition shall pay to the Landlord, as Additional Rent, in each Rental Year, the Tenant's Proportionate Share of the Taxes so allocated against the said lands and the Common Facilities. (c) In the event that there shall not be a separate assessment for Taxes made against the Premises the Landlord at its option, may include all Taxes for the lands described in Schedule "A", the Building, the Common Facilities, the Leasable Premises and all other premises available for leasing in the Building which do not constitute part of the Leasable Premises, in the costs and expenses referred to in Section 6.02(a) and (b), and the Tenant shall pay its Proportionate Share thereof in the manner and at the time set forth in Section 6.03 hereof. (d) Notwithstanding the provisions of this Lease, the Landlord shall not, in calculating Additional Rent, include goods and services taxes paid or payable to third parties for goods and services acquired by the Landlord which would have the effect of the Tenant paying goods and services taxes on the goods and services taxes which the Landlord has paid or which is payable to third parties for such goods and services so acquired by the Landlord, unless the Landlord is not entitled to claim an input tax credit in respect of such goods and services taxes and unless law provides otherwise and requires the Landlord so to do. Provided that the foregoing shall not be construed so as to prevent or prohibit the Landlord from collecting goods and services taxes on Additional Rent as required by law. Section 5.04 - Business Taxes and Other Taxes of Tenant (a) In addition to the Taxes payable by the Tenant pursuant to Section 5.03, the Tenant shall pay as Additional Rent to the lawful taxing authorities, or to the Landlord, as it may direct, and shall discharge in each Rental Year when the same become due and payable (i) all taxes, rates, duties, assessments and other charges that are levied, rated, charged or assessed against or in respect of all improvements, fixtures, personal property, equipment and facilities on or in the Premises or any part thereof; and, (ii) every tax and license fee which is levied, rated, charged or assessed against or in respect of any and every business carried on in the Premises or in respect of the use or occupancy thereof or any other part of the Building by the Tenant and every subtenant or licensee of the Tenant, all of the foregoing described in subsections (i) and (ii) aforesaid being collectively referred to as "Business Taxes" and whether in any case, any such taxes, rates, duties, assessments or license fees are rated, charged or assessed by any federal, provincial, municipal, school or other body during the Term. If there are no - 18 - separate bills provided for Business Taxes, the Tenant shall pay its Proportionate Share of all Business Taxes with respect to the entire Building; and, (iii) all taxes that are levied, charged, assessed or imposed wholly or partially with respect to the Rent, or the rental of the Premises or the provision of any goods, services or utilities whatsoever by the Landlord to the Tenant under this Lease, whether imposed upon the Tenant or the Landlord, whether the same exist as of the date hereof, as of the Commencement Date, or at any time thereafter. (b) The Tenant shall upon request of the Landlord promptly deliver to the Landlord for inspection, receipts for payment of all taxes payable by the Tenant pursuant to this Section 5.04, notices of any assessments of any taxes referred to in this Section 5.04 received by the Tenant and such other information in connection with any such taxes as the Landlord reasonably determines from time to time. (c) The Tenant hereby expressly agrees that it is not permitted to contest or appeal any taxes referred to in Sections 5.01, 5.03 and 5.04, save and except with respect to its own Business Taxes. The Tenant agrees to deliver to the Landlord, at least ten (10) days prior to the last date permitted for filing of an appeal, notice of any appeal or contestation that the Tenant intends to institute with respect to its own Business Taxes and to consult with and obtain the prior written approval of the Landlord to any such appeal or contestation. If the Tenant obtains approval, the Tenant shall, upon demand, deliver to the Landlord such security for the payment of such Business Taxes as the Landlord deems advisable and the Tenant shall diligently prosecute any such appeal or contestation to a speedy resolution and shall keep the Landlord informed of its progress in that regard from time to time. Section 5.05 - Tenant's Indemnification With Respect to Taxes under Sections 5.01, 5.03 and 5.04 The Tenant shall promptly indemnify and hold harmless the Landlord from and against payment for any and all losses, claims, actions, suits, proceedings, causes of action, demands, damages, judgments, executions, liabilities, responsibilities, costs, charges and expenses (collectively referred to in this Lease as "Claims") occasioned by or arising from any and all taxes payable by the Tenant hereunder including those which may in future be levied in lieu of or in addition to such taxes referred to in Sections 5.01, 5.03 and 5.04 or which may be assessed against any Rent payable pursuant to this Lease whether in lieu of such taxes or otherwise, whether against the Landlord or the Tenant including, without limitation, any increase whensoever occurring in such taxes arising directly or indirectly out of an appeal or contestation by the Tenant of its own Business Taxes relating to the Premises or the Building or any - 19 - part thereof. The Tenant shall deliver to the Landlord on demand such security for any such increase in such Business Taxes as the Landlord deems advisable. Section 5.06 - Landlord's Taxes Notwithstanding what is otherwise herein provided for in this Article V, but subject to the provisions of Section 5.04(a)(iii) hereof, the Tenant shall not be responsible for the payment of taxes on the income or profits of the Landlord to the extent that they are not imposed in lieu of Taxes or any other tax otherwise payable by the Tenant hereunder. Section 5.07 - Per Diem Adjustment If any Rental Year during the Term of this Lease is less than twelve (12) calendar months, the taxes that the Tenant is required to pay pursuant to Article V hereof shall be subject to a per diem adjustment on the basis of a period of 365 days. ARTICLE VI Building and Common Facilities - Control and Payment Section 6.01 - Control of the Building by the Landlord The Landlord or its Manager shall operate and maintain the Building in such manner as the Landlord determines from time to time, and in a first-class and reputable manner as would a prudent landlord of a similar multiple tenancy commercial office/retail building having regard to size, age and location. The Building is at all times subject to the exclusive control and management of the Landlord. Without limiting the generality of the foregoing, the Landlord has the right, in its control, management and operation of the Building and by the establishment of Rules and Regulations and general policies with respect to the operation of the Building or any part thereof at all times during the period of time that the Tenant's Work contemplated in Schedule "C" hereto is being undertaken and throughout the Term, to: (a) (i) obstruct or close off all or any part of the Building for the purpose of maintenance, repair or construction; (ii) close all or any portion of the Building to such extent as may, in the opinion of the Landlord's counsel, be legally sufficient to prevent a dedication thereof or the accrual - 20 - of any rights to any Person or the public therein; (iii) grant, modify and terminate easements and other agreements pertaining to the use and maintenance of all or any part of the Building; (iv) employ all personnel including supervisory personnel and managers necessary for the operation, maintenance and control of the Building; the Tenant acknowledges that the Building may be managed by the Landlord or by the Manager or such other Person as the Landlord designates in writing from time to time; (v) from time to time, prohibit the Tenant and its employees from parking anywhere in the Building; if the Landlord designates tenant parking areas in the Building or elsewhere, the Tenant and its employees shall park their vehicles only in such parking areas; the Tenant shall furnish the Landlord, upon request, with the current licence numbers of all vehicles owned or used by the Tenant and its employees and such other information concerning vehicles and parking thereof as the Landlord may require and the Tenant shall, thereafter, notify the Landlord of any changes within five (5) days after such changes occur; if the Tenant or its employees park their vehicles in any such prohibited parking areas, the Landlord, in addition to all rights and remedies hereunder, shall have the right to charge the Tenant a per diem fee per vehicle parked in any area other than a designated area; such fee is payable as Additional Rent on demand; the Landlord reserves the right to impose charges upon the Tenant and any person (including the general public) for the use of parking facilities; (vi) hire the services of a Manager which may be one of the parties constituting the Landlord or which may be an affiliate, associate, subsidiary or related Person to the Landlord or any party constituting the Landlord; (b) from time to time, change the area, level, location, arrangement or use of the Building or any part thereof, make alterations, additions, subtractions, or re-arrangements to - 21 - the Building or any part thereof, and construct additional buildings, structures, improvements or facilities in, adjoining or near to, the Building or to construct other buildings, structures or improvements in the Building and build additional stories on the Building; and (c) do and perform such other acts in and to the Building as, in the use of good business judgment, the Landlord determines to be advisable for the more efficient and proper operation of the Building. Notwithstanding anything contained in this Lease, it is understood and agreed that if as a result of the exercise by the Landlord of its rights set out in this Section 6.01, the Common Facilities or the Parking Facilities are diminished or altered in any manner whatsoever, the Landlord is not subject to any liability, nor is the Tenant entitled to any compensation or diminution or abatement of Rent, nor is any alteration or diminution of the Common Facilities or the Parking Facilities deemed constructive or actual eviction, or a breach of any covenant for quiet enjoyment contained in this Lease. If the Landlord is directly undertaking itself or through its contractors any matter or any action, which will result in an interference with the Tenant's use and enjoyment of the Building and the Premises for a period in excess of 24 hours, then the Landlord shall first notify the Tenant of its intention so to do, failing which, the Tenant shall have the right to give written notice to the Landlord that it has breached the aforesaid covenant and demanding that within 48 hours of receipt of such notice the Landlord ceases to unreasonably interfere with the Tenant's use and enjoyment of the Building and the Premises, and failing rectification within the aforesaid 48 hours, the Minimum Rent shall abate in proportion to the use of the Premises that is not usable for the purposes intended as determined by the Tenant, acting reasonably, until such matters have been rectified. It is acknowledged by the Tenant that notwithstanding the foregoing, it will be necessary for the Landlord from time to time to construct or demolish tenants' improvements within the Building (including the floor upon which the Premises are located) during Normal Business Hours and that such activity may temporarily create some disruption to the Tenant's normal quiet use and enjoyment of the Building and the Premises and the Tenant acknowledges and agrees that in such instances there shall be no abatement of Minimum Rent. Section 6.02 - Tenant to Bear Share of Expense (a) In each Rental Year, the Tenant shall pay to the Landlord, as Additional Rent, its Proportionate Share or other share determined by the Landlord as provided for herein, as the case may be, of the total costs and expenses incurred, accrued, - 22 - paid, payable or attributable, whether by the Landlord or others on behalf of the Landlord: (1) for the operation, service, maintenance, repair, rebuilding, replacement, insurance, policing, supervision, management, and administration of the Building, and, (2) for the Landlord to discharge its obligations or actions under this Lease or under other leases of premises in the Building or under any arrangements entered into by the Landlord in respect of the Building and/or other adjoining buildings to the extent of any rights accruing to the Building. Any allocation of costs, charges or expenses which is determined by the Landlord under this Lease shall be done on a reasonable and equitable basis. (b) The costs and expenses as set out in Section 6.02(a) include, without limitation and without duplication, the aggregate of: (i) insurance on the Building and any improvements, equipment and other property located thereon; the Landlord's insurance may, without limitation, include loss of insurable gross profits attributable to the perils insured against by the Landlord or commonly insured against by landlords, including loss of rent and other amounts receivable from tenants in the Building, and third party liability coverage including the exposure of personal injury, bodily injury, property damage occurrence, including all contractual obligations coverage and including actions of the employees, contractors, subcontractors and agents working on behalf of the Landlord; (ii) landscaping, cleaning (including window cleaning), painting, snow and ice removal (including without limitation, line painting and curb installation), garbage and waste collection and disposal, and all costs referred to in Section 6.04; (iii) lighting, utilities (including, without limitation, electricity, water, gas, steam and other fuel and hook-up, connection or service charges for utilities, and charges for the use of the sewage disposal system), loudspeakers, and any telephone answering service facilities and systems, used in or serving the Building, and the cost of electricity for any signs designated by the Landlord as part of the Common Facilities; - 23 - (iv) policing, security, security systems, supervision and traffic control; (v) in the event that the Landlord has not contracted for the management services of the Manager or any Person for the operation, supervision, management and administration of the Building, remuneration (including, without limitation, contributions and premiums towards fringe benefits, unemployment and Worker's Compensation insurance, pension plan contributions and similar premiums and contributions) of Persons to the extent engaged in the operation, maintenance, administration, management and supervision of the Building; (vi) the cost of the rental of any equipment and signs, and the cost of building supplies used by the Landlord in the maintenance of the Building; (vii) reasonable auditing, accounting, bookkeeping, legal and other professional and consulting fees and disbursements; (viii) the reasonable cost of all repairs (including, without limitation, major repairs) and replacements to and maintenance and operation of the Building and the Common Facilities and the systems, facilities and equipment serving the Building (including, without limitation, all escalators, elevators, moving sidewalks and other transportation equipment and systems and all heating, ventilating and air conditioning and climate control systems serving the Building) except for the cost of repairing or replacing any inherent structural defects or weaknesses; (ix) depreciation or amortization (1) of the cost, including repair and replacement, of all maintenance, cleaning and operating equipment and master utility meters from the Commencement Date, and, (2) of the costs incurred after the Commencement Date for repairing or replacing all other fixtures, equipment and facilities serving or comprising the Building unless they are, pursuant to Section 6.02(b)(viii), charged fully in the Rental Year in which they are - 24 - incurred in accordance with sound accounting principles; (x) all reasonable costs incurred in acquiring, installing, maintaining, revising, repairing and replacing energy conservation equipment and systems and life safety systems for the Building and for effecting any improvements to the Building made to comply with air pollution or environmental control standards; (xi) heating, ventilating and air conditioning costs of the Building; (xii) subject to the provisions of Article VII hereof, the cost of water, fuel, power, telephone and other utilities used or consumed in or with respect to the Building, subject to reasonable increase thereof from time to time for inflation of costs; (xiii) reserves established by the Landlord for capital expenditures based on $.20 per square foot, per annum, of the Rentable Area of the Building, subject to reasonable increase thereof from time to time for the inflation of costs; (xiv) subject to the provisions of Article V hereof, the Business Taxes of the Landlord and Taxes, and all costs incurred by the Landlord in contesting or appealing such taxes or related assessments (including, without limitation, legal, appraisal and other professional fees and administration and overhead costs) on all or any part of the Building; (xv) sales, value added and excise or other taxes on goods and services provided by or on behalf of the Landlord in connection with the maintenance, repair, operation, administration or management of the Building, whether or not in existence at the Commencement Date; (xvi) capital taxes, if applicable, being the amount of any tax or taxes levied against the Landlord and owners of the Building by any governmental authority having jurisdiction based upon or computed by reference to the paid-up capital or place of business of the - 25 - Landlord and owners of the Building or other similar criteria as determined for the purposes of such tax or taxes, or any similar tax, rate, duty, levy, fee, charge or assessment levied, imposed or assessed in the future in lieu thereof or in addition thereto by any governmental authority. For the purposes hereof such tax or taxes shall mean the amount of tax that would be payable if the Building were the only establishment of the Landlord and owners of the Building and capital taxes shall be limited to the extent that they do not exceed the taxes on the capital employed by the owners of the Building in the Building as at August 1, 1991; (xvii) in the event that the Landlord has not contracted for the management services of a Person for the operation, supervision, management and administration of the Building, an administration fee of fifteen per cent (15%) of such total annual costs set out in Section 6.02(b)(i) to Section 6.02(b)(viii) inclusive and Section 6.02(b)(x) to Section 6.02(b)(xii) inclusive and Section 6.02(b)(xiv) to Section 6.02(b)(xvi) (or such greater amount as shall be standard from time to time in the property management industry, as determined by the Landlord, acting reasonably); (xviii) in the event that the Landlord has hired the services of the Manager or any Person for the operation, supervision, management and administration of the Building, all amounts which the Landlord must pay to such Manager or any Person in connection therewith, including without limitation, management fees and disbursements incurred by such Manager or any Person in carrying out its obligations to the Landlord. From the total of the above costs set out in Section 6.02(b)(i) to Section 6.02(b)(xvi) inclusive, there shall be deducted net proceeds received by the Landlord from insurance policies taken out by the Landlord to the extent that such proceeds relate to the costs and expenses incurred in the maintenance and operation of the Common Facilities. Provided that in computing such costs and expenses described in Section 6.02(a) and (b), if the Landlord from time - 26 - to time determines that the use of any water, fuel, power, telephone or other utilities used or consumed in or with respect to the Premises, or in the event that any service to or in respect of the Premises is disproportionate to the use of other tenants or occupants in the Building, the Landlord may adjust the Tenant's share of the cost thereof from a date reasonably determined by the Landlord to take into account such disproportionate use. Provided further that in computing such costs and expenses described in Section 6.02 (a) and (b), the Tenant acknowledges that certain of such costs and expenses may not be incurred in respect of or for the benefit of all tenants and occupants in the Building, and that the Landlord shall have the right to allocate such costs and expenses in a reasonable and equitable manner amongst the several components and areas of the Building, including the Common Facilities and the Leasable Premises and amongst the various components of Leasable Premises in the Building, and the Tenant shall pay its Proportionate Share of such allocation to the Common Facilities plus a share of such costs and expenses so allocated to other components of the Building wherein such cost or expense relates to the Premises based upon the Rentable Area of the Premises and the Rentable Area of those Leasable Premises in connection with which such allocation has been made. Section 6.03 - Payment of Tenant's Share (a) Subject to the provisions of Articles V and VII hereof, the amounts payable by the Tenant pursuant to Articles V, VI and VII hereof may be estimated by the Landlord for such period as the Landlord determines from time to time, and the Tenant agrees to pay to the Landlord the Tenant's Proportionate Share, or other share thereof determined by the Landlord as provided for herein, as the case may be, as so estimated, of such amounts in monthly installments in advance during such period as Additional Rent. Notwithstanding the foregoing, as soon as bills for all or any portion of the said amounts so estimated are received, the Landlord may bill the Tenant for the Tenant's Proportionate Share thereof or other share thereof determined by the Landlord as provided for herein, as the case may be, and the Tenant shall pay the Landlord such amounts so billed (less all amounts previously paid by the Tenant on the basis of the Landlord's estimate as aforesaid) as Additional Rent on demand. Provided that in the event that the Landlord does not provide a new estimate, notwithstanding that the period for which such previous estimate has been given to the Tenant has expired, the Tenant shall continue to pay its Proportionate Share, or other share thereof determined by the Landlord as provided for herein, as the case may be, based on the most recent estimate provided by the Landlord, until such time as a new estimate is rendered by the Landlord therefor. - 27 - (b) Within a reasonable period of time after the end of the period for which such estimated payments have been made, the Landlord shall deliver to the Tenant an audited statement issued by the Landlord's auditors, which statement will set forth the amounts and costs referred to in Articles V, VI and VII together with a statement of the Tenant's Proportionate Share thereof, as provided for herein. In either case, if necessary, an adjustment shall be made between the parties in the following manner. If the Tenant has paid in excess of the amounts due, the excess shall be credited by the Landlord against Rent, then or in the future owing by the Tenant under this Lease. If the amount the Tenant has paid is less than the amounts due, the Tenant agrees to pay such additional amounts due with the next monthly payment of Minimum Rent. If any Rental Year during the Term is greater or less than any such period determined by the Landlord as aforesaid, the Tenant's Proportionate Share or other share thereof determined by the Landlord as provided for herein, as the case may be, shall be subject to a per diem, pro rata adjustment. Failure of the Landlord to provide any statement under this Section 6.03 shall not prejudice the Landlord's right to provide such statement thereafter or with respect to any other period. The providing of any such statement shall also not affect the Landlord's right to subsequently provide an amended or corrected statement. Section 6.04 - Landlord's Services The Landlord covenants with the Tenant as follows: (a) To provide climate control to the Premises during Normal Business Hours to maintain a temperature adequate for occupancy, except during the making of repairs, alterations or improvements and provided that the Landlord shall have no responsibility or liability for failure to supply climate control service when stopped as aforesaid or when prevented from so doing by strikes or causes beyond the Landlord's reasonable control. The Tenant acknowledges that the Landlord has installed in the Building a system for the purpose of climate control, which system is designed to heat and cool during normal occupancy of the Premises as general offices on the basis of one (1) Person to every one hundred (100) to one hundred and fifty (150) square feet of space on an open floor basis and based on the window shading being fully closed in those offices having exterior windows exposed to the sun, without having regard to the Tenant's specific use thereof or the installation of any heat generating equipment in the Premises by the Tenant or by anyone on behalf of the Tenant. Any use of the Premises not in accordance with the design standards or any arrangement of partitioning which interferes with the normal operation of such system may require changes or alterations in the system or duct through which the same operates. Any changes or alterations so occasioned, if such changes can be accommodated by the Landlord's equipment, shall be - 28 - made by the Tenant at its cost and expense but only with the written consent of the Landlord first had and obtained, and in accordance with drawings and specifications and by a contractor first approved in writing by the Landlord. If installations of partitions, equipment or fixtures by the Tenant necessitates the rebalancing of the portion of the climate control equipment installed in the Premises, the same will be performed by the Landlord at the Tenant's expense payable by the Tenant upon demand as Additional Rent. (b) Subject to the supervision of the Landlord, to furnish, during Normal Business Hours, and during such extended hours as the Landlord may determine, for use by the Tenant and its employees and invitees in common with other persons entitled thereto, passenger elevator service to the Premises, and to furnish upon written request for the use of the Tenant in common with others entitled thereto at reasonable intervals and at such hours as the Landlord may select, freight elevator service to the Premises for the carriage of furniture, equipment, deliveries and supplies. (c) To provide for the use of the Tenant and its employees and invitees in common with others entitled thereto, washrooms on each floor of the Building (except on the ground floor) upon which the Premises are located. (d) To provide janitor and cleaning services when reasonably necessary from time to time to the Premises and to the Building to be rendered substantially in accordance with the standards of a similar first class office building. (e) To furnish appropriate facilities for bringing telephone services by Bell Canada to a point on the floor on which the Premises are located, and cold water to a point on the floor on which the Premises are located. (f) To provide access, reasonable security and elevator service to the Tenant, employees and invitees at all times, subject to the Rules and Regulations for the Building. ARTICLE VII Utilities, Heating, Ventilating and Air Conditioning Section 7.01 - Charges for Utilities (a) The Tenant shall be solely responsible for and shall promptly pay to the Landlord, or as it otherwise directs, in the manner hereinafter provided as a charge with respect to - 29 - the Premises (the "Charge") the aggregate, without duplication, of: (i) the total cost of water, fuel, power, telephone and other utilities (the "Utilities") used or consumed in or with respect to the Premises at rates not in excess of public utility rates for the same services if such utilities are provided by public utilities; and (ii) all costs reasonably incurred by the Landlord in determining or allocating the Charge or determining the Utilities including, without limitation, professional, engineering and consulting fees and an administration fee of fifteen per cent (15%) of the total cost hereinbefore set out in this Section 7.01(a). (b) The Landlord may determine in a reasonable and equitable manner the Charge applicable to the Premises by allocating the Utilities for the Building amongst the several components and areas of the Building, including the Common Facilities, the Leasable Premises, and as between the various different Leasable Premises in the Building, using as a basis, without limitation, (i) check meters installed in the Common Facilities, and individual Leasable Premises and other premises available for leasing which do not constitute part of the Leasable Premises; (ii) the relevant rates of demand and consumption of Utilities in the respective areas; and/or (iii) the connected load of the respective areas comprising the Common Facilities, and those individual Leasable Premises and such other leasable premises and other leasable premises for which there are no check or other meters. (c) Provided that notwithstanding the foregoing, the Landlord at its option may include the cost of all Utilities for the Building, including for Common Facilities, the Premises and all Leasable Premises and other premises available for leasing which do not constitute a part of the Leasable Premises which are not separately metered in the costs and expenses referred to in Section 6.02(a) and subject to what is otherwise herein provided, the Tenant shall pay its Proportionate Share thereof or other share thereof as provided in Section 6.02, in the manner and at the times as set forth in Section 6.03 hereof. (d) The Tenant agrees as follows: (i) If the Landlord elects, for the more efficient and proper operation of the Building, or is required by municipal by- law or the suppliers of the Utilities to purchase - 30 - the Utilities or any of them for the Building, the Tenant shall purchase such Utilities and pay for such Utilities as Additional Rent forthwith on demand to the Landlord at rates not in excess of the rates charged by such suppliers for such Utilities, if applicable; (ii) If requested by the Landlord, the Tenant shall promptly install a separate check meter indicating demand and consumption of Utilities in the Premises at the Tenant's expense and in a location designated by the Landlord; (iii) If the Landlord elects, the Landlord shall be entitled to install, at the Tenant's expense, a separate check meter indicating demand and consumption of Utilities in the Premises, in a location designated by the Landlord. (e) If the suppliers of the Utilities require that the Tenant enter into contracts or arrangements with such suppliers in connection with such Utilities, the Tenant shall be responsible to enter into such contracts or other arrangements and to pay whatever deposits or other amounts that are payable under such contracts or other arrangements. (f) In no event is the Landlord liable for, nor has the Landlord any obligation with respect to, an interruption or cessation of, or a failure in the supply of any such Utilities, services or systems in, to or serving the Building or the Premises, whether or not supplied by the Landlord or others, and whether the interruption or cessation is caused by the Landlord's fault or not. Section 7.02 - Lighting The Landlord shall have the exclusive right to attend to any replacement of electric light bulbs, tubes and ballasts in the Premises throughout the Term. The Landlord may adopt a system of relamping and reballasting periodically on a group basis in accordance with good commercial practice. The Tenant shall pay to the Landlord as Additional Rent on the first day of each and every month during the Term a monthly charge per bulb, tube and ballast on account of the cost of such replacement. If the cost of such replacement shall increase or decrease during the Term, the Landlord shall adjust the Additional Rent payable for such replacement hereunder on an equitable basis and the Tenant agrees to pay such Additional Rent as adjusted. The decision of the Landlord, acting reasonably, with respect to any such adjustment, and Additional Rent based thereon shall be final - 31 - and binding on the parties hereto. If the Landlord does not adopt a system of relamping and reballasting as aforesaid, then replacement of electric light bulbs, tubes and ballasts in the Premises shall be undertaken by the Landlord at such time as they actually burn out and after notice from the Tenant that replacement is required. In such event, the cost of such replacement and installation shall be paid by the Tenant to the Landlord as Additional Rent. Section 7.03 - Heating, Ventilating and Air-Conditioning The Tenant shall, throughout the Term, operate, maintain and regulate the heating, ventilating and air-conditioning equipment within, or installed by or on behalf of the Tenant for the Premises in such a manner as to maintain such reasonable conditions of temperature and humidity within the Premises as is determined by the Landlord and its Architect and engineers so that no direct or indirect appropriation of heating, ventilating or air-conditioning from the Common Facilities or other leasable premises in the Building or the Parking Facilities occurs. The Tenant shall comply with such stipulations and with all Rules and Regulations of the Landlord pertaining to the maintenance and operation of such equipment. Section 7.04 - After Hour Charges The Tenant shall be solely responsible for and shall promptly pay to the Landlord, or as it may otherwise direct, an hourly charge with respect to the Premises for the use of utilities, heating, ventilation and air-conditioning after Normal Business Hours. The Landlord shall have the right to make reasonable adjustments to the hourly charge each year of the Term of the Lease. Such consumption shall be measured by a check meter, installed as provided for herein. ARTICLE VIII Use of the Premises Section 8.01 - Use of the Premises The Tenant shall use the Premises solely for the purposes of office premises for carrying on of the business of voice and data telecommunication services and related purposes and the Tenant will not use or permit, or suffer the use of the Premises or any part thereof for any other business or purpose. - 32 - Section 8.02 - Conduct of Business The Tenant shall occupy the Premises from and after the Commencement Date and thereafter throughout the Term shall conduct continuously and actively the business set out in Section 8.01 hereof in the whole of the Premises. In the conduct of the Tenant's business pursuant to this Lease, the Tenant shall: (a) own, install in the Premises and keep in good order and condition, free from liens or rights of third parties, only fixtures and equipment of first class quality. Notwithstanding the foregoing, the Landlord agrees that certain business equipment may be leased or pledged or charged as security by the Tenant in the normal course of business operations and further provided that, notwithstanding the foregoing, the Tenant shall not be entitled to lease, pledge or charge as security or otherwise any property in connection with which the Landlord has provided to the Tenant a leasehold improvement allowance or inducement, a cash payment, or other form of assistance whether prior to, on the date hereof or hereafter; (b) abide by all Rules and Regulations and general policies formulated by the Landlord from time to time relating to the shipping and receiving of goods, merchandise, materials and supplies; (c) not commit or suffer or permit to be committed any waste upon, or damage to, the Premises, or any nuisance or other act or thing which in the Landlord's opinion disturbs the quiet enjoyment of any other tenant or occupant of premises in the Building; and not perform any acts or carry on any practices which may damage the Building or any part thereof; (d) not do, nor suffer or permit to be done, any act in or about the Building which, in the Landlord's opinion, hinders or interrupts the flow of traffic to, in and from the Building and not do, nor suffer or permit anything to be done which, in the Landlord's opinion, in any way obstructs the free movement of Persons doing business in the Building; (e) not solicit business, nor shall it suffer or permit its employees or agents to solicit business in any part of the Building other than the Premises, nor display any merchandise elsewhere within the Building outside of the Premises at any time without in each case the prior written consent of the Landlord; (f) not install or allow on the Premises any transmitting device, nor erect any aerial on the roof of any building forming part of the Building or on any exterior walls of the Premises or in any of the Common Facilities without written approval of the Landlord. It is agreed by the Landlord that a - 33 - small digital type radio transmitter may be installed by the Tenant at the Tenant's cost on the Building roof. The right of the Tenant hereinbefore provided shall be subject to applicable codes and regulations of the City of Etobicoke and the Municipality of Metropolitan Toronto and any other authorities having jurisdiction. Such radio transmitter shall remain the property of the Tenant and shall be maintained at the Tenant's cost and expense and at the expiration of the Term or earlier termination of the Lease, the Tenant shall remove such radio transmitter at the Tenant's expense and shall promptly repair all damage caused by any such removal. The Tenant's obligation to observe and perform these covenants shall survive the expiration of the Term or earlier termination of the Lease; (g) not use any travelling or flashing lights, or any signs, television or other audio-visual or mechanical devices in a manner so that they can be seen outside of the Premises, and not use any loudspeakers, television, phonographs, radio or other audio-visual or mechanical devices in a manner so that they can be heard outside of the Premises, without in each case the prior written consent of the Landlord. If the Tenant uses any such equipment without receiving the prior written consent of the Landlord, the Landlord shall be entitled to remove such equipment without notice at any time and such removal shall be done and all damage as a result thereof shall be made good, in each case, at the cost of the Tenant, payable as Additional Rent forthwith on demand; (h) not use, or permit to be used, any part of the Premises for any activity or business which (in the reasonable opinion of the Landlord) is dangerous, noxious or offensive; (i) (i) cooperate with the Landlord in the conservation of all forms of energy in the Building, including, without limitation, in the Premises; (ii) comply with all laws, by-laws, regulations and orders relating to the conservation of energy affecting the Building or any part thereof; and, (iii) promptly comply, at the Tenant's expense, with all reasonable requests and demands of the Landlord made with a view to such energy conservation. Any and all costs and expenses paid or incurred by the Landlord in installing energy conservation equipment and systems, so far as the same apply to or are reasonably apportioned to the Building by the Landlord, shall be included in Section 6.02(b)(x). The Landlord shall not be liable or responsible to the Tenant in any way for any Claims whether direct or consequential, paid, suffered or incurred by the Tenant due to any reduction in the services provided by the Landlord to the Tenant or to the Building or any part thereof as a result of the Landlord's compliance with such laws, by-laws, regulations or orders; and - 34 - (j) not permit or allow any odours, vapours, steam, water, vibrations, noises or other undesirable effects to emanate from the Premises or any equipment or installation therein which, in the Landlord's opinion, are objectionable or cause any interference with the safety, comfort or convenience of the Building by the Landlord or any occupants thereof or their customers or invitees. If the Tenant is in default of any of the foregoing, the Landlord shall have the right to verbally inform the Tenant's manager in the Premises thereof, whereupon the Tenant shall forthwith (i) take such steps as are necessary to cure any such default, and, (ii) cease selling the offending item or items, as the case may be. Any business, conduct or practice promulgated, carried on or maintained by the Tenant, whether through advertising or selling procedures or otherwise, which in the opinion of the Landlord, acting reasonably, may harm or tend to harm the business or reputation of the Landlord or reflect unfavourably on the Building, the Landlord or other tenants in the Building, or which may tend to confuse, mislead, deceive or be fraudulent to the public, shall be immediately discontinued by the Tenant at the request of the Landlord. Section 8.03 - Observance of Law The Tenant shall, at its sole cost and expense and subject to Sections 10.01 and 10.02 hereof, promptly: (a) observe and comply with all provisions of law including, without limitation, all requirements of all governmental authorities, including federal, provincial and municipal legislative enactments, by-laws and other regulations now or hereafter in force which pertain to or affect the Premises, the Tenant's use of the Premises or the conduct of any business in the Premises, or the making of any repairs, replacements, alterations, additions, changes, substitutions or improvements of or to the Premises; and (b) carry out all modifications, alterations or changes of or to the Premises and the Tenant's conduct of business in or use of the Premises which are required by any such authorities as are set out above. - 35 - ARTICLE IX Insurance and Indemnity Section 9.01 - Tenant's Insurance (a) The Tenant, at its expense, will maintain, throughout the Term and any period when it is in possession of the Premises, the insurance (the "Insurance") described below. The Tenant will cause each such insurance policy to, a) be primary, non-contributing with and not in excess of any other insurance available to the Landlord or the Mortgagees, b) contain a prohibition against cancellation or material change that reduces or restricts the Insurance except on thirty (30) days prior notice to the Landlord, acting reasonably, and the Mortgagee. Upon request from the Landlord or upon the placement, renewal, amendment or extension of all or any part of the Insurance, the Tenant will immediately deliver to the Landlord evidence of the Insurance on the Landlord's standard form of certificate or, if required by the Mortgagee, evidence in the form of certified copies of the policies. The Insurance is as follows: (i) all risks (including flood and earthquake) property insurance, and broad comprehensive boiler and machinery insurance on all objects owned or operated by the Tenant or by others (other than the Landlord) or on behalf of the Tenant in the Premises or relating to or serving the Premises, insurance for all property owned by the Tenant or for which the Tenant is legally liable, located within the Building, and insurance for all Tenant's fixtures and all leasehold improvements situate at the Premises, whether installed by the Tenant, by the Landlord or on behalf of the Tenant, whether prior to the date of this Lease or installed hereafter, and whether it is the property of the Landlord or the Tenant, in an amount of the full replacement cost thereof, subject to an agreed amount clause, with reasonable deductibles of up to three percent (3%) of the replacement cost of property insured. This insurance will, 1) name the Landlord and the Mortgagee, as insureds, 2) contain a waiver of any subrogation rights that the insurers may have against the Landlord or the Mortgagee and against those for whom any of them is responsible in law, 3) (except with respect to the Tenant's stock-in-trade, furniture and - 36 - trade fixtures) incorporate the standard mortgage clause of the Mortgagee; (ii) Two Million Dollars ($2,000,000.00) inclusive limits comprehensive general liability insurance. This insurance will, 1) include owners' and contractors' protective, products, completed operations, personal injury, employers', contingent employers' and blanket contractual liability coverages; provisions for cross liability, severability of interests and occurrence property damage, 2) name the Landlord as an additional insured, and 3) contain a provision that precludes invalidation as respects the interests of the Landlord and the Mortgagee, by reason of any breach or violation of warranties, representations, declarations, or conditions; (iii) all risks tenant's legal liability insurance for the replacement cost of the Premises; (iv) One Million Dollars ($1,000,000.00) inclusive limits automobile liability insurance on a non-owned form including contractual liability, and on an owners form, covering all licensed vehicles operated by or on behalf of the Tenant; and (v) any other form of insurance that the Tenant, or the Landlord, acting reasonably, or that the Mortgagee requires, in amounts and for insurance risks against which a prudent tenant would insure. (b) The Tenant agrees that if the Tenant fails to take out or keep any such Insurance referred to in this Section 9.01, or should any such Insurance not be approved by the Landlord or the Mortgagee and should the Tenant not commence to diligently rectify (and thereafter proceed diligently to rectify) the situation within forty-eight (48) hours after written notice by the Landlord to the Tenant (stating if the Landlord or the Mortgagee does not approve of such insurance, the reasons therefor) the Landlord has the right, without assuming any obligation in connection therewith and without prejudice to any other rights and remedies of the Landlord under this Lease, to effect such insurance at the sole cost of the Tenant and all outlays by the Landlord shall be immediately paid by the Tenant to the Landlord as Additional Rent on the first day of the next month following such payment by the Landlord. - 37 - Section 9.02 - Increase in Insurance Premiums The Tenant shall not keep, use, sell or offer for sale in or upon the Premises any article which may be prohibited by any fire insurance policy in force from time to time covering the Premises or the Building. If (a) the occupancy of the Premises; (b) the conduct of business in the Premises; or (c) any acts or omissions of the Tenant in the Building or any part thereof, causes or results in any increase in premiums or requires an increase in the amount of insurance carried from time to time by the Landlord with respect to the Building, the Tenant shall pay any such increase in premiums as Additional Rent forthwith after invoices for such additional premiums are rendered by the Landlord. In determining whether increased premiums are caused by or result from the use or occupancy of the Premises, a schedule issued by the organization computing the insurance rate on the Building showing the various components of such rate shall be conclusive evidence of the several items and charges which make up such rate. The Tenant shall comply promptly with all recommendations of any insurance rating and inspection authority or of any insurer now or hereafter in effect, pertaining to or affecting the Premises or the Building. Section 9.03 - Cancellation of Insurance If any insurance policy upon the Building or any part thereof shall be cancelled or shall be threatened by the insurer to be cancelled, or the coverage thereunder reduced in any way by the insurer by reason of the use and occupation of the Premises or any part thereof by the Tenant or by any Transferee, or by anyone permitted by the Tenant to be upon the Premises, and if the Tenant fails to remedy the condition giving rise to cancellation, threatened cancellation, or reduction of coverage within forty-eight (48) hours after notice thereof by the Landlord, the Landlord may, at its option, either (a) re-enter and take possession of the Premises forthwith by leaving upon the Premises a notice in writing of its intention so to do and thereupon the Landlord shall have the same rights and remedies as are contained in Article XV, or (b) enter upon the Premises and remedy the condition giving rise to such cancellation, threatened cancellation or reduction, and the Tenant shall forthwith pay the cost thereof to the Landlord, as Additional Rent and the Landlord shall not be liable for any loss or damage caused to any property of the Tenant or of others located on the Premises as a result of any such entry. The Tenant agrees that any such entry by the Landlord is not a re-entry or a breach of any covenant for quiet enjoyment contained in this Lease. - 38 - Section 9.04 - Insurance Risks The Tenant shall not omit or permit to be done or omitted to be done on or in the Building anything which would cause an increase in the Landlord's cost of insurance or the cost of insurance of another tenant of the Building or any property in the vicinity of the Building, against perils as to which the Landlord, such other tenant or owners of such property in the vicinity of the Building have insured or which shall cause any policy of such insurance to be subject to cancellation. Section 9.05 - Loss or Damage (a) Except for the negligence of the Landlord, its agents, servants, employees or those for whom it may in law be responsible, the Landlord shall not be liable or responsible in any way to the Tenant or others for (i) any injury or death arising from or out of any occurrence in, upon, at, or relating to the Building or any loss or damage to property (including loss of use thereof) of the Tenant or others located in the Building from any cause whatsoever, whether or not any such injury, death, loss or damage results from the acts, omission or fault of the Landlord, or its agents, servants, employees or other Persons for whom it is in law responsible, (ii) (without limiting the generality of the foregoing) any injury or death to Persons or loss or damage to property resulting from fire, smoke, explosion, falling plaster, falling ceiling tiles, falling fixtures, steam, gas, fumes, vapours, electricity, water, rain, flood, snow, sleet, ice, or leaks from any part of the Building, or from any pipes, sprinklers, appliances, electrical or other wiring, plumbing works, roof, windows, or subsurface of any floor or ceiling of any part of the Building, or from the street or any other place, or by dampness or by any other cause whatsoever, or (iii) any such injury, death, loss or damage caused by other tenants or Persons in the Building, or by occupants of adjacent property thereto, or by the public, or by construction, or by any private, public or quasi-public work, or by interruption, cessation or failure of any public or other utility service or by Force Majeure. All property of the Tenant kept or stored on the Premises shall be so kept or stored at the risk of the Tenant only, and the Tenant shall promptly indemnify and hold harmless the Landlord from any and all claims arising out of any loss of or damage to such property, including loss of use thereof, and including without limitation, any subrogation claims by the Tenant's insurers. Notwithstanding anything herein provided, the liability of the Landlord pursuant to this Section 9.05 shall be limited to the amount of insurance proceeds actually received by the Landlord in respect of the foregoing. (b) With respect to any liability which the Landlord may have arising from the provisions of this Section 9.05, the Landlord shall promptly indemnify and hold harmless the Tenant - 39 - from and against all claims in connection therewith, including in connection with any injury or death or any loss or damage to property; if the Tenant shall, without fault on the Tenant's part, be made a party to any litigation commenced by or against the Landlord in respect of the liability the Landlord may have arising from this Section 9.05, and subject to the judgment or order of a Court, the Landlord shall promptly indemnify and hold harmless the Tenant and shall pay out costs, expenses and legal fees incurred or paid by the Tenant in connection with such litigation forthwith on demand therefor. If the Landlord fails to conduct its defence in a vigorous and effective manner, the Tenant may, at its option and at the landlord's expense, participate in or assume carriage of any such litigation in which the Tenant is a co-defendant or settlement discussions relating to the foregoing, or any other matter for which the Landlord is required to indemnify the Tenant thereunder. Alternatively, the Tenant may require the Landlord, at the expense of the Landlord, to assume carriage of and responsibility for all or any part of such litigation or discussions. Without limiting the generality of the foregoing, the Landlord shall also pay all reasonable costs and expenses, including, without limitation, any professional, consultant, and legal fees (on a solicitor and its client basis) that may be reasonably incurred or paid by the Tenant in enforcing the terms, covenants and conditions in this Lease, unless a Court shall otherwise award. The provisions of this Section 9.05(b) shall survive the expiration or earlier termination of this Lease. Section 9.06 - Landlord's Insurance The Landlord shall, at all times throughout the Term, carry (a) all risks property insurance on the Building and comprehensive boiler and machinery insurance on the equipment of the Landlord situate at the Building and owned by the Landlord (specifically excluding any property with respect to which the Tenant and other tenants are obliged to insure pursuant to Section 9.01 or similar sections of their respective leases) and on such boiler and machinery, on a replacement cost basis, in such reasonable amounts and with such reasonable deductions as would be carried by a prudent owner of a reasonably similar building, having regard to size, age and location; (b) public liability and property damage insurance with respect to the Landlord's operations in the Building in such reasonable amounts and with such reasonable deductions as would be carried by a prudent owner of a reasonably similar building, having regard to size, age and location; and (c) such other form or forms of insurance as the Landlord or the Mortgagee reasonably considers advisable. The cost of such insurance shall be included in Section 6.02(b)(i) hereof. Notwithstanding the Landlord's covenant contained in this Section 9.06 and notwithstanding any contribution by the Tenant to the cost of insurance premiums provided herein, the Tenant expressly acknowledges and agrees - 40 - that: (i) the Tenant is not relieved of any liability arising from or contributed to by its negligence or its acts or omissions, and (ii) no insurable interest is conferred upon the Tenant under any policies of insurance carried by the Landlord and the Tenant has no right to receive any proceeds of any such insurance policies carried by the Landlord. Section 9.07 - Indemnification of Landlord Notwithstanding any other terms, covenants and conditions contained in this Lease, the Tenant shall promptly indemnify and hold harmless the Landlord from and against any and all claims in connection with any injury or death or any loss or damage to property arising from or out of any occurrence in, upon or at the Premises, or the occupancy or use by the Tenant of the Premises, or any part thereof, or occasioned wholly or in part by any act, default, negligence or omission of the Tenant or by anyone permitted to be on the Premises by the Tenant. If the Landlord shall, without fault on the Landlord's part, be made a party to any litigation commenced by or against the Tenant, then subject to the judgment or order of a Court, the Tenant shall promptly indemnify and hold harmless the Landlord and shall pay all costs, expenses and legal fees incurred or paid by the Landlord in connection with such litigation, as Additional Rent, on demand. If the Tenant fails to conduct its defence in a vigorous and effective manner, the Landlord may, at its option and at the Tenant's expense, participate in or assume carriage of any litigation in which the Landlord is a co-defendant or settlement discussions relating to the foregoing, or any other matter for which the Tenant is required to indemnify the Landlord under this Lease. Alternatively, the Landlord may require the Tenant at the Tenant's expense to assume carriage of and responsibility for all or any part of such litigation or discussions. Without limiting the generality of the foregoing, the Tenant shall also pay all reasonable costs and expenses, including without limitation, any professional, consultant, and legal fees (on a solicitor and his client basis) that may be reasonably incurred or paid by the Landlord in enforcing the terms, covenants and conditions in this Lease, unless a Court shall otherwise award. The provisions of this Section 9.07 shall survive the expiration or earlier termination of this Lease. - 41 - ARTICLE X Maintenance, Repairs and Alterations Section 10.01 - Maintenance and Repairs by Tenant Subject to Section 10.03 and Article XI hereof, the Tenant, shall, at all times during the Term, at its cost, keep and maintain in good order, first- class condition and repair (which shall include, without limitation, periodic painting and decorating) as determined by the Landlord, and shall, subject to Sections 10.02 and 10.03, make all needed repairs and replacements with due diligence and dispatch to (i) the whole of the Premises; (ii) all partitions, doors, and fixtures located in or upon the Premises; and (iii) all equipment in, appurtenances of and improvements to the Premises (including, without limitation, electrical, lighting, wiring, plumbing fixtures and equipment and the heating, ventilating and air-conditioning equipment within, or installed by or on behalf of the Tenant within the Premises, and all telephone outlets and conduits and special mechanical and electrical equipment within or serving the Premises); and (iv) all damaged glass and plate glass serving the Premises. The Tenant shall not be responsible for any repairs occasioned as a result of the Landlord's, or anyone directly under the Landlord's control, negligent acts or omissions. Section 10.02 - Landlord's Approval of Tenant's Repairs The Tenant shall not make any repairs, alterations, replacement, decorations or improvements to any part of the Premises without first obtaining the Landlord's written approval. The Tenant shall submit to the Landlord: (a) details of the proposed work including drawings and specifications prepared by qualified architects or engineers and conforming to good engineering practice; (b) such indemnification against liens, costs, damages and expenses as the Landlord requires; and (c) evidence satisfactory to the Landlord that the Tenant has obtained, at its expense, all necessary consents, permits, licences and inspections from all governmental and regulatory authorities having jurisdiction. All such repairs, replacements, alterations, decorations or improvements by the Tenant to the Premises approved by the Landlord shall be performed: (i) at the sole cost of the Tenant; (ii) by competent workmen whose labour union affiliations are compatible with others employed by the Landlord and its contractors; (iii) in a good and workmanlike manner; (iv) in accordance with the drawings and specifications approved by the Landlord; and (v) subject to the reasonable regulations, controls and inspection of the Landlord. The Tenant shall pay the fees of any architectural, engineering or other consultant hired by the Landlord in connection with the foregoing plus a sum equal to fifteen per cent (15%) of the total cost - 42 - thereof representing the Landlord's overhead. Any such repair, replacement, alteration, decoration or improvement made by the Tenant without the prior written consent of the Landlord or which is not made in accordance with the drawings and specifications approved by the Landlord shall, if requested by the Landlord, be promptly removed by the Tenant at the Tenant's expense and the Premises restored to their previous condition, failing which the Landlord may, at its option, without notice to the Tenant and without liability on the Landlord's part, remove same at the Tenant's expense which shall be paid by the Tenant to the Landlord together with fifteen (15%) percent of the cost thereof, as Additional Rent forthwith on demand. Notwithstanding anything contained in this Lease including, without limitation, Section 10.01, if any maintenance, repairs, alterations, decorations, additions or improvements to the Premises or to any improvements installed by or on behalf of the Tenant for the benefit of the Premises which are approved by the Landlord (1) affect the structure of the Premises or any part of the Building other than the Premises, or (2) are installed outside of the Premises, or (3) are installed within the Premises but are part of the Common Facilities, or affect any part of the Common Facilities, such work shall be performed only by the Landlord at the Tenant's sole cost and expense. Upon completion thereof, the Tenant shall pay to the Landlord, as Additional Rent upon demand, both the Landlord's costs relating to any such repairs, alterations, decorations, additions or improvements including the fees of any architectural, engineering or other consultants plus a sum equal to fifteen percent (15%) of the total cost thereof representing the Landlord's overhead. No repairs, alterations, additions, decorations or improvements to the Premises by or on behalf of the Tenant shall be permitted which may weaken or endanger the structure or adversely affect the condition or operation of the Premises or the Building or diminish the value thereof, or restrict or reduce the Landlord's coverage for zoning purposes. Section 10.03 - Maintenance by Landlord Subject to Article XI hereof, the Landlord shall, at all times throughout the Term, maintain and repair, or cause to be maintained and repaired, as would a prudent owner of a reasonably similar building, the structure of the Building including, without limitation, the foundations, exterior wall assemblies including weather walls, subfloor, roof, bearing walls, and structural columns and beams of the Building. The cost of such maintenance and repairs (except for the cost of repairing and replacing any inherent structural defects or weaknesses) shall be included in Section 6.02(b)(viii) or shall be depreciated or amortized pursuant to Section 6.02(b)(ix) hereof, unless the Landlord is required, due to the business carried on by the Tenant, to perform such maintenance or make - 43 - such repairs by reason of the application of laws or ordinances or the direction, rules or regulations of any duly constituted regulatory body, or by reason of any act, omission to act, neglect or default of the Tenant, or those for whom the Tenant is in law responsible, in which event the Tenant shall be liable and responsible for the total cost of any such maintenance and repairs plus a sum equal to fifteen percent (15%) of the total cost of such repairs representing the Landlord's overhead, which shall immediately become due and payable to the Landlord as Additional Rent upon demand. Notwithstanding the Landlord's obligations contained in this Section 10.03, the Tenant shall be liable and responsible for the cost of any maintenance and repairs required to be made by the Landlord and which result from any of the circumstances referred to in the immediately preceding sentence plus a sum equal to fifteen per cent (15%) of the total cost of the foregoing representing the Landlord's overhead. If the Tenant refuses or neglects to carry out any maintenance, repairs and replacements properly as required pursuant to Section 10.01 hereof, and to the reasonable satisfaction of the Landlord, the Landlord may, but shall not be obliged to, perform such maintenance, repairs and replacements without being liable for any loss or damage that may result to the Tenant's merchandise, fixtures or other property or to the Tenant's business by reason thereof, and upon completion thereof, the Tenant shall pay to the Landlord the Landlord's costs relating to any such maintenance, repairs and replacements plus a sum equal to fifteen percent (15%) thereof representing the Landlord's overhead, as Additional Rent upon demand. If any elevator servicing the Building or any of the boilers, engines, pipes, climate control equipment or other apparatus or any of them used for the purpose of climate control or operating any elevator, or if the water pipes, drainage pipes, electrical, lighting or other equipment servicing the Building are damaged or destroyed or get out of repair, the Landlord shall have a reasonable time in which to make such repairs or replacements as may be reasonably required for the resumption of services to the Premises which the Landlord has by this Lease expressly agreed to provide and the Tenant is not entitled to any compensation or damages therefor, but if any such equipment, facilities or systems servicing the Building or elevators become impaired, damaged or destroyed in the circumstances referred to in Section 10.06, the Tenant shall be responsible for the cost of repairing, restoring or making good such damage in accordance with the provisions of Section 10.06. Section 10.04 - Repair on Notice In addition to the obligations of the Tenant contained in Section 11.01 hereof, the Tenant shall effect all work referred to therein according to notice from the Landlord but - 44 - failure to give notice shall not relieve the Tenant from its obligations under either Sections 10.01 or 11.01 hereof. Section 10.05 - Surrender of the Premises At the expiration or earlier termination of this Lease, the Tenant shall at its expense (i) peaceably surrender and yield up vacant possession of the Premises to the Landlord in a clean, broom swept and tidy state, and in as good condition and repair as the Tenant is required to maintain the Premises throughout the Term, and (ii) surrender all keys for the Premises to the Landlord at the place then fixed for the payment of Minimum Rent and shall inform the Landlord of all combinations of locks, safes and vaults, if any, in the Premises; (iii) remove all its trade fixtures and such of the alterations, decorations, additions, erections, fixtures, improvements or appurtenances in, on, to, for or which service the Premises as the Landlord shall at its option upon notice to the Tenant require to be removed and the Tenant shall forthwith repair, at its sole cost and expense, all damage to the Premises caused by their installation or removal; and (iv) if the Tenant has filed or registered against title of the Building lands or any part thereof, a caveat, notice, caution or other document or instrument giving notice of this Lease, it shall promptly cause the same to be discharged. The Tenant's obligation to observe and perform the provisions of this Section 10.05 shall survive the expiration or earlier termination of this Lease. Section 10.06 - Repair Where Tenant at Fault Notwithstanding any other terms, covenants and conditions contained in this Lease, if the Building or any part thereof requires repair or becomes damaged or destroyed through the negligence, carelessness or misuse of the Tenant or due to the requirements of governmental authorities relating to the Tenant's conduct of business or through the Tenant in any way damaging the Building, the cost of the resulting repairs, replacements or alterations plus a sum equal to fifteen percent (15%) of the cost thereof representing the Landlord's overhead shall be paid by the Tenant to the Landlord as Additional Rent forthwith upon presentation of an account of such expenses incurred by the Landlord. Section 10.07 - Tenant Not to Overload Facilities The Tenant shall not install any equipment which will exceed or overload the capacity of any utility, electrical or mechanical facilities in the Premises and the Tenant will not bring into the Premises or install any utility, electrical or mechanical facility or service which the Landlord does not approve. The Tenant agrees that if any equipment installed by the Tenant requires additional utility, electrical or mechanical - 45 - facilities, the Landlord may, in its sole discretion, if they are available, elect to install them at the Tenant's expense plus a sum equal to fifteen percent (15%) of such costs representing the Landlord's overhead, payable by the Tenant to the Landlord as Additional Rent, on demand, and in accordance with plans and specifications prepared by the Tenant at the Tenant's expense to be approved in advance in writing by the Landlord. Section 10.08 - Tenant Not to Overload Floors The Tenant shall not bring upon the Premises or any part thereof, any machinery, equipment, article or thing that by reason of its weight, size or use, might in the opinion of the Landlord damage the Premises and shall not at any time overload the floors of the Premises. If any damage is caused to the Premises by any machinery, equipment, object or thing or by overloading, or by any act, neglect, or misuse on the part of the Tenant, or any of its servants, agents, or employees, or any Person having business with the Tenant, the Tenant will forthwith repair such damage, or at the option of the Landlord, pay the Landlord the cost of repairing such damage plus a sum equal to fifteen percent (15%) of such costs representing the Landlord's overhead, as Additional Rent upon demand. Section 10.09 - Removal and Restoration by Tenant (a) All alterations, decorations, additions, erections, fixtures, improvements and appurtenances made by the Tenant, or made by the Landlord on the Tenant's behalf (other than the Tenant's trade fixtures), in, on, to, for or which serve the Premises, shall immediately become the property of the Landlord upon affixation or installation, without compensation therefor to the Tenant. Such alterations, decorations, additions, erections, fixtures, improvements and appurtenances shall not be removed from the Premises either during or at the expiration or earlier of this Lease except that: (i) The Tenant may during the Term in the usual or normal course of its business remove its trade fixtures, provided such trade fixtures have become excess for the Tenant's purposes or the Tenant is substituting new and similar trade fixtures therefor, and provided that in each case (1) the Tenant is not in default under this Lease; and (2) such removal is done at the Tenant's sole cost and expense; and (ii) The Tenant shall, at the expiration or earlier termination of this Lease, at its own cost, remove all its trade fixtures and such of the alterations, decorations, additions, - 46 - erections, fixtures, improvements and appurtenances in, on, to, for or which serve the Premises as the Landlord at its option, upon notice to the Tenant requires to be removed. Notwithstanding the foregoing in Section 10.09(a)(ii), the Tenant's obligation shall be limited to restoring the Premises to the condition that existed at the respective dates upon which the Tenant took possession of the different portions constituting the Premises. (b) If the Tenant does not remove its trade fixtures at the expiration or earlier termination of the Term, the trade fixtures shall, at the option of the Landlord, thereupon become the property of the Landlord, without compensation therefor to the Tenant, and may be removed from the Premises and sold or disposed of by the Landlord in such manner as it deems advisable. (c) The Tenant shall, in the case of every such installation or removal either during or at the expiration of the Term, promptly make good any damage caused to the Premises or the Building. (d) For greater certainty, the Tenant's trade fixtures shall not include (i) heating, ventilating and air-conditioning systems, facilities and equipment in or serving the Premises; (ii) floor covering affixed to the floor of the Premises; (iii) light fixtures or drapes or curtains; (iv) doors; (v) internal stairways, escalators or elevators; and (vi) anything that would not normally be considered a trade fixture; all of which are deemed to be leasehold improvements. Section 10.10 - Notice by Tenant The Tenant shall, when it becomes aware of same, notify the Landlord of any damage to, or deficiency or defect in any part of the Building, including the Premises, any equipment or utility systems, or any installations located therein, notwithstanding the fact that the Landlord may have no obligations with respect to same. Section 10.11 - Tenant to Discharge all Liens The Tenant shall at all times promptly pay all its contractors, material men, suppliers and workmen and all charges incurred by or on behalf of the Tenant for any work, materials or services which may be done, supplied or performed at any time in respect of the Premises and the Tenant shall do any and all things necessary so as to ensure that no lien is registered against the Building or any part thereof, against the Landlord's interest in the Building, or against the Tenant's interest in the - 47 - Premises, and if any such lien is made, filed or registered, the Tenant shall discharge it or cause it to be discharged forthwith at the Tenant's expense. If the Tenant fails to discharge or cause any such lien to be discharged as aforesaid, then, in addition to any other right or remedy of the Landlord, the Landlord may, but it shall not be obligated to, discharge the same by paying the amount claimed to be due into Court or directly to any such lien claimant and the amount so paid by the Landlord and all costs and expenses including without limitation solicitor's fees (on a solicitor and his client basis) incurred as a result of the registration of the lien, including the discharge of the lien, shall be immediately due and payable by the Tenant to the Landlord on demand as Additional Rent. Section 10.12 - Signs and Advertising (a) Subject to Section 10.12(b), the Tenant shall not paint, affix, display or cause to be painted, affixed or displayed, any sign, picture, advertisement, notice, lettering or decoration of any kind anywhere outside the Premises (whether on the outside or inside of the Building) or within the Premises so as to be visible from the outside of the Premises, without the prior written approval of the Landlord. (b) The Tenant, subject to the following terms and provisions, shall have the right to affix prominent corporate signage on the north-west elevation of the penthouse of the Building, being the uppermost part of the Building facia, to be made up of the letters "ACC", together with the Tenant's corporate logo, subject to reasonable approval of the Landlord, to applicable codes and regulations of the City of Etobicoke and the Municipality of Metropolitan Toronto and any other authorities having jurisdiction. Provided, however, that the Tenant shall: (i) on or before the 1st day of September, 1994, provide evidence to the Landlord that the Tenant has applied for a permit and any necessary variances, required, for the said sign, and (ii) the Tenant has erected such sign on or before the 1st day of March, 1995, failing which, the Tenant shall cease to have the rights to signage provided for in this Section 10.12(b). Provided further that ACC Long Distance Ltd. or a Related Company (as defined in Section 12.01(e) hereof) shall occupy the entire Premises and the Additional Premises (as defined in Rider No. 4) if applicable, - 48 - failing which the Tenant shall cease to have the rights to signage provided for in this Section 10.12(b). (c) The Landlord will prescribe a uniform pattern of identification signs for tenants to be placed on the outside of the doors leading into the Premises. (d) Any signs shall remain the property of the Tenant and shall be provided for, erected and maintained at the Tenant's cost and expense. At the expiration of the Term or earlier termination of the Lease, or upon the Tenant ceasing to have the rights provided for in Section 10.12(b), as the case may be, the Tenant shall remove any such signs, pictures, advertisements, notices, letterings or decorations from the Premises and the Building at the Tenant's expense and shall promptly repair all damage caused by any such removal. The Tenant's obligation to observe and perform this covenant shall survive the expiration of the Term or earlier termination of the Lease. Section 10.13 - Directory Board The Tenant shall be entitled at its expense to have its name shown upon the directory board of the Building and the Landlord shall design the style of such identification and the directory board shall be located in an area designated by the Landlord in the main lobby of the Building. ARTICLE XI Damage and Destruction and Expropriation Section 11.01 - Destruction of the Premises (a) If the Premises are at any time destroyed or damaged (including, without limitation, smoke and water damage) as a result of fire, the elements, accident or other casualty required to be insured against by the Landlord pursuant to Section 9.06 hereof or otherwise insured against by the Landlord and not caused by the Tenant, and if as a result of such occurrence: (i) the Premises are rendered untenantable only in part, this Lease shall continue in full force and effect and the Landlord shall, subject to Section 11.02 hereof, commence diligently to reconstruct, rebuild or repair the Premises to the extent only of the Landlord's Work and exclusive of the Tenant's Work and Minimum Rent and Additional Rent shall abate proportionately to the portion of - 49 - the Premises rendered untenantable from the date of the destruction or damage and until the Premises have been restored and rendered tenantable by the Landlord to the extent of the Landlord's Work; (ii) the Premises are rendered wholly untenantable, this Lease shall continue in full force and effect and the Landlord shall, subject to Section 11.02 hereof, commence diligently to reconstruct, rebuild or repair the Premises to the extent of the Landlord's Work and Minimum Rent and Additional Rent shall abate entirely from the date of the destruction or damage and until the Premises have been restored and rendered tenantable in whole or in part by the Landlord to the extent of the Landlord's Work; (iii) the Premises are not rendered untenantable in whole or in part, as provided in Section 11.01(a)(i) or (ii) above, this Lease shall continue in full force and effect, the Rent and other amounts payable by the Tenant shall not terminate, be reduced or abate and the Landlord shall, subject to Section 11.02 hereof, commence diligently to reconstruct, rebuild or repair the Premises to the extent of the Landlord's Work. (b) Upon the Tenant being notified in writing by the Landlord that the Landlord's Work has been completed to such an extent that the Tenant's Work can be commenced, the Tenant shall forthwith complete all the Tenant's Work and all work required to fully restore the Premises for business fully fixtured, stocked and staffed (in any case, without the benefit of any capital allowance inducement to lease, or other payments made at the time of or in conjunction with, the original construction of the Premises by the Landlord to the Tenant in connection with the Tenant's Work). The Tenant shall diligently complete the Tenant's Work and, if the Premises have been closed for business, reopen for business within ninety-five (95) days after notice from the Landlord that the Landlord's Work has been completed to such an extent that the Tenant's Work can be commenced. (c) Nothing in this Section 11.01 requires the Landlord to (i) repair or replace any improvements, equipment, furniture, chattels or trade fixtures in the Premises which do not belong to the Landlord, or, (ii) repair, reconstruct or rebuild the Building or any part thereof, or the Premises or any part thereof, using the plans and specifications and working drawings used in the original construction of the Building or any - 50 - part thereof or in the Premises or any part thereof, provided that such plans and specifications and working drawings so used by the Landlord in repairing, reconstructing or rebuilding call for a quality equal to or better than that called for in the plans and specifications and working drawings used in the original construction. Section 11.02 - Destruction of the Building (a) If thirty-five per cent (35%) or more of the Rentable Area of the Building is at any time destroyed or damaged (including, without limitation, smoke and water damage) as a result of fire, the elements, accident or other casualty, whether or not the Premises are affected by such occurrence, and if, in the opinion of the Landlord, reasonably arrived at, the Rentable Area of the Building so damaged or destroyed cannot be rebuilt or be made fit for the purposes of the respective tenants of such space within one hundred and eighty (180) days of the happening of the damage and destruction, then and so often as any of such events occur, the Landlord may, at its option, to be exercised by written notice to the Tenant within forty-five (45) days following any such occurrence, elect to terminate this Lease. (b) In the event that as a result of any damage or destruction to the Building or to the Premises or any part or parts thereof, the Landlord, acting reasonably, is of the opinion that it is not economically feasible to repair, reconstruct or rebuild the Building and that it is advisable to demolish or substantially renovate the Building, then the Landlord may, at its option, to be exercised by written notice to the Tenant within forty-five (45) days following any such occurrence, elect to terminate this Lease. (c) In the case of such election being made by the Landlord pursuant to either Sections 11.02(a) or 11.02(b) hereof, the Term and the tenancy hereby created shall expire on the thirtieth (30th) day after such notice is given, without indemnity or penalty payable or any other recourse by one party to or against the other and the Tenant shall, within such thirty (30) day period, vacate the Premises and surrender them to the Landlord with the Landlord having the right to re-enter and repossess the Premises discharged of this Lease and to expel all Persons and remove all property therefrom. All Rent shall be due and payable without reduction or abatement up to the date of the Notice. (d) If all or any part of the Building is at any time destroyed or damaged as set out in Sections 11.02(a) and/or 11.02(b) hereof, and the Landlord does not elect to terminate this Lease in accordance with the rights hereinbefore granted, the Landlord shall, following such destruction or damage, commence diligently to reconstruct, rebuild or repair, the - 51 - Premises to the extent that the Landlord is obligated to repair the Premises as set forth in the provisions of Section 11.01 hereof, and if necessary, that part of the Building immediately adjacent to the Premises, but only to the extent of the Landlord's responsibilities pursuant to the terms of the various leases for the premises in the Building and exclusive of any tenant's responsibilities set out therein. If the Landlord elects to repair, reconstruct or rebuild the Building or any part thereof, the Landlord may use plans and specifications and working drawings other than those used in the original construction of the Building or any part thereof provided that such plans and specifications and working drawings so used by the Landlord call for a quality equal to or better than that called for in the plans and specifications and working drawings used in the original construction. (e) Notwithstanding any of the provisions hereinbefore set out in this Lease: (1) in the event of damage or destruction occurring to the Building, the Premises, or any part or parts thereof by reason of any cause in respect of which there are no proceeds of insurance available to the Landlord or proceeds of insurance are available but insufficient to pay the Landlord for the costs of rebuilding or making fit the Building or the Premises or effecting the Landlord's Work because any Mortgagee or other Person entitled thereto will not consent to the payment to the Landlord of the proceeds of any insurance policy for such purpose, or, (2) if any such damage or destruction is caused by the Tenant, the Landlord may terminate this Lease on thirty (30) days' written notice to the Tenant and all Rent shall be adjusted as of, and the Tenant shall vacate and surrender the Premises on, such termination date. Section 11.03 - Expropriation Both the Landlord and the Tenant agree to cooperate with each other in respect of any expropriation of all or any part of the Premises or any other part of the Building, so that each may receive the maximum award in the case of any expropriation to which they are respectively entitled at law. If and to the extent that any portion of the Building other than the Premises is expropriated, then the full proceeds accruing therefrom or awarded as a result thereof, shall belong solely to the Landlord and the Tenant will abandon or assign to the Landlord any rights which the Tenant may have or acquire by operation of law to such proceeds or award and will promptly execute such documents as in the opinion of the Landlord are or may be necessary to give effect to this intention. If at any time during the Term, (a) more than twenty per cent (20%) of the Rentable Area of the Building, or, (b) more than twenty per cent (20%) of the area of the Common Facilities, or, (c) more than ten per cent (10%) of the area of those Common - 52 - Facilities which are exterior or adjacent to the buildings forming part of the Building, is acquired or expropriated by any lawful expropriating authority, or if reasonable access to the Building is materially and adversely affected by any such acquisition or expropriation, then in any of such events, at the option of the Landlord, this Lease shall cease and terminate as of the date of the interest acquired or expropriated vesting in such expropriating authority and the Tenant shall have no claim against the Landlord for the value of any unexpired Term or for damages or for any reason whatsoever. If the Landlord does not so elect to cancel this Lease by notice as aforesaid, this Lease shall continue in full force and effect without any reduction or abatement of Rent, provided that if any part of the Premises is expropriated and as a result thereof the area of the Premises is physically reduced, then from and after the date of such physical reduction, the Rentable Area of the Premises shall be adjusted to take into account any such reduction in area, and the Minimum Rent payable by the Tenant pursuant to Section 4.02 shall be adjusted on the basis of the rental rate set out therein, and the Tenant shall be entitled to claim from the Expropriating Authority in respect to its leasehold interests that may be expropriated. Section 11.04 - Architect's Certificate The certificate of the Architect shall bind the parties as to (a) the percentage of the Rentable Area of the Building damaged or destroyed; (b) whether or not the Premises are rendered untenantable and the extent of such untenantability; (c) the date upon which the Landlord's Work is completed or substantially completed and the date when the Premises are rendered tenantable; (d) the state of completion of any work of either the Landlord or the Tenant under this Lease; (e) whether reasonable access to the Building is materially and adversely affected by any such acquisition or expropriation; and (f) the percentage of the Rentable Area of the Building which is acquired or expropriated pursuant to this Lease. ARTICLE XII Assignment, Subletting and Change of Control Section 12.01 - Consent Required (a) In this Article "Transfer" means (i) an assignment, a sublease, a mortgage, charge or debenture (floating or otherwise) or other encumbrance of this Lease or the Premises or any part of them, (ii) a parting with or sharing of possession of all or part of the Premises, and, (iii) a transfer or issue by sale, assignment, bequest, inheritance, operation of law or other - 53 - disposition, or by subscription of all or part of the corporate shares of the Tenant which results in a change in the effective voting control of the Tenant. "Transferor" means the Person or Persons who is or will be making a Transfer and "Transferee" means the Person or Persons to whom a Transfer is or is to be made (it being understood that for a Transfer described in Section 12.01(a)(iii) above the Transferor is the Person that has effective voting control before the Transfer and the Transferee is the Person that has effective voting control after the Transfer). (b) The Tenant will not affect or permit a Transfer without in each instance obtaining the prior written consent of the Landlord, which consent will not be unreasonably withheld, except that despite any provisions of this Lease or any statutory provision to the contrary the Tenant hereby acknowledges that it shall not be unreasonable for the Landlord to withhold its consent to a Transfer if: (i) the Tenant is then in default under any of the terms, covenants and conditions herein on its part to be observed and performed; (ii) covenants, restrictions, or commitments given by the Landlord to other tenants in the Building or to Mortgagees or other parties regardless of when given, prevent or inhibit the Landlord from giving its consent to the Transfer or any Mortgagee does not consent thereto; (iii) the Transfer is a mortgage, charge, debenture (floating or otherwise) of, or in respect of, this Lease or the Premises or any part of them. Notwithstanding the foregoing Section 12.01(b)(iii), the Landlord shall give consideration to a request by the Tenant for the consent of the Landlord to an assignment or subletting of the interest of the Tenant in this Lease and in the Premises, as a security interest, provided that the said security interest shall not interfere with the Landlord's financing needs, shall not without exception rank in priority to any security interests of the Landlord hereunder and, the lender entering into a written agreement with the Landlord on terms and conditions satisfactory to the Landlord acting reasonably; and/or (iv) the Landlord does not receive sufficient information, material, books or records from - 54 - the Tenant or the Transferee to enable the Landlord, in the Landlord's opinion, acting reasonably, to make a determination as to the credit worthiness, financial responsibility, the nature of business, the business history, the business experience and the integrity of the Transferee and to make a determination as to whether or not it should give its consent, and/or based on the aforesaid information or otherwise, the Landlord is not satisfied with those matters hereinbefore set forth. (c) Section 12.01(b) does not apply to a Transfer described in Section 12.01(a)(iii) which occurs when the Tenant is a corporation whose shares are traded and listed on a stock exchange in Canada or the United States. (d) Section 12.01(b) does not apply to a Transfer consisting of an assignment if the Transferee is a Related Company (as hereinafter described in Section 12.01(e)), provided that the Tenant will not affect or permit such a Transfer without in each instance fulfilling the following: (i) The Tenant shall give at least ten (10) days' prior written notice to the Landlord of its intention to effect such a Transfer to a Related Company, which notice shall provide particulars in reasonable detail as to how the Transferee is a Related Company; (ii) The Tenant and the Transferee have agreed in writing with the Landlord that (i) the Transferee shall remain a Related Company and, (ii) upon the Transferee ceasing to be a Related Company, the event giving rise to the Transferee ceasing to be a Related Company shall be deemed for the purposes of this Lease to constitute a Transfer and the provisions of Section 12.01(b) shall apply upon the happening of such event; (iii) The Tenant and the Transferee, as the case may be, shall have complied with the provisions of Section 12.02(e), (f), (g) and (h); and (iv) The Tenant is not then in default under any of the terms, covenants and conditions herein on its part to be observed and performed. (e) The term "Related Company" shall mean a corporation which directly or indirectly controls, is controlled - 55 - by, or is under common control with ACC Long Distance Ltd. or ACC Long Distance Inc.; the term "control", "controls" and "controlled" shall mean that at least 51% of the voting shares are directly or beneficially held which are sufficient to elect a sufficient number of directors to control the affairs of such corporation. Section 12.02 - Conditions of Consent The following terms and conditions apply in respect of any Transfer (but this shall not imply consent by the Landlord to any Transfer without the Tenant first complying with the provisions of Section 12.01(b) hereof); (a) the consent by the Landlord to any Transfer and the deemed consent pursuant to Section 12.01(c) and/or (d) hereof is not a waiver of the requirement for consent to any subsequent Transfer; (b) no acceptance by the Landlord of Rent or other payments by a Transferee is, (i) a waiver of the requirement for the Landlord to consent to the Transfer, (ii) the acceptance of the Transferee as the Tenant, (subject however to the provisions of Section 12.01(c) and (d) hereof), or, (iii) a release of the Tenant from its obligations under this Lease; (c) The Landlord may apply amounts collected from the Transferee to any unpaid Rent; (d) the Transferor, unless the Transferee is a sub-tenant of the Tenant, will retain no rights under this Lease in respect of obligations to be performed by the Landlord or in respect of the use or occupation of the Premises after the Transfer and will execute an Indemnity Agreement on the Landlord's standard form in respect of obligations to be performed after the Transfer by the Transferee; (e) the Transferor will cause the Transferee to promptly execute an agreement (prepared by the Landlord at the Tenant's expense) directly with the Landlord, (i) agreeing to be bound by all of the terms of this Lease (including, without limitation, the provisions of Section 8.01 relating to the use of the Premises) as if the Transferee had originally executed this Lease as the Tenant, and, (ii) amending the Lease to incorporate any conditions imposed by the Landlord in its consent or required by this Section 12.02; but the Transferor will not be released from its obligations under this Lease and shall be (and shall cause any Indemnitor to be) a party to such agreement, and the liability of the Transferor and Transferee shall be joint and several; - 56 - (f) if as a result of any such Transfer, the Tenant is entitled, directly or indirectly, to receive in respect of any such Transfer, a bonus or premium payable for any such Transfer which relates to the Tenant's interest in the Lease or to the Premises (excluding any consideration for the Tenant's trade fixtures) or a Rent (whether Minimum Rent or Additional Rent) greater than that required to be paid to the Landlord pursuant to the provisions of this Lease, the Tenant shall pay to the Landlord, as Additional Rent one hundred percent (100%) of any such bonus, premium or increased Rent, as aforesaid, forthwith upon receipt thereof by the Tenant from any such Transferee from time to time. In this respect, the Tenant shall make available to the Landlord upon request any and all books and records of the Tenant so as to enable the Landlord to verify the receipt of the amount thereof, of any bonus, premium or greater Rent, as aforesaid, which the Tenant has received from any such Transferee from time to time, as aforesaid; (g) any documents relating to a Transfer or relating to the Landlord's consent will be prepared by the Landlord or its solicitors and all of the legal costs of the Landlord with respect thereto together with a reasonable administration charge for the Landlord shall be paid by the Tenant to the Landlord on demand, as Additional Rent; and (h) Notwithstanding the effective date of any permitted Transfer as between the Tenant and any Transferee, all Rent for the month in which such effective date occurs shall be paid in advance by the Tenant so that the Landlord will not be required to accept partial payments of Rent for such month from either the Tenant or any Transferee. Section 12.03 - No Advertising of Premises The Tenant shall not advertise the whole or any part of the Premises or this Lease for the purpose of a Transfer and shall not print, publish, post, display or broadcast any notice or advertisement to that effect and shall not permit any broker or other Person to do any of the foregoing, unless the complete text and format of any such notice, advertisement or offer is first approved in writing by the Landlord. Without in any way restricting or limiting the Landlord's right to refuse any text or format on other grounds, any text or format proposed by the Tenant shall not contain any reference to the rental rate of the Premises. Section 12.04 - Assignment by the Landlord In the event of the sale, lease or disposition by the Landlord of the Building or any part thereof, or the assignment by the Landlord of this Lease or any interest of the Landlord hereunder other than by way of security, the Landlord shall, - 57 - thereupon and without further agreement, be freed and relieved of all liability with respect to all covenants and obligations to be performed or observed by the Landlord. Provided that any funds in the hands of the Landlord at the time of such sale, lease, disposition or assignment shall be turned over to the Person in respect of which the Landlord is entering into the sale, lease, disposition or assignment. ARTICLE XIII Access and Alterations Section 13.01 - Right of Entry (a) The Landlord and its agents have the right to enter the Premises at all reasonable times to examine the same and to make such repairs, alterations, changes, adjustments, improvements or additions to the Premises or the Building or any part thereof or any adjacent property as the Landlord considers necessary or desirable without this constituting a re-entry or a breach of any covenant for quiet enjoyment contained in this Lease or implied by law. The Rent required to be paid pursuant to this Lease shall not abate or be reduced while any such repairs, alterations, changes, adjustments, improvements or additions are being made due to loss or interruption of business of the Tenant, inconvenience or otherwise, and the Landlord shall not be liable to the Tenant for any injury or death caused to any Person or for any loss or damage to the property of the Tenant or of others located on the Premises as a result of such entry. (b) The Landlord and its agents have the right to enter the Premises at all reasonable times to show them to prospective purchasers, lessees, insurers or mortgagees and during the twelve (12) months prior to the expiration of the Term, the Landlord may place upon the Premises the usual "For Rent" or "For Sale" notices which the Tenant shall permit to remain thereon without molestation or complaint. (c) If the Tenant is not personally present to open and permit an entry into the Premises at any time when for any reason an entry therein is necessary or permissible, the Landlord or its agents may forcibly enter the same without rendering the Landlord or such agents liable therefor, and without in any manner affecting the obligations and covenants of this Lease. The Tenant agrees that no entry into the Premises or anything done in, to or for the Premises by the Landlord pursuant to a right granted by this Lease shall constitute a breach of any covenant for quiet enjoyment, or (except where expressed by the Landlord in writing) shall constitute a re-entry or forfeiture, or an actual or constructive eviction and the Landlord shall not - 58 - be liable to the Tenant for any injury or death to any person or for any loss or damage to any property of the Tenant or of others as a result of any such entry of thing. ARTICLE IV Status Statement, Attornment and Subordination Section 14.01 - Status Statement Within ten (10) days after written request therefor by the Landlord, or if upon any sale, assignment, lease or mortgage of the Premises or the land thereunder or the Building by the Landlord, a status statement is required from the Tenant, the Tenant shall deliver, in a form supplied by the Landlord, as the Landlord may direct, a status statement or a certificate to any proposed mortgagee or purchaser, or to the Landlord, stating (if such is the case): (a) that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and identifying the modification agreements) or if this Lease is not in full force and effect, the certificate shall so state; (b) the Commencement Date; (c) the date to which Rent has been paid under this Lease; (d) whether or not there is any existing default by the Tenant in the payment of any Rent or other sum of money under this Lease, and whether or not there is any other existing or alleged default by either party under this Lease with respect to which a notice of default has been served and if there is any such default, specifying the nature and extent thereof; (e) whether there are any setoffs, defences or counter claims against enforcement or the obligations to be performed by the Tenant under this Lease; and (f) with reasonable particularity, details respecting the Tenant's and any Indemnitor's financial standing and corporate organization; or as otherwise required by the form supplied or directed to be used by the Landlord. - 59 - Section 14.02 - Subordination and Attornment (a) This Lease and all of the rights of the Tenant hereunder are, and shall at all times be, subject and subordinate to any and all mortgages, trust deeds and the charge or lien resulting from, or any instruments of, any financing, refinancing or collateral financing and any renewals or extensions thereof from time to time in existence against the Building or any part thereof. Upon request, the Tenant shall subordinate this Lease and all of its rights hereunder in such form as the Landlord requires to any and all mortgages, trust deeds or the charge or lien resulting from, any instrument of, any financing, refinancing or collateral financing and to all advances made or hereafter to be made upon the security thereof. (b) The Tenant shall, if possession is taken under, or any proceedings are brought for the foreclosure of, or in the event of the exercise of the power of sale under any mortgage, charge, lease or sale and leaseback transaction, deed of trust, or the lien resulting from any other method of financing, refinancing or collateral financing made by the Landlord or otherwise in existence against the Building, or any part thereof, attorn to the Mortgagee, chargee, lessee, trustee, other encumbrancer or the purchaser upon any such foreclosure or sale and recognize such Mortgagee, chargee, lessee, trustee, other encumbrancer or the purchaser as the Landlord under this Lease. (c) The obligation of the Tenant to subordinate this Lease and to attorn to the Mortgagee as provided for in Section 14.02(a) and (b) is conditional upon the Mortgagee providing a written acknowledgement in favour of the Tenant, that so long as the Tenant is not in default under the covenants, obligations and agreements on the part of the Tenant herein to be performed, the Tenant may continue in possession of the Premises, without disturbance by the Mortgagee. Section 14.03 - Execution of Documents The Tenant shall, upon request of the Landlord or the Mortgagee or any other Person having an interest in the Building, or any part thereof, execute and deliver promptly such instruments, acknowledgements, statements or certificates to carry out the intent of Sections 14.01 and 14.02 or any other provision of this Lease subject however to the provisions of Section 14.02(c) in the case of any instruments of subordination or attornment required under the provisions of Sections 14.01 and 14.02 hereof. If ten (10) days after the date of a request by the Landlord to execute any such instruments, statements, acknowledgements or certificates the Tenant has not executed and delivered the same to the Landlord or to whomsoever the Landlord directs, the Tenant hereby irrevocably appoints the Landlord as the Tenant's attorney with full power and authority to execute - 60 - and deliver in the name of the Tenant any such instruments, statements, acknowledgements or certificates. Section 1.4.04 - Financial Information The Tenant shall, upon request, provide the Landlord with such public information as to the Tenant's or the Indemnitor's financial standing and corporate organization as the Landlord or the Mortgagee requires. Failure of the Tenant to comply with the Landlord's request herein shall constitute a default under the terms of this Lease and the Landlord shall be entitled to exercise all of its rights and remedies provided for in this Lease. ARTICLE XV Default and Landlord's Remedies Section 15.01 - Right to Re-Enter Notwithstanding anything contained in any present or future laws to the contrary, if and whenever: (a) the Tenant fails to pay any Rent or other sums due hereunder on the day or dates appointed for the payment thereof, (provided the Landlord first gives five (5) days' written notice to the Tenant of any such failure); or (b) the Tenant fails to observe or perform any other of the terms, covenants or conditions of this Lease to be observed or performed by the Tenant (other than the terms, covenants or conditions set out below in subparagraphs (c) to (l), inclusive, for which no notice shall be required) provided the Landlord first gives the Tenant fifteen (15) days, or such shorter period of time as is otherwise provided herein, written notice of any such failure to perform and the Tenant within such period of fifteen (15) days fails to commence diligently and thereafter to proceed diligently and continuously to cure any such failure to perform; or (c) the Tenant or any Indemnitor of this Lease or any Person occupying the Premises or any part thereof or any licensee, concessionaire or franchisee operating business in the Premises becomes bankrupt or insolvent or takes benefit of any act now or hereafter in force for bankrupt or insolvent debtors or files any proposal or makes any assignment for the benefit of creditors or any arrangement or compromise; or (d) a receiver of a receiver and manager is appointed for all or a portion of the Tenant's property or any such - 61 - Indemnitor's, occupant's, licensee's, concessionaire's or franchisee's property; or (e) any steps are taken or any action or proceedings are instituted by the Tenant or by any other party including, without limitation, any court or governmental body of competent jurisdiction for the dissolution, winding-up or liquidation of the Tenant or its assets; or (f) the Tenant makes or attempts to make a sale in bulk of any of its assets, wherever situated (other than a bulk sale made to a Transferee permitted under this Lease); or (g) the Tenant sells or disposes of the goods, trade fixtures, equipment or chattels of the Tenant or removes or commences, attempts or threatens to remove them from the Premises so that in the Landlord's opinion there would not in the event of such sale, disposal or removal be sufficient goods of the Tenant on the Premises subject to distress to satisfy all Rent due or accruing hereunder for a period of at least twelve (12) months; or (h) the Tenant abandons or attempts to abandon the Premises or any part thereof, or the Landlord has reasonable cause to believe that the Tenant intends to abandon or attempt to abandon the Premises or any part thereof; or (i) the Premises or any part thereof become and remain vacant or unoccupied for a period of five (5) consecutive days or more without the prior written consent of the Landlord, or are used by any Persons other than such as are entitled to use them; or (j) the Tenant effects or attempts to effect a Transfer that is not permitted by this Lease; or (k) this Lease or any of the Tenant's assets on the Premises are taken under any writ of execution, chattel mortgage, charge, debenture or other security instrument; or (l) re-entry is permitted under any other terms of this Lease, then and in every such case the Landlord, in addition to any other rights or remedies it has pursuant to this Lease or at law, or otherwise, shall have the immediate right to terminate this lease by notice to the Tenant or to re-enter the Premises and repossess the Premises and enjoy them as of its former estate, and the Tenant hereby agrees that the Landlord may expel all Persons and remove all property from the Premises and such property may be removed and sold or disposed of by the Landlord by public auction or otherwise, and either in bulk or by - 62 - individual item, all as the Landlord in its sole discretion may decide (and the Tenant acknowledges and agrees that the proceeds of such sale or disposition shall be applied by the Landlord in the same manner as set out in the second sentence of Section 15.02 hereof, insofar as applicable) or may be stored in a public warehouse or elsewhere at the cost and for the account of the Tenant, all without service of notice or resort to legal process and without the Landlord being considered guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby or for any claim for damages. The Tenant hereby irrevocably waives (i) the benefit of any present or future laws which in any way may limit or diminish the Landlord's right to terminate this Lease or re- enter into possession of the Premises in pursuance of its rights or remedies as set forth in this Lease, and, (ii) any and all rights of redemption granted by or under any present or future laws in the event of the Tenant being evicted or dispossessed for any cause, or in the event of the Landlord obtaining possession of the Premises by reason of the violation by the Tenant of any of the terms or conditions of this Lease or otherwise. Section 15.02 - Right to Relet If the Landlord elects to re-enter the Premises as herein provided, or if it takes possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may thereafter terminate this Lease, or, it may from time to time without terminating this Lease make such alterations and repairs as are necessary in order to relet the Premises or any part thereof and to relet the Premises or part thereof as agent for the Tenant for such term or terms (which may be for a term extending beyond the Term) and at such Rent and upon such other terms, covenants and conditions as Landlord in its sole discretion considers advisable. Upon each such reletting all Rent received by the Landlord from such reletting shall be applied, first to the payment of any indebtedness other than Rent due hereunder from the Tenant to the Landlord; second, to the payment of any costs and expenses of such reletting including brokerage fees and solicitor's fees and of costs of such alterations and repairs; third, to the payment of Rent due and unpaid hereunder; and the residue, if any, shall be held by the Landlord and applied in payment of future Rent as the same becomes due and payable hereunder. If such Rent received from such reletting during any month is less than that to be paid during that month by the Tenant hereunder, the Tenant shall pay any such deficiency, which shall be calculated and paid monthly in advance on or before the first day of each and every month. No such re-entry or taking possession of the Premises by the Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention is given to the Tenant. Notwithstanding any such reletting without - 63 - termination the Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Section 15.03 - Other Rights of the Landlord The Landlord shall have the right to recover from the Tenant all damages, costs and expenses incurred by the Landlord as a result of any default by the Tenant including, if the Landlord terminates this Lease, any deficiency between those amounts which would have been payable by the Tenant for the portion of the Term following such termination and the net amounts actually received by the Landlord during such period of time with respect to the Premises. In any of the events referred to in Section 15.01 hereof, in addition to any other rights of the Landlord, the Landlord shall have the right to recover from the Tenant the full amount of the current month's Rent together with the next three months instalments of Rent, all of which shall accrue on a day to day basis and shall immediately become due and payable as accelerated rent and the Landlord may immediately distrain for the same, together with any Rent arrears then unpaid. If the Landlord at any time terminates this Lease for any breach, in addition to any other remedies it may have, it may recover from the Tenant all damages it incurs by reason of such breach, including without limitation, the cost of recovering the Premises and solicitor's fees (on a solicitor-client basis). Section 15.04 - Survival of Obligations The indemnity provisions of this Lease and the rights of the Landlord in respect thereof and the rights of the Landlord in respect of any failure by the Tenant to perform any of its obligations under this Lease shall remain in full force and effect notwithstanding the expiration or earlier termination of the Term. Section 15.05 - Expenses If legal action is brought for recovery of possession of the Premises, for the recovery of Rent or any other amount due under this Lease, or because of the breach of any other terms, covenants or conditions herein contained on the part of the Tenant to be kept or performed, and a breach is established, the Tenant shall pay to the Landlord as Additional Rent, upon demand, all costs and expenses incurred therefor, including, without limitation, any professional, consultant and legal fees (on a solicitor and his client basis), unless a Court shall otherwise award. - 64 - Section 15.06 - Removal of Chattels In case of removal by the Tenant of the goods and chattels of the Tenant from the Premises, the Landlord may follow same for thirty (30) days in the same manner as is provided for in The Landlord and Tenant Act (Ontario) or any like legislation in any other province in Canada. Section 15.07 - Waiver of Exemption from Distress The Tenant hereby waives and renounces the benefit of any present or future laws purporting to limit or qualify the Landlord's right to distrain. Notwithstanding any term or condition of this Lease or anything contained in any present or future laws, none of the goods and chattels of the Tenant at any time during the continuance of the Term shall be exempt from levy by distress for Rent or other sums provided in this Lease to be paid by the Tenant as Rent in arrears, and upon any claim being made by the Landlord, this provision may be pleaded as an estoppel against the Tenant in any action brought to test the rights to the levying upon any such goods as are named as exempted in such legislation, the Tenant hereby waiving all and every benefit that it could or might have with regard thereto. Section 15.08 - Landlord May Cure Tenant's Default or Perform Tenant's Covenants If the Tenant fails to pay, when due, any Rent or other charge required to be paid pursuant to this Lease, the Landlord, after giving five (5) days' notice in writing to the Tenant, may, but shall not be obligated to, pay all or any part of the same. If the Tenant is in default in the performance of any of its covenants or obligations hereunder (other than the payment of Rent or other charge required to be paid pursuant to this Lease) the Landlord may from time to time after giving such notice as it considers sufficient (or without notice in the case of an emergency) having regard to the circumstances applicable, perform or cause to be performed any of such covenants or obligations, or any part thereof, and for such purpose may do such things as may be required, including, without limitation, entering upon the Premises and doing such things as may be required upon or in respect of the Premises or any part thereof as the Landlord reasonably considers requisite or necessary. All expenses incurred and expenditures made pursuant to this Section 15.08 plus a sum equal to fifteen per cent (15%) thereof representing the Landlord's overhead shall be paid by the Tenant as Additional Rent forthwith upon demand. The Landlord shall have no liability to the Tenant for any loss or damages resulting from any such action or entry by the Landlord upon the Premises. - 65 - Section 15.09 - Lien on Personal Property As security for the due payment by the Tenant of the Rent reserved hereunder whether now due, accruing due or to fall due at any time during the Term, and the performance by the Tenant of all covenants, agreements, provisoes and conditions of the Tenant to be performed hereunder, the Tenant hereby grants to the Landlord a first lien and charge on all of the personal property of the Tenant on, in or about the Premises. The Tenant confirms the first lien and charge granted pursuant to Section 15.09 of the Original Lease which provisions shall remain in full force and effect and shall continue to bind the Tenant in favour of the Landlord and its successors and assigns. All liens and charges hereinbefore provided shall constitute a security agreement within the meaning of the Personal Property Security Act (Ontario) or any like legislation in any other province in Canada and on default of the Tenant hereunder the Landlord shall have, in addition to any other rights and remedies it may be entitled to under this Lease or otherwise, all the rights and remedies of a secured party under the Personal Property Security Act. For greater clarity, the rights of the Landlord hereunder shall be in addition to and not in substitution for any other rights and remedies of the Landlord. Nothing contained herein shall prevent the Tenant from disposing of its inventory in the ordinary course of business and for the purpose of carrying on same. The provision of this Section 15.09 shall survive the expiration or earlier termination of this Lease. Provided that the Tenant is not in default hereunder, the Landlord shall execute its subordination of the Landlord's security hereby granted, in favour of security granted by the Tenant in the normal course of its business operations to facilitate the financing of the Tenant's equipment or the Tenant's business. Section 15.10 - Charges Collectible as Rent If the Tenant is in default in the payment of any amounts, monies or charges required to be paid by the Tenant pursuant to this Lease, they shall, if not paid when due, or when otherwise provided hereunder, be collectible as Rent in arrears together with the next monthly instalment of Minimum Rent thereafter falling due hereunder, but nothing herein contained is deemed to suspend or delay the payment by the Tenant of any amount, money or charge at the time same becomes due and payable hereunder, or limit any other remedy of the Landlord. The Tenant agrees that the Landlord may, at its option, apply or allocate any sums received from or due to the Tenant against any amounts due and payable hereunder in such manner as the Landlord sees fit. - 66 - Section 15.11 - Remedies Generally Mention in this Lease of any particular remedy of the Landlord in respect of the default by the Tenant does not preclude the Landlord from any other remedy in respect thereof, whether available at law or in equity or by statute or expressly provided for in this Lease. No remedy shall be exclusive or dependent upon any other remedy, but the Landlord may from time to time exercise any one or more of such remedies independently or in combination, such remedies being cumulative and not alternative. Whenever the Tenant seeks a remedy in order to enforce the observance or performance of one of the terms, covenants and conditions contained in this Lease on the part of the Landlord to be observed or performed, the Tenant's only remedy shall be for such damages as the Tenant shall be able to prove in a court of competent jurisdiction that it has suffered as a result of a breach (if established) by the Landlord in the observance and performance of any of the terms, covenants and conditions contained in this Lease on the part of the Landlord to be observed or performed, except that where this Lease provides that the Landlord's consent or approval is not to be unreasonably withheld, the Tenant's sole remedy if the Landlord unreasonably withholds consent or approval, shall be an action for specific performance and the Landlord shall not be liable for any damages. ARTICLE XVI Miscellaneous Section 16.01 - Rules and Regulations The Rules and Regulations adopted and promulgated by the Landlord from time to time are hereby made a part of this Lease as if they were embodied herein. The Rules and Regulations existing as at the Commencement Date are those set out in Schedule "D" hereto. The Rules and Regulations may differentiate between different types of businesses, but the Rules and Regulations will be adopted and promulgated by the Landlord acting reasonably and in such manner as would a prudent landlord of a reasonably similar building. The Tenant's failure to keep and observe the Rules and Regulations constitutes a default under this Lease in such manner as if the same were contained herein as covenants. The Landlord reserves the right from time to time to amend or supplement the Rules and Regulations applicable to the Premises or the Building. The Landlord is not responsible to the Tenant in the event of the non-observance or violation of any of such Rules and Regulations or of the terms, covenants or conditions of any other lease of premises in the Building and is under no obligation to enforce any such Rules and Regulations or terms, covenants or conditions. - 67 - Section 16.02 - Overholding - No Tacit Renewal If the Tenant remains in possession of the Premises after the end of the Term with the consent of the Landlord but without having executed and delivered a new lease, there is no tacit or implied renewal of this Lease and the Term hereby granted, notwithstanding any statutory provisions or legal presumption to the contrary, and the Tenant shall be deemed to be occupying the Premises as a Tenant from month-to-month at a monthly Minimum Rent payable in advance on the first day of each month equal to 110% of the monthly amount of Minimum Rent payable during the last month of the Term and otherwise, upon the same terms, covenants and conditions as are set forth in this Lease (including the payment of all Additional Rent), so far as these are applicable to a monthly tenancy. Section 16.03 - Successors All rights and liabilities herein granted to or imposed upon the respective parties hereto, extend to and bind the respective successors and assigns of each party hereto constituting the Landlord and the heirs, executors, administrators and permitted successors and assigns of the Tenant, as the case may be. No rights, however, shall enure to the benefit of any Transferee of the Tenant unless the Transfer to such Transferee is permitted under the terms of this Lease. If there is more than one Tenant, they are all bound jointly and severally by the terms, covenants and conditions herein. Section 16.04 - Tenant Partnership If at any time during the Term (i) there is more than one Tenant or more than one Person constituting the Tenant hereunder then they shall each be liable jointly and severally for all of the Tenant's obligations hereunder and (ii) the Tenant is a partnership, joint venture or co-tenancy (the "Tenant Partnership"), each Person who is presently a member of the Tenant Partnership, and each Person who becomes a member of any successor Tenant Partnership hereafter, shall be and continue to be liable jointly and severally for the full and complete performance of, and shall be and continue to be subject to the terms, covenants and conditions of this Lease, whether or not such Person ceases to be a member of such Tenant Partnership or successor Tenant Partnership. Section 16.05 - Waiver The waiver by the Landlord of any breach of any term, covenant or conditions herein contained is not deemed to be a waiver of such term, covenant or condition or of any subsequent breach of the same or of any other term, covenant or condition herein contained. The subsequent acceptance of Rent hereunder by - 68 - the Landlord is not deemed to be a waiver of any preceding breach by the Tenant of any term, covenant or condition of this Lease, regardless of the Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No term, covenant or condition of this Lease is deemed to have been waived by the Landlord unless such waiver is in writing by the Landlord. All Rent to be paid by the Tenant to the Landlord hereunder shall be paid without any deduction, abatement, set-off or compensation whatsoever except for Minimum Rent and Additional Rent to the extent it may be abated pursuant to Section 11.01, and the Tenant hereby waives the benefit of any statutory or other rights in respect of abatement, set-off or compensation in its favour at the time hereof or at any future time. Section 16.06 - Accord and Satisfaction No payment by the Tenant or receipt by the Landlord of a lesser amount than the monthly payment of Minimum Rent herein stipulated is deemed to be other than on account of the earliest stipulated Minimum Rent, nor is any endorsement or statement on any cheque or any letter accompanying any cheque or payment as Rent deemed an acknowledgement of full payment or an accord and satisfaction, and the Landlord may accept and cash such cheque or payment without prejudice to the Landlord's right to recover the balance of such Rent or pursue any other remedy provided in this Lease. No receipt of monies by the Landlord from the Tenant after the termination of this Lease in any lawful manner shall re-instate, continue or extend the Term, or affect any notice previously given to the Tenant, or operate as a waiver of the right of the Landlord to enforce the payment of Rent then due or thereafter falling due, or operate as a waiver of the right of the Landlord, to recover possession of the Premises by proper suit, action, proceedings or other remedy; it being agreed that, after the service of notice to terminate this Lease and the expiration of the time therein specified, and after the commencement of any suit, action, proceeding or other remedy, or after a final order or judgment for possession of the Premises, the Landlord may demand, receive and collect any monies due, or thereafter falling due without in any manner affecting such notice, suit, action, proceeding, order or judgment; and any and all such monies so collected shall be deemed payments on account of the use and occupation of the Premises or at the election of the Landlord on account of the Tenant's liability hereunder. Section 16.07 - Brokerage Commissions Any brokerage commission with respect to this Lease transaction shall be borne exclusively by the Tenant and the Tenant shall promptly indemnify and hold the Landlord harmless - 69 - from any and all claims with respect thereto, except in respect of LNR Corporation and the commission owing with respect to the January 1994 Lease Amending Agreement. Section 16.08 - No Partnership or Agency Nothing in this Lease shall create any relationship between the parties to this Lease other than that of Landlord and Tenant and it is acknowledged and agreed that the Landlord does not in any way or for any purpose become a partner of the Tenant in the conduct of its business, or otherwise, or a joint venturer or a member of a joint enterprise with the Tenant, nor is the relationship of principal and agent created. Section 16.09 - Agent The Landlord may perform all or any of its obligations hereunder by or through such manager or other agency as it may from time to time determine, and the Tenant shall, as from time to time directed by the Landlord in writing pay to such manager or agent any monies payable hereunder to the Landlord. Section 16.10 - Force Majeure Notwithstanding anything to the contrary contained in this Lease, if either party hereto is bona fide delayed or hindered in or prevented from the performance of any term, covenant or act required hereunder by reason of strikes; labour troubles; inability to procure materials or services; power failure; restrictive governmental laws or regulations; riots; insurrection; sabotage; rebellion; war; act of God; or other reason whether of a like nature or not which is not the fault of the party delayed in performing work or doing acts required under the terms of the Lease, (collectively referred to in this Lease as "Force Majeure") then performance of such term, covenant or act is excused for the period of the delay and the party so delayed shall be entitled to perform such term, covenant or act within the appropriate time period after the expiration of the period of such delay. However, the provisions of this Section do not operate to excuse the Tenant from the prompt payment of Rent or any other payments required under this Lease. Section 16.11 - Notices Any notice, demand, request or other instrument which may be or is required to be given under this Lease shall be delivered in person or sent by registered mail postage prepaid and shall be addressed (a) if to the Landlord c/o Coopers & Lybrand Limited, 145 King Street West, Toronto, Ontario M5H IV8, Attention: Mr. Tony Cancelliere, Senior Vice-President, with a copy to such other Person or at such other address as the Landlord designates by written notice, and (b) if to the Tenant, - 70 - at the Premises, Suite 401, Attention: President. Any such notice, demand, request or consent is conclusively deemed to have been given or made on the day upon which such notice, demand, request or consent is delivered, or, if mailed, then seventy-two (72) hours following the date of mailing, as the case may be, and the time period referred to in the notice commences to run from the time of delivery or seventy-two (72) hours following the date of mailing. Either party may at any time give notice in writing to the other of any change of address of the party giving such notice, and from and after the giving of such notice, the address therein specified is deemed to be the address of such party for the giving of notices hereunder. If the postal service is interrupted or is substantially delayed, any notice, demand, request or other instrument shall only be delivered in person. Section 16.12 - No Option The submission of this Lease for examination does not constitute a reservation of or option to lease for the Premises and this Lease become effective as a Lease only upon execution and delivery thereof by the Landlord and the Tenant. Section 16.13 - Registration The Tenant will not register or permit the registration of this Lease or any assignment or sublease or other document evidencing any interest of the Tenant in this Lease or the Premises except that, at the Tenant's request, subject to the Tenant paying the Landlord's costs and expenses, the Landlord will enter into a short form of lease with the Tenant for registration purposes, describing the parties, the Term, and the other minimum information required under the applicable legislation but the short form of lease must be in a form satisfactory to the Landlord, acting reasonably. Upon the expiration or earlier termination of this Lease, the Tenant shall, at its expense, forthwith remove and discharge such short form of lease, if any, from the title of the Building lands. Section 16.14 - Compliance with The Planning Act It is an express condition of this Lease, that the provisions of Section 50 of the Planning Act, Statutes of Ontario, 1990, as amended, be complied with if applicable in law. Until any necessary consent to this Lease is obtained, notwithstanding anything else contained herein, the Term (including any extensions or renewals thereof) shall not extend for a period greater than twenty-one (21) years less one (1) day from the Commencement Date. The Tenant shall apply diligently to prosecute such application for such consent forthwith upon the execution of this Lease by both the Landlord and the Tenant, and the Tenant shall be responsible for all costs, expenses, taxes and levies imposed, charged or levied as a result of such - 71 - application and in order to obtain such consent. Notwithstanding the foregoing provisions of this Section 16.14, the Landlord reserves the right at any time to apply for such consent in lieu of the Tenant (at the Tenant's expense) and the Tenant's application is hereby expressly made subject to any application which the Landlord intends to make. Section 16.15 - Metric Conversion If measurements are expressed in metric measure in this Lease, the following conversion factors apply: 1 metre = 3.2808 feet; 1 square metre = 10.7639 square feet; 1 foot = .3048 metres; and 1 square foot = .0929 square metres. Section 16.16 - Limited Assets The Tenant shall look solely to the Landlord's interest in the Building for the collection or satisfaction of any money or judgment which the Tenant may recover against the Landlord, and the Tenant shall not look for the collection or satisfaction of any such money or judgment to any other assets. Section 16.17 - Bankruptcy and Insolvency Act The Tenant hereby irrevocably waives any right it may have under Section 65.2(1) of the Bankruptcy and Insolvency Act, S.C. 1992, or any successor or similar legislation, to repudiate this Lease, and any such purported repudiation of this Lease shall be of no force or effect. Section 16.18 - Parking Spaces The Landlord agrees to make available to the Tenant for the herein Term sixty-three (63) parking spaces in the Parking Facilities on the P2 or P3 levels. The Tenant agrees to abide by the rules and regulations established from time to time by the Landlord and/or the parking operator of the Parking Facilities. The Tenant agrees to pay as part of the Rent, the monthly parking charge of the Parking Facilities at the prevailing rates from time to time, on or before the due dates thereof each month for each such underground parking space. The parking spaces shall be on an "unreserved basis". The Tenant acknowledges that the Landlord shall have no obligation to police the Parking Facilities. Each parking space shall be used only for the parking of one motor vehicle. The Tenant shall not be permitted to Transfer any of the parking spaces and acknowledges that the entitlement may not be shared by any other Person. - 72 - Section 16.19 - Quiet Enjoyment If the Tenant pays the Rent and other sums herein provided when due, and punctually observes and performs all of the terms, covenants and conditions on the Tenant's part to be observed and performed hereunder, the Tenant shall peaceably and quietly hold and enjoy the Premises for the Term hereby demised without hindrance or interruption by the Landlord or any other Person lawfully claiming by, through or under the Landlord subject, nevertheless, to the terms, covenants and conditions of this Lease. IN WITNESS WHEREOF, the Landlord and the Tenant have executed this Lease. SIGNED, SEALED AND DELIVERED ) in the presence of ) COOPERS & LYBRAND LIMITED AS ) RECEIVER AND MANAGER FOR ) DUNDAS KIPLING II INC. ) ) Per: Tony Cancelliere c/s ) --------------------- ) Senior Vice President ) ) ACC LONG DISTANCE LTD. ) ) Per: W. R. Schultz c/s ) -------------------- V. P. Finance - 73 - SCHEDULE "A" LEGAL DESCRIPTION OF THE BUILDING Those lands and premises lying, situate and being in the City of Etobicoke, in the Municipality of Metropolitan Toronto, consisting of Part of Lot 7, Concession 5, Colonel Smith's Tract, designated as Parts 3 and 5 on 64R- 5004. - 74 - SCHEDULE "B" FLOOR PLAN 5343 Dundas Street West Etobicoke, Ontario 4th Floor The purpose of this plan is to identify the approximate location of the Premises in the Building. The Landlord reserves the right at any time to relocate, rearrange or alter the buildings and structures, other premises and Common Facilities. - 75 - SCHEDULE "B" FLOOR PLAN 5343 Dundas Street West Etobicoke, Ontario 6th Floor The purpose of this plan is to identify the approximate location of the Premises in the Building. The Landlord reserves the right at any time to relocate, rearrange or alter the buildings and structures, other premises and Common Facilities. - 76 - SCHEDULE "C" LANDLORD'S AND TENANT'S WORK 1. LANDLORD'S WORK (Base Building Standard) The Landlord shall finish the Premises in the manner and standard to the Building which, without limiting the generality of the foregoing, will include the following: (a) Supply and install a smooth concrete floor, ready for the Tenant's floor covering. (b) Supply and install standard Building ceiling system, including T- Bar ceiling, ceiling tiles, and recessed fluorescent lighting based on a typical open office floor area. (c) Supply and install adequate heating and air-conditioning to the Premises (and to be thermostat-controlled within the Premises) and to supply and install all necessary duct work and diffusers within the Premises based on a typical open office floor area. Any additional diffusers or zones required within the Premises, over and above what is being provided based on a typical open office floor area, will be at the Tenant's expense. Specialized Tenant needs, as for example, computer rooms, may require separate mechanical systems at the Tenant's expense. (d) Supply and install building standard window coverings. (e) Power will be supplied to the Premises based on a general power formula of one outlet per 200 square feet of floor area. Outlet boxes will be provided in each floor ceiling space. (f) (i) For multi-tenancy floors, dividing partitions between the Premises and the remainder of the floor on which the Premises are located, together with a standard entrance door and such other standard door or doors from the public corridor to the Premises as are required by the appropriate municipal or other governmental authorities. The colour of the interior surfaces of the dividing partitions will be prime painted. It is understood that the location of the demising partitions dividing the Premises - 77 - from the balance of the floor on which the Premises are located is subject to approval of the appropriate municipal or other governmental authorities; (ii) For single tenancy floors, two (2) Building standard washrooms in a location to be chosen by the Landlord and exterior wall surfaces primed for painting. 2. TENANT'S WORK (a) Any changes desired by the Tenant which depart from the Base Building standard or which involve the use of materials not standard to the Building or which involve leasehold improvements are subject to the Landlord's prior written approval, which approval may be subject to such terms and conditions as the Landlord deems desirable, including without limiting the generality of the foregoing choice of contractors, labour compatibility, and bonding, and any extra expense above that of the Base Building standard and any expense in installing leasehold improvements shall be made at the expense of the Tenant including without limitation, the preparation of the space plan and the working drawings. The Landlord has the right to retain the services of its consultants to review the Tenant.s space plans and working drawings, at the Tenant's expense. The Landlord has the right to request the Tenant to use contractors of the Landlord's choice. (b) All permits necessary for the installation of the Tenant's leasehold improvements and approval of plans must be obtained by the Tenant from the applicable authorities prior to the commencement of installations by the Tenant, at its expense and a copy sent to the Landlord. (c) The Tenant and its contractors are responsible for removing garbage and debris from the Premises and the Building daily and to place same into garbage containers for that purpose as provided. All tenants will be assessed their proportionate share of the cost of providing empty garbage containers on the job site during the construction of their premises. Any of the Tenant's garbage or debris removed by the Landlord's forces will be charged to the Tenant's account. (d) The Tenant will pay to the Landlord forthwith upon demand (i) the reasonable costs incurred by the Landlord in retaining consultants to review the Tenant's space plan and working drawings, (ii) a fee equal to fifteen percent (15%) of the cost of the Tenant's leasehold improvements toward the cost of the Landlord's supervision and overhead during installation of the said leasehold improvements; and (iii) all reasonable costs incurred by the Landlord during the period the Tenant fixtures - 78 - the Premises including without limitation the cost of elevators to vertically transport workers and materials with respect to the carrying out of the Tenant's Work in the Premises. (e) All work shall be constructed in a good and workmanlike manner, free and clear of liens, as expeditiously as possible, and so as to not prejudice any warranties or affect any installations with respect to Base Building work including without limitation the mechanical, electrical, sprinkler, plumbing, and other systems servicing the Building or any part or parts thereof, or affect the operation and balancing of the said systems. (f) All plans and specifications and working drawings, showing details of all the Tenant's leasehold improvements within the Premises, including the location of plumbing and electrical outlets, must, prior to the commencement of the work, be submitted by the Tenant to the Landlord for its written approval. The work shall be done in accordance with the provisions of the Lease, and the provisions of Section 10.02 of the Lease shall apply mutatis mutandis to work undertaken by the Tenant. (g) The cost of all leasehold improvements whether constructed by the Tenant's own contractor or by the Landlord's contractor shall be paid promptly by the Tenant in accordance with the provisions of the Construction Lien Act. (h) The Tenant shall perform all work required to provide all leasehold improvements so that the Premises are available for carrying on the Tenant's business at the Premises. (i) In undertaking Tenant's Work, the Tenant shall ensure that its contractors, subcontractors and consultants co-operate with the Landlord while the Landlord is undertaking the Landlord's Work. - 79 - SCHEDULE "D" RULES AND REGULATIONS 1. The Landlord shall permit the Tenant and the Tenant's employees and all Persons lawfully requiring communication with them to have the use, during Normal Business Hours in common with others entitled thereto, of the main entrance and the stairways, corridors, elevators or other mechanical means of access leading to the Premises. At times other than during Normal Business Hours the Tenant and the employees of the Tenant shall have access to the Building and to the Premises only in accordance with the Rules and Regulations and shall be required to satisfactorily identify themselves and to register in any book which may at the Landlord's option be kept by the Landlord for such purpose. If identification is not satisfactory, the Landlord is entitled to prevent the Tenant or the Tenant's employees or other Persons lawfully requiring communication with the Tenant from having access to the Building. In addition, the Landlord is not required to open the door to the Premises for the purpose of permitting entry therein to any Person not having a key to the Premises. 2. The Tenant shall permit window cleaners to clean the windows of the Premises during Normal Business Hours. 3. The sidewalks, entrances, passages, escalators, elevators and staircases shall not be obstructed or used by the Tenant, its agents, servants, contractors, invitees or employees for any purpose other than ingress to and egress from the Premises and the Building. The Landlord reserves entire control of all parts of the Building employed for the common benefit of the tenants and without restricting the generality of the foregoing, the sidewalks, entrances, corridors and passages not within the Premises, washrooms, lavatories, air conditioning closets, fan rooms, janitors. closets, electrical closets and other closets, stairs, escalators, elevator shafts, flues, stacks, pipe shafts and ducts and shall have the right to place such signs and appliances therein, as it deems advisable, provided that ingress and egress from the Premises is not unduly impaired thereby. 4. The Tenant, its agents, servants, contractors, invitees or employees, shall not bring in or take out, position, construct, install or move any safe, business machinery or other heavy machinery or equipment or anything liable to injure or destroy any part of the Building, including the Premises, without first obtaining the consent in writing of the Landlord. In giving such consent, the Landlord shall have the right in its sole discretion, to prescribe the weight permitted and the - 80 - position thereof, the use and design of planks, skids or platforms, and to distribute the weight thereof. All damage done to the Building, including the Premises, by moving or using any such heavy equipment or other office equipment or furniture shall be repaired at the expense of the Tenant. The moving of all heavy equipment or other office equipment or furniture shall occur only by prior arrangement with the Landlord. Safes and other heavy office equipment and machinery shall be moved through the halls and corridors only upon steel bearing plates. No freight or bulky matter of any description will be received into the Building, including the Premises, or carried in the elevators except during hours approved by the Landlord. 5. The Tenant shall not place or cause to be placed any additional locks upon any doors of the Premises without the approval of the Landlord and subject to any conditions imposed by the Landlord. Two keys shall be supplied to the Landlord for each entrance door to the Premises and all locks shall be standard to permit access to the Landlord's master key. If additional keys are requested, they must be paid for by the Tenant. No one, other than the Landlord's staff, will have keys to the outside entrance doors of the Building. 6. The water closets and other water apparatus shall not be used for any purpose other than those for which they were constructed, and no sweepings, rubbish, rags, ashes or other substances shall be thrown therein. Any damage resulting from misuse shall be borne by the Tenant by whom or by whose agents, servants or employees the same is caused. The Tenant shall not, (1) let the water run unless it is in actual use, (2) deface or mark any part of the Building, including the Premises, (3) drive nails, spikes, hooks or screws into the walls or woodwork of the Building, including the Premises, or, (4) bore, drill or cut into the walls or woodwork of the Building, including the Premises, in any manner or for any reason. 7. No one shall use the Premises for sleeping apartments or residential purposes, or for the storage of personal effects or articles other than those required for business purposes. 8. The Tenant shall not permit any cooking or any heating of any foods or liquids in the Premises without the written consent of the Landlord, but this shall not prevent the Tenant from having an electric coffee maker or electric kettle on the Premises. 9. Canvassing, soliciting and peddling in or about the Building are prohibited. 10. It shall be the duty of the Tenant to assist and cooperate with the Landlord in preventing injury to the Premises. - 81 - 11. No inflammable oils or other inflammable, dangerous or explosive materials save those approved in writing by the Landlord's insurers shall be kept or permitted to be kept in the Premises. 12. No bicycles or other vehicles shall be brought within the Building without the consent of the Landlord. 13. No animals or birds shall be brought into the Building without the consent of the Landlord. 14. The Tenant shall not install or permit the installation or use of any machine dispensing goods for sale in the Premises or the Building or permit the delivery of any food or beverage to the Premises without the written approval of the Landlord or in contravention of any Rules and Regulations fixed or to be fixed by the Landlord. Only Persons authorized by the Landlord shall be permitted to deliver or to use the stairs, elevators or escalators in the Building for the purpose of delivering food or beverages to the Premises. 15. If the Tenant desires telegraphic or telephonic connections, the Landlord will direct the electricians as to where and how the wires are to be introduced. No gas pipe or electric wire will be permitted which has not been ordered or authorized by the Landlord. No outside radio or television aerials shall be allowed on any part of the Premises without authorization in writing by the Landlord. 16. The Tenant shall not cover or obstruct any of the skylights and windows that reflect or admit light into any part of the Building except for the proper use of approved blinds and drapes. 17. Any hand trucks, carryalls or similar appliances used in the Building with the consent of the Landlord shall be equipped with rubber tires, slide guards and such other safeguards as the Landlord requires. 18. The Tenant shall not place or maintain any supplies, merchandise or other articles in any vestibule or entry of the Premises, on the footwalks adjacent thereto or elsewhere on the exterior of the Premises or elsewhere in the Building. 19. The Tenant shall not do or permit anything to be done in the Premises, or bring or keep anything therein which will in any way increase the risk of fire or the rate of fire insurance on the Building or on property kept therein, or obstruct or interfere with the rights of other tenants or in any way injure or annoy them or the Landlord, or violate or act at variance with the laws relating to fires or with the regulations of the Fire Department, or with any insurance upon the Building or any part - 82 - thereof, or violate or act in conflict with any of the rules and ordinances of the Board of Health or with any statute or municipal by-law. - 83 - SCHEDULE "E" INDEMNITY AGREEMENT THIS AGREEMENT is dated the 1st day of March, 1994. BETWEEN: COOPERS & LYBRAND LIMITED AS RECEIVER AND MANAGER FOR DUNDAS KIPLING II INC. (hereinafter called the "Landlord"), PARTY OF THE FIRST PART - and - ACC TELENTERPRISES LTD. (hereinafter called the "Indemnitor"), PARTY OF THE SECOND PART In order to induce the Landlord to enter into an amended and restated lease dated the 1st day of March, 1994, and made between the Landlord and ACC Long Distance Ltd., as Tenant, as may be supplemented by an agreement relating to any and all Additional Premises (collectively, the "Lease"), and for other good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, the Indemnitor hereby makes the following indemnity and agreement (the "Indemnity") with and in favour of the Landlord: 1. The Indemnitor hereby agrees with the Landlord that at all times during the Term and any extension or renewal of the Lease it will, (a) make the due and punctual payment of all Rent, monies, charges and other amounts of any kind whatsoever payable under the Lease by the Tenant whether to the Landlord or otherwise and whether the Lease has been disaffirmed or disclaimed; (b) effect prompt and complete performance of all of the terms, covenants and conditions contained in the Lease on the part of the Tenant therein to be kept, observed and performed; and, (c) indemnify and save harmless the Landlord from any claims for non-payment of Rent, money, charges or other amounts expressed to be due under the Lease or resulting from any failure by the Tenant to observe and perform any of the terms, covenants and conditions in the Lease. 2. This Indemnity is absolute and unconditional and the obligations of the Indemnitor shall not be released, discharged, - 84 - mitigated, impaired or affected by, (a) any extension of time, indulgences or modifications which the Landlord extends to or makes with the Tenant in respect of the performance of any of the obligations of the Tenant under the Lease; (b) any waiver by or failure of the Landlord to enforce any of the terms, covenants and conditions contained in the Lease; (c) any Transfer of the Lease by the Tenant or by any Transferee or by any trustee, receiver or liquidator; (d) any consent which the Landlord gives to any such Transfer; (e) any amendment to the Lease or any waiver by the Tenant of any of its rights under the Lease; (f) the expiration or other termination of the Term, or, (g) any overholding by the Tenant of the Premises or any part thereof. 3. The Indemnitor hereby expressly waives notice of the acceptance of this Agreement and all notice of non-performance, non-payment or non-observance on the part of the Tenant of the terms, covenants and conditions in the Lease. Without limiting the generality of the foregoing, any notice which the Landlord desires to give to the Indemnitor shall be sufficiently given if delivered in person to the Indemnitor or if mailed by prepaid registered or certified post addressed to the Indemnitor at the Premises, and every such notice is deemed to have been given upon the day it was delivered in person, or if mailed, seventy- two (72) hours after it was mailed. The Indemnitor may designate by notice in writing a substitute address for that set forth above and thereafter notices shall be directed to such substitute address. If two or more parties are named as Indemnitor, any notice given hereunder or under the Lease shall be sufficiently given if delivered or mailed in the foregoing manner to any one of such parties. 4. In the event of a default under the Lease or under this Indemnity, the Indemnitor waives any right to require the Landlord to, (a) proceed against the Tenant or pursue any rights or remedies against the Tenant with respect to the Lease, (b) proceed against or exhaust any security of the Tenant held by the Landlord, or, (c) pursue any other remedy whatsoever in the Landlord's power. The Landlord has the right to enforce this Indemnity regardless of the acceptance of additional security from the Tenant and regardless of any release or discharge of the Tenant by the Landlord or by others or by operation of any law. 5. Without limiting the generality of the foregoing, the liability of the Indemnitor under this Indemnity is not and is not deemed to have been waived, released, discharged, impaired, or affected by reason of the release or discharge of the Tenant in any receivership, bankruptcy, winding-up or other creditors' proceedings or the rejection, disaffirmance or disclaimer of the Lease in any proceeding or the termination of the Lease for any reason whatsoever and shall continue with respect to the periods prior thereto and thereafter, for and with respect to the Term as if the Lease had not been disaffirmed, disclaimed, or terminated, - 85 - and in furtherance hereof, the Indemnitor agrees, upon any such disaffirmance, disclaimer, or termination, that the Indemnitor shall, at the option of the Landlord, become the Tenant of the Landlord upon the same terms and conditions as are contained in the Lease, applied mutatis mutandis. The liability of the Indemnitor shall not be affected by any repossession of the Premises by the Landlord, provided, however, that the net payments received by the Landlord after deducting all costs and expenses of repossessing and reletting the Premises shall be credited from time to time by the Landlord against the indebtedness of the Indemnitor hereunder and the Indemnitor shall pay any balance owing to the Landlord form time to time immediately upon demand. 6. No action or proceedings brought or instituted under this Indemnity and no recovery in pursuance thereof shall be a bar or defence to any further action or proceeding which may be brought under this Indemnity by reason of any further default hereunder or in the performance and observance of the terms, covenants and conditions in the Lease. 7. No modification of this Indemnity shall be effective unless it is in writing and is executed by both the Indemnitor and the Landlord. 8. The Indemnitor shall, without limiting the generality of the foregoing, be bound by this Indemnity in the same manner as though the Indemnitor were the Tenant named in the Lease. 9. If two or more individuals, corporations, partnerships or other business associations (or any combination of two or more thereof) execute this Indemnity as Indemnitor, the liability of each such individual, corporation, partnership or other business association hereunder is joint and several. In like manner, if the Indemnitor named in this Indemnity is a partnership or other business association, the members of which are by virtue of statutory or general law, subject to personal liability, the liability of each such member is joint and several. 10. All of the terms, covenants and conditions of this Indemnity extend to and are binding upon the Indemnitor, his or its heirs, executors, administrators, successors and assigns, as the case may be, and enure to the benefit of and may be enforced by the Landlord, its successors and assigns, as the case may be, and any mortgagee, chargee, trustee under a deed of trust or other encumbrancer of all or any part of the Building referred to in the Lease. 11. The expressions "Landlord," "Tenant," "Rent," "Term," "Premises," "Building," "Transfer" and "Additional Premises" and - 86 - other terms or expressions where used in this Indemnity respectively, have the same meaning as in the Lease. 12. This Indemnity shall be construed in accordance with the laws of the province of Ontario. 13. Wherever in this Indemnity reference is made to either the Landlord or the Tenant, the reference is deemed to apply also to the respective heirs, executors, administrators, successors and assigns and permitted assigns, respectively, of the Landlord and the Tenant, as the case may be, named in the Lease. Any assignment by the Landlord of any of its interest in the Lease operates automatically as an assignment to such assignee of the benefit of this Indemnity. IN WITNESS WHEREOF the Landlord and the Indemnitor have executed this Indemnity. SIGNED, SEALED AND DELIVERED ) in the presence of ) COOPERS & LYBRAND LIMITED AS ) RECEIVER AND MANAGER FOR ) DUNDAS KIPLING II INC. ) ) Per: c/s ) -------------------- ) Name: ) Title: ) ) I have authority to bind the ) Corporation. ) ) ACC TELENTERPRISES LTD. ) ) Per: ) ------------------------ ) Name: ) Title: ) ) Per: c/s ) -------------------- ) Name: ) Title: ) ) We have authority to bind the ) Corporation - 87 - RIDER NO. 1 OPTION TO EXTEND THE TERM The Tenant, if not in material default under the Lease, either in payment of Rent or observance of the covenants herein, shall have the option to extend the Lease with respect to all of the Premises, together with all of the Additional Premises, for a further term of five (5) years upon giving at least twelve (12) months' written notice of the exercise of such right and subject to the same provisions as are contained in this Lease except that there shall be no further right of extension, the Rent for the extension term shall be the then market rent for the Premises as determined by agreement between the Landlord and the Tenant and any tenant inducements, (which includes without limitation, any rent-free periods), improvement allowance, turnkey package and/or cash inducements shall be negotiated between the Landlord and the Tenant at that time which tenant inducements, (which includes without limitation, any rent-free periods), improvement allowance, turnkey package and/or cash inducements, as applicable, shall be taken into account for the purposes of determining the market rent for the Premises during the extension term, provided that there shall be no obligation by the Landlord to provide any tenant inducements, (which includes without limitation, any rent-free periods), improvement allowance, turnkey package and/or cash inducements). The Landlord shall advise the Tenant as to the proposed extension rental rate at least ninety (90) days prior to the last date upon which the option is required to be exercised. The Tenant and the Landlord shall have ninety (90) days from the Tenant's notice to negotiate and agree upon the rate of Minimum Rent payable during the extension term and any other terms and conditions, failing which the matter shall be referred to arbitration by a single arbitrator subject to the Arbitration Act (1990) and the decision of the arbitrator shall be final and binding on the parties. In the event that the rate of Minimum Rent has not been established either by agreement or by arbitration by the commencement date of the extension term, then the Tenant shall continue to pay to the Landlord on account of Minimum Rent, the same Minimum Rent which the Tenant was obligated to pay during the last year of the initial term hereof; once the Minimum Rent has been determined by agreement or by arbitration for the extension term, any adjustment shall be made by the parties with any underpayment having been made by the Tenant, payable to the Landlord within thirty (30) days of the determination of the rate of Minimum Rent applicable to the extension term, and with any overpayment which may have been made by the Tenant to the Landlord, to be credited by the Landlord in favour of the Tenant as the Minimum Rent next falls due, until such overpayment has been fully credited to the Tenant. - 88 - RIDER NO. 2 FREE RENT PERIODS Notwithstanding the provisions of this Lease, the actual rent payable in respect of portions of the Premises shall be adjusted as follows: (a) for the period March 1, 1994, to February 28, 1995, the Tenant shall not be obligated to pay Minimum Rent or Additional Rent with respect to 5,678 square feet of the Sixth Floor Expansion Premises; (b) for the period of March 1, 1995 to February 29, 1996, the Tenant shall not be obligated to pay Minimum Rent with respect to 1,678 square feet of the Sixth Floor Expansion Premises. Notwithstanding the foregoing, Additional Rent as provided in the Lease shall be due and payable on the entire Sixth Floor Expansion Premises (9,678 square feet). - 89 - RIDER NO. 3 LEASE CANCELLATION PROVISIONS The Tenant, if not in default under the terms of this Lease, shall have the one time right to terminate the Term of the Lease and to give up vacant possession of the Premises, effective February 29, 2000, provided it gives at least twelve (12) months' prior written notice to the Landlord and makes payment of a cancellation fee to the Landlord at the rate of $35.00 per square foot of Rentable Area of the Premises. In the event that the Tenant does not provide written notice to the Landlord exercising its right of termination by February 28, 1999, the termination right shall become null and void. The Tenant shall be obligated to perform all of the obligations of the Tenant, including without limitation, the obligation to pay Rent up until the termination date of February 29, 2000, and shall, notwithstanding any such termination, remain responsible for the performance of all covenants which survive termination. The cancellation fee shall be due and payable on or before such termination date and failure to pay such cancellation fee by such date shall, at the option of the Landlord, entitle the Landlord to declare that the cancellation right is null and void, in which case the Tenant shall be obligated to pay Rent during the entire remainder of the Term, as well as remain liable for payment of the cancellation fee. - 90 - RIDER NO. 4 OPTION TO LEASE ADDITIONAL SPACE If, during the Term, the Landlord becomes aware that any space contiguous to the Premises situate on the 4th or 6th floors of the Building or floors adjacent to the 4th or 6th floors of the Building (the "Additional Premises") will become available for leasing, the Landlord shall by written notice to the Tenant, offer to the Tenant the right to lease such Additional Premises in an "as is" condition, provided that the Tenant is not in default under this Lease. The Tenant shall have thirty (30) days from receipt of such notice to exercise this right, failing which the Tenant shall have no further rights in respect of the Additional Premises so offered by the Landlord to the Tenant in such written notice, and the Landlord may lease the Additional Premises on whatever terms it may determine. If the Tenant accepts such offer, all the provisions of this Lease (except for the rate of Minimum Rent per square foot of the Rentable Area of such Additional Premises) shall apply and except for any tenant inducements which form part of this Lease, shall apply with respect to the Additional Premises. The Minimum Rent applicable to the Additional Premises shall be the then market rent for similar premises in the vicinity of the Building. The term of the Lease with respect to the Additional Premises shall commence on the later of the date upon which the Tenant gives notice that it exercises its right with respect to the Additional Premises and the date upon which the Additional Premises are vacated by the former tenant, and shall be for the same length of term as then remaining with respect to the Premises. The Landlord and Tenant shall enter into a supplement to this Lease to include the Additional Premises, mutatis mutandis, save and except with respect to the rate of the Minimum Rent and for any tenant inducements which may form part of this Lease. - 91 - RIDER NO. 5 PAYMENT FOR LEASEHOLD IMPROVEMENTS - SIXTH FLOOR EXPANSION PREMISES Provided the Tenant is not in default under this Lease, the Landlord shall pay to the Tenant a leasehold improvement allowance (the "Improvement Allowance") as a once only contribution applicable only to the Commencement Date, equal to the actual cost to the Tenant of completing its leasehold improvements in the Sixth Floor Expansion Premises, but not to exceed $20.00 per square foot of Rentable Area of the Sixth Floor Expansion Premises. The Improvement Allowance shall be paid, subject to compliance with the holdback requirements of the Construction Lien Act, after presentation to the Landlord of paid invoices from the Tenant's contractors and suppliers for completion of such leasehold improvement work, upon the latest of: (a) the Commencement Date of this Lease; (b) the date of execution of this Lease; and (c) the date the Tenant completes all of its leasehold improvement work in the Sixth Floor Expansion Premises and takes occupancy thereof. The Landlord shall be entitled to holdback ten percent (10%) of the Improvement Allowance, or such greater amount if required in order to comply with the Construction Lien Act, until the expiry of all relevant periods for filing of any construction lien claim relating to such work, and shall release such holdback only if no notice of any claim for lien is received. The Tenant acknowledges that it is accepting the Sixth Floor Expansion Premises in an "as is" condition. EX-99.11 14 UNDERLEASE AGREEMENT DATED 12/23/93 EXHIBIT 99.11 DATED 23rd December 1993 ----------------------------------------------- (1) IBM UNITED KINGDOM LIMITED - and - (2) ACC LONG DISTANCE UK LIMITED - and (3) ACC CORP __________ U N D E R L E A S E of Tenth Floor at The Chiswick Centre 414 Chiswick High Road London W4 __________ ASHURST MORRIS CRISP Broadwalk House 5 Appold Street London EC2A 2HA Tel: 071-638-1111 Fax: 071-972-7990 REF: VTH/ID167 DATE: 17/11/93 CONTENTS -------- Clause Heading - ------ ------- or Schedule - ----------- PARTICULARS 1. DEFINITIONS 2. INTERPRETATION 3. DEMISE 4. THE TENANT'S COVENANTS 4.1. Rents 4.2. Outgoings and VAT 4.3. Repair, cleaning and decorating 4.4. User and Restrictions on Use 4.5. Waste and Alterations 4.6. Aerials Signs and Advertisements 4.7. Obstruction 4.8. Statutory Obligations and Fire Precautions 4.9. Access to Landlord and Notice of Repair 4.10. Dealings 4.11. Landlord's Costs 4.12. The Planning Acts 4.13. Plans, Documents and Information 4.14. Indemnities 4.15. Disposal Boards and Viewing 4.16. Encroachments 4.17. Yield Up 4.18. Interest on Arrears 4.19. Statutory Notices 4.20. Defective Premises 4.21. Compliance with Regulations 4.22. Outside Business Hours 4.23. Superior Lease Covenants 4.24. Option to Determine 5. THE LANDLORD'S COVENANTS 6. INSURANCE 6.1. Tenant's Insurance Covenants 6.2. Suspension of Principal Rent 7. PROVISOS 7.1. Re-Entry 7.2. Rights and Easements 7.3. Disputes with Adjoining Occupiers 7.4. Exclusion of Use Warranty 7.5. Representations 7.6. Tenant's Property 7.7. Compensation on Vacating 7.8. Covenants relating to Adjoining Premises 7.9. Service of Notices -i- 7.10. Value Added Tax 7.11. Exclusion of Landlord and Tenant Act 1954 7.12. Jurisdiction THE FIRST SCHEDULE - Part 1 - Rights and Easements Granted Part 2 - Rights and Easements Excepted and Reserved THE SECOND SCHEDULE - Principal Rent and Rent Review THE THIRD SCHEDULE - Covenants by the Surety THE FOURTH SCHEDULE - The Regulations -ii- PARTICULARS ----------- DATE : 23rd December 1993 - -------------------------------------------------------------------------------- LEASE OR UNDERLEASE : UNDERLEASE - -------------------------------------------------------------------------------- LANDLORD : IBM UNITED KINGDOM LIMITED whose registered office is at P.O. Box 41 North Harbour Portsmouth Hampshire PO6 3AU TENANT : ACC LONG DISTANCE UK LIMITED (Company Registration Number 2671855) whose registered office is at 2-3 Cursitor Street London EC4A 1NE SURETY : ACC CORP whose registered office is at 39 State Street City Rochester NY 14614 United States of America - -------------------------------------------------------------------------------- PREMISES : the tenth floor of the Building shown for the purpose of identification only edged red on the Floor Plan and being more particularly described in Clause 1 - -------------------------------------------------------------------------------- CONTRACTUAL TERM : 10 years from and including the 29th day of September 1993 until and including the 28th day of September 2003 - -------------------------------------------------------------------------------- PRINCIPAL RENT : EIGHTY SIX THOUSAND FIVE HUNDRED AND EIGHTY POUNDS ((Pounds)86,580) per annum - -------------------------------------------------------------------------------- RENT COMMENCEMENT DATE : the 24th day of June 1995 - -------------------------------------------------------------------------------- INITIAL PROVISIONAL SERVICE CHARGE : TWENTY TWO THOUSAND TWO HUNDRED AND THIRTY POUNDS ((Pounds)22,230) per annum - -------------------------------------------------------------------------------- PERMITTED USER : high class offices within Class II of the Schedule to the Town and Country Planning (Use Classes) Order 1972 - -------------------------------------------------------------------------------- INTERIOR DECORATING YEARS : 1998 - -------------------------------------------------------------------------------- THIS UNDERLEASE made on the date and between the parties specified in the Particulars WITNESSES as follows:- 1. DEFINITIONS ----------- In this Lease and the Schedules the following words and expressions have the following meanings:- "Accountant" means any person or firm appointed by the Landlord (including an employee of the Landlord or a Group Company of the Landlord) to perform the functions of the Accountant under this Lease "Act of Insolvency" means: in relation to a corporate body that:- it is unable to pay its debts as defined in section 123 of the Insolvency Act 1986 (referred to as "the Act" in the remainder of this definition) (and for the purposes of interpreting that section the words "if it is proved to the satisfaction of the court that" in sub-sections 123(l)(e) and 123(2) shall be ignored) or a proposal is made for a voluntary arrangement under Part I of the Act or a petition is presented for an administration order under Part II of the Act or a receiver and (or) manager or administrative receiver is appointed whether under Part III of the Act or otherwise or it goes into liquidation as defined in Section 247(2) of the Act (other than a voluntary winding up solely for the purpose of amalgamation or reconstruction while solvent) or a provisional liquidator is appointed under Section 135 of the Act or a proposal is made for a scheme of arrangement under Section 425 of the Companies Act 1985 and in relation to an individual that:- - 2 - an application is made for an interim order or a proposal is made for a voluntary arrangement under Part VIII of the Act or a bankruptcy petition is presented to the Court or his circumstances are such that a bankruptcy petition could be presented under Part IX of the Act or he enters into a deed of arrangement "Adjoining Property" means any neighbouring or adjoining land or premises now or at any time during the Term belonging to the Landlord or a Group Company of the Landlord "Building" means the land and building(s) known as The Chiswick Centre Chiswick London W4 shown for the purpose of identification only edged red on the Site Plan "Business Day" means a day on which clearing banks in the City of London are (or would be but for a strike lockout or other stoppage affecting particular banks or banks generally) open during banking hours and "Business Days" shall be interpreted accordingly "Business Hours" means 8.30 a.m. to 6.30 p.m. Mondays to Fridays (except Bank Holidays) or such other hours as the Landlord may determine "Car Park" means the car parking areas shown for the purpose of identification only edged green on the Site Plan "Common Parts" means all areas which are from time to time during the Term provided by the Landlord for common use and enjoyment by the general public and (or) by tenants and the occupiers of the Building and all persons expressly or by implication authorised by them including without limitation the pedestrian areas and walkways forecourts car parking areas landscaped areas entrance halls landings hoists lifts lift-shafts staircases escalators and passages "Conduits" mean all conduits sewers drains mains ducts pipes gutters watercourses wires cables fibres channels flues and all other conducting media including any fixings louvres cowls and any other ancillary apparatus "Contractual Term" has the meaning given in the Particulars - 3 - "Development" has the meaning given by Section 55 of the Town and Country Planning Act 1990 "Exclusion Agreement" means an agreement contained or referred to in an underlease of the Premises or any part thereof authorised by Order of the Court under Section 38(4)(a) of the 1954 Act excluding in relation to that underlease the provisions of Sections 24 to 28 of the Landlord and Tenant Act "Floor Plan" means the plan annexed to this Lease and marked "Floor Plan" "Group Company" means any company which is for the time being a subsidiary or a holding company or another subsidiary of the holding company in each case within the meaning of Section 736 of the Companies Act 1985 which Section shall for this purpose be deemed not to have been amended by subsequent legislation "Initial Provisional Service Charge" means the annual amount referred to in the Particulars "Insurance Rent" means the sums to be reimbursed by the Tenant to the Landlord comprising a reasonable proportion of the cost to the Landlord from time to time of:- (a) insuring the Building or reimbursing the Superior Landlord therefor in accordance with the Landlord's obligations contained in this Lease and the Superior Lease and (b) effecting insurance against loss of the Principal Rent for a period of three years and (c) insuring in such amount and on such terms as the Landlord or the Superior Landlord shall reasonably consider appropriate against all liability of the Landlord or the Superior Landlord to third parties arising out of or in connection with any matter relating to the Building "Insured Risks" means fire storm tempest flood earthquake lightning explosion impact aircraft (other than hostile aircraft) and other aerial devices and articles dropped therefrom riot civil commotion and malicious damage bursting or overflowing of water tanks apparatus or conduits subsidence heave and such other risks as the Landlord may in its reasonable discretion from time to time determine "Interest" means interest (compounded at monthly rests) both before and after any judgement at the Interest Rate then prevailing during the period beginning on the date 14 days after the relevant payment is due and has been demanded and ending on the date on which the relevant payment is received by way of cleared funds - 4 - "Interest Rate" means Four percentage points above the base lending rate from time to time in force of National Westminster Bank PLC or such other Bank whose Chairman is a member of the Committee of London Clearing Bankers as the Landlord may from time to time nominate in writing or should such base lending rate cease to exist such other rate of interest as the Landlord (acting reasonably) shall deem to be most closely comparable with the said base lending rate "Interior Decorating Years" has the meaning given in the Particulars "Landlord" means the party described as the Landlord in the Particulars and includes the party for the time being entitled to the reversion immediately expectant on the determination of the Term "Landlord and Tenant Act" means the Landlord and Tenant Act 1954 "this Lease" means this Lease and any document which is made supplemental to this Lease or which is entered into pursuant to or in accordance with the terms of this Lease "Lettable Areas" means all parts of the Building which from time to time are either occupied or used by a tenant or tenants or capable or intended of being so occupied or used "Outside Business Hours Charge" means the whole of the cost incurred by the Landlord in carrying out or providing any of the Services (which are not normally provided by the Landlord outside the Business Hours) at the request of the Tenant outside Business Hours (including but not limited to costs and expenses in the nature of those set out in Part C of the Fourth Schedule) or in the event of any of the Services being carried out or provided outside Business Hours to the Tenant (at the request of the Tenant) and to any other tenant or tenants of the Building a fair proportion thereof as reasonably and properly determined by the Landlord "Particulars" means the immediately preceding section of this Lease headed "Particulars" "Permitted Underlease" means an underlease of the whole of the Premises which:- (a) is granted without any fine or premium (b) reserves a rent not less than the greater of the then open market rent of the Premises and the Principal Rent then payable - 5 - (c) incorporates provisions for the review of rent at the same times and on the same basis as in this Lease and (d) is (so far as is consistent with an underlease) in a form similar to this Lease and (e) incorporates an Exclusion Agreement "Permitted User" has the meaning given in the Particulars "Planning Acts" means the Town and Country Planning Act 1990 the Planning (Listed Buildings and Conservation Areas) Act 1990 the Planning (Hazardous Substances) Act 1990 the Planning (Consequential Provisions) Act 1990 and the Planning and Compensation Act 1991 "Plant" means all apparatus plant machinery and equipment within the Building from time to time including without limitation lifts lift-shafts hoists escalators stand-by generators and boilers and items relating to mechanical ventilation heating cooling public address telephone and closed-circuit television and building management systems the fire alarm system the sprinkler system the security systems the smoke detection and heat detection equipment and systems and the cleaning cradle equipment "Premises" means the part of the Building described as the Premises in the Particulars and includes:- (a) the plasterwork and decorative finishes applied to the internal surfaces of the external and load-bearing walls and columns of the Building but not any other part of the external or load-bearing walls and columns (b) the floor finishes and floor trunking finishes (c) the ceiling finishes any suspended ceiling and the void above any suspended ceiling so that the upper limit of the Premises includes such finishes suspended ceiling and void but does not extend to anything above them (d) the entirety of the non-load-bearing internal walls and glass partitions wholly within the Premises - 6 - (e) the plasterwork and decorative finishes applied to the internal surfaces of the internal non-load-bearing walls and the internal surface of partitioning or balustrading dividing the Premises from other parts of the Building and the internal decorative surfaces of the window frames and window furniture in the windows which form part of the external envelope of the Building or which separate the Premises from any atria within the Building (f) the internal surfaces and door furniture of the doors and the door frames (g) all additions and improvements to the Premises (h) all the Landlord's fixtures and fittings and fixtures of every kind which shall from time to time be in or upon the Premises (whether originally affixed or fastened to or upon the Premises or otherwise) except any such fixtures installed by the Tenant (i) all Conduits in on under or over and exclusively serving the Premises except those belonging to a statutory undertaker or public utility and references to the "Premises" in the absence of any provision to the contrary include any and every part of the Premises "Principal Rent" has the meaning given to it in the Particulars and in paragraph 1 of the Second Schedule "Rent Commencement Date" has the meaning given in the Particulars "Rents" means the Principal Rent the Insurance Rent and the other payments reserved as rent and referred to in Clause 3 "Replies to Preliminary Enquiries" means the replies given to the enquiries raised by Hopkins and Wood, Solicitors for the Tenant on grant of a Lease dated 16th August 1993 by Ashurst Morris Crisp, Solicitors for the Landlord dated 12th October 1993 and their letter to Hopkins and Wood dated 5th November 1993 "Service Charge" means the aggregate of the sums which the Landlord is required to pay to the Superior Landlord pursuant to Clauses 1(1)(iii) and 1(1)(iv) of the Superior Lease - 7 - "Services" means the services facilities and amenities to be provided by the Superior Landlord for the benefit of the Building "Site Plan" means the plan annexed to this Lease and marked "Site Plan" "Superior Lease" means a lease dated 8th March 1984 and made between (1) Clerical Medical and General Life Assurance Society and (2) the Landlord and the lease supplemental thereto dated 19th April 1985 and made between the same parties and includes where the context admits any lease whether mediate or immediate out of which that lease was created "Superior Lease Covenants" means the covenants agreements and provisions affecting the Premises contained in any Superior Lease and on the part of the tenant to be performed and observed except the covenant for payment of rent "Surety" means the party (if any) described as the Surety in the Particulars and includes:- (a) any party who enters into covenants with the Landlord pursuant to sub- clause 4.10 and (b) in the case of an individual his personal representatives "Tenant" means the party described as the Tenant in the Particulars and includes the Tenant's successors in title and assigns "Term" means the Contractual Term "Utilities" means water sewage gas electricity telephone telecommunications and other services and supplies of whatever nature now or at any time during the Term serving the Premises "Value Added Tax" means Value Added Tax or any other tax of a similar nature that may be substituted for or levied in addition to it in each case at the rate current from time to time 2. INTERPRETATION -------------- 2.1. The Particulars and the Schedules form part of this Lease - 8 - 2.2. The definitions contained in the Particulars have the meanings appearing alongside them for the purposes of this Lease 2.3. Where the Landlord or the Tenant or the Surety for the time being are two or more persons obligations expressed or implied to be made by or with such party are deemed to be made by or with such persons jointly and severally 2.4. Words importing one gender include all other genders and words importing the singular include the plural and vice versa 2.5.1. Rights expressed to be reserved in favour of the Landlord shall be deemed to extend to any superior landlord and any mortgagee of the Premises and all persons authorised by the Landlord and by any superior landlord or mortgagee including its or their agents professional advisers contractors and workmen 2.5.2. Rights expressed to be granted in favour of the Tenant shall be deemed to extend to all persons authorised by the Tenant or its mortgagee including its or their agents professional advisers contractors and workman 2.6. Any covenants by the Tenant not to do an act or thing shall be deemed to include an obligation not to permit or suffer such act or thing to be done 2.7. Any provisions in this Lease referring to the consent or approval of the Landlord shall be construed as also requiring the consent or approval of any superior landlord where such consent shall be required but nothing in this Lease shall be construed as implying that any obligation is imposed upon any superior landlord not unreasonably to refuse or delay any such consent or approval 2.8. Any references to a specific statute include any statutory extension or modification amendment or re-enactment of such statute and any regulations instruments or orders made under such statute and any general reference to "statute" or "statutes" include any regulations instruments or orders made under such statute or statutes 2.9. References in this Lease to any Clause sub-clause Schedule or paragraph without further designation shall be construed as a reference to a Clause sub-clause or paragraph of or Schedule to this Lease so numbered - 9 - 2.10. The Clause Paragraph and Schedule headings and the table of contents are for ease of reference only and shall not be taken into account in the construction or interpretation of this Lease or of the Clause Paragraph or Schedule to which they refer 2.11. Any reference to a superior landlord includes the Landlord's reversioner (whether mediate or immediate) at any time 2.12. References to "last year of the Term" include the last year of the Term if the Term shall determine otherwise than by effluxion of time and references to "expiry of the Term" include such other determination of the Term 2.13. The terms "parties" or "party" mean the Landlord and (or) the Tenant and except where there is an express indication to the contrary include the Surety 3. DEMISE ------ The Landlord at the request of the Surety demises to the Tenant the Premises TOGETHER WITH the rights and easements set out in Part 1 of the First Schedule but EXCEPTING AND RESERVING the rights and easements set out in Part 2 of the First Schedule TO HOLD the Premises to the Tenant for the Contractual Term YIELDING AND PAYING to the Landlord:- 3.1 on and from the date hereof until the Review Date the Principal Rent payable without any deduction by equal quarterly payments in advance on the usual quarter days the first such payment being a sum in respect of the period from and including the date hereof up to and including the day before the first quarter day after the date hereof and to be paid on the date hereof and 3.2. by way of further rent:- 3.2.1. the Insurance Rent payable at the times and in the manner provided in Clause 6 3.2.2. the payments of Interest referred to in sub-clause 4.18 3.2.3. the Service Charge payable at the times and in the manner provided in Clauses 1(2) 1(3) 1(4) 1(5) and 1(6) of the Superior Lease - 10 - 4. THE TENANT'S COVENANTS ---------------------- The Tenant covenants with the Landlord throughout the Term:- 4.1. Rents ----- To pay the Rents on the days and in the manner set out or referred to in this Lease and not to exercise or seek to exercise any right or claim to withhold rent or any right or claim to legal or equitable set-off 4.2. Outgoings and VAT ----------------- 4.2.1. To pay and to indemnify the Landlord against all rates taxes assessments duties charges impositions and outgoings which are now or during the Term shall be charged assessed or imposed upon the Premises or upon the owner or occupier of them save and except: (a) any tax charged on the Landlord in respect of rents and other payments due under this Lease (b) any tax occasioned by any disposition or deemed disposition of or dealing with the reversion expectant on the Term (c) such rates taxes charges assessments duties impositions and outgoings as the Landlord is bound by law to pay notwithstanding any contract to the contrary 4.2.2. To pay and to indemnify the Landlord against Value Added Tax chargeable in respect of any taxable supplies made to the Tenant by the Landlord under any of the terms of or in connection with this Lease (whether or not at the Landlord's election or otherwise howsoever arising) or in respect of any taxable supplies made by any third party to the Landlord where the Tenant agrees in this Lease to reimburse the Landlord for its costs in relation to those supplies and such sums shall be deemed to be and shall be recoverable as rent in arrear 4.2.3. To pay and to indemnify the Landlord for all charges including meter rents for all Utilities consumed or used at or in relation to the Premises - 11 - 4.3. Repair, cleaning and decorating ------------------------------- 4.3.1. To keep the Premises in good and substantial repair and condition (damage or destruction caused by any of the Insured Risks excepted unless and to the extent that the insurance effected by the Landlord is vitiated forfeited or avoided or the insurance money is irrecoverable in consequence of any act or default of the Tenant or any person deriving title under the Tenant or anyone at the Premises expressly or by implication with the authority of the Tenant or such person) 4.3.2. To replace from time to time with items of an equivalent standard and commensurate with the nature of the Premises the Landlord's fixtures and fittings in the Premises which may be or become beyond repair at any time during or at the expiry of the Term 4.3.3. In each of the Interior Decorating Years and in the last year of the Term to redecorate the interior of the Premises in a good and workmanlike manner and with appropriate materials of good quality to the reasonable satisfaction of the Landlord 4.3.4. As often as may be necessary throughout the Term to clean and treat and wash in accordance with good standards and in a good and workmanlike manner to the reasonable satisfaction of the Landlord all materials surfaces and finishes of the interior of the Premises which ought normally to be so cleaned treated or washed (subject to the provisions of paragraph 4.3.5 below) 4.3.5. As often as may be reasonably necessary but no less frequently than once in every month of the Term to clean the internal surfaces of the glazing of the windows and other glazing which form part of the external envelope of the Building or which separate the Premises from any atria within the Building 4.3.6. Not to maintain repair replace or carry out any other works to or otherwise interfere with or damage any plant machinery apparatus and equipment relating to or connected with the air conditioning and heating systems 4.3.7. To comply in all respects with all reasonable regulations and requirements of or imposed by or on behalf of the Landlord in relation to the collection and disposal of refuse from the Premises and (or) from the Building - 12 - 4.4. User and Restrictions on Use ---------------------------- 4.4.1. Not to use the Premises for any purpose other than the Permitted User 4.4.2. Not to keep or use or permit or suffer to be kept or used on the Premises any materials of a dangerous inflammable or explosive nature or any machinery engine safe or other thing which may attack or in any way injure by percolation corrosion vibration excessive eight or otherwise the structure of the demised premises or the keeping or using whereof may contravene any statute or any local regulation or bye-law for the time being affecting the demised premises Provided that the Tenant may keep and use on the Premises inflammable materials used in the normal course of using premises as an office in such reasonable quantities only as may be necessary in connection with such use and subject to observing all statutes regulations and bye-laws relating to the keeping and using of such substances and complying with the requirements of the insurers of the Premises 4.4.3. Not to use the Premises for a sale by auction 4.4.4. Not to overload the existing electric wires and cables and in the event of any additional or new wiring or cable becoming necessary or of the Landlord being required by the Electricity Authority or by the Insurers or the Building to provide the same the Tenant shall pay the cost of all such additional or new wiring or cable exclusively used by the Premises and of connecting the same to the mains and a proportional part of the cost of any such wiring or cable in respect of those parts of the Building used in common with other tenants such proportion to be certified by the Landlord 4.4.5.1. Not to use or permit or suffer the Premises or any part thereof to be used for any illegal or immoral purpose nor for the manufacture sale or consumption on the premises of beer wine or spirituous liquors nor as a school consular or diplomatic office hotel club billiard-saloon restaurant snack-bar launderette sex- shop betting shop or office gaming house bingo-hall discotheque dance-hall funfair leisure-centre or amusement arcade nor for the business of an undertaker nor for any noisy noxious or offensive trade or business nor as a residence or sleeping place for any person nor for any purpose which would constitute a breach of any restrictive covenants affecting the Building Provided that such prohibitions shall not prevent the use of the Premises for instruction and lecture purposes - 13 - and for a restaurant and snack-bar in each case as ancillary to the Tenant's use of the Premises 4.4.5.2. Not to do or permit or suffer to be done on the demised premises or any part thereof or in any communal part of the Building or the curtilage thereof anything which may be or become or cause a nuisance damage disturbance injury or danger of or to the Landlord or any other tenants of the Building or the owners lessees or occupiers of any premises in the neighbourhood and (without prejudice to the generality of the foregoing) not to use or permit or suffer to be used on the demised premises any electrical instrument or device unless fitted with an effective suppressor and properly earthed and insulated And to keep the Landlord fully and effectually indemnified against all actions proceedings damages costs expenses claims and demands whatsoever arising out of or in consequence of any breach or non-observance of this covenant 4.5. Waste and Alterations --------------------- Not to:- 4.5.1. commit any waste on or at the Premises 4.5.2. make any addition or extension to the Premises 4.5.3. unite the Premises with any adjoining premises 4.5.4. make any structural alteration to the Premises or 4.5.5. make any other alterations to the Premises PROVIDED THAT no consent shall be necessary for the erection removal and alteration of dry movable partitions within the Premises subject to the Tenant supplying full specifications and drawings within 7 days of completing such works and complying with all necessary statutory and other regulations whether relating to fire precautions or otherwise and preserving the integrity and proper working of the heating/air conditioning system for the Building and the Premises in particular and subject to the Tenant if so required by the Landlord removing the same at the end of the term and making good all damage thereby occasioned and restoring the demised premises to their former state and condition in all respects to the reasonable satisfaction of the Landlord and PROVIDED FURTHER THAT if in the - 14 - Landlord's opinion any partitioning fails to comply with such regulations as aforesaid or interferes with or damages the said heating/air conditioning system for the Building the Tenant shall at the request of the Landlord remove the same and make good all damage thereby occasioned without delay 4.6. Aerials Signs and Advertisements -------------------------------- Not at any time to affix or exhibit or permit or suffer to be affixed or exhibited to or upon any part of the exterior of the Premises or on the inside surface of any windows of the Premises or elsewhere in the Building any placard poster sign signboard notice or advertisement except as permitted by the Regulations set out in the Fourth Schedule substituted therefor by the Superior Landlord for the good management and reputation of the said Building 4.7. Obstruction ----------- Not to do anything whereby any road path forecourt or other area over which the Tenant may have rights of access or use may be damaged or the proper use thereof by others may be obstructed in any way 4.8. Statutory Obligations and Fire Precautions ------------------------------------------ 4.8.1. At the Tenant's own expense to execute all works and provide and maintain all arrangements upon or in respect of the Premises or the use to which the Premises are being put that are required in order to comply with the requirements of any statute or any government department local authority other public or competent authority environmental authority or court of competent jurisdiction regardless of whether such requirements are imposed on the Landlord the Tenant or the occupier and where such works or arrangements are required in respect of the Premises and other parts of the Building to be carried out by the Landlord to pay to the Landlord on demand a contribution representing a proper and reasonable proportion of the cost of implementing such works or arrangements 4.8.2. At the Tenant's own expense and without limiting the obligations set out earlier in this sub-clause 4.8:- - 15 - 4.8.2.1. to comply in all respects with the provisions of any statutes and any other obligations imposed by law or by any bye-laws applicable to the Premises or in regard to carrying on the business for the time being carried on at the Premises and 4.8.2.2. to comply with the requirements and recommendations of the fire authority and the Landlord in relation to fire precautions affecting the Demised Premises 4.9. Access to Landlord and Notice of Repair --------------------------------------- 4.9.1. To permit the Landlord on reasonable prior notice (except in case of emergency in which case no notice shall be necessary) and during reasonable times (or at any time in case of emergency):- 4.9.1.1. to enter upon the Premises for the purpose of ascertaining that the covenants and conditions of this Lease have been observed and performed 4.9.1.2. to inspect the state of repair and condition of the Premises 4.9.1.3. to give to the Tenant or leave upon the Premises a notice specifying any breach by the Tenant of the terms of this Lease and requesting the Tenant as soon as practicable to remedy the same and 4.9.1.4. to exercise the rights and easements excepted and reserved in Part 2 of the First Schedule 4.9.2. As soon as practicable to remedy the breach as required by such notice 4.9.3. If within ten Business Days (or within such shorter period as the Landlord may reasonably specify) of the service of such a notice the Tenant shall not have commenced and be proceeding diligently with the execution of the work referred to in the notice or shall have failed to complete the work within a reasonable period of time or if in the Landlord's reasonable opinion the Tenant is unlikely to have completed the work within such period to permit the Landlord to enter the Premises to execute such work as may be necessary to comply with the notice and to pay to the Landlord the proper cost of so doing and all proper expenses incurred by the Landlord (including legal costs and surveyor's fees) within ten Business Days of a written demand - 16 - 4.10. Dealings -------- 4.10.1. Not to:- 4.10.1.1. hold the Premises expressly or impliedly on trust for another person 4.10.1.2. part with possession of the Premises 4.10.1.3. share possession of the Premises with another person 4.10.1.4. allow anyone other than the Tenant its officers and employees to occupy the Premises 4.10.2. Not to assign a part (as distinct from the whole) of the Premises 4.10.3. Not to assign the whole of the Premises:- 4.10.3.1. unless the proposed assignee has first covenanted by deed with the Landlord in such form as the Landlord may reasonably require that with effect from the date of the assignment and for the remainder of the Term the assignee will pay the Rents and observe and perform all the provisions of this Lease to be observed and performed by the Tenant nor 4.10.3.2. (where the proposed assignee is a corporate body and the Landlord reasonably so requires) without first procuring either covenants by deed in the form (mutatis mutandis) ------ set out in the Third Schedule with the Landlord from not less than two individuals who are or a corporate body which is acceptable to the Landlord as guarantor or some other -- form of collateral security reasonably acceptable to the Landlord nor 4.10.3.3. without the prior written consent of the Landlord (which will not be unreasonably withheld) 4.10.3.4. The Tenant and the Surety shall be released from their respective obligations contained in this Lease upon any assignment of this Lease on the date two years after the assignment has been completed 4.10.4. Not to charge a part (as distinct from the whole) of the Premises - 17 - 4.10.5. Not to charge the whole of the Premises except to a bank or similar financial institution for the purpose only of borrowing money on the security of the Lease and with the prior written consent of the Landlord (which will not be unreasonably withheld) 4.10.6. Not to underlet a part (as distinct from the whole) of the Premises 4.10.7. Not to underlet the whole of the Premises:- 4.10.7.1. unless the proposed undertenant has first covenanted by deed with the Landlord in such form as the Landlord may reasonably require that with effect from the date of the underlease and during the term of the underlease the undertenant will observe and perform all the provisions of the underlease to be observed and performed by the undertenant and the provisions of this Lease (other than payment of the Principal Rent) to be observed and performed by the Tenant nor 4.10.7.2. (where the proposed undertenant is a corporate body and the Landlord reasonably so requires) without first procuring either ------ covenants by deed with the Landlord in the form (mutatis mutandis) set out in the Third Schedule from two individuals who are or a corporate body which is acceptable to the Landlord as guarantor or an alternative form of security reasonably -- acceptable to the Landlord nor 4.10.7.3. except by way of a Permitted Underlease nor 4.10.7.4. without the prior written consent of the Landlord (which will not be unreasonably withheld) 4.10.8. To enforce and not to waive or vary the provisions of a Permitted Underlease and to operate at the relevant dates of review the rent review provisions contained in an underlease but not to agree the rent upon such a review without the prior written approval of the Landlord 4.10.9. Within fifteen Business Days of any assignment charge underlease or sub-underlease or any transmission or other devolution relating to the Premises to give written notice thereof to the Landlord's solicitors together with three certified copies of the relevant document and to pay the Landlord's and Superior Landlord's solicitors' reasonable charges for the registration of every such document plus Value Added Tax - 18 - 4.11. Landlord's Costs ---------------- To pay to the Landlord and indemnify the Landlord against all reasonable and proper costs fees charges disbursements and expenses on an indemnity basis (including without prejudice to the generality of the above those payable to counsel solicitors surveyors and bailiffs) reasonably and properly incurred by the Landlord in relation to or incidental to:- 4.11.1. every application made by the Tenant for a consent approval or licence required by the provisions of this Lease whether such consent approval or licence is granted or lawfully refused or proffered subject to any lawful qualification or condition or whether the application is withdrawn 4.11.2. the preparation and service of a notice under Section 146 of the Law of Property Act 1925 or incurred by or in contemplation of proceedings under Sections 146 or 147 of that Act notwithstanding that forfeiture is avoided otherwise than by relief granted by the Court 4.11.3. the recovery or attempted recovery of arrears of the Rents or other sums due from the Tenant and 4.11.4. any steps taken in contemplation of or in connection with the preparation and service of a schedule of dilapidations during or after the expiry of the Term but which relates to dilapidations caused or occurring during the Term 4.12. The Planning Acts ----------------- 4.12.1. Not to commit any breach of the Planning Acts and to comply with the provisions and requirements of the Planning Acts that affect the Premises whether as to the Permitted User or otherwise and to indemnify and keep the Landlord indemnified both during and after the expiry of the Term against all liability whatsoever including costs and expenses incurred as a result of any breach occurring during the Term 4.12.2. At the expense of the Tenant to obtain all planning permissions and to serve all such notices as may be required for the carrying out of any operations or user on the Premises which may constitute Development provided that no application for planning permission shall be made without the prior written consent of the Landlord such consent to be withheld or granted at the Landlord's absolute discretion provided that the Landlord shall not unreasonably withhold consent in relation to matters in respect of which it has already granted consent pursuant to sub-clause 4.5 unless the - 19 - implementation of such planning permission would or would be likely to create or give rise to any tax or other fiscal liability for the Landlord and the Tenant fails to indemnify the Landlord against such liability having first been asked in writing to do so 4.12.3. Subject only to any statutory direction to the contrary to pay and satisfy any charge or levy that may subsequently be imposed under the Planning Acts in respect of the carrying out or maintenance of any such operations or the commencement or continuance of any such user 4.12.4. Notwithstanding any consent which may be granted by the Landlord under this Lease not to carry out or make any alteration or addition to the Premises or any change of use until:- 4.12.4.1. all necessary notices under the Planning Acts have been served and copies produced to the Landlord 4.12.4.2. all necessary permissions and consents under or pursuant to the Planning Acts have been obtained and produced to the Landlord and 4.12.4.3. the Landlord has acknowledged that every necessary planning permission is acceptable to it the Landlord being entitled to refuse to acknowledge its acceptance of a planning permission on the grounds that any condition contained in it or anything omitted from it or any period referred to in it would be or be likely to be prejudicial to the Landlord's interest in the Premises whether during or after the expiry of the Term 4.12.5. Unless the Landlord shall otherwise direct to carry out and complete before the expiry of the Term:- 4.12.5.1. any works stipulated to be carried out to the Premises by a date subsequent to such expiry as a condition of any planning permission granted for any Development commenced before the expiry of the Term and 4.12.5.2. any Development commenced upon the Premises in respect of which the Landlord shall or may be or become liable for any charge or levy under the Planning Acts - 20 - 4.12.6. If required by the Landlord but at the cost of the Tenant to appeal against any refusal of planning permission or the imposition of any conditions on a planning permission relating to the Premises following an application by the Tenant 4.12.7. Not to object to any application for planning permission that the Landlord may make whether jointly or alone in respect of any adjoining or neighbouring property 4.13. Plans, Documents and Information -------------------------------- If reasonably called upon to do so to produce within a reasonable period of demand: 4.13.1. to the Landlord all such plans documents and other evidence as the Landlord may reasonably require in order to satisfy itself that the provisions of this Lease have been complied with 4.13.2. to the Landlord or its agent full particulars of all occupants of the Premises and the terms of their occupation 4.14. Indemnities ----------- To be responsible for and to keep the Landlord fully indemnified against all damage damages losses costs expenses actions demands proceedings claims and liabilities made against or suffered or incurred by the Landlord and for and against all damage occasioned to the Premises or to any other part of the Building or any adjoining or neighbouring building arising directly or indirectly out of:- 4.14.1. any act omission or negligence of the Tenant or any persons at the Premises expressly or impliedly with the Tenant's authority or 4.14.2. any breach or non-observance by the Tenant of the covenants conditions or other provisions of this Lease or any of the matters to which this demise is subject 4.15. Disposal Boards and Viewing --------------------------- To permit the Landlord upon reasonable notice and during the last six months of the Contractual Term and at any time thereafter to permit upon reasonable notice persons with the written authority of the Landlord - 21 - or its agent at reasonable times of the day to view the Premises without interruption provided they are accompanied by the Landlord or its agents 4.16. Encroachments ------------- Not to stop up darken or obstruct any windows or light belonging to the Premises. 4.17. Yield Up -------- At the expiry of the Term:- 4.17.1. to yield up the Premises in accordance with the terms of this Lease to the reasonable satisfaction of the Landlord 4.17.2. to remove all placards signs notices fascias boards name-plates and advertisements fixed or exhibited by the Tenant in or upon the Premises and immediately to make good to the reasonable satisfaction of the Landlord any damage caused by such removal and 4.17.3. to give up all keys of the Premises to the Landlord 4.18. Interest on Arrears ------------------- If the Tenant shall fail to pay the Rents or any other sum due under or pursuant to this Lease within ten Business Days of the date on which payment was due and formally demanded (except in the case of the Principal Rent) the Tenant shall pay to the Landlord Interest on the Rents or other such sum and such Interest shall be deemed to be and shall be recoverable as rent in arrear 4.19. Statutory Notices ----------------- To give full particulars to the Landlord of any notice direction order or proposal for the Premises made given or issued to the Tenant by any local or public authority within three Business Days of receipt and if so required by the Landlord to produce it to the Landlord and without delay and at the cost of the Tenant to take all necessary steps to comply with such notice direction or order - 22 - 4.20. Defective Premises ------------------ To give notice to the Landlord of any defect in the Premises which might give rise to an obligation on the Landlord to do or refrain from doing any act or thing in order to comply with the provisions of this Lease or the duty of care imposed on the Landlord pursuant to the Defective Premises Act 1972 or otherwise and at all times to display and maintain all necessary notices which the Landlord may from time to time require to be displayed at the Premises 4.21. Compliance with Regulations --------------------------- At all times during the term to observe perform and comply with the conditions and regulations specified in the Fourth Schedule hereto and any alterations or additions thereto which may from time to time be made by the Landlord for the good management and reputation of the Building and the curtilage thereof and the parking areas or the safety or convenience of the tenants thereof And to take all reasonable steps to secure compliance with such conditions and regulations by the Tenant's staff and visitors 4.22. Outside Business Hours ---------------------- To give to the Landlord reasonable prior notice if the Tenant wishes to have access to the Premises outside the Business Hours for the Building and to pay to the Landlord on demand from time to time the costs of providing any of the services requited by the Tenant outside the Business Hours 4.23. Superior Lease Covenants ------------------------ 4.23.1. To observe and perform the Superior Lease Covenants 4.23.2. Not to do or permit or suffer anything whereby the Superior Lease may be avoided or forfeited 4.23.3. To keep the Landlord indemnified against all claims liabilities costs and expenses for or in respect of any breach by the Tenant of the Superior Lease Covenants 4.23.4. To permit the Landlord and any authorised person to enter the Premises at reasonable times only and upon reasonable prior notice (except in cases of emergency) in order to comply with any of the Superior Lease Covenants which may be necessary to prevent a forfeiture of the Superior Lease subject to the Landlord making good without unreasonable delay any damage thereby caused - 23 - 4.24. Option to Determine ------------------- If the Tenant shall desire to terminate the Term and to quit the Premises on the date of expiry of the fifth year of the Term and shall give to the Landlord not less than twelve months previous notice in writing to that effect (in respect of which notice time shall be of the essence) then upon the expiration of such notice the term of years created by this underlease shall forthwith cease and determine but without prejudice to any remedy of either party against the other in respect of any antecedent claims or breach of covenant contained in this Lease and the Tenant shall deliver up vacant possession of the Premises 5. THE LANDLORD'S COVENANTS ------------------------ The Landlord covenants with the Tenant that:- 5.1. the Tenant paying the Rents and performing and observing the covenants and conditions on the part of the Tenant herein contained the Landlord shall permit the Tenant peaceably and quietly to hold and enjoy the Premises during the Term without any interruption or disturbance from or by the Landlord or by any person lawfully claiming through under or in trust for the Landlord 5.2. it will use best endeavours to procure the compliance by the Superior Landlord with the covenants on the part of the Superior Landlord contained in the Superior Lease 5.3. the Landlord shall during the Term pay the rent reserved by the Superior Lease and perform and observe the covenants and conditions contained in the Superior Lease and on the part of the Landlord as tenant to be performed and observed except to the extent that they fall to be performed and observed by the Tenant pursuant to this Lease 6. INSURANCE --------- 6.1. Tenant's Insurance Covenants ---------------------------- The Tenant covenants with the Landlord:- 6.1.1. to pay the Insurance Rent within ten business days of a written demand for the period from and including the date of this Lease up to and including the day before the next policy renewal date and subsequently to pay the Insurance Rent within ten Business Days of a written demand and (if - 24 - so demanded) in advance of the policy renewal date provided that any such demand will be supported by proper evidence that the demand has been properly made 6.1.2. to comply with all the requirements and recommendations of the insurers of the Building that are notified to the Tenant 6.1.3. not to do or knowingly permit anything that could cause any policy of insurance on or in relation to the Building to become void or voidable wholly or in part nor (unless the Tenant shall have previously notified the Landlord and agreed to pay the increased premium) anything by which additional insurance premiums may become payable 6.1.4. to keep the Premises supplied with such fire fighting equipment as the insurer may require or as the Landlord may reasonably require and to maintain such equipment to their satisfaction and in efficient working order 6.1.5. to comply with the requirements and recommendations of the insurer and the reasonable requirements of the Landlord as to fire precautions relating to the Premises 6.1.6. not to obstruct the access to any fire equipment or the means of escape from the Premises nor to lock any fire door while the Premises are occupied 6.1.7. as soon as it reasonably comes to the attention of the Tenant to give notice to the Landlord immediately upon the happening of any event which might affect any insurance policy on or relating to the Premises or upon the happening of any event against which the Landlord may have insured under this Lease 6.1.8. not to effect any policy of insurance in relation to the Building without the prior written consent of the Landlord PROVIDED THAT the Tenant may insure the contents of the Premises and third party risks without the consent of the Landlord 6.1.9. if at any time the Tenant shall be entitled to the benefit of any insurance on the Premises except insurance of the contents of the Premises and third party risks (which is not effected or maintained in pursuance of any obligation contained in this Lease) to apply all money received by virtue of such insurance in making good the loss or damage in respect of which such money shall have been received - 25 - 6.1.10. if and whenever during the Term the Premises or any part ("the relevant part") of the Building giving access to the Premises are damaged or destroyed by any of the Insured Risks and the insurance money under the policy of insurance effected by the Landlord pursuant to its obligations contained in this Lease is by reason of any act or default of the Tenant or anyone at the Premises expressly or by implication with the Tenant's authority wholly or partially irrecoverable immediately in every such case to pay to the Landlord on demand the amount of such insurance money so irrecoverable with Interest on such amount (from the date of demand or (if earlier) the date on which the Landlord first suffered financial loss because of the insurance money being irrecoverable in whole or in part as aforesaid) 6.2. Suspension of Principal Rent ---------------------------- That if the Premises or any part thereof shall at any time during the term be destroyed or damaged by any of the Insured Risks so as to be unfit for occupation and use and any policy or policies of insurance effected by the Landlord shall not have vitiated or payment of the policy monies refused in consequence of some act or default of the Tenant the rents hereby reserved shall be suspended and shall cease to be payable until the Premises shall again be rendered fit for occupation and use or until the expiration of a period of three years (whichever shall be the shorter period) and if the Premises are not reinstated or rebuilt within the period of three years the Tenant may terminate this Lease by giving written notice to the Landlord within one month after the expiration of the period of three years and upon service of such notice this Lease shall terminate but without prejudice to any claim the Landlord may have against the Tenant for any earlier breach of covenant and any dispute concerning this Clause shall be determined by a single arbitrator in accordance with the Arbitration Acts 1950 and 1979 7. PROVISOS -------- 7.1. Re-Entry -------- If and whenever during the Term:- 7.1.1. the Rents (or any of them or any part of them) under this Lease are outstanding for more than ten Business Days after becoming due whether formally demanded or not or 7.1.2. there is a breach by the Tenant or the Surety of any covenant or other term of this Lease or any document expressed to be supplemental to this Lease or - 26 - 7.1.3. the Tenant or the Surety commits or permits an Act of Insolvency the Landlord may re-enter the Premises or any part of them in the name of the whole at any time and even if any previous right of re-entry has been waived and then the Term will absolutely cease but without prejudice to any rights or remedies which may have accrued to the Landlord against the Tenant or the Surety in respect of any breach of covenant or other term of this Lease including the breach in respect of which the re-entry is made 7.2. Rights and Easements -------------------- The operation of Section 62 of the Law of Property Act 1925 shall be excluded from this Lease and the only rights granted to the Tenant are those expressly set out in Part I of the First Schedule and the Tenant shall not by virtue of this Lease be deemed to have acquired or be entitled to and the Tenant shall not during the Term acquire or become entitled to by any means whatever any easement from or over or affecting any other land or premises now or at any time after the date of this Lease belonging to the Landlord or any Group Company of the Landlord and not comprised in this Lease 7.3. Disputes with Adjoining Occupiers --------------------------------- If any dispute arises between the Tenant and the tenants or occupiers of other parts of the Building or the Adjoining Property as to any easement right or privilege in connection with the use of the Premises and any other part of the Building or the Adjoining Property or as to the boundary structures separating the Premises from any other property it shall be decided by the Landlord or in such manner as the Landlord shall direct 7.4. Exclusion of Use Warranty ------------------------- Nothing in this Lease or in any consent granted by the Landlord under this Lease shall imply or warrant that the Premises may lawfully be used under the Planning Acts for the purpose authorised in this Lease or any purpose subsequently authorised 7.5. Representations --------------- The Tenant acknowledges that this Lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord except any such statement or representation that is expressly set out in this Lease and those contained in the Replies to Preliminary Enquiries - 27 - 7.6. Tenant's Property ----------------- If after the Tenant has vacated the Premises on the expiry of the Term any property of the Tenant remains in or on the Premises and the Tenant fails to remove it within ten Business Days after being requested in writing by the Landlord to do so or if after using all reasonable endeavours the Landlord is unable to make such a request to the Tenant within ten Business Days from the first attempt so made by the Landlord:- 7.6.1. the Landlord may as the agent of the Tenant sell such property and the Tenant shall indemnify the Landlord against any liability incurred by it to any third party whose property shall have been sold by the Landlord in the mistaken belief held in good faith (which shall be presumed unless the contrary is proved) that such property belonged to the Tenant 7.6.2. the Landlord shall (subject to paragraph 7.6.3 below) forthwith after such sale pay to the Tenant the proceeds of such sale after having deducted the reasonable fees and expenses incurred by or on behalf of the Landlord in connection with such sale 7.6.3. if the Landlord having made reasonable efforts is unable to locate the Tenant the Landlord shall be entitled to retain such proceeds of sale absolutely unless the Tenant shall claim them within three months of the date on which the Tenant vacated the Premises and 7.6.4. the Tenant shall indemnify the Landlord against any damage occasioned to the Premises and any actions claims proceedings costs expenses and demands made against the Landlord caused by or related to the presence of the property in or on the Premises 7.7. Compensation on Vacating ------------------------ Any statutory right of the Tenant to claim compensation from the Landlord on vacating the Premises shall be excluded to the extent that the law allows 7.8. Covenants Relating to Adjoining Premises ---------------------------------------- Nothing contained in or implied by this Lease shall give the Tenant the benefit of or the right to enforce or to prevent the release or modifications of any covenant agreement or condition entered into by any tenant of the Landlord in respect of any property not comprised in this Lease - 28 - 7.9. Service of Notices ------------------ 7.9.1. The provisions of Section 196 of the Law of Property Act 1925 as amended by the Recorded Delivery Service Act 1962 shall apply to the giving and service of all notices and documents under or in connection with this Lease except that Section 196 shall be deemed to be amended as follows:- the final words of Section 196(4)" . . . . and that service . . . be delivered" shall be deleted and there shall be substituted ". . . and that service shall be deemed to be made on the second Business Day after the registered letter has been posted" 7.9.2. Any notice or document shall also be sufficiently served if sent by telex facsimile transmission or any other means of electronic transmission to the party to be served and that service shall be deemed to be made on the day of transmission if transmitted before 4 p.m. on a Business Day but otherwise on the next following Business Day and in this Clause "party" includes the Surety 7.10. Value Added Tax --------------- 7.10.1. Save as the context requires or as otherwise stated all references to payments made in this Lease are references to such payments exclusive of any Value Added Tax chargeable in respect of the supply of goods or services for which the payment is consideration and insofar as such payments fall to be made under this Lease such Value Added Tax shall be added to the amount thereof and paid in addition thereto 7.10.2. Without prejudice to and save as mentioned earlier in this sub- clause 7.10 where any supply is made pursuant to this Lease the recipient of such supply shall pay to the supplier any Value Added Tax chargeable in respect thereof 7.10.3. Where any payment is required to be made pursuant to this Lease to reimburse the payee for any expenditure which the payee may have incurred such payment shall include an amount equal to any Value Added Tax comprised in that expenditure which is not recoverable by the payee as input tax under Section 14 of the Value Added Tax Act 1983 - 29 - 7.11. Exclusion of Landlord and Tenant Act 1954 ----------------------------------------- Having been authorised to do so by Order of the Lambeth County Court made on the 14th day of December 1993 under the provisions of Section 38(4) of the Landlord and Tenant Act (as amended by Section 5 of the Law of Property Act 1969) the Landlord and the Tenant hereby agree that the provisions of Section 24 to 28 (inclusive) of the Landlord and Tenant Act shall be excluded in relation to this Lease 7.12. Jurisdiction ------------ 7.12.1. This Deed shall be governed by and construed in accordance with English Law 7.12.2. The parties hereto irrevocably submit to the non-exclusive jurisdiction of the High Court of Justice in London for the purpose of hearing and determining any dispute arising out of this Deed and for the purpose of enforcement of any judgment against its assets the Surety agrees that service of any writ notice or other document for the purpose of any proceedings in such Court shall be duly served upon it if delivered or sent by registered post to ACC Corp at 39 State Street City Rochester NY 14614 United States of America IN WITNESS of which this Lease has been executed as a Deed by the parties and is delivered on the date appearing in the Particulars THE FIRST SCHEDULE ------------------ Part 1 ------ Rights and Easements Granted ---------------------------- 1. The exclusive right to park private motor cars in eight parking spaces in the Car Park and/or any adjoining parking area from time to time available to the Landlord 2. The following rights (in common with the Landlord the Superior Landlord and their lessees and tenants and all other persons expressly or impliedly authorised by them respectively):- 2.1. the right at all times to use the common entrance halls (including the approaches thereto from the public highway) staircases lift lobbies corridors passages toilets and (during the hours when the same shall be in operation) the lifts for the purpose of ingress to and egress from the Premises:- - 30 - (i) during the hours of 9.00 a.m. to 12.30 p.m. on Saturdays and 8.30 a.m. to 6.30 p.m. on all other weekdays except Bank and other general Public Holidays (ii) subject to the Tenant complying with the covenant contained in Clause 4.22 during all other hours and days 2.2. the free and uninterrupted passage and running of water soil gas electricity telephone telex air and other services from or to the Premises through the sewers drains pipes cables conduits and ducts which are now or may hereafter be in under over or upon the Building 2.3. the right to support shelter and protection for the Premises from the remainder of the Building THE FIRST SCHEDULE ------------------ Part 2 ------ Rights and Easements Excepted and Reserved ------------------------------------------ 1. The right at any time to alter or add to any adjoining adjacent or neighbouring premises or building upon any adjoining adjacent or neighbouring land or to build thereon notwithstanding that the access of light or air to any windows of the Premises is thereby diminished but provided that any damage caused in the exercise of such right is forthwith made good to the satisfaction of the Tenant 2. The free and uninterrupted passage and running of water soil gas electricity telephone telex air and other services from or to other parts of the Building through the sewers drains pipes wires cables conduits and ducts which are now or may hereafter be in under over or upon the Premises 3. The full and free right and liberty to enter upon the Premises after giving the requisite notice (except in case of emergency or as otherwise provided) at such times and for such purposes as the Tenant herein covenants to permit entry or where the same is necessary for the purposes of enabling the Landlord to comply with its obligations herein contained and perform the services set out in the Fourth Schedule of the Superior Lease 4. Full right of support shelter and protection for the remainder of the Building from the Premises - 31 - THE SECOND SCHEDULE ------------------- Principal Rent and Rent Review ------------------------------ 1. In this Schedule the following expressions shall have the following meanings:- (a) "the Review Date" means the Twenty fifth day of December One thousand nine hundred and ninety eight (b) "the rent periods" means the initial period commencing with the date on which rent commences to be payable hereunder until (but not including) the Review Date and thereafter the final period to the end of the term (c) "the basic yearly rent" means the Principal Rent (d) "commercial yearly rent" means the yearly rent at which the Premises as a whole might reasonably be expected then to be let in the open market with vacant possession by a willing landlord to a willing tenant by a lease in the same terms in all respects as this Lease (other than the amount of the basic yearly rent payable hereunder but including the provisions for rent review and excluding the provisions of Clause 4.24 of this Lease) for a term equal to the original term of this Lease commencing on the Review Date and on the following assumptions (whether or not such shall in fact be the case):- (i) that the Premises are fitted out and equipped for immediate occupation and use for the purpose or purposes required by the willing tenant referred to in paragraph (d) above (ii) that no work has been carried out thereon by the Tenant its sub- tenants or their respective predecessors in title during the Contractual Term which has diminished the rental value of the Premises and that in case the Premises have been destroyed or damaged they have been fully restored (iii) that all the Tenant's covenants and conditions in this Lease have been duly performed and observed - 32 - (iv) that the Premises may be lawfully used by any person for the purposes permitted under this Lease (v) that the willing tenant referred to in paragraph (d) would commence paying rent immediately on and from the Review Date and that such rent would not be discounted in any way to reflect any rent concession or other benefit but disregarding (i) any effect on rent of the fact that the Tenant its sub-tenants or their respective predecessors in title have been in occupation of the Premises or any part thereof (ii) any goodwill attached to the Premises or any part thereof by reason of the carrying on thereat of the business of the Tenant its sub-tenants or their predecessors in title in their respective businesses and (iii) any effect on rent of any improvement of the Premises or any part thereof completed not more than twenty one years prior to the date at which the review is to take effect and carried out with consent (where required) otherwise than in pursuance of an obligation to the Landlord or its predecessors in title either (a) by the Tenant its sub-tenants or their respective predecessors in title during the term or (b) by any tenant or sub-tenant of the Premises before the commencement of the term so long as the Landlord or its predecessors in title have not since the improvement was carried out had vacant possession of the relevant part of the Premises 2. The Landlord shall be entitled by notice in writing given to the Tenant at any time during the last year of any rent period to call for a review of the basic yearly rent payable under this Lease and if upon any such review it shall be found that the commercial yearly rent of the Premises at the end of such rent period shall be greater than the Principal Rent hereinbefore reserved then as from the end of such rent period the basic yearly rent payable under this Lease shall on each such occasion be increased to the then commercial yearly rent as aforesaid 3. If notwithstanding the provisions of the previous sub-clause a review of the basic yearly rent shall not have been called for during the last year of any rent period by notice as aforesaid the Landlord may at any time during the first four years of the next rent period immediately following serve upon the Tenant a notice calling for a review of the basic yearly rent payable under this Lease and if upon any such review it shall be found that the commercial - 33 - yearly rent of the demised premises at the end of the year of the term in which or at the next usual quarter day following the date on which the notice was actually served (whichever shall be the earlier) shall be greater than the Principal Rent hereinbefore reserved or than the basic yearly rent then payable hereunder owing to the operation of this present Schedule (as the case may be) then as from the end of such year of the term or such quarter day (whichever shall be the earlier) the basic yearly rent payable under this Lease shall on each such occasion be increased to the then commercial yearly rent as aforesaid Provided always that:- (a) a review of the basic yearly rent shall (except in circumstances arising under paragraph (b) of this proviso) only be called for once in accordance with the provisions of this sub-clause and the previous sub-clause of this Schedule during the period of five years commencing with the last year of each rent period and (b) if a review of the basic yearly rent shall have been called for at any time in accordance with this sub-clause or the previous sub-clause of this Schedule by notice as aforesaid but the right to review the basic yearly rent or to recover an increased basic yearly rent is restrained or restricted by or by virtue of any Act of Parliament coming into force after the review has been called for as aforesaid so that either the review cannot be carried out or the whole or any part of any increase in the basic yearly rent arising upon that review cannot be recovered with effect from the review date the Landlord may by notice in writing to the Tenant require the previous sub-clause or this sub- clause (as the case may be) to be construed as if the basic yearly rent was to be reviewed at and any increased basic yearly rent found to be payable was to be payable with effect from the date upon which such restraint or restriction was first removed or relaxed and for the purpose of operating the review procedure under sub-clause 4 of this Schedule such notice shall be construed as the Landlord's notice calling for review in lieu of the notice served by the Landlord under this sub-clause or the previous sub-clause of this Schedule (as the case may be) 4. Such review shall in the first instance be made by the Landlord and the Tenant or their respective Surveyors in collaboration but if no agreement as to the amount of the increase (if any) to be made in the said yearly rent shall have been reached between the parties within three months after the date of the Landlord's notice calling for such review (or any extension of such time agreed in writing between the parties) the question whether there shall be an increase in the said yearly rent (and if so what the amount of the revised yearly rent shall be) shall be determined by an arbitrator such arbitrator to be nominated in the absence of agreement by or on behalf of the President for the time being of the Royal Institution of Chartered Surveyors on the application of either the Landlord or the Tenant And in relation to the application for any such nomination or the determination by the person nominated time shall not be of the essence Provided always that if at any review date the revised basic yearly rent to be - 34 - payable as from such review date shall not then have been agreed between the Landlord and the Tenant and if the parties shall not have made any application to the President for the time being of the Royal Institution of Chartered Surveyors as hereinbefore provided and shall not have agreed on the identity of the arbitrator the Tenant may serve on the Landlord notice in writing containing a proposal as to the amount of such revised basic yearly rent not being less than the basic yearly rent payable immediately before such review date and the amount so proposed shall be deemed to have been agreed by the parties as the revised basic yearly rent to be payable from such review date and sub-clause 6 of this Schedule shall apply accordingly unless the Landlord shall make such application as aforesaid within three months after service of such notice by the Tenant 5. (a) In the case of an arbitration the arbitration shall be conducted in accordance with the Arbitration Act 1950 to 1979 (b) When the amount of any basic yearly rent to be ascertained as hereinbefore provided shall have been so ascertained memoranda specifying and confirming the revised basic yearly rent to be payable shall forthwith be signed by or on behalf of the Landlord and the Tenant and annexed to this Lease and the Counterpart thereof and the parties shall bear their own costs in respect thereof 6. If at any review date the revised basic yearly rent to be payable as from such review date shall not then have been agreed or determined in the manner aforesaid then until such agreement or determination shall have been made the Tenant shall pay the said rent at such yearly rate at such times and in such manner as shall have been applicable immediately prior to such review date and any rent in excess of such rent which may later be found to be payable hereunder in respect of the period from such review date until the quarter day next following such agreement or determination shall be paid without any deduction within twenty one days of the date on which the revised basic yearly rent shall have been ascertained with interest thereon at four per cent below the Interest Rate calculated on a day to day basis from the date at which the rent was to be reviewed down to the date of payment THE THIRD SCHEDULE ------------------ Covenants by the Surety ----------------------- 1.1. Covenant and indemnity by Surety -------------------------------- (a) In consideration of the Landlord entering into this Lease the Surety covenants with the Landlord that:- - 35 - (i) the Tenant (failing whom the Surety) will at all times during the Term duly perform and observe all the covenants on the part of the Tenant contained in this Lease (including without limitation the payment of the Rents and all other sums payable under this Lease) in the manner and at the times specified in this Lease and (ii) the Surety will indemnify and keep indemnified the Landlord against all claims demands losses damages liability costs fees and expenses whatsoever sustained by the Landlord by reason of or arising in any way directly or indirectly out of any default by the Tenant in the performance and observance of any of its obligations hereunder or the payment of any Rents or other sums payable hereunder or arising as a result of the Lease being disclaimed by a liquidator or trustee in bankruptcy or similar officer appointed to or in respect of the Tenant and having such power (each a "Relevant Disclaimer") (b) For the purposes of Clause 1.1(a) above the Term will be deemed to continue for the duration specified in this Lease notwithstanding that a Relevant Disclaimer occurs 1.2. Nature of Surety's Obligations ------------------------------ (a) The obligations of the Surety hereunder are primary obligations (b) The Surety is jointly and severally liable with the Tenant for the fulfillment of all the obligations of the Tenant under this Lease (c) Notwithstanding any legal limitation disability or incapacity on or of the Tenant or any other fact or circumstance whether known to the Landlord or not the Landlord may proceed against and recover from the Surety as if the Surety was named as the Tenant in this Lease (d) The Landlord shall not be obliged to make any demand on the Tenant before enforcing its rights against the Surety hereunder 1.3. Waiver by Surety ---------------- The obligations of the Surety hereunder are to constitute a continuing security in addition to and without prejudice to any other rights which the Landlord may have and the Surety hereby waives any right to require the - 36 - Landlord to proceed against the Tenant or to pursue any other remedy whatsoever which may be available to the Landlord before proceeding against the Surety 1.4. Postponement of claims by Surety against Tenant ----------------------------------------------- (a) Unless otherwise instructed by the Landlord the Surety will not claim or accept any payment or property in any liquidation bankruptcy composition or arrangement of the Tenant in competition with the Landlord nor seek to recover (whether directly or by way of set off lien counter claim or otherwise) any money or other property nor exercise any other right or remedy whatsoever in respect of any sum which may be or become due to the Surety from the Tenant nor exercise any rights of subrogation or indemnity against the Tenant until in each such case all the Surety's obligations hereunder have been performed and discharged in full (b) The Surety will forthwith pay to the Landlord an amount equal to any set-off in fact exercised by it and will promptly pay or transfer to the Landlord any payment or distribution or benefit in fact received by it notwithstanding the terms of Clause 1.4(a) above (c) The Surety agrees that it will exercise any rights of subrogation against the Tenant and any rights to prove in a liquidation of the Tenant which it may have in accordance with the directions of the Landlord 1.5. Postponement of participation by Surety in security --------------------------------------------------- The Surety confirms it has not taken and undertakes it will not take from the Tenant any security in connection with its obligations hereunder and declares that any security so taken shall be held on trust for the Landlord and further the Surety agrees that it shall not be entitled to participate in any security held by the Landlord in respect of the Tenant's obligations to the Landlord under this Lease nor to stand in the place of the Landlord in respect of any such security until all the obligations of the Tenant or the Surety to the Landlord under this Lease have been performed or discharged in full 1.6. No release of Surety -------------------- None of the following nor any combination thereof shall release determine discharge or in any way lessen or affect the liability of the Surety hereunder or otherwise prejudice or affect the right of the Landlord to recover from the Surety to the full extent of its obligations hereunder:- - 37 - (a) any neglect delay or forbearance of the Landlord in endeavouring to obtain payment of the Rents or other amounts payable under this Lease by the Tenant or in enforcing the performance or observance of any of the obligations of the Tenant under this Lease (b) any refusal by the Landlord to accept Rents tendered by or on behalf of the Tenant (c) any extension of time given by the Landlord to the Tenant (d) any variation of the terms of this Lease (including any reviews of the Principal Rent) or the transfer of the Landlord's reversion or the assignment of this Lease or the surrender of any part thereof (e) the release of any person for the time being jointly or severally liable for the Tenant's obligations or liable as surety for the Tenant's obligations (f) any change in the constitution structure or powers of any of the Tenant the Surety or the Landlord or the liquidation administration or bankruptcy (as the case may be) of any of the Tenant the Surety or the Landlord (g) any legal limitation or any immunity disability or incapacity of the Tenant (whether or not known to the Landlord) or the fact that any dealings with the Landlord or the Tenant may be outside or in excess of the powers of the Tenant or the Surety (h) the taking variation compromise renewal release or refusal or neglect to perfect or enforce any right remedies or securities against the Tenant or any other person (i) any Relevant Disclaimer (j) any other act omission matter or thing whatsoever whereby but for this provision the Surety would be exonerated or released either wholly or in part (other than a release by Deed given by the Landlord) 1.7. Disclaimer or forfeiture of Lease --------------------------------- (a) The Surety undertakes to the Landlord that:- - 38 - (i) if a liquidator or trustee in bankruptcy or similar officer having such power shall disclaim or surrender this Lease or (ii) if this Lease shall be forfeited or (iii) if the Tenant shall cease to have legal existence THEN the Surety shall if the Landlord by notice in writing given to the Surety within six (6) months after such disclaimer or other event occurs so requires accept from and execute and deliver to the Landlord a counterpart of a new lease of the Premises for a term commencing on the date of the disclaimer or other event and continuing for the residue then remaining unexpired of the Term (as specified in this Lease) such new lease to be at the cost of the Surety and to be at the same rents and subject to the same covenants conditions and provisions as are contained in this Lease (b) If this Lease is disclaimed and for any reason the Landlord does not require the Surety to accept a new lease of the Premises in accordance with this Schedule the Landlord shall be entitled to require that the Surety pays to the Landlord on demand an amount equal to the Rents for the period commencing with the date of such disclaimer and ending on whichever is the earlier of:- (i) the date six months after such disclaimer and (ii) the date (if any) upon which the Premises are relet 1.8. Cumulative Powers and Avoidance of Payments ------------------------------------------- (a) The powers conferred on the Landlord hereunder are cumulative without prejudice to its powers under the general law and may be exercised as often as the Landlord thinks appropriate The Landlord may in connection with the exercise of its powers join or concur with any person in any transaction scheme or arrangement whatsoever (b) If the Landlord reasonably considers that any amount paid by the Surety hereunder is capable of being avoided or set aside on the liquidation or administration of the Surety or otherwise then for the purposes of this Lease such amount shall not be considered to have been paid - 39 - (c) Any settlement or discharge between the Landlord and the Tenant and/or the Surety shall be conditional upon no security or payment to the Landlord by the Tenant or the Surety or any other person being avoided or set aside or ordered to be refunded or reduced by virtue of any provision or enactment relating to bankruptcy insolvency or liquidation for the time being in force and accordingly (but without limiting the Landlord's other rights hereunder) the Landlord shall be entitled to recover from the Surety the value which the Landlord has placed upon such security or the amount of any such payment as if such settlement or discharge had not occurred 1.9. Representations --------------- The Surety warrants and represents that it has full power to enter into the obligations and covenants hereunder and has taken all necessary corporate or other action required to authorise its execution of this Lease and that the provisions of this Lease constitute the legal valid and binding obligations of the Surety 1.10. Benefit of guarantee -------------------- (a) The covenants undertakings and agreements of the Surety hereunder shall enure for the benefit of the successors and assigns of the Landlord to this Lease without the necessity for any assignment thereof to such successors and assigns (b) Without prejudice to Clause 1.10(a) above the Landlord may assign the benefit of the provisions of this Lease and the covenants undertakings and agreements of the Surety hereunder to any third party and the Surety shall join in such documents as may be necessary to effect such assignment 1.11 Interest on Late Payment ------------------------ The Surety will pay Interest on all sums payable by it to the Landlord hereunder 1.12. Costs and Expenses ------------------ The Surety will indemnify the Landlord against all the Landlord's legal and other costs losses charges and expenses (on a full indemnity basis) arising in connection with any modification amendment release and/or enforcement or attempted enforcement of or preservation of the Landlord's rights under this Lease - 40 - 1.13. Set-off ------- All payments to be made by the Surety hereunder will be made in full without any deduction for any set-off or counterclaim the Surety may have against the Landlord 1.14. Waiver ------ No delay or omission by the Landlord in exercising any right power or privilege hereunder shall impair such right power of privilege or be construed as a waiver of such right power or privilege 1.15. Invalidity ---------- If at any time any one or more provisions of this Schedule is or becomes invalid illegal or unenforceable in any respect under any law the validity legality and enforceability of the remaining provisions hereof shall not be in any way affected or impaired thereby THE FOURTH SCHEDULE ------------------- The Regulations --------------- 1. The Landlord (which term shall in this Fourth Schedule include the Superior Landlord) or the Landlord's agents or staff shall be at liberty to refuse to any person access to the Building if they shall think that such refusal is for the benefit of the tenants or occupants of the Building 2. Tenants are not entitled to use the lifts for the carriage of articles likely to cause damage to the lifts or the Building and the Landlord or the Landlord's agents or staff shall be at liberty to refuse permission to use the passenger lifts for the carriage of any goods whatsoever if this shall interfere with the convenience of the other tenants or occupants of the said building or be likely to cause damage to the passenger lifts or the Building 3. Tenants are not entitled to place deposit store or abandon any goods articles or rubbish whatsoever in the common parts of the said building but shall place all rubbish only in the bin stores or other areas designated for that purpose by the Landlord from time to time 4. Tenants shall not misuse the communal toilet facilities and lifts and in particular shall not empty tea leaves down the sinks or deposit solid or obnoxious matter in the toilets - 41 - 5. Tenants shall not be entitled to erect nameboards or display notices in the common parts of the Building but each tenant may have one entry only in respect of the tenancy on the Landlord's nameboard in the entrance hall of the Building by arrangement with the Landlord's agents The Landlord reserves the right to vary the position of any entrance hall nameboard and to rearrange the disposition of the lettering thereon Nameboards or display notices or lettering on the entrance door or subsidiary entrance door of the Premises must conform to the standard design for the Building to be notified to the tenant by the Landlord or the Landlord's agents 6. Any services rendered to a tenant by staff employed by the Landlord other than services referred to in the Fourth Schedule of the Superior Lease hereto are to be deemed special services for which and for the consequences of which that tenant shall be entirely responsible and tenants shall not be entitled to any services from such staff which may in any way interfere with the performance of their duties to the Landlord or the Landlord's agents 7. Tenants shall not play or permit or suffer the playing of any musical instrument or the use of any radio television record-player or other similar device for the reproduction of any music or sound on or in the Premises so as to be audible outside the Premises (THE COMMON SEAL of IBM UNITED KINGDOM (LIMITED was hereunto affixed in the (presence of: Director NJH Secretary [illegible] - 42 - Annex A Site Plan [This document is a site plan that shows the Chiswick Centre bordered by Chiswick High Road, Essex Place and Acton Lane. The Site plan also shows the available parking spaces.] - 43 - Annex B Floor Plan [This document is a floor plan that shows the office area that is subject to the Lease.] EX-99.12 15 UNDERLEASE AGREEMENT DATED 6/6/95 Exhibit 99.12 DATED 6th June 1995 ------------------------------------------------------------------------ (1) IBM UNITED KINGDOM LIMITED - and - (2) ACC LONG DISTANCE UK LIMITED - and - (3) ACC CORP - -------------------------------------------------------------------------------- UNDERLEASE of First Floor at The Chiswick Centre 414 Chiswick High Road London W4 - -------------------------------------------------------------------------------- ASHURST MORRIS CRISP Broadwalk House 5 Appold Street London EC2A 2HA Tel: 0171-638-1111 Fax: 0171-972-7990 CONTENTS Clause - ------ or Schedule Heading - ----------- ------- PARTICULARS 1. DEFINITIONS 2. INTERPRETATION 3. DEMISE 4. THE TENANT'S COVENANTS 4.1. Rents 4.2. Outgoings and VAT 4.3. Repair, cleaning and decorating 4.4. User and Restrictions on Use 4.5. Waste and Alterations 4.6 Aerials Signs and Advertisements 4.7. Obstruction 4.8. Statutory Obligations and Fire Precautions 4.9. Access to Landlord and Notice of Repair 4.10. Dealings 4.11. Landlord's Costs 4.12. The Planning Acts 4.13. Plans, Documents and Information 4.14. Indemnities 4.15. Disposal Boards and Viewing 4.16. Encroachments 4.17. Yield Up 4.18. Interest on Arrears 4.19. Statutory Notices 4.20. Defective Premises 4.21. Compliance with Regulations 4.22. Outside Business Hours 4.23. Superior Lease Covenants 4.24. Option to Determine 5. THE LANDLORD'S COVENANTS 6. INSURANCE3 6.1. Tenant's Insurance Covenants 6.2. Suspension of Principal Rent 7. PROVISOS 7.1. Re-Entry 7.2. Rights and Easements 7.3. Disputes with Adjoining Occupiers 7.4. Exclusion of Use Warranty 7.5. Representations 7.6. Tenant's Property 7.7. Compensation on Vacating 7.8. Covenants relating to Adjoining Premises -i- 7.9. Service of Notices 7.10. Value Added Tax 7.11. Exclusion of Landlord and Tenant Act of 1954 7.12. Jurisdiction THE FIRST SCHEDULE - Part 1 Rights and Easements Granted THE FIRST SCHEDULE - Part 2 Rights and Easements Excepted and Reserved THE SECOND SCHEDULE - Principal Rent and Rent Review THE THIRD SCHEDULE - Covenants by the Surety THE FOURTH SCHEDULE - The Regulations -ii- PARTICULARS ----------- DATE : 6th June 1995 - -------------------------------------------------------------------------------- LEASE OR UNDERLEASE : UNDERLEASE - -------------------------------------------------------------------------------- LANDLORD : IBM UNITED KINGDOM LIMITED whose registered office is at P.O. Box 41 North Harbour Portsmouth Hampshire PO6 3AU TENANT : ACC LONG DISTANCE UK LIMITED (Company Registration Number 2671855) whose registered office is at 2-3 Cursitor Street London EC4A 1NE SURETY : ACC CORP whose registered office is at 39 State Street City Rochester NY14614 United States of America - -------------------------------------------------------------------------------- PREMISES : the first floor of the Building shown for the purpose of identification only edged red on the Floor Plan and being more particularly described in Clause 1 - -------------------------------------------------------------------------------- CONTRACTUAL TERM : From and including the 7th day of April 1995 until and including the 28th day of September 2003 - -------------------------------------------------------------------------------- PRINCIPAL RENT : ONE HUNDRED AND THIRTY FIVE THOUSAND FOUR HUNDRED AND TWENTY POUNDS ((Pounds)135,420) per annum - -------------------------------------------------------------------------------- RENT COMMENCEMENT DATE : the 20th day of May 1996 - -------------------------------------------------------------------------------- INITIAL PROVISIONAL SERVICE CHARGE : THIRTY FOUR THOUSAND SEVEN HUNDRED AND SEVEN POUNDS ((Pounds)34,707) per annum - -------------------------------------------------------------------------------- PERMITTED USER : high class offices within Class II of the Schedule to the Town and Country Planning (Use Classes) Order 1972 - -------------------------------------------------------------------------------- INTERIOR DECORATING YEARS : 1998 - -------------------------------------------------------------------------------- THIS UNDERLEASE made on the date and between the parties specified in the Particulars WITNESSES as follows:- 1. DEFINITIONS ----------- In this Lease and the Schedules the following words and expressions have the following meanings:- "Accountant" means any person or firm appointed by the Landlord (including an employee of the Landlord or a Group Company of the Landlord) to perform the functions of the Accountant under this Lease "Act of Insolvency" means in relation to a corporate body that:- it is unable to pay its debts as defined in section 123 of the Insolvency Act 1986 (referred to as "the Act" in the remainder of this definition) (and for the purposes of interpreting that section the must be proved to the satisfaction of the court that" in sub- sections 123(1) and 123(2) shall be ignored) or a proposal is made for a voluntary arrangement under Part I of the Act or a petition is presented for an administration order under Part II of the Act or a receiver and (or) manager or administrative receiver is appointed whether under Part III of the Act or otherwise or it goes into liquidation as defined in Section 247(2) of the Act (other than a voluntary winding up solely for the purpose of amalgamation or reconstruction while solvent) or a provisional liquidator is appointed under Section 135 of the Act or a proposal is made for a scheme of arrangement under Section 425 of the Companies Act 1985 and in relation to an individual that:- - 2 - an application is made for an interim order or a proposal is made for a voluntary arrangement under Part VIII of the Act or a bankruptcy petition is presented to the Court or his circumstances are such that a bankruptcy petition could be presented under Part IX of the Act or he enters into a deed of arrangement "Adjoining Property" means any neighbouring or adjoining land or premises now or at any time during the Term belonging to the Landlord or a Group Company of the Landlord "Building" means the land and building(s) known as The Chiswick Centre Chiswick London W4 shown for the purpose of identification only edged red on the Site Plan "Business Day" means a day on which clearing banks in the City of London are (or would be but for a strike lockout or other stoppage affecting particular banks or banks generally) open during banking hours and "Business Days" shall be interpreted accordingly "Business Hours" means 8.30 a.m. to 6.30 p.m. Mondays to Fridays (except Bank Holidays) or such other hours as the Landlord may determine "Car Park" means the car parking areas shown for the purpose of identification only edged green on the Site Plan "Common Parts" means all areas which are from time to time during the Term provided by the Landlord for common use and enjoyment by the general public and (or) by tenants and the occupiers of the Building and all persons expressly or by implication authorised by them including without limitation the pedestrian areas and walkways forecourts car parking areas landscaped areas entrance halls landings hoists lifts lift-shafts staircases escalators and passages "Conduits" mean all conduits sewers drains mains ducts pipes gutters watercourses wires cables fibres channels flues and all other conducting media including any fixings louvres cowls and any other ancillary apparatus "Contractual Term" has the meaning given in the Particulars - 3 - "Development" has the meaning given by Section 55 of the Town and Country Planning Act 1990 "Exclusion Agreement" means an agreement contained or referred to in an underlease of the Premises or any part thereof authorised by Order of the Court under Section 38(4)(a) of the 1954 Act excluding in relation to that underlease the provisions of Sections 24 to 28 of the Landlord and Tenant Act "Floor Plan" means the plan annexed to this Lease and marked "Floor Plan" "Group Company" means any company which is for the time being a subsidiary or a holding company or another subsidiary of the holding company in each case within the meaning of Section 736 of the Companies Act 1985 which Section shall for this purpose be deemed not to have been amended by subsequent legislation "Initial Provisional Service Charge" means the annual amount referred to in the Particulars "Insurance Rent" means the sums to be reimbursed by the Tenant to the Landlord comprising a reasonable proportion of the cost to the Landlord from time to time of:- (a) insuring the Building or reimbursing the Superior Landlord therefor in accordance with the Landlord's obligations contained in this Lease and the Superior Lease and (b) effecting insurance against loss of the Principal Rent for a period of three years and (c) insuring in such amount and on such terms as the Landlord or the Superior Landlord shall reasonably consider appropriate against all liability of the Landlord or the Superior Landlord to third parties arising out of or in connection with any matter relating to the Building "Insured Risks" means fire storm tempest flood earthquake lightning explosion impact aircraft (other than hostile aircraft) and other aerial devices and articles dropped therefrom riot civil commotion and malicious damage bursting or overflowing of water tanks apparatus or conduits subsidence heave and such other risks as the Landlord may in its reasonable discretion from time to time determine "Interest" means interest (compounded at monthly rests) both before and after any judgement at the Interest Rate then prevailing during the period beginning on the date 14 days after the relevant payment is due and has been demanded and ending on the date on which the relevant payment is received by way of cleared funds - 4 - "Interest Rate" means Four percentage points above the base lending rate from time to time in force of National Westminster Bank PLC or such other Bank whose Chairman is a member of the Committee of London Clearing Bankers as the Landlord may from time to time nominate in writing or should such base lending rate cease to exist such other rate of interest as the Landlord (acting reasonably) shall deem to be most closely comparable with the said base lending rate "Interior Decorating Years" has the meaning given in the Particulars "Landlord" means the party described as the Landlord in the Particulars and includes the party for the time being entitled to the reversion immediately expectant on the determination of the Term "Landlord and Tenant Act" means the Landlord and Tenant Act 1954 "this Lease" means this Lease and any document which is made supplemental to this Lease or which is entered into pursuant to or in accordance with the terms of this Lease "Lettable Areas" means all parts of the Building which from time to time are either occupied or used by a tenant or tenants or capable or intended of being so occupied or used "Outside Business Hours Charge" means the whole of the cost incurred by the Landlord in carrying out or providing any of the Services (which are not normally provided by the Landlord outside the Business Hours) at the request of the Tenant outside Business Hours (including but not limited to costs and expenses in the nature of those set out in Part C of the Fourth Schedule) or in the event of any of the Services being carried out or provided outside Business Hours to the Tenant (at the request of the Tenant) and to any other tenant or tenants of the Building a fair proportion thereof as reasonably and properly determined by the Landlord "Particulars" means the immediately preceding section of this Lease headed "Particulars" "Permitted Underlease" means an underlease of the whole of the Premises which:- (a) is granted without any fine or premium (b) reserves a rent not less than the greater of the then open market rent of the Premises and the Principal Rent then payable - 5 - (c) incorporates provisions for the review of rent at the same times and on the same basis as in this Lease and (d) is (so far as is consistent with an underlease) in a form similar to this Lease and (e) incorporates an Exclusion Agreement "Permitted User" has the meaning given in the Particulars "Planning Acts" means the Town and Country Planning Act 1990 the Planning (Listed Buildings and Conservation Areas) Act 1990 the Planning (Hazardous Substances) Act 1990 the Planning (Consequential Provisions) Act 1990 and the Planning and Compensation Act 1991 "Plant" means all apparatus plant machinery and equipment within the Building from time to time including without limitation lifts lift-shafts hoists escalators stand-by generators and boilers and items relating to mechanical ventilation heating cooling public address telephone and closed-circuit television and building management systems the fire alarm system the sprinkler system the security systems the smoke detection and heat detection equipment and systems and the cleaning cradle equipment "Premises" means the part of the Building described as the Premises in the Particulars and includes:- (a) the plaster work and decorative finishes applied to the internal surfaces of the external and load-bearing walls and columns of the Building but not any other part of the external or load-bearing walls and columns (b) the floor finishes and floor trunking finishes (c) the ceiling finishes any suspended ceiling and the void above any suspended ceiling so that the upper limit of the Premises incudes such finishes suspended ceiling and void but does not extend to anything above them (d) the entirety of the non-load-bearing internal walls and glass partitions wholly within the Premises (e) the plasterwork and decorative finishes applied to the internal surfaces of the internal non-load-bearing walls and the internal surface of partitioning or balustrading dividing the Premises from other parts of the Building and the internal decorative surfaces of the window frames and window - 6 - furniture in the windows which form part of the external envelope of the Building or which separate the Premises from any atria within the Building (f) the internal surfaces and door furniture of the doors and the door frames (g) all additions and improvements to the Premises (h) all the Landlord's fixtures and fittings and fixtures of every kind which shall from time to time be in or upon the Premises (whether originally affixed or fastened to or upon the Premises or otherwise) except any such fixtures installed by the Tenant (i) all Conduits in on under or over and exclusively serving the Premises except those belonging to a statutory undertaker or public utility and references to the "Premises" in the absence of any provision to the contrary include any and every part of the Premises "Principal Rent" has the meaning given to it in the Particulars and in paragraph 1 of the Second Schedule "Rent Commencement Date" has the meaning given in the Particulars "Rents" means the Principal Rent the Insurance Rent and the other payments reserved as rent and referred to in Clause 3 "Service Charge" means the aggregate of the sums which the Landlord is required to pay to the Superior Landlord pursuant to Clauses 1(1)(iii) and 1(1)(iv) of the Superior Lease "Services" means the services facilities and amenities to be provided by the Superior Landlord for the benefit of the Building "Site Plan" means the plan annexed to this Lease and marked "Site Plan" "Superior Lease" means a lease dated 8th March 1984 and made between (1) Clerical Medical and General Life Assurance Society and (2) the Landlord and the lease supplemental thereto dated 19th April 1985 and made - 7 - between the same parties and includes where the context admits any lease whether mediate or immediate out of which that lease was created "Superior Lease Covenants" means the covenants agreements and provisions affecting the Premises contained in any Superior Lease and on the part of the tenant to be performed and observed except the covenant for payment of rent "Surety" means the party (if any) described as the Surety in the Particulars and includes:- (a) any party who enters into covenants with the Landlord pursuant to sub- clause 4.10 and (b) in the case of an individual his personal representatives "Tenant" means the party described as the Tenant in the Particulars and includes the Tenant's successors in title and assigns "Term" means the Contractual Term "Utilities" means water sewage gas electricity telephone telecommunications and other services and supplies of whatever nature now or at any time during the Term serving the Premises "Value Added Tax" means Value Added Tax or any other tax of a similar nature that may be substituted for or levied in addition to it in each case at the rate current from time to time 2. INTERPRETATION -------------- 2.1. The Particulars and the Schedules form part of this Lease 2.2. The definitions contained in the Particulars have the meanings appearing alongside them for the purposes of this Lease 2.3. Where the Landlord or the Tenant or the Surety for the time being are two or more persons obligations expressed or implied to be made by or with such party are deemed to be made by or with such persons jointly and severally - 8 - 2.4. Words importing one gender include all other genders and words importing the singular include the plural and vice versa 2.5.1. Rights expressed to be reserved in favour of the Landlord shall be deemed to extend to any superior landlord and any mortgagee of the Premises and all persons authorised by the Landlord and by any superior landlord or mortgagee including its or their agents professional advisers contractors and workmen 2.5.2. Rights expressed to be granted in favour of the Tenant shall be deemed to extend to all persons authorised by the Tenant or its mortgagee including its or their agents professional advisers contractors and workman 2.6. Any covenants by the Tenant not to do an act or thing shall be deemed to include an obligation not to permit or suffer such act or thing to be done 2.7. Any provisions in this Lease referring to the consent or approval of the Landlord shall be construed as also requiring the consent or approval of any superior landlord where such consent shall be required but nothing in this Lease shall be construed as implying that any obligation is imposed upon any superior landlord not unreasonably to refuse or delay any such consent or approval 2.8. Any references to a specific statute include any statutory extension or modification amendment or re-enactment of such statute and any regulations instruments or orders made under such statute and any general reference to "statute" or "statutes" include any regulations instruments or orders made under such statute or statutes 2.9. References in this Lease to any Clause sub-clause Schedule or paragraph without further designation shall be construed as a reference to a Clause sub- clause or paragraph of or Schedule to this Lease so numbered 2.10. The Clause Paragraph and Schedule headings and the table of contents are for ease of reference only and shall not be taken into account in the construction or interpretation of this Lease or of the Clause Paragraph or Schedule to which they refer 2.11. Any reference to a superior landlord includes the Landlord's reversioner (whether mediate or immediate) at any time 2.12. References to "last year of the Term" include the last year of the Term if the Term shall determine otherwise than by effluxion of time and references to "expiry of the Term" include such other determination of the Term - 9 - 2.13. The terms "parties" or "party" mean the Landlord and (or) the Tenant and except where there is an express indication to the contrary include the Surety 3. DEMISE ------ The Landlord at the request of the Surety demises to the Tenant the Premises TOGETHER WITH the rights and easements set out in Part 1 of the First Schedule but EXCEPTING AND RESERVING the rights and easements set out in Part 2 of the First Schedule TO HOLD the Premises to the Tenant for the Contractual Term YIELDING AND PAYING to the Landlord:- 3.1. on and from the date hereof until the Review Date the Principal Rent payable without any deduction by equal quarterly payments in advance on the usual quarter days the first such payment being a sum in respect of the period from and including the date hereof up to and including the day before the first quarter day after the date hereof and to be paid on the date hereof and 3.2. by way of further rent:- 3.2.1. the Insurance Rent payable at the times and in the manner provided in Clause 6 3.2.2. the payments of Interest referred to in sub-clause 4.18 3.2.3. the Service Charge payable at the times and in the manner provided in Clauses 1(2) 1(3) 1(4) 1(5) and 1(6) of the Superior Lease 4. THE TENANT'S COVENANTS ---------------------- The Tenant covenants with the Landlord throughout the Term:- 4.1. Rents ----- To pay the Rents on the days and in the manner set out or referred to in this Lease and not to exercise or seek to exercise any right or claim to withhold rent or any right or claim to legal or equitable set-off - 10 - 4.2. Outgoings and VAT ----------------- 4.2.1. To pay and to indemnify the Landlord against all rates, taxes, assessments, duties, charges, impositions and outgoings which are now or during the Term shall be charged assessed or imposed upon the Premises or upon the owner or occupier of them save and except:- (a) any tax charged on the Landlord in respect of rents and other payments due under this Lease (b) any tax occasioned by any disposition or deemed disposition of or dealing with the reversion expectant on the Term (c) such rates taxes charges assessments duties impositions and outgoings as the Landlord is bound by law to pay notwithstanding any contract to the contrary 4.2.2. To pay and to indemnify the Landlord against Value Added Tax chargeable in respect of any taxable supplies made to the Tenant by the Landlord under any of the terms of or in connection with this Lease (whether or not at the Landlord's election or otherwise howsoever arising) or in respect of any taxable supplies made by any third party to the Landlord where the Tenant agrees in this Lease to reimburse the Landlord for its costs in relation to those supplies and such sums shall be deemed to be and shall be recoverable as rent in arrear 4.2.3. To pay and to indemnify the Landlord for all charges including meter rents for all Utilities consumed or used at or in relation to the Premises 4.3. Repair, cleaning and decorating ------------------------------- 4.3.1. To keep the Premises in good and substantial repair and condition (damage or destruction caused by any of the Insured Risks excepted unless and to the extent that the insurance effected by the Landlord is vitiated forfeited or avoided or the insurance money is irrecoverable in consequence of any act or default of the Tenant or any person deriving title under the Tenant or anyone at the Premises expressly or by implication with the authority of the Tenant or such person) 4.3.2. To replace from time to time with items of an equivalent standard and commensurate with the nature of the Premises the Landlord's fixtures and fittings in the Premises which may be or become beyond repair at any time during or at the expiry of the Term - 11 - 4.3.3. In each of the Interior Decorating Years and in the last year of the Term to redecorate the interior of the Premises in a good and workmanlike manner and with appropriate materials of good quality to the reasonable satisfaction of the Landlord 4.3.4. As often as may be necessary throughout the Term to clean and treat and wash in accordance with good standards and in a good and workmanlike manner to the reasonable satisfaction of the Landlord all materials surfaces and finishes of the interior of the Premises which ought normally to be so cleaned treated or washed (subject to the provisions of paragraph 4.3.5 below) 4.3.5. As often as may be reasonably necessary but no less frequently than once in every month of the Term to clean the internal surfaces of the glazing of the windows and other glazing which form part of the external envelope of the Building or which separate the Premises from any atria within the Building 4.3.6. Not to maintain repair replace or carry out any other works to or otherwise interfere with or damage any plant machinery apparatus and equipment relating to or connected with the air conditioning and heating systems 4.3.7. To comply in all respects with all reasonable regulations and requirements of or imposed by or on behalf of the Landlord in relation to the collection and disposal of refuse from the Premises and (or) from the Building 4.4. User and Restrictions on Use ---------------------------- 4.4.1. Not to use the Premises for any purpose other than the Permitted User 4.4.2. Not to keep or use or permit or suffer to be kept or used on the Premises any materials of a dangerous inflammable or explosive nature or any machinery engine safe or other thing which may attack or in any way injure by percolation corrosion vibration excessive weight or otherwise the structure of the demised premises or the keeping or using whereof may contravene any statute or any local regulation or bye-law for the time being affecting the demised premises Provided that the Tenant may keep and use on the Premises inflammable materials used in the normal course of using premises as an office in such reasonable quantities only as may be necessary in connection with such use and subject to observing all statutes regulations and bye-laws relating to the keeping and using of such substances and complying with the requirements of the insurers of the Premises - 12 - 4.4.3. Not to use the Premises for a sale by auction 4.4.4. Not to overload the existing electric wires and cables and in the event of any additional or new wiring or cable becoming necessary or of the Landlord being required by the Electricity Authority or by the Insurers or the Building to provide the same the Tenant shall pay the cost of all such additional or new wiring or cable exclusively used by the Premises and of connecting the same to the mains and a proportional part of the cost of any such wiring or cable in respect of those parts of the Building used in common with other tenants such proportion to be certified by the Landlord 4.4.5.1. Not to use or permit or suffer the Premises or any part thereof to be used for any illegal or immoral purpose nor for the manufacture sale or consumption on the premises of beer wine or spirituous liquors nor as a school consular or diplomatic office hotel club billiard-saloon restaurant snack-bar launderette sex-shop betting shop or office gaming house bingo-hall discotheque dance-hall funfair leisure-centre or amusement arcade nor for the business of an undertaker nor for any noisy noxious or offensive trade or business nor as a residence or sleeping place for any person nor for any purpose which would constitute a breach of any restrictive covenants affecting the Building Provided that such prohibitions shall not prevent the use of the Premises for instruction and lecture purposes and for a restaurant and snack-bar in each case as ancillary to the Tenant's use of the Premises 4.4.5.2. Not to do or permit or suffer to be done on the demised premises or any part thereof or in any communal part of the Building or the curtilage thereof anything which may be or become or cause a nuisance damage disturbance injury or danger of or to the Landlord or any other tenants of the Building or the owners lessees or occupiers of any premises in the neighbourhood and (without prejudice to the generality of the foregoing) not to use or permit or suffer to be used on the demised premises any electrical instrument or device unless fitted with an effective suppressor and properly earthed and insulated And to keep the Landlord fully and effectually indemnified against all actions proceedings damages costs expenses claims and demands whatsoever arising out of or in consequence of any breach or non-observance of this covenant 4.5. Waste and Alterations --------------------- Not to:- 4.5.1. commit any waste on or at the Premises - 13 - 4.5.2. make any addition or extension to the Premises 4.5.3. unite the Premises with any adjoining premises 4.5.4. make any structural alteration to the Premises or 4.5.5. make any other alterations to the Premises PROVIDED THAT no consent shall be necessary for the erection removal and alteration of dry movable partitions within the Premises subject to the Tenant supplying full specifications and drawings within 7 days of completing such works and complying with all necessary statutory and other regulations whether relating to fire precautions or otherwise and preserving the integrity and proper working of the heating/air conditioning system for the Building and the Premises in particular and subject to the Tenant if so required by the Landlord removing the same at the end of the term and making good all damage thereby occasioned and restoring the demised premises to their former state and condition in all respects to the reasonable satisfaction of the Landlord and PROVIDED FURTHER THAT if in the Landlord's opinion any partitioning fails to comply with such regulations as aforesaid or interferes with or damages the said heating/air conditioning system for the Building the Tenant shall at the request of the Landlord remove the same and make good all damage thereby occasioned without delay 4.6 Aerials Signs and Advertisements -------------------------------- 4.6. Not at any time to affix or exhibit or permit or suffer to be affixed or exhibited to or upon any part of the exterior of the Premises or on the inside surface of any windows of the Premises or elsewhere in the Building any placard poster sign signboard notice or advertisement except as permitted by the Regulations set out in the Fourth Schedule substituted therefor by the Superior Landlord for the good management and reputation of the said Building 4.7. Obstruction ----------- Not to do anything whereby any road path forecourt or other area over which the Tenant may have rights of access or use may be damaged or the proper use thereof by others may be obstructed in any way - 14 - 4.8. Statutory Obligations and Fire Precautions ------------------------------------------ 4.8.1. At the Tenant's own expense to execute all works and provide and maintain all arrangements upon or in respect of the Premises or the use to which the Premises are being put that are required in order to comply with the requirements of any statute or any government department local authority other public or competent authority environmental authority or court of competent jurisdiction regardless of whether such requirements are imposed on the Landlord the Tenant or the occupier and where such works or arrangements are required in respect of the Premises and other parts of the Building to be carried out by the Landlord to pay to the Landlord on demand a contribution representing a proper and reasonable proportion of the cost of implementing such works or arrangements 4.8.2. At the Tenant's own expense and without limiting the obligations set out earlier in this sub-clause 4.8:- 4.8.2.1. to comply in all respects with the provisions of any statutes and any other obligations imposed by law or by any bye-laws applicable to the Premises or in regard to carrying on the business for the time being carried on at the Premises and 4.8.2.2. to comply with the requirements and recommendations of the fire authority and the Landlord in relation to fire precautions affecting the Demised Premises 4.9. Access to Landlord and Notice of Repair --------------------------------------- 4.9.1. To permit the Landlord on reasonable prior notice (except in case of emergency in which case no notice shall be necessary) and during reasonable times (or at any time in case of emergency):- 4.9.1.1. to enter upon the Premises for the purpose of ascertaining that the covenants and conditions of this Lease have been observed and performed 4.9.1.2. to inspect the state of repair and condition of the Premises 4.9.1.3. to give to the Tenant or leave upon the Premises a notice specifying any breach by the Tenant of the terms of this Lease and requesting the Tenant as soon as practicable to remedy the same and 4.9.1.4. to exercise the rights and easements excepted and reserved in Part 2 of the First Schedule - 15 - 4.9.2. As soon as practicable to remedy the breach as required by such notice 4.9.3. If within ten Business Days (or within such shorter period as the Landlord may reasonably specify) of the service of such a notice the Tenant shall not have commenced and be proceeding diligently with the execution of the work referred to in the notice or shall have failed to complete the work within a reasonable period of time or if in the Landlord's reasonable opinion the Tenant is unlikely to have completed the work within such period to permit the Landlord to enter the Premises to execute such work as may be necessary to comply with the notice and to pay to the Landlord the proper cost of so doing and all proper expenses incurred by the Landlord (including legal costs and surveyor's fees) within ten Business Days of a written demand 4.10. Dealings -------- 4.10.1. Not to:- 4.10.1.1. hold the Premises expressly or impliedly on trust for another person 4.10.1.2. part with possession of the Premises 4.10.1.3. share possession of the Premises with another person 4.10.1.4. allow anyone other than the Tenant its officers and employees to occupy the Premises 4.10.2. Not to assign a part (as distinct from the whole) of the Premises. 4.10.3. Not to assign the whole of the Premises:- 4.10.3.1. unless the proposed assignee has first covenanted by deed with the Landlord in such form as the Landlord may reasonably require that with effect from the date of the assignment and for the remainder of the Term the assignee will pay the Rents and observe and perform all the provisions of this Lease to be observed and performed by the Tenant nor 4.10.3.2. (where the proposed assignee is a corporate body and the Landlord reasonably so requires) without first procuring either covenants by ------ deed in the form (mutatis mutandis) set out in the Third Schedule with the Landlord from not less than two individuals who are or a corporate body which is acceptable - 16 - to the Landlord as guarantor or some other form of collateral security -- reasonably acceptable to the Landlord nor 4.10.3.3. without the prior written consent of the Landlord (which will not be unreasonably withheld) 4.10.3.4. The Tenant and the Surety shall be released from their respective obligations contained in this Lease upon any assignment of this Lease on the date two years after the assignment has been completed 4.10.4. Not to charge a part (as distinct from the whole) of the Premises 4.10.5. Not to charge the whole of the Premises except to a bank or similar financial institution for the purpose only of borrowing money on the security of the Lease and with the prior written consent of the Landlord (which will not be unreasonably withheld) 4.10.6. Not to underlet a part (as distinct from the whole) of the Premises 4.10.7. Not to underlet the whole of the Premises:- 4.10.7.1. unless the proposed undertenant has first covenanted by deed with the Landlord in such form as the Landlord may reasonably require that with effect from the date of the underlease and during the term of the underlease the undertenant will observe and perform all the provisions of the underlease to be observed and performed by the undertenant and the provisions of this Lease (other than payment of the Principal Rent) to be observed and performed by the Tenant nor 4.10.7.2. (where the proposed undertenant is a corporate body and the Landlord reasonably so requires) without first procuring either covenants by ------ deed with the Landlord in the form (mutatis mutandis) set out in the Third Schedule from two individuals who are or a corporate body which is acceptable to the Landlord as guarantor or an alternative form of -- security reasonably acceptable to the Landlord nor 4.10.7.3. except by way of a Permitted Underlease nor 4.10.7.4. without the prior written consent of the Landlord (which will not be unreasonably withheld) - 17 - 4.10.8. To enforce and not to waive or vary the provisions of a Permitted Underlease and to operate at the relevant dates of review the rent review provisions contained in an underlease but not to agree the rent upon such a review without the prior written approval of the Landlord 4.10.9. Within fifteen Business Days of any assignment charge underlease or sub-underlease or any transmission or other devolution relating to the Premises to give written notice thereof to the Landlord's solicitors together with three certified copies of the relevant document and to pay the Landlord's and Superior Landlord's solicitors' reasonable charges for the registration of every such document plus Value Added Tax 4.11. Landlord's Costs ---------------- To pay to the Landlord and indemnify the Landlord against all reasonable and proper costs fees charges disbursements and expenses on an indemnity basis (including without prejudice to the generality of the above those payable to counsel solicitors surveyors and bailiffs) reasonably and properly incurred by the Landlord in relation to or incidental to:- 4.11.1 every application made by the Tenant for a consent approval or licence required by the provisions of this Lease whether such consent approval or licence is granted or lawfully refused or proffered subject to any lawful qualification or condition or whether the application is withdrawn 4.11.2. the preparation and service of a notice under Section 146 of the Law of Property Act 1925 or incurred by or in contemplation of proceedings under Sections 146 or 147 of that Act notwithstanding that forfeiture is avoided otherwise than by relief granted by the Court 4.11.3. the recovery or attempted recovery of arrears of the Rents or other sums due from the Tenant and 4.11.4. any steps taken in contemplation of or in connection with the preparation and service of a schedule of dilapidations during or after the expiry of the Term but which relates to dilapidations caused or occurring during the Term 4.12. The Planning Acts ----------------- 4.12.1. Not to commit any breach of the Planning Acts and to comply with the provisions and requirements of the Planning Acts that affect the Premises whether as to the Permitted User or otherwise and to indemnify and - 18 - keep the Landlord indemnified both during and after the expiry of the Term against all liability whatsoever including costs and expenses incurred as a result of any breach occurring during the Term 4.12.2. At the expense of the Tenant to obtain all planning permissions and to serve all such notices as may be required for the carrying out of any operations or user on the Premises which may constitute Development provided that no application for planning permission shall be made without the prior written consent of the Landlord such consent to be withheld or granted at the Landlord's absolute discretion provided that the Landlord shall not unreasonably withhold consent in relation to matters in respect of which it has already granted consent pursuant to sub-clause 4.5 unless the implementation of such planning permission would or would be likely to create or give rise to any tax or other fiscal liability for the Landlord and the Tenant fails to indemnify the Landlord against such liability having first been asked in writing to do so 4.12.3. Subject only to any statutory direction to the contrary to pay and satisfy any charge or levy that may subsequently be imposed under the Planning Acts in respect of the carrying out or maintenance of any such operations or the commencement or continuance of any such user 4.12.4. Notwithstanding any consent which may be granted by the Landlord under this Lease not to carry out or make any alteration or addition to the Premises or any change of use until:- 4.12.4.1. all necessary notices under the Planning Acts have been served and copies produced to the Landlord 4.12.4.2. all necessary permissions and consents under or pursuant to the Planning Acts have been obtained and produced to the Landlord and 4.12.4.3. the Landlord has acknowledged that every necessary planning permission is acceptable to it the Landlord being entitled to refuse to acknowledge its acceptance of a planning permission on the grounds that any condition contained in it or anything omitted from it or any period referred to in it would be or be likely to be prejudicial to the Landlord's interest in the Premises whether during or after the expiry of the Term 4.12.5. Unless the Landlord shall otherwise direct to carry out and complete before the expiry of the Term:- 4.12.5.1. any works stipulated to be carried out to the Premises by a date subsequent to such expiry as a condition of any planning permission granted for any Development commenced before the expiry of the Term and - 19 - 4.12.5.2. any Development commenced upon the Premises in respect of which the Landlord shall or may be or become liable for any charge or levy under the Planning Acts 4.12.6. If required by the Landlord but at the cost of the Tenant to appeal against any refusal of planning permission or the imposition of any conditions on a planning permission relating to the Premises following an application by the Tenant 4.12.7. Not to object to any application for planning permission that the Landlord may make whether jointly or alone in respect of any adjoining or neighbouring property 4.13. Plans, Documents and Information -------------------------------- If reasonably called upon to do so to produce within a reasonable period of demand:- 4.13.1. to the Landlord all such plans documents and other evidence as the Landlord may reasonably require in order to satisfy itself that the provisions of this Lease have been complied with 4.13.2. to the Landlord or its agent full particulars of all occupants of the Premises and the terms of their occupation. 4.14. Indemnities ----------- To be responsible for and to keep the Landlord fully indemnified against all damage damages losses costs expenses actions demands proceedings claims and liabilities made against or suffered or incurred by the Landlord and for and against all damage occasioned to the Premises or to any other part of the Building or any adjoining or neighbouring building arising directly or indirectly out of:- 4.14.1. any act omission or negligence of the Tenant or any persons at the Premises expressly or impliedly with the Tenant's authority or 4.14.2. any breach or non-observance by the Tenant of the covenants conditions or other provisions of this Lease or any of the matters to which this demise is subject - 20 - 4.15. Disposal Boards and Viewing --------------------------- To permit the Landlord upon reasonable notice and during the last six months of the Contractual Term and at any time thereafter to permit upon reasonable notice persons with the written authority of the Landlord or its agent at reasonable times of the day to view the Premises without interruption provided they are accompanied by the Landlord or its agents 4.16. Encroachments ------------- Not to stop up darken or obstruct any windows or light belonging to the Premises 4.17. Yield Up -------- At the expiry of the Term:- 4.17.1. to yield up the Premises in accordance with the terms of this Lease to the reasonable satisfaction of the Landlord 4.17.2. to remove all placards signs notices fascias boards name-plates and advertisements fixed or exhibited by the Tenant in or upon the Premises and immediately to make good to the reasonable satisfaction of the Landlord any damage caused by such removal and 4.17.3. to give up all keys of the Premises to the Landlord 4.18. Interest on Arrears ------------------- If the Tenant shall fail to pay the Rents or any other sum due under or pursuant to this Lease within ten Business Days of the date on which payment was due and formally demanded (except in the case of the Principal Rent) the Tenant shall pay to the Landlord Interest on the Rents or other such sum and such Interest shall be deemed to be and shall be recoverable as rent in arrear 4.19. Statutory Notices ----------------- To give full particulars to the Landlord of any notice direction order or proposal for the Premises made given or issued to the Tenant by any local or public authority within three Business Days of receipt and - 21 - if so required by the Landlord to produce it to the Landlord and without delay and at the cost of the Tenant to take all necessary steps to comply with such notice direction or order 4.20. Defective Premises ------------------ To give notice to the Landlord of any defect in the Premises which might give rise to an obligation on the Landlord to do or refrain from doing any act or thing in order to comply with the provisions of this Lease or the duty of care imposed on the Landlord pursuant to the Defective Premises Act 1972 or otherwise and at all times to display and maintain all necessary notices which the Landlord may from time to time require to be displayed at the Premises 4.21. Compliance with Regulations --------------------------- At all times during the term to observe perform and comply with the conditions and regulations specified in the Fourth Schedule hereto and any alterations or additions thereto which may from time to time be made by the Landlord for the good management and reputation of the Building and the curtilage thereof and the parking areas or the safety or convenience of the tenants thereof And to take all reasonable steps to secure compliance with such conditions and regulations by the Tenant's staff and visitors 4.22. Outside Business Hours ---------------------- To give to the Landlord reasonable prior notice if the Tenant wishes to have access to the Premises outside the Business Hours for the Building and to pay to the Landlord on demand from time to time the costs of providing any of the services required by the Tenant outside the Business Hours 4.23. Superior Lease Covenants ------------------------ 4.23.1. To observe and perform the Superior Lease Covenants 4.23.2. Not to do or permit or suffer anything whereby the Superior Lease may be avoided or forfeited 4.23.3. To keep the Landlord indemnified against all claims liabilities costs and expenses for or in respect of any breach by the Tenant of the Superior Lease Covenants - 22 - 4.23.4. To permit the Landlord and any authorised person to enter the Premises at reasonable times only and upon reasonable prior notice (except in cases of emergency) in order to comply with any of the Superior Lease Covenants which may be necessary to prevent a forfeiture of the Superior Lease subject to the Landlord making good without unreasonable delay any damage thereby caused 4.24. Option to Determine ------------------- If the Tenant shall desire to terminate the Term and to quit the Premises on the date 29th September 1998 and shall give to the Landlord not less than twelve months previous notice in writing to that effect (in respect of which notice time shall be of the essence) then upon the expiration of such notice the term of years created by this underlease shall forthwith cease and determine but without prejudice to any remedy of either party against the other in respect of any antecedent claims or breach of covenant contained in this Lease and the Tenant shall deliver up vacant possession of the Premises 5. THE LANDLORD'S COVENANTS ------------------------ The Landlord covenants with the Tenant that:- 5.1. the Tenant paying the Rents and performing and observing the covenants and conditions on the part of the Tenant herein contained the Landlord shall permit the Tenant peaceably and quietly to hold and enjoy the Premises during the Term without any interruption or disturbance from or by the Landlord or by any person lawfully claiming through under or in trust for the Landlord 5.2. it will use best endeavours to procure the compliance by the Superior Landlord with the covenants on the part of the Superior Landlord contained in the Superior Lease 5.3. the Landlord shall during the Term pay the rent reserved by the Superior Lease and perform and observe the covenants and conditions contained in the Superior Lease and on the part of the Landlord as tenant to be performed and observed except to the extent that they fall to be performed and observed by the Tenant pursuant to this Lease - 23 - 6. INSURANCE --------- 6.1. Tenant's Insurance Covenants ---------------------------- The Tenant covenants with the Landlord:- 6.1.1. to pay the Insurance Rent within ten business days of a written demand for the period from and including the date of this Lease up to and including the day before the next policy renewal date and subsequently to pay the Insurance Rent within ten Business Days of a written demand and (if so demanded) in advance of the policy renewal date provided that any such demand will be supported by proper evidence that the demand has been properly made 6.1.2. to comply with all the requirements and recommendations of the insurers of the Building that are notified to the Tenant 6.1.3. not to do or knowingly permit anything that could cause any policy of insurance on or in relation to the Building to become void or voidable wholly or in part nor (unless the Tenant shall have previously notified the Landlord and agreed to pay the increased premium) anything by which additional insurance premiums may become payable 6.1.4. to keep the Premises supplied with such fire fighting equipment as the insurer may require or as the Landlord may reasonably require and to maintain such equipment to their satisfaction and in efficient working order 6.1.5. to comply with the requirements and recommendations of the insurer and the reasonable requirements of the Landlord as to fire precautions relating to the Premises 6. 1.6. not to obstruct the access to any fire equipment or the means of escape from the Premises nor to lock any fire door while the Premises are occupied 6.1.7. as soon as it reasonably comes to the attention of the Tenant to give notice to the Landlord immediately upon the happening of any event which might affect any insurance policy on or relating to the Premises or upon the happening of any event against which the Landlord may have insured under this Lease - 24 - 6.1.8. not to effect any policy of insurance in relation to the Building without the prior written consent of the Landlord PROVIDED THAT the Tenant may insure the contents of the Premises and third party risks without the consent of the Landlord 6.1.9. if at any time the Tenant shall be entitled to the benefit of any insurance on the Premises except insurance of the contents of the Premises and third party risks (which is not effected or maintained in pursuance of any obligation contained in this Lease) to apply all money received by virtue of such insurance in making good the loss or damage in respect of which such money shall have been received 6.1.10. if and whenever during the Term the Premises or any part ("the relevant part") of the Building giving access to the Premises are damaged or destroyed by any of the Insured Risks and the insurance money under the policy of insurance effected by the Landlord pursuant to its obligations contained in this Lease is by reason of any act or default of the Tenant or anyone at the Premises expressly or by implication with the Tenant's authority wholly or partially irrecoverable immediately in every such case to pay to the Landlord on demand the amount of such insurance money so irrecoverable with Interest on such amount (from the date of demand or (if earlier) the date on which the Landlord first suffered financial loss because of the insurance money being irrecoverable in whole or in part as aforesaid) 6.2. Suspension of Principal Rent ---------------------------- That if the Premises or any part thereof shall at any time during the term be destroyed or damaged by any of the Insured Risks so as to be unfit for occupation and use and any policy or policies of insurance effected by the Landlord shall not have vitiated or payment of the policy monies refused in consequence of some act or default of the Tenant the rents hereby reserved shall be suspended and shall cease to be payable until the Premises shall again be rendered fit for occupation and use or until the expiration of a period of three years (whichever shall be the shorter period) and if the Premises are not reinstated or rebuilt within the period of three years the Tenant may terminate this Lease by giving written notice to the Landlord within one month after the expiration of the period of three years and upon service of such notice this Lease shall terminate but without prejudice to any claim the Landlord may have against the Tenant for any earlier breach of covenant and any dispute concerning this Clause shall be determined by a single arbitrator in accordance with the Arbitration Acts 1950 and 1979 - 25 - 7. PROVISOS -------- 7.1. Re-Entry -------- If and whenever during the Term:- 7.1.1. the Rents (or any of them or any part of them) under this Lease are outstanding for more than ten Business Days after becoming due whether formally demanded or not or 7.1.2. there is a breach by the Tenant or the Surety of any covenant or other term of this Lease or any document expressed to be supplemental to this Lease or 7.1.3. the Tenant or the Surety commits or permits an Act of Insolvency the Landlord may re-enter the Premises or any part of them in the name of the whole at any time and even if any previous right of re-entry has been waived and then the Term will absolutely cease but without prejudice to any rights or remedies which may have accrued to the Landlord against the Tenant or the Surety in respect of any breach of covenant or other term of this Lease including the breach in respect of which the re-entry is made 7.2. Rights and Easements -------------------- The operation of Section 62 of the Law of Property Act 1925 shall be excluded from this Lease and the only rights granted to the Tenant are those expressly set out in Part I of the First Schedule and the Tenant shall not by virtue of this Lease be deemed to have acquired or be entitled to and the Tenant shall not during the Term acquire or become entitled to by any means whatever any easement from or over or affecting any other land or premises now or at any time after the date of this Lease belonging to the Landlord or any Group Company of the Landlord and not comprised in this Lease 7.3. Disputes with Adjoining Occupiers --------------------------------- If any dispute arises between the Tenant and the tenants or occupiers of other parts of the Building or the Adjoining Property as to any easement right or privilege in connection with the use of the Premises and any other part of the Building or the Adjoining Property or as to the boundary structures separating the Premises from any other property it shall be decided by the Landlord or in such manner as the Landlord shall direct - 26 - 7.4. Exclusion of Use Warranty ------------------------- Nothing in this Lease or in any consent granted by the Landlord under this Lease shall imply or warrant that the Premises may lawfully be used under the Planning Acts for the purpose authorised in this Lease or any purpose subsequently authorised 7.5. Representations --------------- The Tenant acknowledges that this Lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord except any such statement or representation that is expressly set out in this Lease 7.6. Tenant's Property ----------------- If after the Tenant has vacated the Premises on the expiry of the Term any property of the Tenant remains in or on the Premises and the Tenant fails to remove it within ten Business Days after being requested in writing by the Landlord to do so or if after using all reasonable endeavours the Landlord is unable to make such a request to the Tenant within ten Business Days from the first attempt so made by the Landlord:- 7.6.1. the Landlord may as the agent of the Tenant sell such property and the Tenant shall indemnify the Landlord against any liability incurred by it to any third party whose property shall have been sold by the Landlord in the mistaken belief held in good faith (which shall be presumed unless the contrary is proved) that such property belonged to the Tenant 7.6.2. the Landlord shall (subject to paragraph 7.6.3 below) forthwith after such sale pay to the Tenant the proceeds of such sale after having deducted the reasonable fees and expenses incurred by or on behalf of the Landlord in connection with such sale 7.6.3. if the Landlord having made reasonable efforts is unable to locate the Tenant the Landlord shall be entitled to retain such proceeds of sale absolutely unless the Tenant shall claim them within three months of the date on which the Tenant vacated the Premises and 7.6.4. the Tenant shall indemnify the Landlord against any damage occasioned to the Premises and any actions claims proceedings costs expenses and demands made against the Landlord caused by or related to the presence of the property in or on the Premises - 27 - 7.7. Compensation on Vacating ------------------------ Any statutory right of the Tenant to claim compensation from the Landlord on vacating the Premises shall be excluded to the extent that the law allows 7.8. Covenants Relating to Adjoining Premises ---------------------------------------- Nothing contained in or implied by this Lease shall give the Tenant the benefit of or the right to enforce or to prevent the release or modifications of any covenant agreement or condition entered into by any tenant of the Landlord in respect of any property not comprised in this Lease 7.9. Service of Notices ------------------ 7.9.1. The provisions of Section 196 of the Law of Property Act 1925 as amended by the Recorded Delivery Service Act 1962 shall apply to the giving and service of all notices and documents under or in connection with this Lease except that Section 196 shall be deemed to be amended as follows: the final words of Section 196(4) . . . . and that service . . . be delivered" shall be deleted and there shall be substituted ". . . and that service shall be deemed to be made on the second Business Day after the registered letter has been posted" 7.9.2. Any notice or document shall also be sufficiently served if sent by telex facsimile transmission or any other means of electronic transmission to the party to be served and that service shall be deemed to be made on the day of transmission if transmitted before 4 p.m. on a Business Day but otherwise on the next following Business Day and in this Clause "Party" includes the Surety 7.10. Value Added Tax --------------- 7.10.1. Save as the context requires or as otherwise stated all references to payments made in this Lease are references to such payments exclusive of any Value Added Tax chargeable in respect of the supply of goods or services for which the payment is consideration and insofar as such payments fall to be made under this Lease such Value Added Tax shall be added to the amount thereof and paid in addition thereto - 28 - 7.10.2. Without prejudice to and save as mentioned earlier in this sub-clause 7.10 where any supply is made pursuant to this Lease the recipient of such supply shall pay to the supplier any Value Added Tax chargeable in respect thereof 7.10.3. Where any payment is required to be made pursuant to this Lease to reimburse the payee for any expenditure which the payee may have incurred such payment shall include an amount equal to any Value Added Tax comprised in that expenditure which is not recoverable by the payee as input tax under Section 14 of the Value Added Tax Act 1983 7.11. Exclusion of Landlord and Tenant Act of 1954 -------------------------------------------- Having been authorised to do so by Order of the Mayor's and City of London Court made on the 18th day of April 1995 under the provisions of Section 38(4) of the Landlord and Tenant Act (as amended by Section 5 of the Law of Property Act 1969) the Landlord and the Tenant hereby agree that the provisions of Section 24 to 28 (inclusive) of the Landlord and Tenant Act shall be excluded in relation to this Lease. 7.12. Jurisdiction ------------ 7.12.1. This Deed shall be governed by and construed in accordance with English Law 7.12.2. The parties hereto irrevocably submit to the non-exclusive jurisdiction of the High Court of Justice in London for the purpose of hearing and determining any dispute arising out of this Deed and for the purpose of enforcement of any judgment against its assets, the Surety agrees that service of any writ notice or other document for the purpose of any proceedings in such Court shall be duly served upon it if delivered or sent by registered post to ACC Corp at 39 State Street City Rochester NY 14614 United States of America 7.12.3 It is hereby agreed that there is no Agreement for Lease to which this Lease gives effect IN WITNESS of which this Lease has been executed as a Deed by the parties and is delivered on the date appearing in the Particulars - 29 - THE FIRST SCHEDULE ------------------ Part I ------ Rights and Easements Granted ---------------------------- 1. The exclusive right to park private motor cars in twelve parking spaces in the Car Park and/or any adjoining parking area from time to time available to the Landlord 2. The following rights (in common with the Landlord the Superior Landlord and their lessees and tenants and all other persons expressly or impliedly authorised by them respectively):- 2.1. the right at all times to use the common entrance halls (including the approaches thereto from the public highway) staircases lift lobbies corridors passages toilets and (during the hours when the same shall be in operation) the lifts for the purpose of ingress to and egress from the Premises:- (i) during the hours of 9.00 a.m. to 12.30 p.m. on Saturdays and 8.30 a.m. to 6.30 p.m. on all other weekdays except Bank and other general Public Holidays (ii) subject to the Tenant complying with the covenant contained in Clause 4.22 during all other hours and days 2.2. the free and uninterrupted passage and running of water soil gas electricity telephone telex air and other services from or to the Premises through the sewers drains pipes cables conduits and ducts which are now or may hereafter be in under over or upon the Building 2.3. the right to support shelter and protection for the Premises from the remainder of the Building THE FIRST SCHEDULE ------------------ Part 2 ------ Rights and Easements Excepted and Reserved ------------------------------------------ 1. The right at any time to alter or add to any adjoining adjacent or neighbouring premises or building upon any adjoining adjacent or neighbouring land or to build thereon notwithstanding that the access of light or air to any windows of the Premises is thereby diminished but provided that any damage caused in the exercise of such right is forthwith made good to the satisfaction of the Tenant - 30 - 2. The free and uninterrupted passage and running of water soil gas electricity telephone telex air and other services from or to other parts of the Building through the sewers drains pipes wires cables conduits and ducts which are now or may hereafter be in under over or upon the Premises 3. The full and free right and liberty to enter upon the Premises after giving the requisite notice (except in case of emergency or as otherwise provided) at such times and for such purposes as the Tenant herein covenants to permit entry or where the same is necessary for the purposes of enabling the Landlord to comply with its obligations herein contained and perform the services set out in the Fourth Schedule of the Superior Lease 4. Full right of support shelter and protection for the remainder of the Building from the Premises THE SECOND SCHEDULE ------------------- Principal Rent and Rent Review ------------------------------ 1. In this Schedule the following expressions shall have the following meanings:- (a) "the Review Date" means the Twenty fifth day of December One thousand nine hundred and ninety eight (b) "the rent periods" means the initial period commencing with the date on which rent commences to be payable hereunder until (but not including) the Review Date and thereafter the final period to the end of the term (c) "the basic yearly rent" means the Principal Rent (d) "commercial yearly rent" means the yearly rent at which the Premises as a whole might reasonably be expected then to be let in the open market with vacant possession by a willing landlord to a willing tenant by a lease in the same terms in all respects as this Lease (other than the amount of the basic yearly rent payable hereunder but including the provisions for rent review and excluding the provisions of Clause 4.24 of this Lease) for a term equal to the original term of this Lease commencing on the Review Date and on the following assumptions (whether or not such shall in fact be the case):- (i) that the Premises are fitted out and equipped for immediate occupation and use for the purpose or purposes required by the willing tenant referred to in paragraph (d) above - 31 - (ii) that no work has been carried out thereon by the Tenant its sub-tenants or their respective predecessors in title during the Contractual Term which has diminished the rental value of the Premises and that in case the Premises have been destroyed or damaged they have been fully restored (iii) that all the Tenant's covenants and conditions in this Lease have been duly performed and observed (iv) that the Premises may be lawfully used by any person for the purposes permitted under this Lease (v) that the willing tenant referred to in paragraph (d) would commence paying rent immediately on and from the Review Date and that such rent would not be discounted in any way to reflect any rent concession or other benefit but disregarding (i) any effect on rent of the fact that the Tenant its sub-tenants or their respective predecessors in title have been in occupation of the Premises or any part thereof (ii) any goodwill attached to the Premises or any part thereof by reason of the carrying on thereat of the business of the Tenant its sub-tenants or their predecessors in title in their respective businesses and (iii) any effect on rent of any improvement of the Premises or any part thereof completed not more than twenty one years prior to the date at which the review is to take effect and carried out with consent (where required) otherwise than in pursuance of an obligation to the Landlord or its predecessors in title either (a) by the Tenant its sub-tenants or their respective predecessors in title during the term or (b) by any tenant or sub-tenant of the Premises before the commencement of the term so long as the Landlord or its predecessors in title have not since the improvement was carried out had vacant possession of the relevant part of the Premises 2. The Landlord shall be entitled by notice in writing given to the Tenant at any time during the last year of any rent period to call for a review of the basic yearly rent payable under this Lease and if upon any such - 32 - review it shall be found that the commercial yearly rent of the Premises at the end of such rent period shall be greater than the Principal Rent hereinbefore reserved then as from the end of such rent period the basic yearly rent payable under this Lease shall on each such occasion be increased to the then commercial yearly rent as aforesaid 3. If notwithstanding the provisions of the previous sub-clause a review of the basic yearly rent shall not have been called for during the last year of any rent period by notice as aforesaid the Landlord may at any time during the first four years of the next rent period immediately following serve upon the Tenant a notice calling for a review of the basic yearly rent payable under this Lease and if upon any such review it shall be found that the commercial yearly rent of the demised premises at the end of the year of the term in which or at the next usual quarter day following the date on which the notice was actually served (whichever shall be the earlier) shall be greater than the Principal Rent hereinbefore reserved or than the basic yearly rent then payable hereunder owing to the operation of this present Schedule (as the case may be) then as from the end of such year of the term or such quarter day (whichever shall be the earlier) the basic yearly rent payable under this Lease shall on each such occasion be increased to the then commercial yearly rent as aforesaid Provided always that:- (a) a review of the basic yearly rent shall (except in circumstances arising under paragraph (b) of this proviso) only be called for once in accordance with the provisions of this sub-clause and the previous sub-clause of this Schedule during the period of five years commencing with the last year of each rent period and (b) if a review of the basic yearly rent shall have been called for at any time in accordance with this sub-clause or the previous sub-clause of this Schedule by notice as aforesaid but the right to review the basic yearly rent or to recover an increased basic yearly rent is restrained or restricted by or by virtue of any Act of Parliament coming into force after the review has been called for as aforesaid so that either the review cannot be carried out or the whole or any part of any increase in the basic yearly rent arising upon that review cannot be recovered with effect from the review date the Landlord may by notice in writing to the Tenant require the previous sub-clause or this sub- clause (as the case may be) to be construed as if the basic yearly rent was to be reviewed at and any increased basic yearly rent found to be payable was to be payable with effect from the date upon which such restraint or restriction was first removed or relaxed and for the purpose of operating the review procedure under sub-clause 4 of this Schedule such notice shall be construed as the Landlord's notice calling for review in lieu of the notice served by the Landlord under this sub-clause or the previous sub-clause of this Schedule (as the case may be) - 33 - 4. Such review shall in the first instance be made by the Landlord and the Tenant or their respective Surveyors in collaboration but if no agreement as to the amount of the increase (if any) to be made in the said yearly rent shall have been reached between the parties within three months after the date of the Landlord's notice calling for such review (or any extension of such time agreed in writing between the parties) the question whether there shall be an increase in the said yearly rent (and if so what the amount of the revised yearly rent shall be) shall be determined by an arbitrator such arbitrator to be nominated in the absence of agreement by or on behalf of the President for the time being of the Royal Institution of Chartered Surveyors on the application of either the Landlord or the Tenant And in relation to the application for any such nomination or the determination by the person nominated time shall not be of the essence Provided always that if at any review date the revised basic yearly rent to be payable as from such review date shall not then have been agreed between the Landlord and the Tenant and if the parties shall not have made any application to the President for the time being of the Royal Institution of Chartered Surveyors as hereinbefore provided and shall not have agreed on the identity of the arbitrator the Tenant may serve on the Landlord notice in writing containing a proposal as to the amount of such revised basic yearly rent not being less than the basic yearly rent payable immediately before such review date and the amount so proposed shall be deemed to have been agreed by the parties as the revised basic yearly rent to be payable from such review date and sub-clause 6 of this Schedule shall apply accordingly unless the Landlord shall make such application as aforesaid within three months after service of such notice by the Tenant 5. (a) In the case of an arbitration the arbitration shall be conducted in accordance with the Arbitration Act 1950 to 1979 (b) When the amount of any basic yearly rent to be ascertained as hereinbefore provided shall have been so ascertained memoranda specifying and confirming the revised basic yearly rent to be payable shall forthwith be signed by or on behalf of the Landlord and the Tenant and annexed to this Lease and the Counterpart thereof and the parties shall bear their own costs in respect thereof 6. If at any review date the revised basic yearly rent to be payable as from such review date shall not then have been agreed or determined in the manner aforesaid then until such agreement or determination shall have been made the Tenant shall pay the said rent at such yearly rate at such times and in such manner as shall have been applicable immediately prior to such review date and any rent in excess of such rent which may later be found to be payable hereunder in respect of the period from such review date until the quarter day next following such agreement or determination shall be paid without any deduction within twenty one days of the date on which the revised basic yearly rent shall have been ascertained with interest thereon at four per cent below the Interest Rate calculated on a day to day basis from the date at which the rent was to be reviewed down to the date of payment - 34 - THE THIRD SCHEDULE ------------------ Covenants by the Surety ----------------------- 1.1. Covenant and indemnity by Surety -------------------------------- (a) In consideration of the Landlord entering into this Lease the Surety covenants with the Landlord that:- (i) the Tenant (failing whom the Surety) will at all times during the Term duly perform and observe all the covenants on the part of the Tenant contained in this Lease (including without limitation the payment of the Rents and all other sums payable under this Lease) in the manner and at the times specified in this Lease and (ii) the Surety will indemnify and keep indemnified the Landlord against all claims demands losses damages liability costs fees and expenses whatsoever sustained by the Landlord by reason of or arising in any way directly or indirectly out of any default by the Tenant in the performance and observance of any of its obligations hereunder or the payment of any Rents or other sums payable hereunder or arising as a result of the Lease being disclaimed by a liquidator or trustee in bankruptcy or similar officer appointed to or in respect of the Tenant and having such power (each a "Relevant Disclaimer") (b) For the purposes of Clause 1.l(a) above the Term will be deemed to continue for the duration specified in this Lease notwithstanding that a Relevant Disclaimer occurs 1.2. Nature of Surety's Obligations ------------------------------ (a) The obligations of the Surety hereunder are primary obligations (b) The Surety is jointly and severally liable with the Tenant for the fulfillment of all the obligations of the Tenant under this Lease (c) Notwithstanding any legal limitation disability or incapacity on or of the Tenant or any other fact or circumstance whether known to the Landlord or not the Landlord may proceed against and recover from the Surety as if the Surety was named as the Tenant in this Lease - 35 - (d) The Landlord shall not be obliged to make any demand on the Tenant before enforcing its rights against the Surety hereunder 1.3. Waiver by Surety ---------------- The obligations of the Surety hereunder are to constitute a continuing security in addition to and without prejudice to any other rights which the Landlord may have and the Surety hereby waives any right to require the Landlord to proceed against the Tenant or to pursue any other remedy whatsoever which may be available to the Landlord before proceeding against the Surety 1.4. Postponement of claims by Surety against Tenant ----------------------------------------------- (a) Unless otherwise instructed by the Landlord the Surety will not claim or accept any payment or property in any liquidation bankruptcy composition or arrangement of the Tenant in competition with the Landlord nor seek to recover (whether directly or by way of set off lien counter claim or otherwise) any money or other property nor exercise any other right or remedy whatsoever in respect of any sum which may be or become due to the Surety from the Tenant nor exercise any rights of subrogation or indemnity against the Tenant until in each such case all the Surety's obligations hereunder have been performed and discharged in full (b) The Surety will forthwith pay to the Landlord an amount equal to any set-off in fact exercised by it and will promptly pay or transfer to the Landlord any payment or distribution or benefit in fact received by it notwithstanding the terms of Clause 1.4(a) above (c) The Surety agrees that it will exercise any rights of subrogation against the Tenant and any rights to prove in a liquidation of the Tenant which it may have in accordance with the directions of the Landlord 1.5. Postponement of participation by Surety in security --------------------------------------------------- The Surety confirms it has not taken and undertakes it will not take from the Tenant any security in connection with its obligations hereunder and declares that any security so taken shall be held on trust for the Landlord and further the Surety agrees that it shall not be entitled to participate in any security held by the Landlord in respect of the Tenant's obligations to the Landlord under this Lease nor to stand in the place of the Landlord in respect of any such security until all the obligations of the Tenant or the Surety to the Landlord under this Lease have been performed or discharged in full - 36 - 1.6. No release of Surety -------------------- None of the following nor any combination thereof shall release determine discharge or in any way lessen or affect the liability of the Surety hereunder or otherwise prejudice or affect the right of the Landlord to recover from the Surety to the full extent of its obligations hereunder:- (a) any neglect delay or forbearance of the Landlord in endeavouring to obtain payment of the Rents or other amounts payable under this Lease by the Tenant or in enforcing the performance or observance of any of the obligations of the Tenant under this Lease (b) any refusal by the Landlord to accept Rents tendered by or on behalf of the Tenant (c) any extension of time given by the Landlord to the Tenant (d) any variation of the terms of this Lease (including any reviews of the Principal Rent) or the transfer of the Landlord's reversion or the assignment of this Lease or the surrender of any part thereof (e) the release of any person for the time being jointly or severally liable for the Tenant's obligations or liable as surety for the Tenant's obligations (f) any change in the constitution structure or powers of any of the Tenant the Surety or the Landlord or the liquidation administration or bankruptcy (as the case may be) of any of the Tenant the Surety or the Landlord (g) any legal limitation or any immunity disability or incapacity of the Tenant (whether or not known to the Landlord) or the fact that any dealings with the Landlord or the Tenant may be outside or in excess of the powers of the Tenant or the Surety (h) the taking variation compromise renewal release or refusal or neglect to perfect or enforce any right remedies or securities against the Tenant or any other person (i) any Relevant Disclaimer - 37 - (j) any other act omission matter or thing whatsoever whereby but for this provision the Surety would be exonerated or released either wholly or in part (other than a release by Deed given by the Landlord) 1.7. Disclaimer or forfeiture of Lease --------------------------------- (a) The Surety undertakes to the Landlord that:- (i) if a liquidator or trustee in bankruptcy or similar officer having such power shall disclaim or surrender this Lease or (ii) if this Lease shall be forfeited or (iii) if the Tenant shall cease to have legal existence THEN the Surety shall if the Landlord by notice in writing given to the Surety within six (6) months after such disclaimer or other event occurs so requires accept from and execute and deliver to the Landlord a counterpart of a new lease of the Premises for a term commencing on the date of the disclaimer or other event and continuing for the residue then remaining unexpired of the Term (as specified in this Lease) such new lease to be at the cost of the Surety and to be at the same rents and subject to the same covenants conditions and provisions as are contained in this Lease (b) If this Lease is disclaimed and for any reason the Landlord does not require the Surety to accept a new lease of the Premises in accordance with this Schedule the Landlord shall be entitled to require that the Surety pays to the Landlord on demand an amount equal to the Rents for the period commencing with the date of such disclaimer and ending on whichever is the earlier of:- (i) the date six months after such disclaimer and (ii) the date (if any) upon which the Premises are relet 1.8 Cumulative Powers and Avoidance of Payments ------------------------------------------- (a) The powers conferred on the Landlord hereunder are cumulative without prejudice to its powers under the general law and may be exercised as often as the Landlord thinks appropriate The Landlord may in - 38 - connection with the exercise of its powers join or concur with any person in any transaction scheme or arrangement whatsoever (b) If the Landlord reasonably considers that any amount paid by the Surety hereunder is capable of being avoided or set aside on the liquidation or administration of the Surety or otherwise then for the purposes of this Lease such amount shall not be considered to have been paid (c) Any settlement or discharge between the Landlord and the Tenant and/or the Surety shall be conditional upon no security or payment to the Landlord by the Tenant or the Surety or any other person being avoided or set aside or ordered to be refunded or reduced by virtue of any provision or enactment relating to bankruptcy insolvency or liquidation for the time being in force and accordingly (but without limiting the Landlord's other rights hereunder) the Landlord shall be entitled to recover from the Surety the value which the Landlord has placed upon such security or the amount of any such payment as if such settlement or discharge had not occurred 1.9. Representations --------------- The Surety warrants and represents that it has full power to enter into the obligations and covenants hereunder and has taken all necessary corporate or other action required to authorise its execution of this Lease and that the provisions of this Lease constitute the legal valid and binding obligations of the Surety 1.10. Benefit of guarantee -------------------- (a) The covenants undertakings and agreements of the Surety hereunder shall enure for the benefit of the successors and assigns of the Landlord to this Lease without the necessity for any assignment thereof to such successors and assigns (b) Without prejudice to Clause 1.10(a) above the Landlord may assign the benefit of the provisions of this Lease and the covenants undertakings and agreements of the Surety hereunder to any third party and the Surety shall join in such documents as may be necessary to effect such assignment 1.11. Interest on Late Payment ------------------------ The Surety will pay Interest on all sums payable by it to the Landlord hereunder - 39 - 1.12. Costs and Expenses ------------------ The Surety will indemnify the Landlord against all the Landlord's legal and other costs losses charges and expenses (on a full indemnity basis) arising in connection with any modification amendment release and/or enforcement or attempted enforcement of or preservation of the Landlord's rights under this Lease 1.13. Set-off ------- All payments to be made by the Surety hereunder will be made in full without any deduction for any set-off or counterclaim the Surety may have against the Landlord 1.14. Waiver ------ No delay or omission by the Landlord in exercising any right power or privilege hereunder shall impair such right power of privilege or be construed as a waiver of such right power or privilege 1.15. Invalidity ---------- If at any time any one or more provisions of this Schedule is or becomes invalid illegal or unenforceable in any respect under any law the validity legality and enforceability of the remaining provisions hereof shall not be in any way affected or impaired thereby THE FOURTH SCHEDULE ------------------- The Regulations --------------- 1. The Landlord (which term shall in this Fourth Schedule include the Superior Landlord) or the Landlord's agents or staff shall be at liberty to refuse to any person access to the Building if they shall think that such refusal is for the benefit of the tenants or occupants of the Building 2. Tenants are not entitled to use the lifts for the carriage of articles likely to cause damage to the lifts or the Building and the Landlord or the Landlord's agents or staff shall be at liberty to refuse permission to use the passenger lifts for the carriage of any goods whatsoever if this shall interfere with the convenience of the other tenants or occupants of the said building or be likely to cause damage to the passenger lifts or the Building - 40 - 3. Tenants are not entitled to place deposit store or abandon any goods articles or rubbish whatsoever in the common parts of the said building but shall place all rubbish only in the bin stores or other areas designated for that purpose by the Landlord from time to time 4. Tenants shall not misuse the communal toilet facilities and lifts and in particular shall not empty tea leaves down the sinks or deposit solid or obnoxious matter in the toilets 5. Tenants shall not be entitled to erect nameboards or display notices in the common parts of the Building but each tenant may have one entry only in respect of the tenancy on the Landlord's nameboard in the entrance hall of the Building by arrangement with the Landlord's agents The Landlord reserves the right to vary the position of any entrance hall nameboard and to rearrange the disposition of the lettering thereon Nameboards or display notices or lettering on the entrance door or subsidiary entrance door of the Premises must conform to the standard design for the Building to be notified to the tenant by the Landlord or the Landlord's agents 6. Any services rendered to a tenant by staff employed by the Landlord other than services referred to in the Fourth Schedule of the Superior Lease hereto are to be deemed special services for which and for the consequences of which that tenant shall be entirely responsible and tenants shall not be entitled to any services from such staff which may in any way interfere with the performance of their duties to the Landlord or the Landlord's agents 7. Tenants shall not play or permit or suffer the playing of any musical instrument or the use of any radio television record-player or other similar device for the reproduction of any music or sound on or in the Premises so as to be audible outside the Premises (THE COMMON SEAL of IBM UNITED KINGDOM (LIMITED was hereunto affixed in the (presence of:- Director [illegible] Secretary [illegible] - 41 - Annex A Site Plan [This document is a site plan that shows the Chiswick Centre bordered by Chiswick High Road, Essex Place and Acton Lane.] EX-99.13 16 SUPPLEMENTAL LEASE AGREEMENT DATED 6/3/94 Exhibit 99.13 DATED 3rd June 1994 ---------------------------------------------------- (1) IBM UNITED KINGDOM LIMITED - and - (2) ACC LONG DISTANCE UK LIMITED - and - (3) ACC CORP. ___________________________________ SUPPLEMENTAL LEASE of the Ninth Floor The Chiswick Centre 414 Chiswick High Road London W4 ___________________________________ ASHURST MORRIS CRISP Broadwalk House 5 Appold Street London EC2A 2HA Tel: 071-638-1111 Fax: 071-972-7990 REF: AXG/4179H DATE: 18/03/94 - 2 - SUPPLEMENTAL LEASE PARTICULARS ------------------------------ DATE : 3rd June 1994 - -------------------------------------------------------------------------------- LANDLORD : IBM UNITED KINGDOM LIMITED whose registered office is at P.O. Box 41 North Harbour Portsmouth Hampshire P06 3AU - -------------------------------------------------------------------------------- TENANT : ACC LONG DISTANCE UK LIMITED (Company Registration Number 2671855) whose registered office is at 2-3 Cursitor Street London EC4A 1NE - -------------------------------------------------------------------------------- SURETY : ACC CORP whose registered office is at 39 State Street City Rochester NY14614 United States of America - -------------------------------------------------------------------------------- LEASE : a lease of the Tenth Floor, The Chiswick Centre, 414 Chiswick High Road, London W4 dated 23rd December 1993 made between (1) IBM United Kingdom Limited (2) ACC Long Distance UK Limited and (3) ACC Corp for a term of ten years from and including the 29th day of September 1993 until and including the 28th day of September 2003 - -------------------------------------------------------------------------------- SUPPLEMENTAL PREMISES : the land and buildings known as the Ninth Floor, The Chiswick Centre, 414 Chiswick High Road, London W4 shown for the purpose of identification only edged red on the Supplemental Plan - -------------------------------------------------------------------------------- SUPPLEMENTAL RENT : EIGHTY SIX THOUSAND FIVE HUNDRED AND EIGHTY POUNDS ((Pounds)86,580.00) per annum - -------------------------------------------------------------------------------- SUPPLEMENTAL PLAN : the plan attached to this Supplemental Lease - 3 - THIS SUPPLEMENTAL LEASE made on the date and between the parties specified in the Supplemental Lease Particulars WITNESSES as follows:- 1. DEFINITIONS AND INTERPRETATIONS ------------------------------- 1.1. In this Supplemental Lease: 1.1.1. "Supplemental Lease Particulars" means the immediately preceding section of this Supplemental Lease headed "Supplemental Lease Particulars" 1.1.2. the words and expressions defined in the Supplemental Lease Particulars have the meanings therein set out 1.1.3. the words and expressions defined in the Lease have the respective meanings herein specified 1.2. The Supplemental Lease Particulars form part of this Supplemental Lease 2. RECITALS -------- 2.1. The reversion expectant upon the determination of the Contractual Term granted by the Lease is vested in the Landlord and the remainder of the Contractual Term is vested in the Tenant 2.2. The Landlord has agreed to grant and the Tenant has agreed to accept this Supplemental Lease - 4 - 3. DEMISE ------ 3.1. The Landlord at the request of the Surety demises to the Tenant the Supplemental Premises TOGETHER WITH the rights and easements granted by but EXCEPTING AND RESERVING the rights excepted and reserved by the Lease TO HOLD the Supplemental Premises from and including the date hereof for the residue of the Contractual Term granted by the Lease SUBJECT TO the matters contained or referred to in the Lease YIELDING AND PAYING to the Landlord the Supplemental Rent on the dates and in the manner and subject to review as set out in the Lease save for the first payment which shall be made on the 25th March 1995 in respect of the period from the 25th March 1995 until the next following quarter day 3.2. This Supplemental Lease is supplemental to the Lease 3.3. This Supplemental Lease is granted subject to the following covenants and provisions which shall insofar as applicable operate to vary henceforth the terms of the Lease 4. TERMS ----- 4.1. Incorporation of terms from the Lease ------------------------------------- The Landlord and the Tenant and the Surety agree that save as to the premises demised the term of years granted and the rent reserved the covenants conditions agreements and other provisions contained in the Lease shall apply to the Supplemental Premises and this demise as if they had been repeated herein in full insofar as consistent with the other terms of this Supplemental Lease and with such modifications as may be necessary to make them applicable to the Supplemental Premises - 5 - 4.2. Landlord's Remedies ------------------- The right of re-entry contained in the Lease shall extend to the Supplemental Premises and apply in the event of non-payment of the Supplemental Rent or breach of any of the other covenants or conditions contained in this Supplemental Lease (whether set out herein in full or being covenants or conditions in the Lease incorporated herein by reference) and similarly the right of re-entry incorporated in this Supplemental Lease shall extend to the Premises and apply in the event of non-payment of the Principal Rent or breach of any of the other covenants or conditions contained in the Lease 4.3. Determination of Term --------------------- If the term of years created by the Lease is determined then the term of years granted by this Supplemental Lease shall automatically determine at the same time and vice versa but without prejudice to the rights and remedies of either party in respect of any antecedent breach by the other 4.4. Rent Review ----------- The Supplemental Rent shall be reviewed at the same time in the same manner and on the same terms as the Principal Rent under the Lease save that it is agreed that on any review of the Principal Rent reserved by the Lease and any review of the Supplemental Rent hereby reserved it shall be assumed that the Premises and the Supplemental Premises are available to let as a whole by a willing Landlord to a willing Tenant by one lease without a fine or premium being paid by either party and the said rent agreed or determined on review shall be apportioned as to 50% in respect of the reviewed Supplemental Rent for the Supplemental Premises and 50% in respect of the reviewed Principal Rent in respect of the Premises - 6 - 4.5. Variations to the Lease ----------------------- The Lease shall henceforth be varied as set out in the Schedule hereto 5. TENANT'S COVENANTS ------------------ The Tenant covenants with the Landlord:- 5.1. To pay the Supplemental Rent on the days and in the manner set out in the Lease 5.2. To observe and perform in relation to the Supplemental Premises the covenants on the Tenant's part in the Lease so far as the same ought by virtue of this Supplemental Lease to be performed and observed 5.3. Without prejudice to clauses 4.1 and 5.3 not to assign underlet or charge the Premises or the Supplemental Premises or any part thereof except in accordance with the terms of the Lease (as though the Premises and the Supplemental Premises had together been demised thereby) 6. LANDLORD'S COVENANTS -------------------- The Landlord hereby covenants with the Tenant to observe and perform in relation to the Supplemental Premises the covenants on the part of the Landlord in the Lease so far as the same ought by virtue of this Supplemental Lease to be observed and performed - 7 - 7. SURETY'S COVENANTS ------------------ The Surety hereby covenants with the Landlord to observe and perform in relation to the Supplemental Premises the covenants on the part of the Surety in the Lease so far as the same ought by virtue of this Supplemental Lease to be observed and performed 8. EXCLUSION OF LANDLORD AND TENANT ACT 1954 ----------------------------------------- Having been authorised to do so by Order of the Lambeth County Court made on the 29th day of March 1994 under the provisions of Section 38(4) of the Landlord and Tenant Act (as amended by Section 5 of the Law of the Property Act 1969) the Landlord and the Tenant hereby agree that the provisions of Section 24 to 28 (inclusive) of the Landlord and Tenant Act shall be excluded in relation to this Supplemental Lease 9. MEMORANDUM AND REGISTRATION --------------------------- The parties shall each cause a memorandum of this Supplemental Lease to be endorsed on the original or counterpart of the Lease (whichever is in their possession) and shall supply a copy of such endorsement to the other within fourteen days of the date hereof 10. JURISDICTION ------------ 10.1 This Deed shall be governed by and construed in accordance with English Law 10.2 The parties hereto irrevocably submit to the non-exclusive jurisdiction of the High Court of Justice in London for the purpose of hearing and determining any dispute arising out of this Deed and for the purpose of enforcement of any judgment against its assets the Surety agrees that service of any writ notice or other document for the purpose of any proceedings in such Court shall be duly served upon it if delivered or sent by registered post to ACC Corp at 39 State Street City Rochester NY14614 United States of America - 8 - IN WITNESS of which this Supplemental Lease has been executed as a deed by the parties and is delivered on the date appearing in the Supplemental Lease Particulars SCHEDULE -------- Variations to the Lease ----------------------- 1. Clause 1 of Part 1 of the First Schedule shall be varied so that the word "eight" in the first line of the clause is replaced by the word "sixteen" 2. The definition of "Service Charge" in Clause 1 shall be revised so that the definition now reads "Service Charge" means the aggregate of the sums which the Landlord is required to pay to the Superior Landlord pursuant to clauses 1(1)(iii) and 1(1)(iv) of the Superior Lease or should the Superior Lease be terminated for any reason the aggregate of the sums the Landlord would have been required to pay to the Superior Landlord pursuant to clauses 1(1)(iii) and 1(1)(iv) of the Superior Lease if it was still in existence. THE COMMON SEAL of THE LANDLORD ) was hereunto affixed in the ) presence of: ) Director [illegible] Secretary [illegible] - 9 - Annex A Floor Plan [This document is a floor plan that shows the office area that is subject to the Lease.] EX-99.14 17 CONTINGENT INTEREST AGREEMENT DATED 7/21/95 Exhibit 99.14 CONTINGENT INTEREST AGREEMENT THIS CONTINGENT INTEREST AGREEMENT (this "Agreement"), dated as of July 21, 1995 is made by ACC CORP., a Delaware corporation (the "Company"), in favor of FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association ("First Union") and SHAWMUT BANK CONNECTICUT, N.A. ("Shawmut", and together with First Union, the "Managing Agents"). STATEMENT OF PURPOSE -------------------- Pursuant to a Credit Agreement, dated as of even date herewith (together with all amendments and other modifications, if any, from time to time hereafter made thereto, the "Credit Agreement"), between the Company and certain Subsidiaries of the Company as Borrowers thereunder (collectively, the "Borrowers"), the Lenders party thereto (the "Lenders"), the Managing Agents and First Union, as Administrative Agent for the Lenders, the Lenders will extend Loans to the Borrowers as more specifically described in the Credit Agreement. In connection with the transactions contemplated by the Credit Agreement and in consideration of the structuring of and commitment to the credit facility described therein, the Managing Agents have requested, and the Company has agreed to execute and deliver, this Agreement to the Managing Agents to provide a contingent interest payment to the Managing Agents on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and to induce the Managing Agents to serve as Managing Agents under the Credit Agreement, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are ------------- defined in the Credit Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "Common Stock" shall mean the $.015 par value common stock of the Company or any other capital stock of the Company into which such stock is reclassified or reconstituted. "Contingent Interest Payment" shall have the meaning assigned thereto in paragraph 2. "Trigger Date" shall mean the Business Day on which notice is received by the Company from a Managing Agent of the election by such Managing Agent to exercise its right to receive its Contingent Interest Payment hereunder at any time after the occurrence of any Trigger Event or Trigger Events. "Trigger Event" shall mean the earlier to occur of the following events: (a) eighteen months shall have elapsed since the Closing Date, (b) the Credit Agreement shall - 2 - have been amended in any material respect as determined in the reasonable discretion of the Managing Agents, (c) a letter of intent or definitive agreement to sell at least 51% of the Common Stock or at least 51% of the assets of the Company or any Material Subsidiary in any transaction or series of transactions (including any letter of intent to merge or merger agreement having the foregoing effect) shall have been executed by the Company or the shareholders of the Company or any such sale of Common Stock or assets (including any Change in Control or merger having the foregoing effect) shall have occurred or (d) the Common Stock shall have ceased to be actively traded in the national over-the-counter market and quoted on the national market system of the National Association of securities Dealers Automated Quotation System ("NASDAQ"), other than on a temporary basis, as determined by the Managing Agents in their sole discretion. "Trigger Price" shall mean the difference between (a) the average of the daily market price of the Common Stock as quoted by NASDAQ calculated for each of the thirty consecutive Business Days immediately preceding the Trigger Date less (b) the average of the daily market price of the Common Stock as ---- quoted by NASDAQ for each of the thirty consecutive Business Days immediately preceding the date which is five days prior to the Closing Date (the "Closing Price"); provided, that in no event shall the Trigger Price exceed the Closing -------- Price plus $15.00. The "daily market price" for each such Business Day shall ---- mean the average of the last reported closing bid and asked prices on such day in the over-the-counter market as formulated by NASDAQ. 2. Contingent Interest Payment. The Company agrees to pay to each --------------------------- Managing Agent, within ten (10) Business Days following the Trigger Date for such Managing Agent, a contingent interest payment (a "Contingent Interest Payment") equal to the product of (a) the Trigger Price times (b) 140,000 shares ----- of Common Stock (the "Share Factor") times (c) .5; provided, that in no event ----- -------- shall the Contingent Interest Payment to each Managing Agent be less than $375,000. 3. Manner of Payment. Payment of the Contingent Interest Payment ----------------- shall be made to the Managing Agents, (a) in cash or other immediately available funds in Dollars, (b) by tender of shares of Common Stock having a then market value equal to the portion of the Contingent Interest Payment to be paid in such shares, at the election of the Company or (c) by a combination of cash and tender of shares of Common Stock; provided, that such payment in shares shall -------- not exceed fifty percent (50%) of the Contingent Interest Payment made to each Managing Agent. Payment of the cash portion of the Contingent Interest Payment shall be made to such accounts as the Managing Agents shall direct in writing to the Company. Payment of the portion of the Contingent Interest Payment to be paid by the tender of shares of Common Stock shall be made by delivery of the certificates evidencing such shares (with appropriate stock powers executed in blank) to the Managing Agents or such Affiliates thereof as the Managing Agents shall direct in writing to the Company. - 3 - 4. Stock Dividends, Splits, Combinations, Reorganizations, ------------------------------------------------------- Reclassifications, Dissolutions and Other Dilutive Events. - --------------------------------------------------------- (a) In case the Company shall, prior to payment in full of each Contingent Interest Payment, (i) declare or pay a dividend or dividends on its Common Stock payable in shares of its capital stock (including Common Stock or any security convertible into or granting rights to purchase shares of Common Stock), (ii) split or subdivide the then outstanding shares of its Common Stock into a greater number of shares, (iii) combine the then outstanding shares of its Common Stock into a smaller number of shares or (iv) issue any shares of its capital stock in a reclassification of Common Stock or any other capital adjustment, recapitalization or reorganization, or any consolidation of the Company with, or merger of the Company into, any other corporation, or any sale, lease or other transfer of all or a substantial portion (51% or more) of the assets of the Company, or any share exchange, or any distribution by the Company of its assets with respect to its Common Stock as a liquidating or partial liquidating dividend or any similar transaction affecting the Common Stock (for purposes of this paragraph 4, the transactions referred to in clause (iv) being collectively referred to as the "Reorganization Transactions") , then, in each such case, the Company and the Managing Agents (or the remaining Managing Agent if a prior Contingent Interest Payment has been made to the other Managing Agent) shall, in good faith and within ten Business Days after the record date for such dividend or the effective date of such split, subdivision, combination or Reorganization Transaction, make such proportionate and equitable adjustments to the Trigger Price, the Share Factor and any other appropriate variable in the determination of the Contingent Interest Payment as may be necessary so that the Managing Agents (or Managing Agent) shall receive the same Contingent Interest Payment after any such transaction as the Managing Agents (or Managing Agent) would have received prior to any such transaction. In the event the Company and the Managing Agents (or Managing Agent) are unable to agree on such adjustment within such ten Business Day period, such dispute shall be resolved within thirty Business Days after the end of such ten Business Day period by an independent accounting firm of recognized national standing selected by the Managing Agents (or Managing Agent) and the fees and expenses of such firm shall be borne equally by the Company and the Managing Agents (or Managing Agent). (b) Notwithstanding anything to the contrary contained herein, the Company shall not effect any such Reorganization Transaction involving another Person unless, upon or prior to the consummation thereof, the Company shall have caused the successor Person or the Person to or with which the property of the Company has been consolidated, merged, exchanged, leased or otherwise transferred to assume by written instrument the obligation to deliver to each Managing Agent the Contingent Interest Payment in accordance with the foregoing provisions. Upon any Reorganization Transaction referred to in this paragraph 4, this Agreement shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable as part of a Contingent Interest Payment hereunder after the consummation of such Reorganization Transaction. - 4 - 5. Subsequent Fundamental Transactions. ----------------------------------- (a) The Company shall give the Managing Agents prior written notice in accordance with Section 13.1 of the Credit Agreement of any of the following transactions by the Company or any Material Subsidiary: any merger (other than any merger effected solely to change the domicile of the Company or any Material Subsidiary); consolidation, share exchange, sale that in the aggregate constitutes the disposition of all or substantially all of its assets, any other corporate transaction pursuant to which any holder of Common Stock receives cash, securities or other property, or any transaction in which the Company or any of its Subsidiaries is acquired by purchase of a majority of its common equity (each, a "Fundamental Transaction"). (b) If at any time within three months after making any Contingent Interest Payment hereunder, the Company or any Material Subsidiary (i) completes a Fundamental Transaction or (ii) enters into any agreement or letter of intent contemplating a Fundamental Transaction, the Company shall, simultaneously with the closing of such transaction or at such later time as any payment in cash, securities or other property is received by the Company, such Subsidiary or their shareholders, make an additional payment to the applicable Managing Agent in an amount equal to the excess (the "Excess") of (i) the Contingent Interest Payment such Managing Agent would have received if such payment was made on or after the closing of such Fundamental Transaction over (ii) the Contingent Interest Payment previously received by such Managing Agent; provided, that the -------- sum of such initial Contingent Interest Payment and such Excess shall not exceed $1,000,500 with respect to any Managing Agent. Each payment to a Managing Agent pursuant to this Section 5(b) shall be made in accordance with Section 3 hereof. 6. Certain Covenants. The Company covenants and agrees that, until ----------------- each Contingent Interest Payment has been fully paid in accordance with this Agreement: (a) the Company will have at all times, free from preemptive rights, a number of shares of authorized but unissued Common Stock sufficient to enable it at any time to fulfill all its obligations hereunder; and (b) the Common Stock deliverable pursuant to this Agreement shall be (i) listed on NASDAQ or a national securities exchange (as defined in the Securities Exchange Act of 1934, as amended), (ii) either (x) duly registered under the Securities Act of 1933, as amended, and applicable securities laws of North Carolina with respect to any Common Stock delivered to First Union and applicable securities laws of Connecticut with respect to any Common Stock delivered to Shawmut or (y) so registered by the Company at its sole expense as expeditiously as possible after such delivery (but in no event later than sixty (60) days thereafter), (iii) duly and validly issued, fully paid and non- assessable, (iv) free from all taxes, liens and charges, and if any shares of Common Stock to be delivered as part of a Contingent Interest Payment require any additional registration with or approval of any governmental authority under any applicable law before such shares may be - 5 - issued in connection with receipt of such Contingent Interest Payment, the Company will, at its sole expense, as expeditiously as possible, cause such shares to be duly registered or approved, as the case may be. If for any reason the Common Stock delivered to a Managing Agent pursuant to clause (ii)(y) above is not so registered within such sixty (60) day period, the Borrower shall pay in cash on the first Business Day after the expiration of such period to such Managing Agent the market value of such Common Stock on the date of delivery thereof plus interest thereon for such period at the Default Rate. ---- 7. Default Rate. Any payment to a Managing Agent not made on the ------------ payment date applicable thereto under this Agreement shall bear interest from such date until the Business Day on which such payment is made at a per annum rate equal to the Base Rate as determined under the Credit Agreement plus four ---- percent (4%). 8. Severability. Any provision of this Agreement which is prohibited ------------ or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9. Paragraph Headings. The paragraph headings used in this ------------------ Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 10. Waivers and Amendments; Successors and Assigns; Governing Law. ------------------------------------------------------------- None of the terms or provisions of this Agreement may be amended, supplemented or otherwise modified except by a written instrument executed by the Company and each Managing Agent to whom a Contingent Interest Payment may become owing hereunder. This Agreement shall be binding upon the successors and assigns of the Company and shall inure to the benefit of the Managing Agents and their respective successors and assigns. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of North Carolina. 11. Notices. All notices and communications hereunder shall be given ------- to the addresses and otherwise in accordance with Section 13.1 of the Credit Agreement. 12. Consent to Jurisdiction. The Company hereby irrevocably consents ----------------------- to the personal jurisdiction of the state and federal courts located in Mecklenburg County, North Carolina, in any action, claim or other proceeding arising out of or any dispute in connection with this Agreement, any rights or obligations hereunder, or the performance of such rights and obligations. The Company hereby irrevocably consents to the service of a summons and complaint and other process in any action, claim or proceeding brought by the Managing Agents in connection with this Agreement, any rights or obligations hereunder, or the performance of such rights and obligations, on behalf of itself or its property, in the manner provided in Section 13.1 of the Credit Agreement. Nothing in this Section 11 shall - 6 - affect the right of the Managing Agents to serve legal process in any other manner permitted by Applicable Law or affect the right of the Managing Agents to bring any action or proceeding against the Company or its properties in the courts of any other jurisdictions. 13. Waiver of Jury Trial. NOTWITHSTANDING ANY OTHER PROVISION -------------------- CONTAINED HEREIN, IN THE EVENT ANY JUDICIAL PROCEEDING IS INSTITUTED IN CONNECTION WITH THIS AGREEMENT, TO THE EXTENT PERMITTED BY LAW, THE MANAGING AGENTS BY THEIR ACCEPTANCE OF THIS AGREEMENT OR THE BENEFITS HEREOF AND THE COMPANY EACH HEREBY IRREVOCABLY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF OR ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. - 7 - IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of the date first above written. [CORPORATE SEAL] ACC CORP. By: /s/ John J. Zimmer --------------------------- Name: John J. Zimmer --------------------------- Title: Vice President - Finance --------------------------- [CORPORATE SEAL] FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ Jim F. Redman --------------------------- Name: Jim F. Redman --------------------------- Title: Sr. Vice President --------------------------- [CORPORATE SEAL] SHAWMUT BANK OF CONNECTICUT, N.A. By: /s/ Robert F. Nest --------------------------- Name: Robert F. Nest --------------------------- Title: Director --------------------------- EX-99.15 18 LEASEHOLD MORTGAGE DATED 7/21/95 Exhibit 99.15 SATISFACTION: The indebtedness secured by this Leasehold Mortgage has been satisfied in full. By:_______________________ Name:_____________________ Title:____________________ Date:_____________________ This instrument was prepared by and when recorded please return to: Michael L. Flynn, Esq. Kennedy Covington Lobdell & Hickman, L.L.P. Suite 4200 100 North Tryon Street Charlotte, NC 28202-4006 LEASEHOLD MORTGAGE [NEW YORK] This Leasehold Mortgage is made and entered into as of this 21 day ------ of July, 1995, by and among ACC CORP., a Delaware corporation ("Mortgagor"), and FIRST UNION NATIONAL BANK OF NORTH CAROLINA ("Mortgagee"), as Administrative Agent for the financial institutions (the "Lenders") as are, or may from time to time become, parties to the Credit Agreement (as defined below). WHEREAS, Mortgagor and certain Affiliates thereof are indebted to the Lenders in the principal sum of up to Thirty-Five Million Dollars ($35,000,000), as evidenced by the Notes of even date executed by the Mortgagor and such Affiliates in favor of the Lenders, and such other documents as may have been executed or given by Mortgagor in connection with the transactions contemplated by the Credit Agreement of even date between the Mortgagor and such Affiliates as Borrowers thereunder (collectively, the "Borrowers"), the Lenders and the Mortgagee, as Administrative Agent for the Lenders (as amended or supplemented, the "Credit Agreement", and collectively with the Notes and such other documents, the "Loan Documents"), the terms and conditions of which are incorporated herein by reference; NOW, THEREFORE, as security for the payment and performance of up to $750,000 of the Obligations (as defined in the Credit Agreement), the Mortgagor has created a security interest in, bargained, sold, given, granted, assigned and conveyed and does by these presents create a security interest in, bargain, sell, give, grant, assign and convey unto the - 2 - Mortgagee, its or his successors and assigns, all of Mortgagor's right, title and interest in and to that certain leasehold estate under a lease agreement (as amended or supplemented, the "Lease"), dated January 25, 1994, between the Mortgagor and The Hague Corporation, of the Premises commonly known as 400 West Avenue, Rochester, New York, 14614 (the "Leasehold Estate") , which is more particularly described on Exhibit A attached hereto and incorporated herein by --------- reference. TO HAVE AND TO HOLD the Leasehold Estate described herein unto the Mortgagee, its heirs and successors in interest forever. THIS CONVEYANCE IS MADE UPON THIS SPECIAL TRUST, that if the Mortgagor shall satisfy all Obligations secured hereby, and shall comply with all of the covenants, terms and conditions of this Leasehold Mortgage and the Loan Documents, then this conveyance shall be null and void and shall be canceled of record at the request and cost of Mortgagor. But if at any time there shall be any default in satisfaction of any Obligations or under this instrument or under the terms and conditions of any instrument secured hereby, which default shall not have been cured within any applicable grace period (if any) provided therefor, then, at the option of Mortgagee, with the consent of the Required Lenders, the entire indebtedness hereby secured shall immediately become due, payable and collectible without further notice, regardless of maturity, and this Mortgage may be foreclosed by judicial proceedings, or the Mortgagee is hereby authorized and empowered to expose to sale and to sell the Leasehold Estate described herein at public sale for cash in compliance with the requirements of Article 14 of the New York Real Property Actions and Proceedings Laws, or any subsequently enacted statute relating to nonjudicial foreclosure sales in effect on the date foreclosure is commenced, and at the time and place fixed for the sale to sell the Leasehold Estate described herein to the highest bidder for cash, and Mortgagee shall execute a conveyance of said Leasehold Estate to and deliver possession of same to the purchaser. Mortgagee may bid and become the purchaser at any sale under this Leasehold Mortgage. The proceeds of the sale shall, after the Mortgagee retains a reasonable compensation, together with reasonable attorneys' fees incurred by Mortgagee in such proceeding, be applied first to the payment of the costs and expenses of such sale; second, to the payment to the whole amount of Obligations then owing by the Mortgagor to the Lenders and secured hereby; and third to the payment of the surplus, if any, to the Mortgagor or to whomever else may be lawfully entitled thereto. This Leasehold Mortgage is made as additional collateral to secure the payment and performance of the Obligations. Other terms capitalized but not otherwise defined herein shall have the meanings ascribed thereto in the Credit Agreement. MORTGAGOR ACKNOWLEDGES, COVENANTS AND AGREES WITH MORTGAGEE AS FOLLOWS: 1. Mortgagor represents and warrants that there have been no prior encumbrances, conveyances or assignments of its interest in the Lease which are still in effect, and that the Lease is a valid and enforceable agreement, that neither Mortgagor nor, to its - 3 - knowledge, any other party, is in material default thereunder and that all covenants, conditions and agreements have been performed as required therein, except those not due to be performed until after the date hereof. 2. No change in the terms of the Lease shall be valid without the written approval of Mortgagee, with the consent of the Required Lenders, and Mortgagor shall not assign, sell, pledge, mortgage or otherwise transfer or encumber its interest in the Lease so long as this Leasehold Mortgage is in effect except as permitted by the Credit Agreement. 3. Mortgagor shall give prompt notice to Mortgagee of any notice of default received by it under the Lease, together with a complete copy of any such notice of default. 4. Mortgagor shall perform each and all of the covenants and obligations of the tenant under the Lease for so long as this Leasehold Mortgage is in effect, including, without limitation, the obligations to maintain, rebuild and insure the improvements which constitute a portion of the premises thereunder. 5. Should Mortgagor fail to make any payment or to do any act as herein provided, then Mortgagee may, but without obligation to do so and without notice to or demand on Mortgagor and without releasing Mortgagor from any obligation, make or do the same, including, without limitation, appearing in and defending any action purporting to affect the security hereof or the rights or powers of Mortgagee hereunder and performing any obligation of Mortgagor under the Lease, and in exercising any such powers, paying all necessary costs and expenses, including, without limitation, attorneys' fees. Mortgagor will pay immediately upon demand all sums expended by Mortgagee under the authority hereof, and the same shall be added to the Obligations and shall be secured hereby and by the Loan Documents. 6. Upon the occurrence and continuation of an Event of Default, Mortgagee may, with the consent of the Required Lenders, at its option, without notice and without regard to the adequacy of security for the Obligations, either in person or by agent and with or without bringing any action or proceeding, or by a receiver to be appointed by a court, enter upon, take possession of, and operate the premises which are the subject of the Lease, make, enforce, modify and accept any provision of, or surrender, the Lease, and do any other act or acts which Mortgagee deems proper to protect the security hereof until all Obligations have been paid or performed in full. The entering upon and taking possession of such premises shall not cure or waive any default or waive, modify or affect any notice of default under the Credit Agreement or any other security instrument, nor invalidate any act done pursuant to any such notice. 7. Mortgagor hereby irrevocably constitutes and appoints Mortgagee as its attorney-in-fact to demand, receive, and enforce Mortgagor's rights with respect to the Lease for and on behalf of and in the name of Mortgagor or, with the same force and effect as Mortgagor could do if this Leasehold Mortgage had not been made. Mortgagee may, without affecting any of its rights or remedies against Mortgagor under any other instrument, document or agreement, exercise its rights under this Leasehold Mortgage as Mortgagor's attorney-in-fact - 4 - in any other manner permitted by law, and in addition Mortgagee shall have and possess, without limitation, any and all rights and remedies of a secured party under the Uniform Commercial Code or otherwise as provided by law. 8. At Mortgagor's sole cost and expense, Mortgagor will appear in and defend any action growing out of or in any manner connected with the Lease or the obligations or liabilities of Mortgagor thereunder. In addition, Mortgagor shall indemnify and hold Mortgagee harmless from and against any and all claims, demands, liabilities, losses, lawsuits, judgments, and costs and expenses, including, without limitation, reasonable attorneys' fees to which Mortgagee may become exposed or which Mortgagee may incur in exercising any of its rights under this Leasehold Mortgage. 9. This Leasehold Mortgage is for security purposes only. Accordingly, Mortgagee shall not have the right under this Leasehold Mortgage to enforce the provisions of said Lease or exercise rights hereunder unless and until there shall have occurred an Event of Default. 10. Subject to the limitation on further assignment by Mortgagor set forth above, this Leasehold Mortgage shall be binding upon and inure to the benefit of the legal representatives, assigns and successors in interest of Mortgagor and Mortgagee, including any subsequent holders of Notes. 11. All notices hereunder shall be sent to the addresses and pursuant to the procedures set forth in Section 13.1 of the Credit Agreement. 12. Mortgagor warrants and represents that it is the Lessee of the Leasehold Estate under the Lease; such Leasehold Estate is free and clear of all liens, charges and encumbrances whatsoever, except those which have been approved by Mortgagee; and Mortgagor has full right and power to make this conveyance. 13. In addition to the rights and remedies set forth herein, Mortgagee shall have all rights and remedies set forth in the Loan Documents. IN WITNESS WHEREOF, Mortgagor has executed and sealed this Leasehold Mortgage this 10 day of July, 1995. ------ ACC CORP. [CORPORATE SEAL] By: John J. Zimmer ----------------------------- Name: John J. Zimmer --------------------- ATTEST: Daniel J. Venuti Title: Vice Pres-Finance ------------------------ --------------------- Name: Daniel J. Venuti ---------------- Title: Asst. Secretary --------------- STATE OF NORTH CAROLINA) -------------- ) COUNTY OF MECKLENBURG ) ------------- I, Betty G. Smith, a Notary Public of the county and state aforesaid, --------------- certify that Daniel J. Venuti personally came before me this day and ---------------- acknowledged that (s)he is Assistant Secretary of ACC CORP., a Delaware --------- corporation, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by its Vice President-Finance ---------------------- sealed with its corporate seal and attested by herself as its Assistant --------- Secretary. WITNESS my hand and official stamp, this 10th day of July, 1995. -------- Betty G. Smith ------------------------------- Notary Public My commission expires: August 5, 19997 Exhibit A --------- to Leasehold Mortgage between ACC Corp. and First Union National Bank of North Carolina, as Administrative Agent Description of Leased Premises ------------------------------ 400 West Avenue Rochester, New York 14614 ALL THAT TRACT OR PARCEL OF LAND situate in the City of Rochester, County of Monroe and State of New York being part of Town Lots 67 and 76 in the 20,000 Acre Tract and being Parcel "A" on a Resubdivision Map entitled "400 West Avenue and 95 Ames Street" made by Earl F. Greer III, N.Y.S.P.L.S. No. 049115, dated December 23, 1991 of Lozier Architects/Engineers, being Project #1990-36 and File No. 39789, and bounded and described as follows: Commencing at the intersection of the west street line of Ames Street with north street line of West Avenue, said point having New York State Plan Coordinates of N 1149136.12 and E 750584.00; thence (A) S 89 degrees 10' 15" W and along the north street line of said West Avenue a distance of 667.59 feet to the point of beginning of the parcel described herewith; thence (1) S 89 degrees 10' 15" W and continuing along the north street line of said West Avenue a distance of 637.08 feet to a point, said point being 0.04 feet south of and 0.18 feet west of a found stone monument, said point also having New York State Plane Coordinates of N 1149117.23 and E 749279.47; thence (2) S 89 degrees 18' 15" W and continuing along the north street line of West Avenue a distance of 850.28 feet to a point, said point being 0.03 feet north of a found drill hole; thence (3) N 49 degrees 03' 28" W a distance of 31.24 feet to a point on the east street line of Buffalo Road, said point being 0.23 feet south of and 0.17 feet east of a found P.K. nail; thence the following three courses along the east street line of Buffalo Road; thence (4) N 04 degrees 56' 45" W a distance of 390.45 feet to a point; thence (5) S 75 degrees 50' 26" W a distance of 4.51 feet; thence (6) N 14 degrees 08' 30" W a distance of 59.81 feet to a point on the South line of lands now or formerly owned by the Chessie System, formerly lands of the Buffalo, Rochester and Pittsburgh Railroad; thence the following seven courses along lands now or formerly owned by the Chessie System; thence (7) N 76 degrees 25' 54" E a distance of 236.15 feet to a point; thence (8) N 81 degrees 16' 59" E a distance of 199.24 feet to a point; thence (9) N 72 degrees 20' 16" E a distance of 515.88 feet to a point; thence (10) N 00 degrees 41' 22" W a distance of 6.50 feet to a point; thence (11) N 75 degrees 52' 10" E a distance of 631.00 feet to a point; thence (12) N 00 degrees 35' 05" W a distance of 4.11 feet to a point; thence (13) N 75 degrees 47' 52" East a distance of 25.46 feet to a point in the centerline of the former Hague Street; thence (14) S 00 degrees 35' 45" E and along the centerline of the former Hague Street a distance of 859.89 feet to the point of beginning. - 2 - Hereby intending to describe a parcel of land containing 1,009,569 square feet or 23.177+/- acres. Together with the benefits of the Reciprocal Easement Agreement dated March 2, 1993 between Combustion Engineering, Inc. and The Hague Corporation which agreement is to be recorded in the Monroe County Clerk's Office on even date herewith. EX-99.16 19 LEASEHOLD MORTGAGE DATED 7/21/95 Exhibit 99.16 SATISFACTION: The indebtedness secured by this Leasehold Mortgage has been satisfied in full. By: _______________________ Name: _____________________ Title:_____________________ Date: _____________________ This instrument was prepared by and when recorded please return to: Michael L. Flynn, Esq. Kennedy Covington Lobdell & Hickman, L.L.P. Suite 4200 100 North Tryon Street Charlotte, NC 28202-4006 LEASEHOLD MORTGAGE [NEW YORK] This Leasehold Mortgage is made and entered into as of this 21 day ------ of July, 1995, by and among ACC SYRACUSE TELECOM CORP., a New York corporation ("Mortgagor"), and FIRST UNION NATIONAL BANK OF NORTH CAROLINA ("Mortgagee"), as Administrative Agent for the financial institutions (the "Lenders") as are, or may from time to time become, parties to the Credit Agreement (as defined below). WHEREAS, certain Affiliates of Mortgagor are indebted to the Lenders in the principal sum of up to Thirty-Five Million Dollars ($35,000,000), as evidenced by the Notes of even date executed by such Affiliates in favor of the Lenders, and such other documents as may have been executed or given by such Affiliates in connection with the transactions contemplated by the Credit Agreement of even date between such Affiliates as Borrowers thereunder (collectively, the "Borrowers"), the Lenders and the Mortgagee, as Administrative Agent for the Lenders (as amended or supplemented, the "Credit Agreement", and collectively with the Notes and such other documents, the "Loan Documents"), the terms and conditions of which are incorporated herein by reference; NOW, THEREFORE, as security for the payment and performance of up to $250,000 of the Obligations (as defined in the Credit Agreement), the Mortgagor has created a security interest in, bargained, sold, given, granted, assigned and conveyed and does by these presents create a security interest in, bargain, sell, give, grant, assign and convey unto the Mortgagee, its or his successors and assigns, all of Mortgagor's right, title and interest in and to that certain leasehold estate under a lease agreement (as amended or supplemented, the "Lease"), dated December 28, 1993, between the Mortgagor and State Tower of Syracuse - 2 - Associates, L.P., of the Premises commonly known as Suite 206 State Tower Building, 109 South Warren Street, Syracuse, New York (the "Leasehold Estate"), which is more particularly described on Exhibit A attached hereto and --------- incorporated herein by reference. TO HAVE AND TO HOLD the Leasehold Estate described herein unto the Mortgagee, its heirs and successors in interest forever. THIS CONVEYANCE IS MADE UPON THIS SPECIAL TRUST, that if the Affiliates of Mortgagor shall satisfy all Obligations secured hereby, and shall comply with all of the covenants, terms and conditions of this Leasehold Mortgage and the Loan Documents, then this conveyance shall be null and void and shall be canceled of record at the request and cost of Mortgagor. But if at any time there shall be any default in satisfaction of any Obligations or under this instrument or under the terms and conditions of any instrument secured hereby, which default shall not have been cured within any applicable grace period (if any) provided therefor, then, at the option of Mortgagee, with the consent of the Required Lenders, the entire indebtedness hereby secured shall immediately become due, payable and collectible without further notice, regardless of maturity, and this Mortgage may be foreclosed by judicial proceedings, or the Mortgagee is hereby authorized and empowered to expose to sale and to sell the Leasehold Estate described herein at public sale for cash, in compliance with the requirements of Article 14 of the New York Real Property Actions and Proceedings Laws, or any subsequently enacted statute relating to nonjudicial foreclosure sales in effect on the date foreclosure is commenced, and at the time and place fixed for the sale to sell the Leasehold Estate described herein to the highest bidder for cash, and Mortgagee shall execute a conveyance of said Leasehold Estate to and deliver possession of same to the purchaser. Mortgagee may bid and become the purchaser at any sale under this Leasehold Mortgage. The proceeds of the sale shall, after the Mortgagee retains a reasonable compensation, together with reasonable attorneys' fees incurred by Mortgagee in such proceeding, be applied first to the payment of the costs and expenses of such sale; second, to the payment to the whole amount of Obligations then owing by the Affiliates of Mortgagor to the Lenders and secured hereby; and third to the payment of the surplus, if any, to the Mortgagor or to whomever else may be lawfully entitled thereto. This Leasehold Mortgage is made as additional collateral to secure the payment and performance of the Obligations. Other terms capitalized but not otherwise defined herein shall have the meanings ascribed thereto in the Credit Agreement. MORTGAGOR ACKNOWLEDGES, COVENANTS AND AGREES WITH MORTGAGEE AS FOLLOWS: 1. Mortgagor represents and warrants that there have been no prior encumbrances, conveyances or assignments of its interest in the Lease which are still in effect, and that the Lease is a valid and enforceable agreement, that neither Mortgagor nor, to its knowledge, any other party, is in material default thereunder and that all covenants, conditions - 3 - and agreements have been performed as required therein, except those not due to be performed until after the date hereof. 2. No change in the terms of the Lease shall be valid without the written approval of Mortgagee, with the consent of the Required Lenders, and Mortgagor shall not assign, sell, pledge, mortgage or otherwise transfer or encumber its interest in the Lease so long as this Leasehold Mortgage is in effect except as permitted by the Credit Agreement. 3. Mortgagor shall give prompt notice to Mortgagee of any notice of default received by it under the Lease, together with a complete copy of any such notice of default. 4. Mortgagor shall perform each and all of the covenants and obligations of the tenant under the Lease for so long as this Leasehold Mortgage is in effect, including, without limitation, the obligations to maintain, rebuild and insure the improvements which constitute a portion of the premises thereunder. 5. Should Mortgagor fail to make any payment or to do any act as herein provided, then Mortgagee may, but without obligation to do so and without notice to or demand on Mortgagor and without releasing Mortgagor from any Obligation, make or do the same, including, without limitation, appearing in and defending any action purporting to affect the security hereof or the rights or powers of Mortgagee hereunder and performing any obligation of Mortgagor under the Lease, and in exercising any such powers, paying all necessary costs and expenses, including, without limitation, attorneys' fees. Mortgagor will pay immediately upon demand all sums expended by Mortgagee under the authority hereof, and the same shall be added to the Obligations and shall be secured hereby and by the Loan Documents. 6. Upon the occurrence and continuation of an Event of Default, Mortgagee may, with the consent of the Required Lenders, at its option, without notice and without regard to the adequacy of security for the Obligations, either in person or by agent and with or without bringing any action or proceeding, or by a receiver to be appointed by a court, enter upon, take possession of, and operate the premises which are the subject of the Lease, make, enforce, modify and accept any provision of, or surrender, the Lease, and do any other act or acts which Mortgagee deems proper to protect the security hereof until all Obligations have been paid or performed in full. The entering upon and taking possession of such premises shall not cure or waive any default or waive, modify or affect any notice of default under the Credit Agreement or any other security instrument, nor invalidate any act done pursuant to any such notice. 7. Mortgagor hereby irrevocably constitutes and appoints Mortgagee as its attorney-in-fact to demand, receive, and enforce Mortgagor's rights with respect to the Lease for and on behalf of and in the name of Mortgagor or, with the same force and effect as Mortgagor could do if this Leasehold Mortgage had not been made. Mortgagee may, without affecting any of its rights or remedies against Mortgagor under any other instrument, document or agreement, exercise its rights under this Leasehold Mortgage as Mortgagor's attorney-in-fact in any other manner permitted by law, and in addition Mortgagee shall have and possess, - 4 - without limitation, any and all rights and remedies of a secured party under the Uniform Commercial Code or otherwise as provided by law. 8. At Mortgagor's sole cost and expense, Mortgagor will appear in and defend any action growing out of or in any manner connected with the Lease or the obligations or liabilities or Mortgagor thereunder. In addition, Mortgagor shall indemnify and hold Mortgagee harmless from and against any and all claims, demands, liabilities, losses, lawsuits, judgments, and costs and expenses, including, without limitation, reasonable attorneys' fees to which Mortgagee may become exposed or which Mortgagee may incur in exercising any of its rights under this Leasehold Mortgage. 9. This Leasehold Mortgage is for security purposes only. Accordingly, Mortgagee shall not have the right under this Leasehold Mortgage to enforce the provisions of said Lease or exercise rights hereunder unless and until there shall have occurred an Event of Default. 10. Subject to the limitation on further assignment by Mortgagor set forth above, this Leasehold Mortgage shall be binding upon and inure to the benefit of the legal representatives, assigns and successors in interest of Mortgagor and Mortgagee, including any subsequent holders of Notes. 11. All notices hereunder shall be sent to the addresses and pursuant to the procedures set forth in Section 13.1 of the Credit Agreement. 12. Mortgagor warrants and represents that it is the Lessee of the Leasehold Estate under the Lease; such Leasehold Estate is free and clear of all liens, charges and encumbrances whatsoever, except those which have been approved by Mortgagee; and Mortgagor has full right and power to make this conveyance. 13. In addition to the rights and remedies set forth herein, Mortgagee shall have all rights and remedies set forth in the Loan Documents. IN WITNESS WHEREOF, Mortgagor has executed and sealed this Leasehold Mortgage this 10 day of July, 1995. ------ ACC SYRACUSE TELECOM CORP. [CORPORATE SEAL] By: /s/ John J. Zimmer ---------------------------- Name: John J. Zimmer --------------------- ATTEST:/s/ Daniel J. Venuti Title: Controller ------------------------- -------------------- Name: Daniel J. Venuti ----------------- Title: Asst. Secretary --------------- - 5 - STATE OF NORTH CAROLINA) ---------------- ) COUNTY OF MECKLENBURG ) -------------- I, Betty G. Smith, a Notary Public of the county and state aforesaid, -------------- certify that Daniel J. Venuti personally came before me this day and ---------------- acknowledged that (s)he is Assistant Secretary of ACC SYRACUSE TELECOM CORP., a --------- New York corporation, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by its Controller, ---------- sealed with its corporate seal and attested by himself as its Assistant --------- Secretary. WITNESS my hand and official stamp, this 10th day of July, 1995. ---- /s/ Betty G. Smith ---------------------------------- Notary Public My commission expires: August 5, 1997 Exhibit A --------- to Leasehold Mortgage between ACC Syracuse Telecom Corp. and First Union National Bank of North Carolina, as Administrative Agent Description of Leased Premises ------------------------------ Suite 206 State Tower Building 109 South Warren Street Syracuse, New York ALL THAT CERTAIN PLOT, PIECE OR PARCEL OF LAND, with the buildings and improvements thereon created, situate, lying and being in the City of Syracuse, County of Onondaga, and State of New York, known and designated as Lots Nos. 1, ------------ 2, 3, 4, 5, 6, 7, part of 19 and Lot 20, the latter Lot also known as Lot A, - ------------------ -- ------- ----- all being in Block 103 in said City, bounded and described as follows: --------- Beginning at the intersection of the east line of South Warren Street and the south line of East Water Street, thence south 0 degrees 03 30" west on the east line of South Warren Street, 67.68 feet to the northerly line of East Genesee Street; thence south 59 degrees 45' 20" east along the northeasterly line of East Genesee Street, 196.49 feet; thence north 29 degrees 58' 40" east 79.51 feet to a point; thence north 0 degrees 26' 20" west 1.42 feet; thence north 30 degrees 14' 40" east 15.69 feet to a point; thence north 0 degrees 26'29" east 0.67 feet to a point, thence south 89 degrees 33' 40" east 1.21 feet to a point; thence south 0 degrees 26' 20" east 5.33 feet to a point in the south line of Falker property; thence north 0 degrees 03' 40" west 75 feet to the south line of East Water Street; thence north 89 degrees 33' 40" west along the southerly line of East Water Street 217.83 feet to the point and place of beginning. EX-99.17 20 LEASEHOLD MORTGAGE DATED 7/21/95 Exhibit 99.17 SATISFACTION: The indebtedness secured by this Leasehold Mortgage has been satisfied in full. By:______________________ Name:____________________ Title:___________________ Date:____________________ This instrument was prepared by and when recorded please return to: Michael L. Flynn, Esq. Kennedy Covington Lobdell & Hickman, L.L.P. Suite 4200 100 North Tryon Street Charlotte, NC 28202-4006 LEASEHOLD MORTGAGE [NEW YORK] This Leasehold Mortgage is made and entered into as of this 21 ------- day of July, 1995, by and among ACC CORP., a Delaware corporation ("Mortgagor"), and FIRST UNION NATIONAL BANK OF NORTH CAROLINA ("Mortgagee"), as Administrative Agent for the financial institutions (the "Lenders") as are, or may from time to time become, parties to the Credit Agreement (as defined below). WHEREAS, Mortgagor and certain Affiliates thereof are indebted to the Lenders in the principal sum of up to Thirty-Five Million Dollars ($35,000,000), as evidenced by the Notes of even date executed by the Mortgagor and such Affiliates in favor of the Lenders, and such other documents as may have been executed or given by Mortgagor in connection with the transactions contemplated by the Credit Agreement of even date between the Mortgagor and such Affiliates as Borrowers thereunder (collectively, the "Borrowers"), the Lenders and the Mortgagee, as Administrative Agent for the Lenders (as amended or supplemented, the "Credit Agreement", and collectively with the Notes and such other documents, the "Loan Documents"), the terms and conditions of which are incorporated herein by reference; NOW, THEREFORE, as security for the payment and performance of up to $500,000 of the Obligations (as defined in the Credit Agreement), the Mortgagor has created a security interest in, bargained, sold, given, granted, assigned and conveyed and does by these presents create a security interest in, bargain, sell, give, grant, assign and convey unto the - 2 - Mortgagee, its or his successors and assigns, all of Mortgagor's right, title and interest in and to that certain leasehold estate under (a) a lease agreement (as amended or supplemented, and together with the lease referred to in subparagraph (b) below, collectively, the "Lease"), dated January 10, 1989, as extended by Lease Extension Agreement dated July 21, 1992, between the Mortgagor and State Tower of Syracuse Associates, L.P., of the Premises commonly known as Suite 2200 State Tower Building, 109 South Warren Street, Syracuse, New York and (b) a lease agreement (as amended or supplemented, and together with the lease referred to in subparagraph (a) above, collectively, the "Lease"), dated April 5, 1989, as extended by Lease Extension Agreement dated July 21, 1992 and by Lease Addendum dated January 21, 1993, between the Mortgagor and State Tower of Syracuse Associates, L.P., of the Premises commonly known as Suite 204 and Suite 205 State Tower Building, 109 South Warren Street, Syracuse, New York (collectively, the "Leasehold Estate"), which is more particularly described on Exhibit A attached hereto and incorporated herein by reference. - --------- TO HAVE AND TO HOLD the Leasehold Estate described herein unto the Mortgagee, its heirs and successors in interest forever. THIS CONVEYANCE IS MADE UPON THIS SPECIAL TRUST, that if the Mortgagor shall satisfy all Obligations secured hereby, and shall comply with all of the covenants, terms and conditions of this Leasehold Mortgage and the Loan Documents, then this conveyance shall be null and void and shall be canceled of record at the request and cost of Mortgagor. But if at any time there shall be any default in satisfaction of any Obligations or under this instrument or under the terms and conditions of any instrument secured hereby, which default shall not have been cured within any applicable grace period (if any) provided therefor, then, at the option of Mortgagee, with the consent of the Required Lenders, the entire indebtedness hereby secured shall immediately become due, payable and collectible without further notice, regardless of maturity, and this Mortgage may be foreclosed by judicial proceedings, or the Mortgagee is hereby authorized and empowered to expose to sale and to sell the Leasehold Estate described herein at public sale for cash, in compliance with the requirements of Article 14 of the New York Real Property Actions and Proceedings Laws, or any subsequently enacted statute relating to nonjudicial foreclosure sales in effect on the date foreclosure is commenced, and at the time and place fixed for the sale to sell the Leasehold Estate described herein to the highest bidder for cash, and Mortgagee shall execute a conveyance of said Leasehold Estate to and deliver possession of same to the purchaser. Mortgagee may bid and become the purchaser at any sale under this Leasehold Mortgage. The proceeds of the sale shall, after the Mortgagee retains a reasonable compensation, together with reasonable attorneys' fees incurred by Mortgagee in such proceeding, be applied first to the payment of the costs and expenses of such sale; second, to the payment to the whole amount of Obligations then owing by the Mortgagor to the Lenders and secured hereby; and third to the payment of the surplus, if any, to the Mortgagor or to whomever else may be lawfully entitled thereto. This Leasehold Mortgage is made as additional collateral to secure the payment and performance of the Obligations. Other terms capitalized but not otherwise defined herein shall have the meanings ascribed thereto in the Credit Agreement. - 3 - MORTGAGOR ACKNOWLEDGES, COVENANTS AND AGREES WITH MORTGAGEE AS FOLLOWS: 1. Mortgagor represents and warrants that there have been no prior encumbrances, conveyances or assignments of its interest in the Lease which are still in effect, and that the Lease is a valid and enforceable agreement, that neither Mortgagor nor, to its knowledge, any other party, is in material default thereunder and that all covenants, conditions and agreements have been performed as required therein, except those not due to be performed until after the date hereof. 2. No change in the terms of the Lease shall be valid without the written approval of Mortgagee, with the consent of the Required Lenders, and Mortgagor shall not assign, sell, pledge, mortgage or otherwise transfer or encumber its interest in the Lease so long as this Leasehold Mortgage is in effect except as permitted by the Credit Agreement. 3. Mortgagor shall give prompt notice to Mortgagee of any notice of default received by it under the Lease, together with a complete copy of any such notice of default. 4. Mortgagor shall perform each and all of the covenants and obligations of the tenant under the Lease for so long as this Leasehold Mortgage is in effect, including, without limitation, the obligations to maintain, rebuild and insure the improvements which constitute a portion of the premises thereunder. 5. Should Mortgagor fail to make any payment or to do any act as herein provided, then Mortgagee may, but without obligation to do so and without notice to or demand on Mortgagor and without releasing Mortgagor from any Obligation, make or do the same, including, without limitation, appearing in and defending any action purporting to affect the security hereof or the rights or powers of Mortgagee hereunder and performing any obligation of Mortgagor under the Lease, and in exercising any such powers, paying all necessary costs and expenses, including, without limitation, attorneys' fees. Mortgagor will pay immediately upon demand all sums expended by Mortgagee under the authority hereof, and the same shall be added to the Obligations and shall be secured hereby and by the Loan Documents. 6. Upon the occurrence and continuation of an Event of Default, Mortgagee may, with the consent of the Required Lenders, at its option, without notice and without regard to the adequacy of security for the Obligations, either in person or by agent and with or without bringing any action or proceeding, or by a receiver to be appointed by a court, enter upon, take possession of, and operate the premises which are the subject of the Lease, make, enforce, modify and accept any provision of, or surrender, the Lease, and do any other act or acts which Mortgagee deems proper to protect the security hereof until all Obligations have been paid or performed in full. The entering upon and taking possession of such premises shall not cure or waive any default or waive, modify or affect any notice of default under the Credit Agreement or any other security instrument, nor invalidate any act done pursuant to any such notice. - 4 - 7. Mortgagor hereby irrevocably constitutes and appoints Mortgagee as its attorney-in-fact to demand, receive, and enforce Mortgagor's rights with respect to the Lease for and on behalf of and in the name of Mortgagor or, with the same force and effect as Mortgagor could do if this Leasehold Mortgage had not been made. Mortgagee may, without affecting any of its rights or remedies against Mortgagor under any other instrument, document or agreement, exercise its rights under this Leasehold Mortgage as Mortgagor's attorney-in-fact in any other manner permitted by law, and in addition Mortgagee shall have and possess, without limitation, any and all rights and remedies of a secured party under the Uniform Commercial Code or otherwise as provided by law. 8. At Mortgagor's sole cost and expense, Mortgagor will appear in and defend any action growing out of or in any manner connected with the Lease or the obligations or liabilities of Mortgagor thereunder. In addition, Mortgagor shall indemnify and hold Mortgagee harmless from and against any and all claims, demands, liabilities, losses, lawsuits, judgments, and costs and expenses, including, without limitation, reasonable attorneys' fees to which Mortgagee may become exposed or which Mortgagee may incur in exercising any of its rights under this Leasehold Mortgage. 9. This Leasehold Mortgage is for security purposes only. Accordingly, Mortgagee shall not have the right under this Leasehold Mortgage to enforce the provisions of said Lease or exercise rights hereunder unless and until there shall have occurred an Event of Default. 10. Subject to the limitation on further assignment by Mortgagor set forth above, this Leasehold Mortgage shall be binding upon and inure to the benefit of the legal representatives, assigns and successors in interest of Mortgagor and Mortgagee, including any subsequent holders of Notes. 11. All notices hereunder shall be sent to the addresses and pursuant to the procedures set forth in Section 13.1 of the Credit Agreement. 12. Mortgagor warrants and represents that it is the Lessee of the Leasehold Estate under the Lease; such Leasehold Estate is free and clear of all liens, charges and encumbrances whatsoever, except those which have been approved by Mortgagee; and Mortgagor has full right and power to make this conveyance. 13. In addition to the rights and remedies set forth herein, Mortgagee shall have all rights and remedies set forth in the Loan Documents. IN WITNESS WHEREOF, Mortgagor has executed and sealed this Leasehold Mortgage this 10 day of July, 1995. ------ - 5 - ACC CORP. [CORPORATE SEAL] By: /s/ John J. Zimmer ---------------------------- Name: John J. Zimmer --------------------- ATTEST: /s/ Daniel J. Venuti Title: Vice Pres-Finance ------------------------- --------------------- Name: Daniel J. Venuti ----------------- Title: Asst. Secretary ---------------- STATE OF NORTH CAROLINA) -------------- ) COUNTY OF MECKLENBURG ) ------------- I, Betty G. Smith, a Notary Public of the county and state aforesaid, -------------- certify that Daniel J. Venuti personally came before me this day and acknowledged that (s)he is Assistant Secretary of ACC CORP., a Delaware ---------- corporation, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by its Controller, sealed with ---------- its corporate seal and attested by himself as its Assistant Secretary. --------- WITNESS my hand and official stamp, this 10th day of July, 1995. -------- /s/ Betty G. Smith ----------------------------------- Notary Public My commission expires: August 5, 1997 Exhibit A --------- to Leasehold Mortgage between ACC Corp. and First Union National Bank of North Carolina, as Administrative Agent Description of Leased Premises ------------------------------ Suite 2200 Suite 204 and Suite 205 State Tower Building 109 South Warren Street Syracuse, New York ALL THAT CERTAIN PLOT, PIECE OR PARCEL OF LAND, with the buildings and improvements thereon created, situate, lying and being in the City of Syracuse, County of Onondaga, and State of New York, known and designated as Lots Nos. 1, 2, 3, 4, 5, 6, 7, part of 19 and Lot 20, the latter Lot also known as Lot A, all ----- being in Block 103 in said City, bounded and described as follows: Beginning at --------- the intersection of the east line of South Warren Street and the south line of East Water Street, thence south 0 degrees 03' 30" west on the east line of South Warren Street, 67.68 feet to the northerly line of East Genesee Street; thence south 59 degrees 45' 20" east along the northeasterly line of East Genesee Street, 196.49 feet; thence north 29 degrees 58' 40" east 79.51 feet to a point; thence north 0 degrees 26' 20" west 1.42 feet; thence north 30 degrees 14' 40" east 15.69 feet to a point; thence north 0 degrees 26'29" east 0.67 feet to a point; thence south 89 degrees 33' 40" east 1.21 feet to a point; thence south 0 degrees 26' 20" east 5.33 feet to a point in the south line of Falker property; thence north 0 degrees 03' 40" west 75 feet to the south line of East Water Street; thence north 89 degrees 33' 40" west along the southerly line of East Water Street 217.83 feet to the point and place of beginning. EX-99.18 21 MORTGAGE OF LEASEHOLD INTEREST DATED 7/21/95 Exhibit 99.18 MORTGAGE OF LEASEHOLD INTEREST ------------------------------ This agreement made as of the 21st day of July, 1995. ---- ---- BETWEEN: ACC LONG DISTANCE INC./INTERURBAINS ACC INC., a corporation incorporated under the laws of the province of Ontario (hereinafter called the "Company") OF THE FIRST PART - and - ACC CORP., a corporation incorporated under the laws of the State of Delaware (hereinafter called the "Mortgagee") OF THE SECOND PART WHEREAS ACC Long Distance Ltd./Interurbains ACC Ltee. ("ACC Ltd."), as lessee, entered into an amended and restated lease dated as of March 1, 1994 between the Company, as tenant, and Coopers & Lybrand as receiver and manager for Dundas Kipling II Inc., as landlord (such lease as the same may be amended, extended or replaced from time to time being collectively called the "Lease"), relating to the lands and premises municipally known as 5343 Dundas Street West, Etobicoke, Ontario and more particularly described in Schedule "A" hereto (which leased premises are hereinafter referred to as the "Lands"); AND WHEREAS the ACC ltd. assigned its right, title and interest in and to the Lease and the obligations owing thereunder to the Company pursuant to an assignment and assumption agreement dated as of March 1, 1994; AND WHEREAS the Company has agreed to mortgage, charge and assign all of its right, title and interest in and to all benefits arising under or in respect of the Lease including without limitation its rights and interests in the Lands (which rights, title, interests and benefits are hereinafter collectively called the "Leasehold Interest") to the Mortgagee as security for payment of the Indebtedness; - 2 - NOW WITNESS that in consideration of the sum of TWO DOLLARS ($2.00) now paid by the Mortgagee to the Company and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged by the Company), the Company hereby agrees with the Mortgagee as follows: 1. Subject to the exception as to leasehold hereinafter contained, the Company, as security for repayment of the sum of Forty-Five Million ($45,000,000 Cdn.) Canadian Dollars and all present and future indebtedness, liabilities and other obligations of the Company under or pursuant to a certain credit agreement dated July 21, 1995 between the Mortgagee, as lender, and the Company, ACC Telenterprises Ltd./Telentreprises ACC Ltee. and ACC Long Distance Inc./Interurbains ACC Inc., as borrowers (such credit agreement as may be amended, supplemented, replaced or restated from time to time being herein called the "Credit Agreement") and under and pursuant to a related grid promissory note dated July 21, 1995 signed by the Company, ACC Telenterprises Ltd./Telentreprises ACC Ltee. and ACC Long Distance Inc./Interurbains ACC Inc. in favour of the Mortgagee in the principal amount of $29,000,000 U.S. (all of the Company's foregoing indebtedness, liabilities and obligations to the Mortgagee under the Credit Agreement and the aforesaid promissory note being hereinafter called the "Credit Agreement Indebtedness") together with interest thereon at the rate of twenty-five (25%) percent per annum calculated and payable monthly not in advance, both before and after demand and before and after default, judgment and execution from the date hereof until payment (all of the foregoing hereinafter collectively referred to as the "Indebtedness"), hereby mortgages, charges and assigns to the Mortgagee, and grants to the Mortgagee a security interest in the Leasehold Interest. TO HAVE AND TO HOLD the assets hereby mortgaged and charged to the Mortgagee its successors and assigns, forever but subject to the terms and conditions herein set forth. 2. It is hereby declared that the last day of any term of years reserved by any lease, verbal or written, or any agreement therefor (including without limitation the Lease), now held or hereafter acquired by the Company, and whether falling within the general or particular description of the mortgaged premises hereunder or otherwise shall be excepted out of the mortgage and charge constituted hereby or by any other agreement, but the Company shall stand possessed of the reversion of one day remaining in the Company in respect of any such term of years, for the time being demised, as aforesaid, upon trust to assign and dispose of the same as any purchaser of such term of years shall direct. 3. The Company hereby covenants and agrees that it shall at all times, at its own cost and expense, do, execute, acknowledge and deliver or cause to be done, executed, acknowledged or delivered all and singular every such further act, deed, transfer, assignment and assurance as the Mortgagee may reasonably require for the better mortgaging, charging, transferring, assigning and confirming unto the Mortgagee the property and assets hereby mortgaged and charged or intended so to be or which the Company may hereafter become bound - 3 - to mortgage charge, transfer or assign in favour of the Mortgagee and for the better accomplishing and effectuating of this mortgage. 4. The Mortgagee shall not in any way whatsoever be obligated to perform any covenants or obligations of the Company under the Lease. 5. The Company represents and warrants to the Mortgagee that as of the date hereof: (a) the Lease has not been surrendered or forfeited; (b) the rents and covenants therein contained have been duly paid and performed by the Company; (c) the Company has full right, power and authority to mortgage and charge the Lease and the Leasehold Interest as contemplated hereby; and (d) the Company has obtained the consent of the Landlord to the mortgaging and charging of the Lease and the Leasehold Interest (if such consent is required to be obtained from the Landlord). 6. The Company hereby covenants and agrees to and with the Mortgagee that until the Indebtedness has been repaid in full, the Company: (a) shall not without the prior written consent of the Mortgagee create any lien upon or assign or transfer as security or pledge or hypothecate any asset subject to the mortgage and charge hereof except to the Mortgagee and the Company will not, in the ordinary course of business or otherwise, sell, transfer, assign, or otherwise dispose of any such asst without the prior written consent of the Mortgagee; (b) shall not without the prior written consent of the Mortgagee merge or amalgamate with any other corporation; (c) shall insure and keep insured the buildings, erections, fixtures, improvements, premises and all other assets hereby charged against loss or damage by fire and other insurable hazards which such assets are commonly insured against in the Province of Ontario to the full insurable value thereof; the Company shall duly and promptly pay all premiums and other sums of money payable for maintaining such insurance and shall cause all insurance proceeds thereunder to be payable in the case of loss to the Mortgagee as first mortgagee and loss payee such insurance policy(ies) to contain a standard mortgage clause and the Company shall, upon request from the Mortgagee, provide to the Mortgagee evidence of the payment of such premiums and the assignment of such insurance proceeds to the Mortgagee; and (f) shall strictly comply with every covenant and undertaking heretofore or hereafter given by it to the Mortgagee. - 4 - 7. The Company covenants and agrees to and with the Mortgagee that: (a) it shall at all times fully perform and comply with all of its covenants and obligations contained in the Lease, and imposed upon or assumed or agreed to by it pursuant to any prior encumbrance of the Lands or any part thereof or its Leasehold Interest therein and that, if the Company shall fail to do so the Mortgagee may (but shall not be obligated to) take any action the Mortgagee deems necessary or desirable to cure any default by the Company in the performance of or compliance with any of the obligations of the Company pursuant to the Lease or imposed upon, assumed by or agreed to by the Company pursuant to any such prior encumbrance; upon receipt by the Mortgagee from the Landlord or from any such prior encumbrancer of any written notice of default by the Company, the Mortgagee may rely thereon and take any action as aforesaid to cure such default even though the existence of such default or the nature thereof may be questioned or denied by the Company or by any party on behalf of the Company; the Company hereby expressly grants to the Mortgagee and agrees that the Mortgagee shall have the absolute and immediate right to enter in and upon the Lands or any part thereof to such extent and as often as the Mortgagee, in its sole discretion, deems necessary or desirable, in order to cure any such default by the Company; the Mortgagee may pay and expend such sums of money as the Mortgagee in its sole discretion, acting reasonably, deems necessary or desirable for any such purpose, and the Company hereby agrees to pay to the Mortgagee, immediately upon notification by the Mortgagee and without demand, all such sums so paid and expended by the Mortgagee, together with interest thereon at the rate applicable to the Indebtedness from time to time; all such sums so paid or expended by the Mortgagee and such interest thereon, shall be secured hereby in addition to the Indebtedness and in priority to all other mortgages and charges; (b) it shall not surrender the Lease or any rights of renewal with respect thereto nor terminate nor cancel the Lease without the prior written consent of the Mortgagee and that the Company will not, without the prior written consent of the Mortgagee, modify, revise, alter or amend the Lease, either orally or in writing; (c) no release or forbearance of any of the Company's covenants and obligations contained in the Lease or pursuant to any prior encumbrance of the Leasehold Interest or any part thereof shall release the Company from any of its obligations contained herein; - 5 - (d) unless the Mortgagee shall otherwise expressly consent in writing, the title in fee simple to the Lands and the Leasehold Interest shall not merge but shall always remain separate and distinct, notwithstanding the union of said estates in either the Landlord or the Company, by purchase or otherwise; (e) if the Company shall, at any time prior to the repayment in full of the Indebtedness, purchase or in any way acquire the freehold title to the Lands, this mortgage and charge shall attach, extend to and constitute a mortgage and charge of such freehold estate; (f) it will indemnify and save harmless the Mortgagee from and against any and all losses, costs, claims, actions, damages and expenses (including without limitation legal fees and disbursements on a solicitor and client basis) incurred or suffered by the Mortgagee or its agents or employees as a result of or in connection with the presence, removal, disposal or movement of any hazardous waste or substance on the Lands which is not in compliance with Applicable Law; (g) it will at any time and from time to time, upon request from the Mortgagee, deliver to the Mortgagee a statement in writing certifying that: the Lease is in full force and effect; there are no defaults under the Lease; the Lease has not been modified or amended; all amounts required to be paid by the Company under the Lease have been paid to the date of the certificate; (h) upon the occurrence of a default hereunder, the Mortgagee may peaceably and quietly enter upon and use, occupy, possess and enjoy the Lands and the Leasehold Interest, free from all encumbrances, liens and charges, without hindrance, interruption or denial of the same by the Company or any other person or persons, save only the rights of the Landlord under the Lease; (i) the Company hereby assigns and transfers to the Mortgagee all of the Company's right, title and interest in and to the benefit of any and all non-disturbance, attornment or like agreements to which the Company is now or may hereafter become a party (and the Company covenants and agrees to and with the Mortgagee that the Company shall use its best efforts at its own cost and expense to obtain from all appropriate third parties non-disturbance, attornment or other similar agreements in favour of the Mortgagee in form and substance satisfactory to the Mortgagee); and - 6 - (j) the Company shall not subordinate or postpone or agree to subordinate or postpone the Leasehold Interest or the Mortgagee's security interests, charges or rights therein, to or in favour of any lien, charge or encumbrance without the prior written consent of the Mortgagee. 8. The Indebtedness shall become payable and the security hereby constituted shall become enforceable in each and every of the events following (each of such events being hereinafter referred to as an "Event of Default"): (a) if an Event of Default (as defined in the Credit Agreement) occurs; (b) if the Company defaults in the observance or performance in any material respect of any of its covenants, agreements or other obligations under this mortgage, provided however that if such default is curable, such default has not been remedied within 30 days after the Secured Party has given notice to the Company to remedy the default; (c) if an order is made or a resolution passed for the winding- up of the Company, or if a petition is filed for the winding-up of the Company; (d) if the Company ceases or threatens to cease to carry on business or if the Company commits or threatens to commit any act of bankruptcy or if the Company becomes insolvent or makes an assignment or proposal in bankruptcy or makes a bulk sale of its assets or if a bankruptcy petition is filed or presented against the Company; (e) if any proceedings with respect to the Company are commenced under the Companies' Creditors Arrangement Act or the Bankruptcy and Insolvency Act or if the Company shall seek relief or consent to the filing of a petition against it under any law which involves any compromise of any creditor's rights against the Company; (f) if an execution or any other process of any court becomes enforceable against the Company or if a distress or analogous process is levied upon the property of the Company or any part thereof; or (g) if any licences, permits or approvals required by any law, regulation or governmental policy or any governmental agency or - 7 - commission for the operation by the Company of its business shall be withdrawn or cancelled. 9. No waiver by the Mortgagee of any of its rights or remedies hereunder shall be considered a waiver of any other or subsequent right or remedy of the Mortgagee, no delay or omission in the exercise or enforcement by the Mortgagee of any right or remedy shall be considered as a waiver of such right or remedy of the Mortgagee and no exercise or enforcement of such right or remedy shall exhaust or preclude the exercise of any other right or remedy by the Mortgagee. 10. Upon the occurrence and during the continuance of an Event of Default the Mortgagee may: (a) take possession of all or part of the Lands and the Leasehold Interest with the power to exclude the Company, its agents and servants therefrom; and (b) enter upon and lease or sell the whole or any part or parts of the property and assets charged hereby and any such sale may be made hereunder by public auction, by public tender or by private contract, with or without notice and with or without advertising and without any other formality, all of which are hereby waived by the Company to the fullest extent permitted by law and such sale shall be on such terms and conditions as to credit or otherwise and as to upset or reserve bid or price as to the Mortgagee in its sole discretion may seem advantageous and such sale may take place whether or not the Mortgagee has taken possession of such property and assets. 11. Upon the occurrence of an Event of Default, the Mortgagee may appoint by instrument in writing a receiver (including a receiver and manager) or receivers of the Leasehold Interest or any part hereof (which receiver or receivers may be any person or persons, whether an officer or officers or employee or employees of the Mortgagee or not and the Mortgagee may remove any receiver or receivers so appointed and appoint another or others in his or their stead) and any receiver or receivers so appointed shall have the power to: (a) take possession of and to use the Leasehold Interest or any part thereof; (b) preserve and maintain the Leasehold Interest as the receiver shall deem advisable; (c) borrow money required for the preservation or protection of the Leasehold Interest or any part thereof; (d) further charge the Leasehold Interest in priority to the security interests of this mortgage as security for monies so borrowed; and (e) sell, lease or otherwise dispose of the whole or any part of the Leasehold Interest on such terms and conditions and in such manner as the receiver shall determine in its sole and unfettered discretion. - 8 - The Mortgagee shall not be responsible for any actions or errors of omission by the receiver or receivers in exercising any such powers. 12. All rights and remedies of the Mortgagee contained herein shall be cumulative, and all such rights and remedies may be pursued jointly and separately, successively or concurrently at the sole discretion of the Mortgagee. 13. The Company agrees to pay to the Mortgagee forthwith on demand all costs, charges, expenses and fees (including without limitation all legal fees and disbursements on a solicitor and client basis) of or incurred by the Mortgagee and by any receiver or receivers or agent or agents appointed by the Mortgagee in connection with the enforcement of this mortgage, whether by realization, taking possession of the Tenant's Leasehold Interest or otherwise. All such sums, together with interest thereon at the rate or rates applicable to the Indebtedness shall be secured by the charges contained herein. The term "receiver" as used in this mortgage includes a receiver and manager. 14. Upon payment by the Company, its successors or assigns, of the Indebtedness hereby secured (including without limitation interest, costs and expenses), the Mortgagee shall upon request in writing by the Company, its successors or assigns, deliver up this mortgage to the Company, its successors or assigns and, at the expense of the Company, cancel and discharge the charge of this mortgage and execute and deliver to the Company, its successors or assigns such deeds or other instruments as shall be requisite to discharge the charge constituted hereby. 15. This security is in addition to and not in substitution for any other security now or hereafter held by the Mortgagee. 16. In the event that any provision hereof is for any reason held by a court of competent jurisdiction to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision hereof and this mortgage shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 17. This mortgage shall be governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein and all disputes among the parties hereto shall be submitted to the courts of the Province of Ontario provided that the Mortgagee shall be entitled to commence actions in the courts of any other jurisdiction at its discretion for the purpose of enforcing the provisions hereof. 18. All notices, demands, requests, consents and other communications required or permitted or otherwise to be given for any purpose hereunder shall be in writing and shall be communicated by personal delivery or by facsimile transmission to the respective addresses herein set forth, or such other addresses which the parties hereto may from time to time designate by written notice to the other as required herein. All notices, demands, requests, consents and other communications shall be addressed as follows: - 9 - (a) If to the Company, to it at: 5343 Dundas Street West Suite 600 Etobicoke, Ontario M9B 6K5 Attention: Barry Singer Facsimile No.: (416) 236-7392 (b) If to the Mortgagee, to it at: 400 West Avenue Rochester, New York 14611 Attention: Michael Daley Facsimile No.: (716) 987-3335 Each communication given by personal delivery or by facsimile transmission shall be deemed to have been received by the party to which it is so addressed on the date of such personal delivery or facsimile transmission, provided that it is delivered or faxed before 5:00 p.m. (Toronto, Ontario time) on a Business Day (failing which, receipt shall be deemed to have occurred on the next following Business Day). For the purposes of this mortgage, a "Business Day" means a day on which Bank of Montreal's main Toronto, Ontario branch (at 1 First Canadian Place) is open for normal banking business, but specifically excludes any Saturday, Sunday or any other day which is a statutory holiday in Toronto, Ontario. 19. This mortgage shall enure to the benefit of the Mortgagee and its successors and assigns and it shall be binding upon the Company and its successors and assigns. The Mortgagee shall be entitled in its sold and unfettered discretion, without the consent of the Company, to assign the indebtedness hereunder (and any and all security therefor or interest therein) to any assignee or assignees and the Company shall, at the Mortgagee's request, execute or cause to be executed all documents required by the Mortgagee to facilitate such assignment. The Borrower shall not, without the Mortgagee's prior written consent, assign any interest herein to any other person, firm, corporation or other entity whatsoever. 20. Notwithstanding anything else herein contained, payment by Company to the Mortgagee of the Credit Agreement Indebtedness and other costs and expenses (and interest thereon) contemplated hereby shall constitute satisfaction and payment of the Indebtedness owing by the Company to the Mortgagee hereunder. 21. In the event of any of any conflict or inconsistency between the terms and conditions contained herein and the terms and conditions contained in Standard Charge Terms 911, the terms and conditions contained herein shall govern to the extent of such conflict - 10 - or inconsistency and the provisions of the Standard Charge Terms No. 911 shall be deemed to be varied accordingly. 22. Unless otherwise stated herein, all dollar amounts referred to herein are denominated in Canadian dollars. IN WITNESS WHEREOF the Company has caused its corporate seal to be affixed to this mortgage under the hands of by its proper officers duly authorized in that behalf as of the 21st day of July, 1995. ACC LONG DISTANCE INC/ INTERURBAINS ACC INC. Per: /s/ John J. Zimmer ---------------------- Name: John J. Zimmer Title: Assistant Controller Per: /s/ Daniel J. Venuti ---------------------- Name: Daniel J. Venuti Title: Authorized Signatory - 11 - SCHEDULE "A" Legal Description of Lands -------------------------- Part of Lot 7, Concession 5, Colonel Smith's Tract, City of Etobicoke, in the Municipality of Metropolitan Toronto, designated as Part 3 and 5 on Plan 64R- 5004. City of Toronto, Municipality of Metropolitan Toronto. EX-99.19 22 PLEDGE AGREEMENT DATED 7/21/95 Exhibit 99.19 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (the "Pledge Agreement"), dated as of July 21, -- 1995 is made by ACC CORP., a Delaware corporation (the "Pledgor"), in favor of FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association (the "Administrative Agent"), as Administrative Agent for the ratable benefit of itself and the financial institutions (the "Lenders") as are, or may from time to time become, parties to the Credit Agreement (as defined below). STATEMENT OF PURPOSE -------------------- Pursuant to a Credit Agreement, dated as of even date herewith (together with all amendments and other modifications, if any, from time to time hereafter made thereto, the "Credit Agreement"), between the Pledgor and certain Subsidiaries of the Pledgor as Borrowers thereunder (collectively, the "Borrowers"), the Lenders and the Administrative Agent, the Lenders will extend Loans to the Borrowers as more specifically described in the Credit Agreement. The Pledgor is the legal and beneficial owner of the shares of Pledged Stock (as hereinafter defined) issued by the United States Subsidiaries and the Foreign Subsidiaries as specified on Schedule 1 attached hereto and incorporated ---------- herein by reference (collectively, the "Issuers"). In connection with the transactions contemplated by the Credit Agreement and as a condition precedent thereto, the Lenders have requested, and the Pledgor has agreed to execute and deliver, this Pledge Agreement with the Pledged Stock to the Administrative Agent for the ratable benefit of itself and Lenders. NOW, THEREFORE, in consideration of the premises and to induce the Administrative Agent and the Lenders to enter into and make available Loans pursuant to the Credit Agreement, the Pledgor hereby agrees with the Administrative Agent for the ratable benefit of itself and Lenders as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are ------------- defined in the Credit Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "Code" means the Uniform Commercial Code from time to time in ---- effect in the State of North Carolina. "Collateral" means the Pledged Stock and all Proceeds. ---------- "Pledge Agreement" means this Pledge Agreement, as amended or ---------------- modified. - 2 - "Pledged Stock" means the shares of capital stock of each Issuer ------------- listed on Schedule I hereto, together with all stock certificates, ---------- options or rights of any nature whatsoever that may be issued or granted by such Issuer to the Pledgor while this Pledge Agreement is in effect. "Proceeds" means all "proceeds" as such term is defined in -------- Section 9-306(1) of the Code on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Stock, collections thereon, proceeds of sale thereof or distributions with respect thereto. 2. Pledge and Grant of Security Interest. The Pledgor hereby ------------------------------------- delivers to the Administrative Agent, for the ratable benefit of itself and the Lenders all the Pledged Stock and hereby grants to the Administrative Agent, for the ratable benefit of itself and the Lenders, a first priority security interest in the Pledged Stock and all other Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. 3. Stock Powers. Concurrently with the delivery to the ------------ Administrative Agent of each certificate representing one or more shares of Pledged Stock, the Pledgor shall deliver an undated stock power covering such certificate, duly executed in blank by the Pledgor with, if the Administrative Agent so requests, signature guaranteed. 4. Representations and Warranties. To induce the Administrative ------------------------------ Agent and the Lenders to execute the Credit Agreement and make any Loans and to accept the security contemplated hereby, the Pledgor hereby represents and warrants that: (a) the Pledgor has the corporate power, authority and legal right to execute and deliver, to perform its obligations under, and to grant the Lien on the Collateral pursuant to, this Pledge Agreement and has taken all necessary corporate action to authorize its execution, delivery and performance of, and grant of the Lien on the Collateral pursuant to, this Pledge Agreement; (b) this Pledge Agreement constitutes a legal, valid and binding obligation of the Pledgor enforceable against the Pledgor in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by the availability of equitable remedies; (c) the execution, delivery and performance of this Pledge Agreement will not violate any provision of any Applicable Law or contractual obligation of the Pledgor and will not result in the creation or imposition of any Lien on any of the properties or revenues of the Pledgor pursuant to any Applicable Law or contractual obligation, except as contemplated hereby; - 3 - (d) except as contemplated in Section 11 hereof, no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder or creditor of the Pledgor or any Issuer), is required in connection with the execution, delivery, performance, validity or enforceability against the Pledgor of this Pledge Agreement; (e) no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Pledgor, threatened by or against the Pledgor or against any of its properties or revenues with respect to this Pledge Agreement or any of the transactions contemplated hereby; (f) the shares of Pledged Stock listed on Schedule I constitute ---------- all the issued and outstanding shares of all classes of the capital stock of each of the United States Subsidiaries and constitute 66.66% of all the issued and outstanding shares of all classes of capital stock of each of the Foreign Subsidiaries; (g) all the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable; (h) the Pledgor is the record and beneficial owner of, and has good and marketable title to, the Pledged Stock listed on Schedule I, ---------- free of any and all Liens or options in favor of, or claims of, any other Person, except the Lien created by this Pledge Agreement; and (i) upon delivery to the Administrative Agent of the stock certificates evidencing the Pledged Stock, the Lien granted pursuant to this Pledge Agreement will constitute a valid, perfected first priority Lien on the Pledged Stock and the Proceeds related thereto, enforceable as such against all creditors of the Pledgor and any Persons purporting to purchase any of the Pledged Stock from the Pledgor. 5. Certain Covenants. The Pledgor covenants and agrees with the ----------------- Administrative Agent for the ratable benefit of itself and the Lenders that, from and after the date of this Pledge Agreement until the Obligations are paid in full and the Commitments are terminated: (a) If the Pledgor shall, as a result of its ownership of the Pledged Stock, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option - 4 - or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any shares of the Pledged Stock, or otherwise in respect thereof, the Pledgor shall accept the same as the agent of the Administrative Agent, hold the same in trust for the Administrative Agent and deliver the same forthwith to the Administrative Agent in the exact form received, duly indorsed by the Pledgor to the Administrative Agent, if required, together with an undated stock power covering such certificate duly executed in blank by the Pledgor and with, if the Administrative Agent so requests, signature guaranteed, to be held by the Administrative Agent, subject to the terms hereof, as additional collateral security for the Obligations; provided that in no event shall more than 66.66% of all -------- the issued and outstanding shares of all classes of capital stock of each of the Foreign Subsidiaries constitute collateral security hereunder. In addition, any sums paid upon or in respect of the Pledged Stock upon the liquidation or dissolution of any Issuer shall be held by the Administrative Agent as additional collateral security for the Obligations. (b) Without the prior written consent of the Administrative Agent, the Pledgor will not (i) vote to enable, or take any other action to permit, any Issuer to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of any nature of such Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Stock, or (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Collateral, or any interest therein, except for the Lien provided for by this Pledge Agreement. The Pledgor will defend the right, title and interest of the Administrative Agent in and to the Collateral against the claims and demands of all Persons whomsoever. (c) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Administrative Agent, duly endorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Pledge Agreement. (d) The Pledgor agrees to pay, and to save the Administrative Agent and the Lenders harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other - 5 - similar taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Pledge Agreement. (e) On or prior to the formation or acquisition of any Subsidiary of the Pledgor, the Pledgor agrees to execute such amendments and supplements to this Pledge Agreement, including without limitation the Pledge Agreement Supplement attached hereto, and such other documents and instruments and to take any and all actions, all as shall be necessary, in the reasonable judgment of the Administrative Agent, to pledge the Pledgor's interest therein to the Administrative Agent for the ratable benefit of itself and the Lenders. (f) Without the prior written consent of the Administrative Agent, the Pledgor will not sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, or create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the shares of capital stock of the Foreign Subsidiaries owned by the Pledgor but not pledged hereunder, or any interest therein, except as otherwise permitted pursuant to Section 9.3 or Section 9.4 of the Credit Agreement. 6. Cash Dividends; Voting Rights. Unless an Event of Default shall ----------------------------- have occurred and be continuing and the Administrative Agent shall have given notice to the Pledgor of the Administrative Agent's intent to exercise its rights pursuant to Section 7 below, the Pledgor shall be permitted to receive all cash dividends paid in accordance with the terms of the Credit Agreement in respect of the Pledged Stock and to exercise all voting and corporate rights with respect to the Pledged Stock; provided, that no vote shall be cast or -------- corporate right exercised or other action taken which would impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, the Notes, any other Loan Documents or this Pledge Agreement. 7. Rights of the Administrative Agent. ---------------------------------- (a) If an Event of Default shall occur and be continuing and the Administrative Agent shall give notice of its intent to exercise such rights to the Pledgor, (i) the Administrative Agent shall have the right to receive any and all cash dividends paid in respect of the Pledged Stock and make application thereof to the Obligations in the order set forth in Section 10 of the Security Agreement and (ii) all shares of the Pledged Stock shall be registered in the name of the Administrative Agent or its nominee, and the Administrative Agent or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such shares of the Pledged Stock at any meeting of shareholders of the applicable Issuer or otherwise and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the Pledged Stock as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Stock upon the merger, consolidation, reorganization, - 6 - recapitalization or other fundamental change in the corporate structure of the applicable Issuer, or upon the exercise by the Pledgor or the Administrative Agent of any right, privilege or option pertaining to such shares of the Pledged Stock, and in connection therewith, the right to deposit and deliver any and all of the Pledged Stock with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine), all without liability except to account for property actually received by it, but the Administrative Agent shall have no duty to the Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (b) The rights of the Administrative Agent and the Lenders hereunder shall not be conditioned or contingent upon the pursuit by the Administrative Agent or any Lender of any right or remedy against the Pledgor or against any other Person which may be or become liable in respect of all or any part of the Obligations or against any collateral security therefor, guarantee therefor or right of offset with respect thereto. Neither the Administrative Agent nor any Lender shall be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall the Administrative Agent be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. 8. Remedies. If an Event of Default shall occur and be continuing, -------- with the consent of the Required Lenders, the Administrative Agent may, and upon the request of the Required Lenders, the Administrative Agent shall, exercise on behalf of itself and the Lenders, all rights and remedies granted in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, and in addition thereto, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing with regard to the scope of the Administrative Agent's remedies, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Pledgor, any Issuer or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Administrative Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived or released. The Administrative Agent shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, - 7 - appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Lenders hereunder, including, without limitation, reasonable attorneys' fees and disbursements of counsel thereto, to the payment in whole or in part of the Obligations, in the order set forth in Section 10 of the Security Agreement, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Administrative Agent account for the surplus, if any, to the Pledgor. To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands it may acquire against the Administrative Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. The Pledgor further waives and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the Code. 9. Registration Rights; Private Sales. ---------------------------------- (a) If the Administrative Agent shall determine to exercise its right to sell any or all of the Pledged Stock pursuant to Section 8 hereof, and if in the opinion of the Administrative Agent it is necessary or advisable to have the Pledged Stock, or that portion thereof to be sold, registered under the provisions of the Securities Act of 1933, as amended (the "Securities Act"), the Pledgor will cause the applicable Issuer to (i) execute and deliver, and cause the directors and officers of the applicable Issuer to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts as may be, in the opinion of the Administrative Agent, necessary or advisable to register the Pledged Stock, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) to use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Pledged Stock, or that portion thereof to be sold, and (iii) to make all amendments thereto and/or to the related prospectus which, in the opinion of the Administrative Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto. The Pledgor agrees to cause the applicable Issuer to comply with the provisions of the securities or "Blue Sky" laws of any and all jurisdictions which the Administrative Agent shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of Section 11(a) of the Securities Act. (b) The Pledgor recognizes that the Administrative Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor - 8 - acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that, in the event the Administrative Agent is unable to effect a public sale, any such private sale shall be deemed to have been made in a commercially reasonable manner. The Administrative Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the applicable Issuer to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if the applicable Issuer would agree to do so. (c) The Pledgor further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Collateral pursuant to this Section 9 valid and binding and in compliance with any and all other Applicable Laws. The Pledgor further agrees that a breach of any of the covenants contained in this Section 9 will cause irreparable injury to the Administrative Agent and the Lenders not compensable in damages, that the Administrative Agent and the Lenders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 9 shall be specifically enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Credit Agreement. 10. Amendments, etc. With Respect to the Obligations. The Pledgor ------------------------------------------------- shall remain obligated hereunder, and the Collateral shall remain subject to the Lien granted hereby, notwithstanding that, without any reservation of rights against the Pledgor, and without notice to or further assent by the Pledgor, any demand for payment of any of the Obligations made by the Administrative Agent or any Lender may be rescinded by the Administrative Agent or such Lender, and any of the Obligations continued, and the Obligations, or the liability of the Pledgor or any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered, or released by the Administrative Agent or any Lender, and the Credit Agreement, the Notes, any other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or part, as the Lenders (or the Required Lenders, as the case may be) may deem advisable from time to time, and any guarantee, right of offset or other collateral security at any time held by the Administrative Agent or any Lender for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. Neither the Administrative Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any other Lien at any time held by it as security for the Obligations or any property subject thereto. The Pledgor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Administrative Agent or any Lender upon this Pledge Agreement; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Pledge Agreement; and all dealings between the Pledgor, on the one hand, and the - 9 - Administrative Agent and the Lenders, on the other, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Pledge Agreement. The Pledgor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Pledgor with respect to the Obligations. 11. Regulatory Approval. The Pledgor will, at its expense, promptly ------------------- execute and deliver, or cause the execution and delivery of, all applications, certificates, instruments, registration statements and all other documents and papers the Administrative Agent may reasonably request or as may be required by law in connection with the obtaining of any consent, approval, registration, qualification or authorization of the FCC, CRTC, DTI, any PUC or of any other Person necessary or appropriate for the effective exercise of any rights under this Pledge Agreement. Without limiting the generality of the foregoing, if an Event of Default shall have occurred and be continuing, the Pledgor shall take any action which the Administrative Agent may reasonably request in order to transfer and assign to the Administrative Agent, or to such one or more third parties as the Administrative Agent may designate, or to a combination of the foregoing, each Communications License and PUC Authorization. To enforce the provisions of this Section, upon the occurrence and during the continuance of an Event of Default, the Administrative Agent is empowered to request the appointment of a receiver from any court of competent jurisdiction. Such receiver shall be instructed to seek from the FCC, CRTC, DTI and any applicable PUC an involuntary transfer of control of each such Communications License and PUC Authorization for the purpose of seeking a bona fide purchaser to whom control will ultimately be transferred. The Pledgor hereby agrees to authorize such an involuntary transfer of control upon the request of the receiver so appointed and, if the Pledgor shall refuse to authorize the transfer, its approval may be required by the court. Upon the occurrence and during the continuance of an Event of Default, the Pledgor shall further use its best efforts to assist in obtaining approval of the FCC, CRTC, DTI and any applicable PUC, if required, for any action or transactions contemplated by this Pledge Agreement including, without limitation, the preparation, execution and filing with the FCC, CRTC, DTI and any applicable PUC of the assignor's or transferor's portion of any application or applications for consent to the assignment of any Communications License and PUC Authorizations or transfer of control necessary or appropriate under the rules and regulations of the FCC, CRTC, DTI or any PUC for the approval of the transfer or assignment of any portion of the Collateral, together with any Communications License and applicable PUC Authorizations. The Pledgor acknowledges that the assignment or transfer of each Communications License and applicable PUC Authorizations is integral to the Administrative Agent's and the Lenders' realization of the value of the Collateral, that there is no adequate remedy at law for failure by the Pledgor to comply with the provisions of this Section and that such failure would cause irreparable injury not adequately compensable in damages, and therefore agrees that each and every covenant contained in this Section may be specifically enforced, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants. 12. Limitation on Duties Regarding Collateral. The Administrative ----------------------------------------- Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral - 10 - in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar securities and property for its own account. Neither the Administrative Agent, any Lender nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. 13. Powers Coupled with an Interest. All authorizations and agencies ------------------------------- herein contained with respect to the Collateral constitute irrevocable powers coupled with an interest. 14. Severability. Any provision of this Pledge Agreement which is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Paragraph Headings. The paragraph headings used in this Pledge ------------------ Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. No Waiver; Cumulative Remedies. Neither the Administrative Agent ------------------------------ nor any Lender shall by any act (except by a written instrument pursuant to Section 17 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 17. Waivers and Amendments; Successors and Assigns; Governing Law. ------------------------------------------------------------- None of the terms or provisions of this Pledge Agreement may be amended, supplemented or otherwise modified except by a written instrument executed by the Pledgor and the Administrative Agent; provided that any consent by the -------- Administrative Agent to any waiver, amendment, supplement or modification hereto shall be subject to approval thereof by the Lenders or Required Lenders, as applicable, in accordance with Section 13.11 of the Credit Agreement. This Pledge Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of the Administrative Agent and the Lenders and their respective successors and assigns. This Pledge Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of North Carolina. - 11 - 18. Notices. All notices and communications hereunder shall be given ------- to the addresses and otherwise in accordance with Section 13.1 of the Credit Agreement. 19. Irrevocable Authorization and Instruction to Issuers. The ---------------------------------------------------- Pledgor hereby authorizes and instructs each Issuer to comply with any instruction received by it from the Administrative Agent in writing that (a) states that an Event of Default has occurred and is continuing and (b) is otherwise in accordance with the terms of this Pledge Agreement, without any other or further instructions from the Pledgor, and the Pledgor agrees that such Issuer shall be fully protected in so complying. 20. Authority of Administrative Agent. The Pledgor acknowledges that --------------------------------- the rights and responsibilities of the Administrative Agent under this Pledge Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Pledge Agreement shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Pledgor, the Administrative Agent shall be conclusively presumed to be acting as agent for itself and the Lenders with full and valid authority so to act or refrain from acting, and neither the Pledgor nor any Issuer shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 21. Consent to Jurisdiction. The Pledgor hereby irrevocably consents ----------------------- to the personal jurisdiction of the state and federal courts located in Mecklenburg County, North Carolina, in any action, claim or other proceeding arising out of or any dispute in connection with this Pledge Agreement, any rights or obligations hereunder, or the performance of such rights and obligations. The Pledgor hereby irrevocably consents to the service of a summons and complaint and other process in any action, claim or proceeding brought by the Administrative Agent or any Lender in connection with this Pledge Agreement, any rights or obligations hereunder, or the performance of such rights and obligations, on behalf of itself or its property, in the manner provided in Section 13.1 of the Credit Agreement. Nothing in this Section 21 shall affect the right of the Administrative Agent or any Lender to serve legal process in any other manner permitted by Applicable Law or affect the right of the Administrative Agent or any Lender to bring any action or proceeding against the Pledgor or its properties in the courts of any other jurisdictions. 22. Waiver of Jury Trial. NOTWITHSTANDING ANY OTHER PROVISION -------------------- CONTAINED HEREIN, IN THE EVENT ANY JUDICIAL PROCEEDING IS INSTITUTED IN CONNECTION WITH THIS PLEDGE AGREEMENT, TO THE EXTENT PERMITTED BY LAW, THE ADMINISTRATIVE AGENT AND EACH LENDER BY THEIR ACCEPTANCE OF THIS PLEDGE AGREEMENT OR THE BENEFITS HEREOF AND THE PLEDGOR EACH HEREBY IRREVOCABLY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF OR ANY DISPUTE - 12 - IN CONNECTION WITH THIS PLEDGE AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to be duly executed and delivered as of the date first above written. [CORPORATE SEAL] ACC CORP. By: /s/ John J. Zimmer ---------------------------------- Name: John J. Zimmer -------------------------------- Title: Vice President - Finance ------------------------------- - 13 - ACKNOWLEDGEMENT AND CONSENT Each Issuer of Pledged Stock referred to in the foregoing Pledge greement hereby acknowledges receipt of a copy thereof and agrees to be bound hereby and to comply with the terms thereof insofar as such terms are pplicable to it. Each Issuer agrees to notify the Administrative Agent romptly in writing of the occurrence of any of the events described in Section (a) of the Pledge Agreement. Each United States Subsidiary further agrees that he terms of Section 9 of the Pledge Agreement shall apply to it, mutatis ------- utandis, with respect to all actions that may be required of it under or - ------- ursuant to or arising out of Section 9 of the Pledge Agreement. ACC LONG DISTANCE CORP. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ----------------------------- Title: Controller ----------------------------- ACC NATIONAL TELECOM CORP. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ----------------------------- Title: Controller ----------------------------- ACC RADIO CORP. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ----------------------------- Title: Controller ----------------------------- ACC NATIONAL LONG DISTANCE CORP. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ----------------------------- Title: Controller ----------------------------- ACC TELENTERPRISES LTD. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ----------------------------- Title: Assisstant Controller ----------------------------- - 14 - ACC LONG DISTANCE U.K. LTD. By: /s/ John J. Zimmer -------------------------------- Name: John J. Zimmer ------------------------------ Title: Attorney ----------------------------- SCHEDULE 1 To Pledge Agreement --------- DESCRIPTION OF PLEDGED STOCK United States Subsidiaries --------------------------
Issuer Class of Stock Certificate No. No. of Shares - --------------- -------------- --------------- ------------- ACC Long Distance Corp. Common 1 200 ACC National Telecom Corp. Common 1 1 ACC Radio Corp. Common 1 200 ACC National Long Distance Corp. Common 1 1
Foreign Subsidiaries --------------------
Issuer Class of Stock Certificate No. No. of Shares - ------------------------ -------------- --------------- ------------- ACC Tel- Enterprises Ltd. Common C00135 460,000 Common C00136 920,000 Common C00137 920,000 Common C00138 920,000 Common C00139 1,121,699 Common C00141 58,300 ACC Long Distance U.K. Ltd. Common 6 2,000,001
PLEDGE AGREEMENT SUPPLEMENT --------------------------- PLEDGE AGREEMENT SUPPLEMENT, dated as of __________, 199_ (the "Supplement"), made by ACC Corp., a __________ corporation (the "Pledgor"), in - ----------- ------- favor of First union National Bank of North Carolina, a national banking corporation, as Administrative Agent (in such capacity, the "Administrative -------------- Agent"), under the Credit Agreement (as defined in the Pledge Agreement referred - ----- to below) for the benefit of itself and the Lenders (as so defined). 1. Reference is hereby made to that Pledge Agreement, dated as of __________, 1995, made by the Pledgor in favor of the Administrative Agent (as amended, supplemented or otherwise modified as of the date hereof, the "Pledge Agreement"). This Supplement supplements the Pledge ---------------- Agreement, forms a part thereof and is subject to the terms thereof. Terms defined in the Pledge Agreement are used herein as therein defined. 2. The Pledgor hereby confirms and reaffirms the security interest in the Collateral granted to the Administrative Agent for the ratable benefit of itself and the Lenders under the Pledge Agreement, and, as additional collateral security for the prompt and complete payment when due (whether at stated maturity, by acceleration or otherwise) of the Obligations and in order to induce the Lenders to make their Loans under the Credit Agreement, the Pledgor hereby delivers to the Administrative Agent, for the benefit of the Lenders, [all of the issued and outstanding shares of capital stock of [INSERT NAME OF NEW UNITED STATES SUBSIDIARY]] or [66.66% of the issued and outstanding shares of capital stock of [INSERT NAME OF NEW FOREIGN SUBSIDIARY]] (the "New Issuer") ---------- listed below, together with all stock certificates, options, or rights of any nature whatsoever which may be issued or granted by the New Issuer in respect to such stock which the Pledge Agreement, as supplemented hereby, is in force (the "Additional Pledged Stock"; as used in the Pledge Agreement as supplemented by ------------------------ this Supplement, "Pledged Stock" shall be deemed to include the Additional Pledged Stock) and hereby grants to the Administrative Agent, for the ratable benefit of itself and the Lenders, a first priority security interest in the Additional Pledged Stock and all Proceeds thereof. 3. The Pledgor hereby represents and warrants that the representations and warranties contained in paragraph 5 of the Pledge Agreement are true and correct on the date of this Supplement with references therein to the "Pledged Stock" to include the Additional Pledged Stock, with references therein to the "Issuer" to include the New Issuer, and with references to the "Pledge Agreement" to mean the Pledge Agreement as supplemented by this Supplement. 4. The Pledgor shall deliver to the Administrative Agent the Acknowledgement and Consent attached hereto duly executed by the New Issuer. The Additional Pledged Stock pledged hereby is as follows which Pledged Stock shall be deemed part of Schedule I thereto: ---------- - 2 - DESCRIPTION OF PLEDGED STOCK Issuer Class of Stock Certificate No. No. of Shares - ------ -------------- --------------- ------------- New Issuer 5. The Pledgor hereby agrees to deliver to the Administrative Agent such certificates and other documents and take such other action as shall be reasonably requested by the Administrative Agent in order to effectuate the terms hereof and the Pledge Agreement. IN WITNESS WHEREOF, the undersigned has caused this Supplement to be duly executed under seal and delivered as of the date first above written. [CORPORATE SEAL] By: Name: Title: ACKNOWLEDGEMENT AND CONSENT OF NEW ISSUER The undersigned hereby acknowledges receipt of a copy of the foregoing Supplement and the Pledge Agreement referred to therein (the "Pledge ------ Agreement"). The undersigned agrees for the benefit of the Administrative Agent and the Lenders as follows: 1. The undersigned will be bound by the terms of the Pledge Agreement and will comply with such terms insofar as such terms are applicable to the undersigned. 2. The undersigned will notify the Administrative Agent promptly in writing of the occurrence of any of the events described in Section 5(a) of the Pledge Agreement. [3. The Issuer further agrees that the terms of Section 9 of the Pledge Agreement shall apply to it, mutatis mutandis, with respect to all ------- -------- actions that may be required of it under or pursuant to or arising out of Section 9 of the Pledge Agreement.] [ONLY INCLUDE FOR U.S. SUBSIDIARIES] [NAME OF NEW ISSUER] By: Name: Title: EX-99.20 23 PLEDGE AGREEMENT DATED 7/21/95 Exhibit 99.20 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (the "Pledge Agreement"), dated as of July 21, -- 1995 is made by ACC NATIONAL LONG DISTANCE CORP., a Delaware corporation (the "Pledgor"), in favor of FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association (the "Administrative Agent"), as Administrative Agent for the ratable benefit of itself and the financial institutions (the "Lenders") as are, or may from time to time become, parties to the Credit Agreement (as defined below). STATEMENT OF PURPOSE -------------------- Pursuant to a Credit Agreement, dated as of even date herewith (together with all amendments and other modifications, if any, from time to time hereafter made thereto, the "Credit Agreement"), between the Pledgor and certain Affiliates of the Pledgor as Borrowers thereunder (collectively, the "Borrowers"), the Lenders and the Administrative Agent, the Lenders will extend Loans to the Borrowers as more specifically described in the Credit Agreement. The Pledgor is the legal and beneficial owner of the shares of Pledged Stock (as hereinafter defined) issued by the United States Subsidiaries and the Foreign Subsidiaries as specified on Schedule 1 attached hereto and incorporated ---------- herein by reference (collectively, the "Issuers"). In connection with the transactions contemplated by the Credit Agreement and as a condition precedent thereto, the Lenders have requested, and the Pledgor has agreed to execute and deliver, this Pledge Agreement with the Pledged Stock to the Administrative Agent for the ratable benefit of itself and Lenders. NOW, THEREFORE, in consideration of the premises and to induce the Administrative Agent and the Lenders to enter into and make available Loans pursuant to the Credit Agreement, the Pledgor hereby agrees with the Administrative Agent for the ratable benefit of itself and Lenders as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are ------------- defined in the Credit Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "Code" means the Uniform Commercial Code from time to time in ---- effect in the State of North Carolina. "Collateral" means the Pledged Stock and all Proceeds. ---------- "Pledge Agreement" means this Pledge Agreement, as amended or ---------------- modified. - 2 - "Pledged Stock" means the shares of capital stock of each Issuer -------------- listed on Schedule I hereto, together with all stock certificates, ---------- options or rights of any nature whatsoever that may be issued or granted by such Issuer to the Pledgor while this Pledge Agreement is in effect. "Proceeds" means all "proceeds" as such term is defined in -------- Section 9-306(1) of the Code on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Stock, collections thereon, proceeds of sale thereof or distributions with respect thereto. 2. Pledge and Grant of Security Interest. The Pledgor hereby ------------------------------------- delivers to the Administrative Agent, for the ratable benefit of itself and the Lenders all the Pledged Stock and hereby grants to the Administrative Agent, for the ratable benefit of itself and the Lenders, a first priority security interest in the Pledged Stock and all other Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the obligations. 3. Stock Powers. Concurrently with the delivery to the ------------ Administrative Agent of each certificate representing one or more shares of Pledged Stock, the Pledgor shall deliver an undated stock power covering such certificate, duly executed in blank by the Pledgor with, if the Administrative Agent so requests, signature guaranteed. 4. Representations and Warranties. To induce the Administrative ------------------------------ Agent and the Lenders to execute the Credit Agreement and make any Loans and to accept the security contemplated hereby, the Pledgor hereby represents and warrants that: (a) the Pledgor has the corporate power, authority and legal right to execute and deliver, to perform its obligations under, and to grant the Lien on the Collateral pursuant to, this Pledge Agreement and has taken all necessary corporate action to authorize its execution, delivery and performance of, and grant of the Lien on the Collateral pursuant to, this Pledge Agreement; (b) this Pledge Agreement constitutes a legal, valid and binding obligation of the Pledgor enforceable against the Pledgor in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by the availability of equitable remedies; (c) the execution, delivery and performance of this Pledge Agreement will not violate any provision of any Applicable Law or contractual obligation of the Pledgor and will not result in the creation or imposition of any Lien on any of the properties or revenues of the Pledgor pursuant to any Applicable Law or contractual obligation, except as contemplated hereby; - 3 - (d) except as contemplated in Section 11 hereof, no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder or creditor of the Pledgor or any Issuer), is required in connection with the execution, delivery, performance, validity or enforceability against the Pledgor of this Pledge Agreement; (e) no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Pledgor, threatened by or against the Pledgor or against any of its properties or revenues with respect to this Pledge Agreement or any of the transactions contemplated hereby; (f) the shares of Pledged Stock listed on Schedule I constitute ---------- all the issued and outstanding shares of all classes of the capital stock of each of the United States Subsidiaries and constitute 66.66% of all the issued and outstanding shares of all classes of capital stock of each of the Foreign Subsidiaries; (g) all the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable; (h) the Pledgor is the record and beneficial owner of, and has good and marketable title to, the Pledged Stock listed on Schedule I, ---------- free of any and all Liens or options in favor of, or claims of, any other Person, except the Lien created by this Pledge Agreement; and (i) upon delivery to the Administrative Agent of the stock certificates evidencing the Pledged Stock, the Lien granted pursuant to this Pledge Agreement will constitute a valid, perfected first priority Lien on the Pledged Stock and the Proceeds related thereto, enforceable as such against all creditors of the Pledgor and any Persons purporting to purchase any of the Pledged Stock from the Pledgor. 5. Certain Covenants. The Pledgor covenants and agrees with the ----------------- Administrative Agent for the ratable benefit of itself and the Lenders that, from and after the date of this Pledge Agreement until the Obligations are paid in full and the Commitments are terminated: (a) If the Pledgor shall, as a result of its ownership of the Pledged Stock, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any shares - 4 - of the Pledged Stock, or otherwise in respect thereof, the Pledgor shall accept the same as the agent of the Administrative Agent, hold the same in trust for the Administrative Agent and deliver the same forthwith to the Administrative Agent in the exact form received, duly indorsed by the Pledgor to the Administrative Agent, if required, together with an undated stock power covering such certificate duly executed in blank by the Pledgor and with, if the Administrative Agent so requests, signature guaranteed, to be held by the Administrative Agent, subject to the terms hereof, as additional collateral security for the Obligations; provided that in no event shall more than 66.66% -------- of all the issued and outstanding shares of all classes of capital stock of each of the Foreign Subsidiaries constitute collateral security hereunder. In addition, any sums paid upon or in respect of the Pledged Stock upon the liquidation or dissolution of any Issuer shall be held by the Administrative Agent as additional collateral security for the Obligations. (b) Without the prior written consent of the Administrative Agent, the Pledgor will not (i) vote to enable, or take any other action to permit, any Issuer to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of any nature of such Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Stock, or (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Collateral, or any interest therein, except for the Lien provided for by this Pledge Agreement. The Pledgor will defend the right, title and interest of the Administrative Agent in and to the Collateral against the claims and demands of all Persons whomsoever. (c) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Administrative Agent, duly endorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Pledge Agreement. (d) The Pledgor agrees to pay, and to save the Administrative Agent and the Lenders harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other similar taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Pledge Agreement. - 5 - (e) On or prior to the formation or acquisition of any Subsidiary of the Pledgor, the Pledgor agrees to execute such amendments and supplements to this Pledge Agreement, including without limitation the Pledge Agreement Supplement attached hereto, and such other documents and instruments and to take any and all actions, all as shall be necessary, in the reasonable judgment of the Administrative Agent, to pledge the Pledgor's interest therein to the Administrative Agent for the ratable benefit of itself and the Lenders. (f) Without the prior written consent of the Administrative Agent, the Pledgor will not sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, or create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the shares of capital stock of the Foreign Subsidiaries owned by the Pledgor but not pledged hereunder, or any interest therein, except as otherwise permitted pursuant to Section 9.3 or Section 9.4 of the Credit Agreement. 6. Cash Dividends, Voting Rights. Unless an Event of Default shall ----------------------------- have occurred and be continuing and the Administrative Agent shall have given notice to the Pledgor of the Administrative Agent's intent to exercise its rights pursuant to Section 7 below, the Pledgor shall be permitted to receive all cash dividends paid in accordance with the terms of the Credit Agreement in respect of the Pledged Stock and to exercise all voting and corporate rights with respect to the Pledged Stock; provided, that no vote shall be cast or -------- corporate right exercised or other action taken which would impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, the Notes, any other Loan Documents or this Pledge Agreement. 7. Rights of the Administrative Agent. ---------------------------------- (a) If an Event of Default shall occur and be continuing and the Administrative Agent shall give notice of its intent to exercise such rights to the Pledgor, (i) the Administrative Agent shall have the right to receive any and all cash dividends paid in respect of the Pledged Stock and make application thereof to the Obligations in the order set forth in Section 10 of the Security Agreement and (ii) all shares of the Pledged Stock shall be registered in the name of the Administrative Agent or its nominee, and the Administrative Agent or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such shares of the Pledged Stock at any meeting of shareholders of the applicable Issuer or otherwise and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the Pledged Stock as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of the applicable Issuer, or upon the exercise by the Pledgor or the Administrative Agent of any right, privilege or option pertaining to such shares of the Pledged Stock, and in connection therewith, the right to deposit and deliver any and all of the Pledged Stock with any committee, depositary, transfer agent, registrar or other designated agency upon - 6 - such terms and conditions as it may determine), all without liability except to account for property actually received by it, but the Administrative Agent shall have no duty to the Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (b) The rights of the Administrative Agent and the Lenders hereunder shall not be conditioned or contingent upon the pursuit by the Administrative Agent or any Lender of any right or remedy against the Pledgor or against any other Person which may be or become liable in respect of all or any part of the Obligations or against any collateral security therefor, guarantee therefor or right of offset with respect thereto. Neither the Administrative Agent nor any Lender shall be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall the Administrative Agent be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. 8. Remedies. If an Event of Default shall occur and be continuing, -------- with the consent of the Required Lenders, the Administrative Agent may, and upon the request of the Required Lenders, the Administrative Agent shall, exercise on behalf of itself and the Lenders, all rights and remedies granted in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to the obligations, and in addition thereto, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing with regard to the scope of the Administrative Agent's remedies, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Pledger, any Issuer or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Administrative Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived or released. The Administrative Agent shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Lenders hereunder, including, without limitation, reasonable attorneys' fees and disbursements of counsel thereto, to the payment in whole or in part of the obligations, in the order set forth in Section 10 of the Security Agreement, and only after such application and after - 7 - the payment by the Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Administrative Agent account for the surplus, if any, to the Pledgor. To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands it may acquire against the Administrative Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. The Pledgor further waives and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the Code. 9. Registration Rights; Private Sales. ---------------------------------- (a) If the Administrative Agent shall determine to exercise its right to sell any or all of the Pledged Stock pursuant to Section 8 hereof, and if in the opinion of the Administrative Agent it is necessary or advisable to have the Pledged Stock, or that portion thereof to be sold, registered under the provisions of the Securities Act of 1933, as amended (the "Securities Act"), the Pledgor will cause the applicable Issuer to (i) execute and deliver, and cause the directors and officers of the applicable Issuer to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts as may be, in the opinion of the Administrative Agent, necessary or advisable to register the Pledged Stock, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) to use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Pledged Stock, or that portion thereof to be sold, and (iii) to make all amendments thereto and/or to the related prospectus which, in the opinion of the Administrative Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto. The Pledgor agrees to cause the applicable Issuer to comply with the provisions of the securities or "Blue Sky" laws of any and all jurisdictions which the Administrative Agent shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of Section 11(a) of the Securities Act. (b) The Pledgor recognizes that the Administrative Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that, in the event the Administrative Agent is unable to effect a public sale, any such private sale shall be deemed to have been made in a commercially reasonable manner. The Administrative Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary - 8 - to permit the applicable Issuer to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if the applicable Issuer would agree to do so. (c) The Pledgor further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Collateral pursuant to this Section 9 valid and binding and in compliance with any and all other Applicable Laws. The Pledgor further agrees that a breach of any of the covenants contained in this Section 9 will cause irreparable injury to the Administrative Agent and the Lenders not compensable in damages, that the Administrative Agent and the Lenders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 9 shall be specifically enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Credit Agreement. 10. Amendments. etc. With Respect to the Obligations. The Pledgor ------------------------------------------------ shall remain obligated hereunder, and the Collateral shall remain subject to the Lien granted hereby, notwithstanding that, without any reservation of rights against the Pledgor, and without notice to or further assent by the Pledgor, any demand for payment of any of the Obligations made by the Administrative Agent or any Lender may be rescinded by the Administrative Agent or such Lender, and any of the Obligations continued, and the obligations, or the liability of the Pledgor or any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered, or released by the Administrative Agent or any Lender, and the Credit Agreement, the Notes, any other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or part, as the Lenders (or the Required Lenders, as the case may be) may deem advisable from time to time, and any guarantee, right of offset or other collateral security at any time held by the Administrative Agent or any Lender for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. Neither the Administrative Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any other Lien at any time held by it as security for the Obligations or any property subject thereto. The Pledgor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Administrative Agent or any Lender upon this Pledge Agreement; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Pledge Agreement; and all dealings between the Pledgor, on the one hand, and the Administrative Agent and the Lenders, on the other, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Pledge Agreement. The Pledgor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Pledgor with respect to the Obligations. 11. Regulatory Approval. The Pledgor will, at its expense, promptly ------------------- execute and deliver, or cause the execution and delivery of, all applications, certificates, instruments, registration statements and all other documents and papers the Administrative Agent may - 9 - reasonably request or as may be required by law in connection with the obtaining of any consent, approval, registration, qualification or authorization of the FCC, CRTC, DTI, any PUC or of any other Person necessary or appropriate for the effective exercise of any rights under this Pledge Agreement. Without limiting the generality of the foregoing, if an Event of Default shall have occurred and be continuing, the Pledgor shall take any action which the Administrative Agent may reasonably request in order to transfer and assign to the Administrative Agent, or to such one or more third parties as the Administrative Agent may designate, or to a combination of the foregoing, each Communications License and PUC Authorization. To enforce the provisions of this Section, upon the occurrence and during the continuance of an Event of Default, the Administrative Agent is empowered to request the appointment of a receiver from any court of competent jurisdiction. Such receiver shall be instructed to seek from the FCC, CRTC, DTI and any applicable PUC an involuntary transfer of control of each such Communications License and PUC Authorization for the purpose of seeking a bona fide purchaser to whom control will ultimately be transferred. The Pledgor hereby agrees to authorize such an involuntary transfer of control upon the request of the receiver so appointed and, if the Pledgor shall refuse to authorize the transfer, its approval may be required by the court. Upon the occurrence and during the continuance of an Event of Default, the Pledgor shall further use its best efforts to assist in obtaining approval of the FCC, CRTC, DTI and any applicable PUC, if required, for any action or transactions contemplated by this Pledge Agreement including, without limitation, the preparation, execution and filing with the FCC, CRTC, DTI and any applicable PUC of the assignor's or transferor's portion of any application or applications for consent to the assignment of any Communications License and PUC Authorizations or transfer of control necessary or appropriate under the rules and regulations of the FCC, CRTC, DTI or any PUC for the approval of the transfer or assignment of any portion of the Collateral, together with any Communications License and applicable PUC Authorizations. The Pledgor acknowledges that the assignment or transfer of each Communications License and applicable PUC Authorizations is integral to the Administrative Agent's and the Lenders' realization of the value of the Collateral, that there is no adequate remedy at law for failure by the Pledgor to comply with the provisions of this Section and that such failure would cause irreparable injury not adequately compensable in damages, and therefore agrees that each and every covenant contained in this Section may be specifically enforced, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants. 12. Limitation on Duties Regarding Collateral. The Administrative ----------------------------------------- Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar securities and property for its own account. Neither the Administrative Agent, any Lender nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. 13. Powers Coupled with an Interest. All authorizations and agencies ------------------------------- herein contained with respect to the Collateral constitute irrevocable powers coupled with an interest. - 10 - 14. Severability. Any provision of this Pledge Agreement which is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Paragraph Headings. The paragraph headings used in this Pledge ------------------ Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. No Waiver; Cumulative Remedies. Neither the Administrative Agent ------------------------------ nor any Lender shall by any act (except by a written instrument pursuant to Section 17 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 17. Waivers and Amendments; Successors and Assigns; Governing Law. ------------------------------------------------------------- None of the terms or provisions of this Pledge Agreement may be amended, supplemented or otherwise modified except by a written instrument executed by the Pledgor and the Administrative Agent; provided that any consent by the -------- Administrative Agent to any waiver, amendment, supplement or modification hereto shall be subject to approval thereof by the Lenders or Required Lenders, as applicable, in accordance with Section 13.11 of the Credit Agreement. This Pledge Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of the Administrative Agent and the Lenders and their respective successors and assigns. This Pledge Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of North Carolina. 18. Notices. All notices and communications hereunder shall be given ------- to the addresses and otherwise in accordance with Section 13.1 of the Credit Agreement. 19. Irrevocable Authorization and Instruction to Issuers. The ---------------------------------------------------- Pledgor hereby authorizes and instructs each Issuer to comply with any instruction received by it from the Administrative Agent in writing that (a) states that an Event of Default has occurred and is continuing and (b) is otherwise in accordance with the terms of this Pledge Agreement, without any other or further instructions from the Pledgor, and the Pledgor agrees that such Issuer shall be fully protected in so complying. - 11 - 20. Authority of Administrative Agent. The Pledgor acknowledges that --------------------------------- the rights and responsibilities of the Administrative Agent under this Pledge Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Pledge Agreement shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Pledgor, the Administrative Agent shall be conclusively presumed to be acting as agent for itself and the Lenders with full and valid authority so to act or refrain from acting, and neither the Pledgor nor any Issuer shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 21. Consent to Jurisdiction. The Pledgor hereby irrevocably consents ----------------------- to the personal jurisdiction of the state and federal courts located in Mecklenburg County, North Carolina, in any action, claim or other proceeding arising out of or any dispute in connection with this Pledge Agreement, any rights or obligations hereunder, or the performance of such rights and obligations. The Pledgor hereby irrevocably consents to the service of a summons and complaint and other process in any action, claim or proceeding brought by the Administrative Agent or any Lender in connection with this Pledge Agreement, any rights or obligations hereunder, or the performance of such rights and obligations, on behalf of itself or its property, in the manner provided in Section 13.1 of the Credit Agreement. Nothing in this Section 21 shall affect the right of the Administrative Agent or any Lender to serve legal process in any other manner permitted by Applicable Law or affect the right of the Administrative Agent or any Lender to bring any action or proceeding against the Pledgor or its properties in the courts of any other jurisdictions. 22. Waiver of Jury Trial. NOTWITHSTANDING ANY OTHER PROVISION --------------------- CONTAINED HEREIN, IN THE EVENT ANY JUDICIAL PROCEEDING IS INSTITUTED IN CONNECTION WITH THIS PLEDGE AGREEMENT, TO THE EXTENT PERMITTED BY LAW, THE ADMINISTRATIVE AGENT AND EACH LENDER BY THEIR ACCEPTANCE OF THIS PLEDGE AGREEMENT OR THE BENEFITS HEREOF AND THE PLEDGOR EACH HEREBY IRREVOCABLY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF OR ANY DISPUTE IN CONNECTION WITH THIS PLEDGE AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to be duly executed and delivered as of the date first above written. [CORPORATE SEAL] ACC NATIONAL LONG DISTANCE CORP. By: /s/ John J. Zimmer ----------------------- - 12 - Name: John J. Zimmer ------------------------- Title: Controller ------------------------ ACKNOWLEDGEMENT AND CONSENT Each Issuer of Pledged Stock referred to in the foregoing Pledge Agreement hereby acknowledges receipt of a copy thereof and agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. Each Issuer agrees to notify the Administrative Agent promptly in writing of the occurrence of any of the events described in Section 5(a) of the Pledge Agreement. Each United States Subsidiary further agrees that the terms of Section 9 of the Pledge Agreement shall apply to it, mutatis mutandis, with ------- -------- respect to all actions that may be required of it under or pursuant to or arising out of Section 9 of the Pledge Agreement. ACC LONG DISTANCE OF MASSACHUSETTS CORP. By: /s/ John J. Zimmer ---------------------------- Name: John J. Zimmer -------------------------- Title: Controller ------------------------- SCHEDULE 1 To Pledge Agreement --------- DESCRIPTION OF PLEDGED STOCK United States Subsidiaries -------------------------- Issuer Class of Stock Certificate No. No. of Shares - ------ -------------- --------------- ------------- ACC Long Distance of Massachusetts Corp. Common 2 1 PLEDGE AGREEMENT SUPPLEMENT --------------------------- PLEDGE AGREEMENT SUPPLEMENT, dated as of _____________, 199_ (the "Supplement"), made by ACC National Long Distance Corp., a Delaware corporation - ----------- (the "Pledgor"), in favor of First Union National Bank of North Carolina, a ------- national banking corporation, as Administrative Agent (in such capacity, the "Administrative Agent"), under the Credit Agreement (as defined in the Pledge - --------------------- Agreement referred to below) for the benefit of itself and the Lenders (as so defined). 1. Reference is hereby made to that Pledge Agreement, dated as of ___________, 1995, made by the Pledgor in favor of the Administrative Agent (as amended, supplemented or otherwise modified as of the date hereof, the "Pledge ------ Agreement"). This Supplement supplements the Pledge Agreement, forms a part - --------- thereof and is subject to the terms thereof. Terms defined in the Pledge Agreement are used herein as therein defined. 2. The Pledgor hereby confirms and reaffirms the security interest in the Collateral granted to the Administrative Agent for the ratable benefit of itself and the Lenders under the Pledge Agreement, and, as additional collateral security for the prompt and complete payment when due (whether at stated maturity, by acceleration or otherwise) of the Obligations and in order to induce the Lenders to make their Loans under the Credit Agreement, the Pledgor hereby delivers to the Administrative Agent, for the benefit of the Lenders, [all of the issued and outstanding shares of capital stock of [INSERT NAME OF NEW UNITED STATES SUBSIDIARY]] or (66.66% of the issued and outstanding shares of capital stock of (INSERT NAME OF NEW FOREIGN SUBSIDIARY]] (the "New Issuer") ---------- listed below, together with all stock certificates, options, or rights of any nature whatsoever which may be issued or granted by the New Issuer in respect to such stock which the Pledge Agreement, as supplemented hereby, is in force (the "Additional Pledged Stock"; as used in the Pledge Agreement as supplemented by ------------------------ this Supplement, "Pledged Stock" shall be deemed to include the Additional Pledged Stock) and hereby grants to the Administrative Agent, for the ratable benefit of itself and the Lenders, a first priority security interest in the Additional Pledged Stock and all Proceeds thereof. 3. The Pledgor hereby represents and warrants that the representations and warranties contained in paragraph 5 of the Pledge Agreement are true and correct on the date of this Supplement with references therein to the "Pledged Stock" to include the Additional Pledged Stock, with references therein to the "Issuer" to include the New Issuer, and with references to the "Pledge Agreement" to mean the Pledge Agreement as supplemented by this Supplement. 4. The Pledgor shall deliver to the Administrative Agent the Acknowledgement and Consent attached hereto duly executed by the New Issuer. The Additional Pledged Stock pledged hereby is as follows which Pledged Stock shall be deemed part of Schedule 1 thereto: ---------- - 2 - DESCRIPTION OF PLEDGED STOCK Issuer Class of Stock Certificate No. No. of Shares - ------ -------------- --------------- ------------- New Issuer 5. The Pledgor hereby agrees to deliver to the Administrative Agent such certificates and other documents and take such other action as shall be reasonably requested by the Administrative Agent in order to effectuate the terms hereof and the Pledge Agreement. IN WITNESS WHEREOF, the undersigned has caused this Supplement to be duly executed under seal and delivered as of the date first above written. [CORPORATE SEAL] By: Name: Title: ACKNOWLEDGEMENT AND CONSENT OF NEW ISSUER The undersigned hereby acknowledges receipt of a copy of the foregoing Supplement and the Pledge Agreement referred to therein (the "Pledge ------ Agreement"). The undersigned agrees for the benefit of the Administrative Agent and the Lenders as follows: 1. The undersigned will be bound by the terms of the Pledge Agreement and will comply with such terms insofar as such terms are applicable to the undersigned. 2. The undersigned will notify the Administrative Agent promptly in writing of the occurrence of any of the events described in Section 5(a) of the Pledge Agreement. [3. The Issuer further agrees that the terms of Section 9 of the Pledge Agreement shall apply to it, mutatis mutandis, with respect to all ------- -------- actions that may be required of it under or pursuant to or arising out of Section 9 of the Pledge Agreement.] [ONLY INCLUDE FOR U.S. SUBSIDIARIES] [NAME OF NEW ISSUER] By: Name: Title: EX-99.21 24 SECURITY AGREEMENT DATED 7/21/95 Exhibit 99.21 SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT (this "Agreement"), dated as of July 21, 1995 by -- and between ACC CORP., a corporation organized under the laws of Delaware ("ACC"), certain Domestic Subsidiaries of ACC listed on the signature pages hereto (the "Subsidiary Grantors" and, collectively with ACC Corp., the "Grantors") and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association organized under the laws of the United States, as Administrative Agent (the "Administrative Agent") for the benefit of itself, and the financial institutions (the "Lenders") as are, or may from time to time become, parties to the Credit Agreement (as defined below). STATEMENT OF PURPOSE -------------------- Pursuant to a Credit Agreement dated as of even date herewith (together with all amendments and other modifications, if any, from time to time hereafter made thereto, the "Credit Agreement"), between the Grantors and certain Foreign Subsidiaries of ACC as Borrowers thereunder (collectively, the "Borrowers"), the Lenders and the Administrative Agent, the Lenders will extend Loans to the Borrowers as more specifically described in the Credit Agreement. In order to induce the Lenders and the Administrative Agent to enter into the Credit Agreement, and as a condition to the making of the Loans thereunder, the Lenders require that the Grantors grant a continuing security interest in and to the "Collateral" (as hereinafter defined) to secure the "Secured Obligations" (as hereinafter defined). NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions. Terms defined in the Credit Agreement and not ----------- otherwise defined herein, when used in this Agreement including its preamble and recitals, shall have the respective meanings provided for in the Credit Agreement. The following additional terms, when used in this Agreement, shall have the following meanings: "Account Debtor" means any Person who is or may become obligated to any -------------- Grantor under, with respect to, or on account of, an Account. "Accounts" means all "accounts" (as defined in the UCC) now or hereafter -------- owned or acquired by any Grantor or in which any Grantor now or hereafter has or acquires any right or interest, and, in any event, shall also include, without limitation, all accounts receivable, contract rights, book debts, notes, drafts and other obligations or indebtedness owing to any Grantor arising from the sale, lease or exchange of goods or other property by it or property to be sold, leased or exchanged, or the performance of services by it, or to be performed (including, without limitation, any such obligation which might be characterized as an account, contract right or general intangible under the Uniform Commercial Code in effect in any jurisdiction) and all of any Grantor's rights in, to and under all purchase orders for goods, services or other property, - 2 - and all of any Grantor's rights to any goods, services or other property represented by any of the foregoing (including returned or repossessed goods and unpaid sellers' rights of rescission, replevin, reclamation and rights to stoppage in transit) and all monies due to or to become due to any Grantor under all contracts for the sale, lease or exchange of goods or other property or the performance of services by it (whether or not yet earned by performance on the part of such Grantor), in each case whether now in existence or hereafter arising or acquired, including, without limitation, the right to receive the proceeds of said purchase orders and contracts and all collateral security and guarantees of any kind given by any Person with respect to any of the foregoing. "Accounts Aging Report" means a detailed aged trial balance of all Accounts --------------------- existing as of a specified date, specifying the name, addresses, account number, face value and dates of invoices of each Account Debtor obligated on any Accounts so listed, which report may be requested from time to time by the Administrative Agent. "Collateral" means the collective reference to: ---------- (i) Accounts; (ii) Inventory; (iii) Documents; (iv) Equipment; (v) Fixtures; (vi) Instruments; (vii) General Intangibles; (viii) The Collateral Account, all cash deposited therein from time to time, the investments made pursuant to Section 6 and other monies and property of any kind of any Grantor in the possession or under the control of the Administrative Agent or any Lender; (ix) All books and records (including, without limitation, customer lists, credit files, computer programs, printouts and other computer materials and records) of any Grantor pertaining to any of the Collateral; (x) All other goods and personal property of any Grantor whether tangible or intangible; - 3 - (xi) All products and Proceeds of all or any of the Collateral described in clauses (i) through (x) hereof. "Collateral Account" means a cash collateral account established by the ------------------ Grantors with the Administrative Agent, in the name and under the exclusive dominion and control of the Administrative Agent, pursuant to Section 6. "Copyright License" means any written agreement now or hereafter in ----------------- existence granting to any Grantor any right to use any Copyright. "Copyrights" means, collectively, all of the following now owned or ---------- hereafter created or acquired by any Grantor: (a) all copyrights, rights and interests in copyrights, works protectable by copyright, copyright registrations and copyright applications; (b) all renewals of any of the foregoing; (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including, without limitation, damages or payments for past or future infringements of any of the foregoing; (d) the right to sue for past, present and future infringements of any of the foregoing; and (e) all rights corresponding to any of the foregoing throughout the world. "Documents" means all "documents" (as defined in the UCC) or other receipts --------- covering, evidencing or representing goods or services, now or hereafter owned or acquired by any Grantor or in which any Grantor now or hereafter has or acquires any right or interest. "Equipment" means all "equipment" (as defined in the UCC) of any Grantor, --------- wherever located, and all other machinery, equipment and goods (other than Inventory) of any Grantor used or bought for use primarily in the business of such Grantor, including all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor, in all such cases whether now owned or hereafter acquired by any Grantor or in which any Grantor now has or hereafter acquires any right or interest. "Financing Statements" means the Uniform Commercial Code Form UCC-1 -------------------- Financing Statements executed by each Grantor with respect to the Collateral and to be filed in the jurisdictions set forth in the Perfection Certificate. "Fixtures" means all "fixtures" (as defined in the UCC) of any Grantor, -------- whether now owned or hereafter acquired, or in which any Grantor now has or hereafter acquires any right or interest. "General Intangibles" means all "general intangibles" (as defined in the ------------------- UCC) now or hereafter owned or acquired by any Grantor or in which any Grantor now or hereafter has or acquires any right or interest, and, in any event, shall mean and include, without limitation, all rights to indemnification, and all rights, title and interest which any Grantor may now or hereafter have in or under all contracts (other than contracts described in the definition of Accounts), agreements (including without limitation, the Canadian Note Documents and the - 4 - Canadian Subsidiary Security Documents), permits, licenses (which contracts, agreements, permits and licenses may be pledged pursuant to the terms thereof) causes of action, franchises, tax refund claims, customer lists, Intellectual Property, license royalties, goodwill, trade secrets, data bases, business records and all other intangible property of every kind and nature. "Instruments" means all "instruments," "chattel paper" or "letters of ----------- credit" (each as defined in the UCC), including, without limitation, instruments, chattel paper and letters of credit evidencing, representing, arising from or existing in respect of, relating to, securing or otherwise supporting the payment of, any of the Accounts, including (but not limited to) promissory notes (including without limitation, the Canadian Note Documents), drafts, bills of exchange and trade acceptances, now or hereafter owned or acquired by any Grantor or in which any Grantor now or hereafter has or acquires any right or interest. "Intellectual Property" means, collectively, (a) all systems software and --------------------- applications software, including, but not limited to, screen displays and formats, program structures, sequence and organization, all documentation for such software, including, but not limited to, user manuals, flowcharts, programmer's notes, functional specifications, and operations manuals, all formulas, processes, ideas and know-how embodied in any of the foregoing, and all program materials, flowcharts, notes and outlines created in connection with any of the foregoing, whether or not patentable or copyrightable, (b) concepts, discoveries, improvements and ideas, (c) any useful information relating to the items described in clause (a) or (b), including know-how, technology, engineering drawings, reports, design information, trade secrets, practices, laboratory notebooks, specifications, test procedures, maintenance manuals, research, development, manufacturing, marketing, merchandising, selling, purchasing and accounting, (d) Patents, Patent rights and Patent applications, Copyrights and Copyright applications, Trademarks, Trademark rights, trade names, trade name rights, service marks, service mark rights, applications for registration of Trademarks, trade names and service marks, and Trademark, trade name and service mark registrations and Patent Licenses, Trademark Licenses and Copyright Licenses, and (e) other licenses to use any of the items described in the foregoing clauses(a), (b), (c) and (d) or any other similar items of any Grantor necessary for the conduct of its business. "Inventory" means all "inventory" (as defined in the UCC) now or hereafter --------- owned or acquired by any Grantor or in which any Grantor now or hereafter has or acquires any right or interest, wherever located and, in any event, shall mean and include, without limitation, all raw materials, inventory and other materials and supplies, work-in-process, finished goods, all accessions thereto, documents therefor and any products made or processed therefrom and all substances, if any, commingled therewith or added thereto. "Patent License" means any written agreement now or hereafter in existence -------------- granting to any Grantor any right to use any invention on which a Patent is in existence. "Patents" means, collectively, all of the following now owned or hereafter ------- created or acquired by any Grantor: (a) all patents and patent applications including all patentable inventions; (b) all reissues, divisions, continuations, renewals, extensions and continuations-in- - 5 - part of any of the foregoing; (c) all income, royalties, damages or payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including, without limitation, damages or payments for past or future infringements of any of the foregoing; (d) the right to sue for past, present and future infringements of any of the foregoing; and (e) all rights corresponding to any of the foregoing throughout the world. "Perfection Certificate" means a certificate dated as of even date ---------------------- herewith, setting forth the corporate names, chief executive office or principal place of business in each state and other current locations of Collateral of each Grantor and such other information as the Administrative Agent deems pertinent to the perfection of security interests, completed and supplemented with the schedules and attachments contemplated thereby to the satisfaction of the Administrative Agent, and duly certified by the chief executive or chief financial officer of each Grantor so authorized to act. "Permitted Investments" means investments described in Section 9.4 of the --------------------- Credit Agreement. "Permitted Liens" means all such Liens respecting the Collateral permitted --------------- pursuant to Section 9.3 of the Credit Agreement. "Proceeds" means all proceeds of, and all other profits, rentals or -------- receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or realization upon, Collateral, including, without limitation, all claims of any Grantor against third parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance in respect of, any Collateral, and any condemnation or requisition payments with respect to any Collateral and the following types of property acquired with cash proceeds: Accounts, Inventory, Documents, Fixtures, Instruments, General Intangibles and Equipment. "Secured Obligations" means the Obligations as defined in the Credit ------------------- Agreement and any renewals or extensions of any of the Obligations. "Security Interests" means the security interests granted pursuant to ------------------ Section 2, as well as all other security interests created or assigned as additional security for the Secured Obligations pursuant to the provisions of this Agreement. "Trademark License" means any written agreement now or hereafter in ----------------- existence granting to any Grantor any right to use any Trademark. "Trademarks" means, collectively, all of the following now owned or ---------- hereafter created or acquired by any Grantor: (a) all Trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos, other business identifiers, prints and labels on which any of the foregoing have appeared or appear, all registrations and recordings thereof, and all applications in connection therewith, including - 6 - registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state thereof or any other country or any political subdivision of any thereof, including without limitation any thereof referred to on Schedule I hereto; (b) ---------- all reissues, extensions and renewals of any of the foregoing; (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including, without limitation, damages or payments for past or future infringements of any of the foregoing; (d) the right to sue for past, present and future infringements of any of the foregoing; and (e) all rights corresponding to any of the foregoing throughout the world. "UCC" means the Uniform Commercial Code as in effect on the date hereof in --- the State of North Carolina; provided that if by reason of mandatory provisions -------- of law, the perfection or the effect of perfection or non-perfection of the Security Interests in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than North Carolina, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. SECTION 2. The Security Interests. ---------------------- (a) In order to secure the Credit Agreement in accordance with the terms thereof, and to secure the payment and performance of all of the Secured Obligations, each Grantor hereby grants to the Administrative Agent, for the ratable benefit of itself and the Lenders, a continuing security interest in and to all of such Grantor's estate, right, title and interest in and to all Collateral whether now or hereafter owned or acquired by such Grantor or in which such Grantor now has or hereafter has or acquires any rights, and wherever located. (b) The Security Interests are granted as security only and shall not subject the Administrative Agent or any Lender to, or transfer to the Administrative Agent or any Lender, or in any way affect or modify, any obligation or liability of any Grantor with respect to any of the Collateral or any transaction in connection therewith. SECTION 3. Representations and Warranties. Each Grantor represents and ------------------------------ warrants as follows: (a) Such Grantor has the corporate power and authority and the legal right to execute and deliver, to perform its obligations under, and to grant the Security Interests in the Collateral pursuant to, this Agreement and has taken all necessary corporate action to authorize its execution, delivery and performance of, and grant of the Security Interests in the Collateral pursuant to, this Agreement. (b) This Agreement constitutes a legal, valid and binding obligation of such Grantor enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, - 7 - insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (c) The execution, delivery and performance of this Agreement will not violate any provision of any Applicable Law or contractual obligation of such Grantor and will not result in the creation or imposition of any Lien on any of the properties or revenues of such Grantor pursuant to any Applicable Law or contractual obligation of such Grantor, except as contemplated hereby. (d) No consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder or creditor of such Grantor), is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. (e) No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of such Grantor after due inquiry, threatened by or against such Grantor or against any of its properties or revenues with respect to this Agreement or any of the transactions contemplated hereby. (f) Such Grantor has good and marketable title to all of its respective Collateral, free and clear of any Liens other than the Permitted Liens. (g) Such Grantor has not performed or failed to perform any acts that would prevent or hinder the Administrative Agent from enforcing any of the terms of this Agreement. Other than financing statements or other similar or equivalent documents or instruments with respect to Permitted Liens, no financing statement, mortgage, security agreement or similar or equivalent document or instrument covering all or any part of the Collateral of such Grantor is on file or of record in any jurisdiction. No Collateral of such Grantor is in the possession of any Person (other than such Grantor) asserting any claim thereto or security interest therein, except that the Administrative Agent or its designee may have possession of the Collateral as contemplated hereby. (h) All of the information set forth in the Perfection Certificate with respect to such Grantor is true and correct as of the date hereof. (i) Such Grantor has, contemporaneously herewith, delivered to the Administrative Agent possession of all originals of all negotiable Instruments, documents and chattel paper constituting Collateral currently owned or held by such Grantor, if any (duly endorsed in blank, if requested by the Administrative Agent). (j) With respect to any Intellectual Property of Grantor the loss, impairment or infringement of which might have a Material Adverse Effect: - 8 - (i) such Intellectual Property is subsisting and has not been adjudged invalid or unenforceable, in whole or in part; (ii) such Intellectual Property is valid and enforceable; (iii) such Grantor has made all necessary filings and recordations to protect its interest in such Intellectual Property, including, without limitation, recordations of all of its interests in the Patents and Trademarks included in such Intellectual Property in the United States Patent and Trademark Office and its claims to the Copyrights included in such Intellectual Property in the United States Copyright Office; (iv) such Grantor is the exclusive owner of the entire and unencumbered right, title and interest in and to such Intellectual Property and no claim has been made that the use of such Intellectual Property does or may violate the asserted rights of any third party; and (v) such Grantor has performed and will continue to perform all acts and has paid and will continue to pay all required fees and taxes to maintain each and every such item of Intellectual Property in full force and effect. (k) The Financing Statements executed by such Grantor are in appropriate form and when filed in the offices specified in the Perfection Certificate, the Security Interests will constitute valid and perfected security interests in the Collateral of such Grantor, prior to all other Liens and rights of others therein except for the Permitted Liens (to the extent that a security interest therein may be perfected by filing pursuant to the UCC) and all filings and other actions necessary or desirable to perfect and protect such Security Interests have been duly taken. (l) The Inventory, Fixtures and Equipment of such Grantor are insured in accordance with the requirements hereof and of the Credit Agreement. SECTION 4. Further Assurances; Covenants. ----------------------------- (a) General. (i) Each Grantor agrees not to change the location of its chief executive office or principal place of business in any state unless it shall have given the Administrative Agent thirty (30) days prior written notice thereof, executed and delivered to the Administrative Agent all financing statements and financing statement amendments which the Administrative Agent may request in connection therewith and, if requested by the Administrative Agent, delivered an opinion of counsel with respect thereto in accordance with Section 4(a)(vii) hereof. Each Grantor agrees not to change the locations where it keeps or holds any Collateral or any records relating thereto from the applicable location described in the Perfection Certificate unless such Grantor shall have given the - 9 - Administrative Agent thirty (30) days prior written notice of such change of location, executed and delivered to the Administrative Agent all financing statements and financing statement amendments which the Administrative Agent may request in connection therewith and, if requested by the Administrative Agent, delivered an opinion of counsel with respect thereto in accordance with Section 4(a)(vii) hereof; provided, that such -------- Grantor may keep Inventory at, or in transit to, any location described in the Perfection Certificate. Each Grantor agrees not to, in any event, change the location of any Collateral if such change would cause the Security Interests in such Collateral to lapse or cease to be perfected. (ii) Each Grantor agrees not to change its name, identity or corporate structure in any manner unless it shall have given the Administrative Agent thirty (30) days prior written notice thereof, executed and delivered to the Administrative Agent all financing statements and financing statement amendments which the Administrative Agent may request in connection therewith, and, if requested by Administrative Agent, delivered an opinion of counsel with respect thereto in accordance with Section 4(a)(vii) hereof. (iii) Each Grantor will, from time to time, at its expense, execute, deliver, file and record any statement, assignment, instrument, document, agreement or other paper and take any other action (including without limitation any filings of financing or continuation statements under the UCC and any filings with the United States Patent and Trademark Office and United States Copyright Office) that from time to time may be necessary, or that the Administrative Agent may reasonably request, in order to create, preserve, upgrade in rank (to the extent required hereby), perfect, confirm or validate the Security Interests or to enable the Administrative Agent and the Lenders to obtain the full benefits of this Agreement, or to enable the Administrative Agent to exercise and enforce any of its rights, powers and remedies hereunder with respect to any of the Collateral. Prior to the irrevocable payment in full of the Secured Obligations, each Grantor hereby authorizes the Administrative Agent, upon the failure of such Grantor to so do within three Business Days after receipt of notice from the Administrative Agent, to execute and file financing statements, financing statement amendments or continuation statements without such Grantor's signature appearing thereon. Each Grantor agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. Each Grantor shall pay the costs of, or incidental to, any recording or filing of the Financing Statements and any other financing statements, financing statement amendments or continuation statements concerning the Collateral. (iv) If any Collateral exceeding in value $50,000 in the aggregate is at any time in the possession or control of any warehouseman, bailee (other than a carrier transporting Inventory to a purchaser in the ordinary course of business), or any Grantor's agents or processors, such Grantor shall notify in writing such warehouseman, bailee, agent or processor of the Security Interests created hereby, shall obtain such warehouseman's, bailee's, agent's or processor's agreement in writing to hold all such Collateral for the - 10 - Administrative Agent's account subject to the Administrative Agent's instructions, and shall cause such warehouseman, bailee, agent or processor to issue and deliver to the Administrative Agent warehouse receipts, bills of lading or any similar documents relating to such Collateral in the Administrative Agent's name and in form and substance acceptable to the Administrative Agent. (v) Each Grantor will cause the Administrative Agent, for the ratable benefit of itself and the Lenders, to be named as loss payee on each insurance policy covering risks relating to any of its Inventory, Fixtures and Equipment, as reasonably requested by the Administrative Agent. Each Grantor will deliver to the Administrative Agent, upon request of the Administrative Agent, the insurance policies for such insurance. Each such insurance policy shall include effective waivers by the insurer of subrogation, provide that all insurance proceeds shall be adjusted with and payable to the Administrative Agent and provide that no cancellation or termination thereof shall be effective until at least thirty (30) days have elapsed after receipt by the Administrative Agent of written notice thereof. Each Grantor shall arrange for appropriate certifications that the requirements of this Section 4(a)(v) have been satisfied, to be made to the Administrative Agent and each insured party, as soon as practicable, by each insurer or its authorized representative with respect thereto. (vi) Each Grantor will, promptly upon request, provide to the Administrative Agent all information and evidence the Administrative Agent may reasonably request concerning the Collateral, and in particular the Accounts, to enable the Administrative Agent to enforce the provisions of this Agreement. (vii) If requested by the Administrative Agent or the Required Lenders, prior to each date on which any Grantor proposes to take any action contemplated by Section 4(a)(i) or Section 4(a)(ii) hereof, such Grantor shall, at its cost and expense, cause to be delivered to the Administrative Agent and the Lenders an opinion of counsel, in form and content reasonably satisfactory to the Administrative Agent and the Required Lenders. (viii) From time to time upon request by the Administrative Agent, each Grantor shall, at its cost and expense, cause to be delivered to the Administrative Agent and the Lenders an opinion or opinions of counsel, satisfactory to the Administrative Agent, as to the enforceability of the Loan Documents and the Lien of the Administrative Agent and Lenders on the Collateral and other property of such Grantor and such other matters relating to the transactions contemplated hereby as the Administrative Agent or the Required Lenders may reasonably request. (ix) Each Grantor will comply in all material respects with all Applicable Laws applicable to the Collateral or any part thereof or to the operation of such Grantor's business. - 11 - (x) Each Grantor will pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for labor, materials and supplies) against or with respect to the Collateral, except that no such charge need be paid if (A) the validity thereof is being contested in good faith by appropriate proceedings, (B) such proceedings do not involve any danger of the sale, forfeiture or loss of or creation of a Lien on any of the Collateral or any interest therein and (C) such charge is adequately reserved against on such Grantor's books in accordance with GAAP. (xi) No Grantor shall (A) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; or (B) create or suffer to exist any Lien or other charge or encumbrance upon or with respect to any of the Collateral to secure indebtedness of any Person or entity, except as permitted by the Credit Agreement. (b) Accounts, Etc. -------------- (i) Each Grantor shall use all reasonable efforts to cause to be collected from its Account Debtors, as and when due, any and all amounts owing under or on account of each Account (including, without limitation, Accounts which are delinquent, such Accounts to be collected in accordance with lawful collection procedures) and to apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Account. The costs and expenses (including, without limitation, attorney's fees), of collection of Accounts incurred by such Grantor or the Administrative Agent shall be borne by such Grantor. (ii) Upon the occurrence and during the continuance of any Event of Default, upon request of the Administrative Agent or the Required Lenders, each Grantor will promptly notify (and each Grantor hereby authorizes the Administrative Agent so to notify) each Account Debtor in respect of any Account that such Account has been assigned to the Administrative Agent hereunder and that any payments due or to become due in respect of such Account are to be made directly to the Administrative Agent or its designee. (iii) Each Grantor will perform and comply in all material respects with all of its obligations in respect of Accounts and General Intangibles and the exercise by the Administrative Agent of any of its rights hereunder shall not release any Grantor from any of its duties or obligations. - 12 - (iv) No Grantor will (A) amend, modify, terminate or waive any material provision of any agreement giving rise to an Account in any manner which could reasonably be expected to materially adversely affect the value of such Account as Collateral, (B) fail to exercise promptly and diligently each and every material right which it may have under each agreement giving rise to an Account (other than any right of termination) or (C) fail to deliver to the Administrative Agent a copy of each material demand, notice or document received by it relating in any way to any agreement giving rise to an Account. (v) Other than in the ordinary course of business as generally conducted by such Grantor over a period of time, no Grantor will grant any extension of the time of payment of any of the Accounts to any one Account Debtor with an aggregate face amount in excess of $25,000 or compromise, compound or settle the same for less than the full amount thereof, release, wholly or partially, any Person liable for the payment thereof, or allow any credit or discount whatsoever thereon. (c) Inventory,Etc. Each Grantor hereby represents, warrants, covenants and ------------- agrees as follows: (i) all Inventory is, and at shall be at all times, located at places of business listed in the Perfection Certificate or as to which such Grantor has complied with the provisions of Section 4(a)(i) hereof, except Inventory in transit from one such location to another such location; (ii) no Inventory is, nor shall at any time or times be, subject to any Lien whatsoever, except for Permitted Liens; and (iii) no Inventory in aggregate value exceeding $50,000 at any time is, nor shall at any time or times be, kept, stored or maintained with a bailee, warehouseman, carrier or similar party (other than a carrier delivering Inventory to a purchaser in the ordinary course of such Grantor's business) unless the Required Lenders have given their prior written consent and Grantor has complied with the provisions of Section 4(a)(iv) hereof. (d) Equipment, Etc. Each Grantor will maintain each item of Equipment in -------------- the same condition, repair and working order as when acquired, ordinary wear and tear and immaterial impairments of value and damage by the elements excepted, and in accordance with any manufacturer's manual, and will as quickly as practicable provide all maintenance, service and repairs necessary for such purpose and will promptly furnish to the Administrative Agent a statement respecting any material loss or damage to any of the Equipment. (e) Intellectual Property. --------------------- (i) Each Grantor shall notify the Administrative Agent promptly (A) of its acquisition after the Closing Date of any Patent, Patent License, Trademark or Trademark License and (B) if it knows, or has reason to know of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or any court) regarding such Grantor's ownership of any Patent or Trademark, its right to - 13 - register the same, or to keep and maintain the same. In the event that any Patent, Patent License, Trademark or Trademark License is infringed, misappropriated or diluted by a third party, each Grantor shall notify the Administrative Agent promptly after it learns thereof and shall, unless such Grantor and the Administrative Agent shall jointly determine that any such action would be of immaterial economic value, promptly sue for infringement, misappropriation or dilution and to recover any and all damages for such infringement, misappropriation or dilution, and take such other actions as may be appropriate under the circumstances to protect such Patent, Patent License, Trademark or Trademark License. In no event shall any Grantor, either itself or through any agent, employee or licensee, file an application for the registration of any Patent or Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, unless simultaneously therewith it informs the Administrative Agent, and, upon issuance of such Patent or Trademark, executes and delivers any and all agreements, instruments, documents and papers the Administrative Agent may reasonably request to evidence the Security Interests in such Patent or Trademark and the goodwill and general intangibles of such Grantor relating thereto or represented thereby. Each Grantor hereby constitutes the Administrative Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed, and such power, being coupled with an interest, shall be irrevocable until the Commitments have terminated and the Secured Obligations are paid in full. (ii) Each Grantor shall: (A) preserve and maintain in all material respects rights in the Intellectual Property; and (B) upon and after the occurrence of an Event of Default, use its best efforts to obtain any consents, waivers or agreements necessary to enable Administrative Agent to exercise its remedies with respect to the Intellectual Property. No Grantor shall abandon any right to file a Copyright, Patent or Trademark application that is material to the business of such Grantor nor shall any Grantor abandon any such pending Copyright, Patent or Trademark application, or Copyright, Copyright License, Patent, Patent License, Trademark or Trademark License without the prior written consent of Administrative Agent. (iii) Each Grantor hereby Assigns, transfers and conveys to Administrative Agent, effective upon the occurrence and during the continuance of any Event of Default, the nonexclusive right and license to use all Intellectual Property owned or used by such Grantor, together with any goodwill associated therewith, all to the extent necessary to enable Administrative Agent to realize on the Collateral (including, without limitation, completing production of, advertising for sale and selling the Collateral) and any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Administrative Agent and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to any Grantor by Administrative Agent. - 14 - (f) Indemnification. Each Grantor agrees to pay, and to save the --------------- Administrative Agent and the Lenders harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses) (i) with respect to, or resulting from, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (ii) with respect to, or resulting from, complying with any Applicable Law applicable to any of the Collateral or (iii) in connection with any of the transactions contemplated by this Agreement (except to the extent any such liabilities, costs and expenses result from the gross negligence or willful misconduct of the Administrative Agent or Lenders). In any suit, proceeding or action brought by the Administrative Agent under any Account for any sum owing thereunder, or to enforce any provisions of any Account, each Grantor will save, indemnify and keep the Administrative Agent and the Lenders harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the Account Debtor or any other obligor thereunder, arising out of a breach by such Grantor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such Account Debtor or obligor or its successors from such Grantor (except to the extent any such expense, loss or damage results from the gross negligence or willful misconduct of the Administrative Agent or Lenders). The obligations of each Grantor under this Section 4(f) shall survive the termination of the other provisions of this Agreement. SECTION 5. Reporting and Recordkeeping. Each Grantor respectively --------------------------- covenants and agrees with the Administrative Agent and the Lenders that from and after the date of this Agreement and until the Commitments have terminated and all Secured Obligations have been fully satisfied: (a) Maintenance of Records Generally. Such Grantor will keep and maintain -------------------------------- at its own cost and expense complete and accurate records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Collateral and all other dealings with the Collateral. All chattel paper given to such Grantor with respect to any Accounts will be marked with the following legend: "This writing and the obligations evidenced or secured hereby are subject to the security interest of First Union National Bank of North Carolina, as Administrative Agent". For the Administrative Agent's and the Lenders' further security, such Grantor agrees that upon the occurrence and during the continuation of any Event of Default, such Grantor shall deliver and turn over any such books and records directly to the Administrative Agent or its designee. Such Grantor shall permit any representative of the Administrative Agent to inspect such books and records in accordance with Section 7.11 of the Credit Agreement and will provide photocopies thereof to the Administrative Agent upon its reasonable request. (b) Certain Provisions Regarding Maintenance of Records and Reporting Re: --------------------------------------------------------------------- Accounts. - -------- (i) In the event any amounts due and owing in excess of $75,000 are in dispute between any Account Debtor and such Grantor, such Grantor shall provide the Administrative Agent with written notice thereof promptly after such Grantor's learning - 15 - thereof, explaining in detail the reason for the dispute, all claims related thereto and the amount in controversy; provided, that a monthly -------- report of such items provided within ten (10) days after the end of each calendar month shall be deemed to be prompt delivery of such notice. (ii) Such Grantor will promptly notify the Administrative Agent in writing if any Account arises out of a contract with the United States of America, or any department, agency, subdivision or instrumentality thereof, or of any state (or department, agency, subdivision or instrumentality thereof) where such state has a state assignment of claims act or other law comparable to the Federal Assignment of Claims Act, and will take any action required or requested by the Administrative Agent or give notice of the Administrative Agent's Security Interest in such Accounts under the provisions of the Federal Assignment of Claims Act or any comparable law or act enacted by any state or local governmental authority. (c) Further Identification of Collateral. Such Grantor will, if so ------------------------------------ requested by the Administrative Agent, furnish to the Administrative Agent statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Administrative Agent may reasonably request, all in reasonable detail. (d) Notices. In addition to the notices required by Section 5(b) hereof, ------- such Grantor will advise the Administrative Agent promptly, in reasonable detail, (i) of any material Lien or claim made or asserted against any of the Collateral, (ii) of any material adverse change in the composition of the Collateral, and (iii) of the occurrence of any other event which could have a material adverse effect on the Collateral or on the validity, perfection or priority of the Security Interests. SECTION 6. Collateral Account. ------------------ (a) There is hereby established with the Administrative Agent a Collateral Account in the name and under the exclusive dominion and control of the Administrative Agent. There shall be deposited from time to time into such account the cash proceeds of the Collateral required to be delivered to the Administrative Agent pursuant to Section 6(b) or any other provision of this Agreement. Any income received by the Administrative Agent with respect to the balance from time to time standing to the credit of the Collateral Account, including any interest or capital gains on investments of amounts on deposit in the Collateral Account, shall remain, or be deposited, in the Collateral Account together with any investments from time to time made pursuant to subsection (c) of this Section 6, shall vest in the Administrative Agent, shall constitute part of the Collateral hereunder and shall not constitute payment of the Secured Obligations until applied thereto as hereinafter provided. (b) Upon the occurrence and during the continuance of an Event of Default, if requested by the Administrative Agent, each Grantor shall instruct all Account Debtors and other Persons obligated in respect of all Accounts to make all payments in respect of the Accounts - 16 - either (i) directly to the Administrative Agent (by instructing that such payments be remitted to a post office box which shall be in the name and under the exclusive dominion and control of the Administrative Agent) or (ii) to one or more other banks in any state in the United States (by instructing that such payments be remitted to a post office box which shall be in the name and under the exclusive dominion and control of such bank) under arrangements, in form and substance satisfactory to the Administrative Agent, pursuant to which such Grantor shall have irrevocably instructed such other bank (and such other bank shall have agreed) to remit all proceeds of such payments directly to the Administrative Agent for deposit into the Collateral Account or as the Administrative Agent may otherwise instruct such bank, and thereafter if the proceeds of any Collateral shall be received by such Grantor, such Grantor will promptly deposit such proceeds into the Collateral Account and until so deposited, all such proceeds shall be held in trust by such Grantor for and as the property of the Administrative Agent, for the benefit of itself and the Lenders and shall not be commingled with any other funds or property of such Grantor. At any time after the occurrence and during the continuance of an Event of Default, the Administrative Agent may itself so instruct such Grantor's Account Debtors and each Grantor hereby constitutes and appoints the Administrative Agent (and the president, any vice president or any assistant vice president of the Administrative Agent from time to time) as its attorney- in-fact with full power and authority to so instruct such Grantor's Account Debtors. All such payments made to the Administrative Agent shall be deposited in the Collateral Account. (c) The balance from time to time standing to the credit of the Collateral Account shall, except upon the occurrence and continuation of an Event of Default, be distributed to the Grantors upon the order of the Grantors. If immediately available cash on deposit in the Collateral Account is not sufficient to make any distribution to the Grantors referred to in the previous sentence of this Section 6(c), the Administrative Agent shall liquidate as promptly as practicable such investments as required to obtain sufficient cash to make such distribution and, notwithstanding any other provision of this Section 6, such distribution shall not be made until such liquidation has taken place. Upon the occurrence and continuation of an Event of Default, the Administrative Agent shall, if so instructed by the Required Lenders, apply or cause to be applied (subject to collection) any or all of the balance from time to time standing to the credit of the Collateral Account in the manner specified in Section 10. (d) Amounts on deposit in the Collateral Account shall be invested and reinvested from time to time in Permitted Investments as the Grantors shall determine, which investments shall be held in the name and be under the control of the Administrative Agent; provided, that if an Event of Default has occurred -------- and is continuing, the Administrative Agent may and, if instructed by the Required Lenders, shall liquidate any such investments and apply or cause to be applied the proceeds thereof to the payment of the Secured Obligations in the manner specified in Section 10 hereof; and provided further, that (i) each such ---------------- investment shall mature within thirty (30) days after it is acquired by the Administrative Agent and (ii) in order to provide the Administrative Agent, for the ratable benefit of itself and the Lenders, with a perfected security interest therein, each such investment shall be either: - 17 - (A) evidenced by negotiable certificates or Instruments, or if non- negotiable then issued in the name of the Administrative Agent, which (together with any appropriate instruments of transfer) are delivered to, and held by, the Administrative Agent or any agent thereof (which shall not be any of the Grantors or any of their Affiliates) in the State of North Carolina; or (B) in book-entry form and issued by the United States and subject to pledge under applicable state law and Treasury regulations and as to which (in the opinion of counsel to the Administrative Agent) appropriate measures shall have been taken for perfection of the Security Interests. (e) Upon the occurrence of any Event of Default, the Administrative Agent is authorized at any time and from time to time, and during the continuance thereof, without notice to the Grantors, to set off, appropriate and apply any and all amounts on deposit in the Collateral Account, and the proceeds thereof, against all Secured Obligations. SECTION 7. General Authority. ----------------- (a) Each Grantor hereby irrevocably appoints the Administrative Agent its true and lawful attorney, with full power of substitution, in the name of such Grantor, the Administrative Agent, the Lenders or otherwise, for the sole use and benefit of the Administrative Agent and the Lenders, but at such Grantor's expense, to exercise, at any time from time to time all or any of the following powers: (i) to file the Financing Statements and any financing statements, financing statement amendments and continuation statements referred to in Sections 4(a)(i), 4(a)(ii), and 4(a)(iii) hereof, (ii) to demand, sue for, collect, receive and give acquittance for any and all monies due or to become due with respect to any Collateral or by virtue thereof, (iii) to settle, compromise, compound, prosecute or defend any action or proceeding with respect to any Collateral, (iv) to sell, transfer, assign or otherwise deal in or with the Collateral and the Proceeds thereof, as fully and effectually as if the Administrative Agent were the absolute owner thereof, and (v) to extend the time of payment and to make any allowance and other adjustments with reference to the Collateral; provided that the Administrative Agent shall not take any of the actions - -------- described in this Section 7 except those described in clause (i) above unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall give such Grantor not less than - 18 - ten (10) days' prior written notice of the time and place of any sale or other intended disposition of any of the Collateral, except any Collateral which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. Each Grantor agrees that any such notice constitutes "reasonable notification" within the meaning of Section 9-504(3) of the UCC (to the extent such Section is applicable). (b) Each Grantor hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (c) Each Grantor also authorizes the Administrative Agent at any time and from time to time, to execute, in connection with the sale provided for in Section 8 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. SECTION 8. Remedies Upon Event of Default. ------------------------------ (a) If any Event of Default has occurred and is continuing, the Administrative Agent may exercise on behalf of itself and the Lenders all rights of a secured party under the UCC (whether or not in effect in the jurisdiction where such rights are exercised) and, in addition, the Administrative Agent may (i) withdraw all cash, if any, in the Collateral Account and investments made with amounts on deposit in the Collateral Account, and apply such monies, investments and other cash, if any, then held by it as Collateral as specified in Section 10 hereof and (ii) if there shall be no such monies, investments or cash or if such monies, investments or cash shall be insufficient to pay all the Secured Obligations in full, sell the Collateral or any part thereof at public or private sale, for cash, upon credit or for future delivery, and at such price or prices as the Administrative Agent may deem satisfactory. The Administrative Agent or any Lender may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations or if otherwise permitted under applicable law, at any private sale) and thereafter hold the same, absolutely, free from any right or claim of whatsoever kind. Each Grantor will execute and deliver such documents and take such other action as the Administrative Agent deems reasonably necessary or advisable in order that any such sale may be made in compliance with law. Upon any such sale the Administrative Agent shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold (without warranty). Each purchaser at any such sale shall hold the Collateral so sold to it absolutely, free from any claim or right of whatsoever kind, including any equity or right of redemption of any Grantor. To the extent permitted by law, each Grantor hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted. The notice of such sale shall be given to the applicable Grantor ten (10) days prior to such sale and (A) in case of a public sale, state the time and place fixed for such sale, and (B) in the case of a private sale, state the day after which sale may be consummated. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Administrative Agent may fix in the notice of such sale. At any such sale the Collateral - 19 - may be sold in one lot as an entirety or in separate parcels, as the Administrative Agent may determine. The Administrative Agent shall not be obligated to make any such sale pursuant to any such notice. The Administrative Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Administrative Agent until the selling price is paid by the purchaser thereof, but the Administrative Agent shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice. The Administrative Agent, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the Security Interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. The Grantors shall remain liable for any deficiency. (b) For the purpose of enforcing any and all rights and remedies under this Agreement, the Administrative Agent may if an Event of Default has occurred and is continuing (i) require each Grantor to, and each Grantor agrees that it will, at its expense and upon the request of the Administrative Agent, forthwith assemble all or any part of the Collateral as directed by the Administrative Agent and make it available at a place designated by the Administrative Agent which is, in the Administrative Agent's opinion, reasonably convenient to the Administrative Agent and such Grantor, whether at the premises of such Grantor or otherwise, (ii) to the extent permitted by applicable law, enter, with or without process of law and without breach of the peace, any premise where any of the Collateral is or may be located and, without charge or liability to the Administrative Agent, seize and remove such Collateral from such premises, (iii) have access to and use such Grantor's books and records relating to the Collateral and (iv) prior to the disposition of the Collateral, store or transfer such Collateral without charge in or by means of any storage or transportation facility owned or leased by such Grantor, process, repair or recondition such Collateral or otherwise prepare it for disposition in any manner and to the extent the Administrative Agent deems appropriate and, in connection with such preparation and disposition, use without charge any Trademark, trade name, Copyright, Patent or technical process used by such Grantor. (c) Without limiting the generality of the foregoing, if any Event of Default has occurred and is continuing, (i) the Administrative Agent may license, or sublicense, whether general, special or otherwise, and whether on an exclusive or non-exclusive basis, any Patents or Trademarks included in the Collateral throughout the world for such term or terms, on such conditions and in such manner as the Administrative Agent shall in its sole discretion determine; (ii) the Administrative Agent may (without assuming any obligations or liability thereunder), at any time and from time to time, enforce (and shall have the - 20 - exclusive right to enforce) against any licensee or sublicensee all rights and remedies of any Grantor in, to and under any Patent Licenses or Trademark Licenses and take or refrain from taking any action under any thereof, provided, that no such actions shall result in the failure of such -------- Patent Licenses or Trademark Licenses to remain in compliance with all Applicable Law, and each Grantor hereby releases the Administrative Agent and each of the Lenders from and against any claims arising out of, any lawful action so taken or omitted to be taken with respect thereto except with respect to the gross negligence or willful misconduct of the Administrative Agent or the Lenders; and (iii) upon request by the Administrative Agent, each Grantor will execute and deliver to the Administrative Agent a power of attorney, in form and substance satisfactory to the Administrative Agent, for the implementation of any lease, assignment, license, sublicense, grant or option, sale or other disposition of a Patent or Trademark. In the event of any such disposition pursuant to this Section, each Grantor shall supply its know-how and expertise relating to the manufacture and sale of the products bearing Trademarks or the products or services made or rendered in connection with Patents, and its customer lists and other records relating to such Patents or Trademarks and to the distribution of said products, to the Administrative Agent. SECTION 9. Limitation on Duty of Administrative Agent in Respect of -------------------------------------------------------- Collateral. Beyond reasonable care in the custody thereof, the Administrative - ---------- Agent shall have no duty as to any Collateral in its possession or control or in the possession or control of any agent or bailee or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. The Administrative Agent shall be deemed to have exercised reasonable care in the custody of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property, and the Administrative Agent shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee or other agent or bailee selected by the Administrative Agent in good faith. SECTION 10. Application of Proceeds. Upon the occurrence and during the ----------------------- continuance of an Event of Default, the proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied by the Administrative Agent as follows: first, to payment of the out-of-pocket expenses of such sale or other ----- realization, including all reasonable out-of-pocket expenses, liabilities and advances incurred or made by the Administrative Agent in connection therewith, and any other unreimbursed expenses for which the Administrative Agent or any Lender is to be reimbursed pursuant to Section 13.2 of the Credit Agreement, or Section 4(f) or 13 hereof or any corresponding provision of any of the other Loan Documents; second, to payment of any fees owing to the Administrative Agent or ------ any Lender under the Credit Agreement in accordance with the provisions of the Credit Agreement; - 21 - third, to ratable payment of accrued but unpaid interest (including post- ----- petition interest) on the Secured Obligations and any termination payments due in respect of any Hedging Agreement with any Lender (pro rata in --- ---- accordance with all such amounts due); fourth, to the ratable payment of unpaid principal of the Secured ------ Obligations; fifth, to the ratable payment of all other Secured Obligations, until ----- all Secured Obligations shall have been paid in full; and finally, to payment to the applicable Grantors or their respective ------- successor or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. The Administrative Agent may make distribution hereunder in cash or in kind or, on a ratable basis, in any combination thereof. SECTION 11. Concerning the Administrative Agent. The provisions of ----------------------------------- Article XI of the Credit Agreement shall inure to the benefit of the Administrative Agent in respect of this Agreement and shall be binding upon the parties to the Credit Agreement in such respect. In furtherance and not in derogation of the rights, privileges and immunities of the Administrative Agent therein set forth: (a) The Administrative Agent is authorized to take all such action as is provided to be taken by it as Administrative Agent hereunder and all other action incidental thereto. As to any matters not expressly provided for herein, the Administrative Agent may request instructions from the Lenders and shall act or refrain from acting in accordance with written instructions from the Required Lenders (or, when expressly required by this Agreement or the Credit Agreement, all the Lenders) or, in the absence of such instructions, in accordance with its discretion. (b) The Administrative Agent shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of the Security Interests, whether impaired by operation of law or by reason of any action or omission to act on its part (other than any such action or inaction constituting gross negligence or willful misconduct. The Administrative Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Agreement by any Grantor. SECTION 12. Appointment of Collateral Agents. At any time or times, in -------------------------------- order to comply with any legal requirement in any jurisdiction or in order to effectuate any provision of the Loan Documents, the Administrative Agent may appoint another bank or trust company or one or more other Persons, either to act as collateral agent or agents, jointly with the Administrative Agent or separately, on behalf of the Administrative Agent and the Lenders with such power and authority as may be necessary for the effectual operation of the provisions hereof - 22 - and specified in the instrument of appointment (which may, in the discretion of the Administrative Agent, include provisions for the protection of such collateral agent similar to the provisions of Section 11 hereof). SECTION 13. Expenses. In the event that any Grantor fails to comply with -------- the provisions of the Credit Agreement, this Agreement or any other Loan Document, such that the value of any Collateral or the validity, perfection, rank or value of the Security Interests are thereby diminished or potentially diminished or put at risk, the Administrative Agent if requested by the Required Lenders may, but shall not be required to, effect such compliance on behalf of such Grantor, and such Grantor shall reimburse the Administrative Agent for the reasonable costs thereof on demand. All insurance expenses and all reasonable expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, any and all excise, stamp, intangibles, transfer, property, sales, and use taxes imposed by any state, federal, or local authority or any other Governmental Authority on any of the Collateral, or in respect of the sale or other disposition thereof, shall be borne and paid by the Grantors; and if any Grantor fails promptly to pay any portion thereof when due, the Administrative Agent or any Lender may, at its option, but shall not be required to, pay the same and charge such Grantor's account therefor, and such Grantor agrees to reimburse the Administrative Agent or such Lender therefor on demand. All sums so paid or incurred by the Administrative Agent or any Lender for any of the foregoing and any and all other sums for which any Grantor may become liable hereunder and all costs and expenses (including reasonable attorneys' fees, legal expenses and court costs) incurred by the Administrative Agent or any Lender in enforcing or protecting the Security Interests or any of their rights or remedies thereon shall be payable by the Grantors on demand and shall bear interest (after as well as before judgment) until paid at the rate then applicable to Base Rate Loans under the Credit Agreement and shall be additional Secured Obligations hereunder. SECTION 14. Notices. All notices, communications and distributions ------- hereunder shall be given or made in accordance with Section 13.1 of the Credit Agreement. SECTION 15. Waivers, Non-Exclusive Remedies. No failure on the part of ------------------------------- the Administrative Agent or any Lender to exercise, and no delay in exercising and no course of dealing with respect to, any right under the Credit Agreement, this Agreement or any other Loan Document shall operate as a waiver thereof or hereof; nor shall any single or partial exercise by the Administrative Agent or any Lender of any right under the Credit Agreement, this Agreement or any other Loan Document preclude any other or further exercise thereof, and the exercise of any rights in this Agreement, the Credit Agreement and the other Loan Documents are cumulative and are not exclusive of any other remedies provided by law. This Agreement is a Loan Document executed pursuant to the Credit Agreement. SECTION 16. Successors and Assigns. This Agreement is for the benefit of ---------------------- the Administrative Agent and the Lenders and their successors and assigns (as permitted by the Credit Agreement), and in the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such - 23 - indebtedness. This Agreement shall be binding on each Grantor and its successor and assigns; provided, that such Grantor may not assign any of its rights or -------- obligations hereunder without the prior written consent of the Administrative Agent and the Lenders. SECTION 17. Changes in Writing. Neither this Agreement nor any provision ------------------ hereof may be changed, waived, discharged or terminated orally, but only in writing signed by each Grantor and the Administrative Agent with the consent of the Required Lenders (or, when expressly required by this Agreement or the Credit Agreement, all of the Lenders). SECTION 18. Powers Coupled with an Interest. All authorizations and ------------------------------- agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. SECTION 19. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED ------------- AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REFERENCE TO THE CONFLICTS OR CHOICE OF LAW PRINCIPLES THEREOF. SECTION 20. Consent to Jurisdiction. Each Grantor hereby irrevocably ----------------------- consents to the personal jurisdiction of the state and federal courts located in Mecklenburg County, North Carolina, in any action, claim or other proceeding arising out of or any dispute in connection with this Agreement, any rights or obligations hereunder, or the performance of such rights and obligations. Each Grantor hereby irrevocably consents to the service of a summons and complaint and other process in any action, claim or proceeding brought by the Administrative Agent or any Lender in connection with this Agreement, any rights or obligations hereunder, or the performance of such rights and obligations, on behalf of itself or its property, in the manner provided in Section 13.1 of the Credit Agreement. Nothing in this Section 20 shall affect the right of the Administrative Agent or any Lender to serve legal process in any other manner permitted by Applicable Law or affect the right of the Administrative Agent or any Lender to bring any action or proceeding against any Grantor or its properties in the courts of any other jurisdictions. SECTION 21. Waiver of Jury Trial. NOTWITHSTANDING ANY OTHER PROVISION -------------------- CONTAINED HEREIN, IN THE EVENT ANY JUDICIAL PROCEEDING IS INSTITUTED IN CONNECTION WITH THIS AGREEMENT, TO THE EXTENT PERMITTED BY LAW, THE ADMINISTRATIVE AGENT AND EACH LENDER BY THEIR ACCEPTANCE OF THIS AGREEMENT OR THE BENEFITS HEREOF AND EACH GRANTOR HEREBY IRREVOCABLY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF OR ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. SECTION 22. Severability. If any provision hereof is invalid and ------------ unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the other provisions hereof shall - 24 - remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent and the Lenders in order to carry out the intentions of the parties hereto as nearly as may be possible; and (b) the invalidity or unenforceability of any provisions hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. SECTION 23. Headings. The various headings of this Agreement are inserted -------- for convenience only and shall not affect the meaning or interpretation of this Agreement or any provisions hereof. SECTION 24. Counterparts. This Agreement may be executed by the parties ------------- hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. - 25 - IN WITNESS WHEREOF, the parties hereto have caused this supplement to be executed under seal by their duly authorized officers, all as of the day and year first written above. [CORPORATE SEAL] ACC CORP. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ------------------------- Title: Vice President-Finance ------------------------- [CORPORATE SEAL] ACC LONG DISTANCE CORP. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ------------------------- Title: Controller ------------------------- [CORPORATE SEAL) ACC NATIONAL TELECOM CORP. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ------------------------- Title: Controller ------------------------- [CORPORATE SEAL] ACC LONG DISTANCE OF MASSACHUSETTS CORP. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ------------------------- Title: Controller ------------------------- [CORPORATE SEAL] ACC RADIO CORP. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ------------------------- Title: Controller ------------------------- [CORPORATE SEAL] ACC NATIONAL LONG DISTANCE CORP. By: /s/ John J. Zimmer ----------------------------- Name: John J. Zimmer ------------------------- Title: Controller ------------------------- - 26 - Administrative Agent: [CORPORATE SEAL] FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Administrative Agent By: /s/ Jim F. Redman --------------------------- Name: Jim F. Redman ----------------------- Title: Sr. Vice President ---------------------- - 27 - Schedule I to Security Agreement Trademark Registrations -----------------------
Mark Reg. No. Date Goods - ------------ --------- -------- ------------------ Flying ACC 1,371,741 11/19/85 Telecomm. Services Design 1,607,689 7/24/89 Telecomm. Services
Trademark Applications ----------------------
Mark Serial No. Goods - -------------- ---------- ------------------ ACC & Design (fed) 74/607003 Telecomm. Services Digitrunk 74/499613 Telecomm. Services
Trademark Licenses ------------------ None ANNEX I (to Security Agreement) SECURITY AGREEMENT SUPPLEMENT ----------------------------- SECURITY AGREEMENT SUPPLEMENT, dated as of _____________________, (the "Supplement"), made by [INSERT NAME OF NEW SUBSIDIARY], a ________________ - ----------- (the "New Grantor"), in favor of First Union National Bank of North ----------- Carolina, as Administrative Agent (in such capacity, the "Administrative Agent") -------------------- under the Credit Agreement (as defined in the Security Agreement referred to below) for the ratable benefit of itself and the Lenders (as so defined). 1. Reference is hereby made to the Security Agreement dated as of ___________, 1995, made by ACC Corp. and certain Subsidiaries of ACC Corp. (collectively, the "Grantors"), in favor of the Administrative Agent (as amended, supplemented or otherwise modified as of the date hereof, the "Security Agreement"). This Supplement supplements the Security Agreement, forms a part thereof and is subject to the terms thereof. Capitalized terms used and not defined herein shall have the meanings given thereto or referenced in the Security Agreement. 2. In order to secure the Credit Agreement, in accordance with the terms thereof, and to secure the payment and performance of all of the Secured Obligations, the New Grantor hereby grants to the Administrative Agent, for the ratable benefit of itself and the Lenders, a continuing security interest in and to all of the New Grantor's estate, right, title and interest in and to all Collateral whether now or hereafter owned or acquired by the New Grantor or in which the New Grantor now has or hereafter has or acquires any rights, and wherever located (the "New Collateral"). 3. The Security Interests are granted as security only and shall not subject the Administrative Agent or any Lender to, or transfer to the Administrative Agent or any Lender, or in any way affect or modify, any obligation or liability of the New Grantor with respect to any of the New Collateral or any transaction in connection therewith. 4. The New Grantor hereby agrees that it is a party to the Security Agreement as if a signatory thereto on the Closing Date of the Credit Agreement, and the New Grantor shall comply with all of the terms, covenants, conditions and agreements and hereby makes each representation and warranty, in each case set forth therein. The New Grantor agrees that "Collateral" as used therein shall include all New Collateral pledged pursuant hereto and the Security Agreement and "Security Agreement" or "Agreement" as used therein shall mean the Security Agreement as supplemented hereby. 5. Attached hereto are (i) a Perfection Certificate in the form of the Perfection Certificate delivered to the Administrative Agent on the Closing Date and (ii) updated Schedules to the Security Agreement revised to include all required information with respect to the New Grantor. - 2 - 6. The New Grantor hereby acknowledges it has received a copy of the Security Agreement and that it has read and understands the terms thereof. 7. The New Grantor hereby agrees that it shall deliver to the Administrative Agent such UCC Financing Statements and all other certificates or other documents and take such action as the Administrative Agent shall reasonably request in order to effectuate the terms hereof and the Security Agreement. IN WITNESS WHEREOF, the undersigned hereby causes this Supplement to be executed and delivered as of the date first above written. [CORPORATE SEAL [INSERT NAME OF NEW SUBSIDIARY] By:_____________________________ Name: ________________________ Title: _______________________ EX-99.22 25 TRADEMARK SECURITY AGREEMENT DATED 7/21/95 Exhibit 99.22 TRADEMARK SECURITY AGREEMENT ---------------------------- WHEREAS, ACC Corp., a corporation organized under the laws of Delaware ("Company"), owns the Trademarks and the Trademark registrations and Trademark applications listed on Schedule 1 annexed hereto, and is a party to the Trademark Licenses listed on Schedule 1 annexed hereto; and WHEREAS, pursuant to a Credit Agreement (the "Credit Agreement") of even date herewith among the Company and certain of its Subsidiaries as Borrowers (collectively, the "Borrowers"), the financial institutions which are, or may from time to time become, party thereto (collectively, the "Lenders") and First Union National Bank of North Carolina, as administrative agent for the Lenders (the "Administrative Agent"), the Lenders have agreed to extend certain Loans according to the terms and conditions more particularly described in the Credit Agreement; and WHEREAS, pursuant to the terms of the Security Agreement of even date (as said Agreement may be amended or modified from time to time, the "Security Agreement;" all capitalized terms defined in the Credit Agreement or the Security Agreement and not otherwise defined herein have the respective meanings provided for in the Credit Agreement or the Security Agreement), between the Borrowers (as grantors thereunder the "Grantors") and the Administrative Agent, the Grantors have granted to the Administrative Agent for the benefit of itself and the Lenders a security interest in certain assets of each of the Grantors, including all right, title and interest of the Company in, to and under all now owned and hereafter acquired Trademarks, Trademark registrations, Trademark applications and Trademark Licenses, together with the goodwill of the business symbolized by the Company's Trademarks, and all products and proceeds thereof, to secure the payment of all amounts owing by the Borrowers under the Credit Agreement and the other Secured Obligations; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company does hereby grant to the Administrative Agent for the benefit of itself and the Lenders a continuing security interest in all of Company's right, title and interest in, to and under the following (all of the following items or types of property being herein collectively referred to as the "Trademark Collateral"), whether now existing or hereafter created or acquired in order to secure the Secured Obligations referred to herein: (1) each Trademark, Trademark registration and Trademark application, together with any reissues, continuations or extensions thereof including, without limitation, the Trademarks, Trademark registrations (together with any reissues, continuations or extensions thereof) and Trademark applications referred to in Schedule 1 annexed hereto, and all of the goodwill of the business connected with the use of, and symbolized by, each Trademark, Trademark registration and Trademark application; - 2 - (2) each Trademark License and all of the goodwill of the business connected with the use of, and symbolized by, each Trademark License; and (3) all products and proceeds of the foregoing, including, without limitation, any claim by the Company against third parties for past, present or future (a) infringement or dilution of any Trademark or Trademark registration including, without limitation, the Trademarks and Trademark registrations referred to in Schedule 1 annexed hereto, the Trademark registrations issued with respect to the Trademark applications referred to in Schedule 1 and the trademarks licensed under any Trademark License, or (b) injury to the goodwill associated with any Trademark, Trademark registration or trademark licensed under any Trademark License. This security interest is granted in conjunction with the security interests granted to the Administrative Agent pursuant to the Security Agreement. The Company hereby acknowledges and affirms that the rights and remedies of the Administrative Agent with respect to the security interest in the Trademark Collateral made and granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. - 3 - IN WITNESS WHEREOF, the Company has caused this Trademark Security Agreement to be duly executed by its duly authorized officer thereunto as of the 21st day of July, 1995. - ---- ---- -- [CORPORATE SEAL] ACC CORP. ATTEST: By: /s/ Daniel J. Venuti By: /s/ John J. Zimmer ------------------- ----------------------- Name: Daniel J. Venuti Name: John J. Zimmer ----------------- ------------------- Title: Asst. Secretary Title: Vice Pres-Finance ---------------- ------------------ Agreed and Accepted as of the 21st day of July, 1995 ------ ---- -- FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Administrative Agent By: /s/ Jim F. Redman -------------------- Name: Jim F. Redman ------------------ Title: Sr. Vice Pres. ----------------- - 4 - ACKNOWLEDGMENT STATE OF NORTH CAROLINA ---------------- COUNTY OF MECKLENBURG --------------- I, Betty G. Smith, a Notary Public for said County and State, do hereby certify -------------- that John J. Zimmer personally appeared before me this day and stated that (s)he -------------- is Vice President-Finance of ACC Corp. and acknowledged, on behalf of ACC Corp. ---------------------- the due execution of the foregoing instrument. Witness my hand and official seal, this 10th day of July , 1995. -------- ------ /s/ Betty G. Smith --------------------------- Notary Public My commission expires: August 5, 1997 --------------------- - 5 - Schedule 1 to Trademark Security Agreement ------------------ Trademark Registrations -----------------------
Mark Reg. No. Date Goods - ------------ --------- -------- ------------------ Flying ACC 1,371,741 11/19/85 Telecomm. Services Design 1,607,689 7/24/89 Telecomm. Services
Trademark Applications ----------------------
Mark Serial No. Goods - -------------- ---------- ------------------ ACC & Design (fed) 74/607003 Telecomm. Services Digitrunk 74/499613 Telecomm. Services
Trademark Licenses ------------------ None EX-99.23 26 LICENSE AGREEMENT DATED 7/1/93 Exhibit 99.23 LICENCE AGREEMENT ----------------- LICENSOR: HUDSON'S BAY COMPANY, THE BAY DEPARTMENT STORES DIVISION LICENSEE: ACC LONG DISTANCE INC. Dated as of: July 1, 1993 ------------ ACC LONG DISTANCE INC. LICENCE AGREEMENT ---------------------------------------- INDEX ----- Article Page - ------- ---- Recitals 1.1 Definitions..................................... 1 "Activation Fee"................................ 1 "Agreement"..................................... 1 "Appendix"...................................... 1 "Business"...................................... 1 "Completion Date"............................... 1 "Contractor".................................... 1 "Customer"...................................... 1 "Department".................................... 2 "Department Area"............................... 2 "Gross Sales"................................... 2 "Licensor's Fee"................................ 2 "Long Distance Service"......................... 2 "Off Premises".................................. 2 "Period"........................................ 2 "Permitted Use"................................. 2 "Promotion and Advertising Material"............ 2 "Sales Contract"................................ 3 "Services"...................................... 3 "Store"......................................... 3 "Taxes"......................................... 3 "Toll Charges".................................. 3 "Trade-marks"................................... 3 "Trade Name".................................... 3 1.2 Interpretation.................................. 3 1.3 Currency........................................ 3 2.1 Grant of Licence................................ 4 2.2 Name............................................ 4 2.3 Rights of Ownership............................. 4 2.4 Becoming Registered User........................ 5 - i - 2.5 No Objection.................................... 5 2.6 Standards....................................... 5 2.7 Standards: Trade-marks......................... 6 2.8 Use of Trade-Marks.............................. 6 2.9 Infringement: Passing-Off....................... 6 2.10 Disclaimer...................................... 7 3.1 Licence Fee..................................... 7 3.2 Term............................................ 8 3.3 Operation of Business........................... 8 3.4 Warranties...................................... 8 3.5 Compliance With Legislation..................... 9 3.6 Workers' Compensation Board..................... 9 3.7 Taxes........................................... 9 3.8 Taxes Indemnity................................. 10 3.9 Inspection...................................... 10 3.10 Hours........................................... 10 3.11 Employees of Licensee........................... 10 3.12 No Contractual Obligations...................... 11 4.1 Cash and Credit Sales........................... 11 4.2 Audit of Records................................ 12 4.3 Daily Report and Settlement..................... 12 4.4 Settlement by Licensor.......................... 12 4.5 Right to Deduct................................. 13 - ii - 4.6 Sale of Services................................ 13 4.7 Discounts....................................... 13 5.1 Advertising..................................... 14 5.2 Store-Wide Campaigns............................ 14 5.3 No Publicity.................................... 14 6.1 Fixtures and Equipment.......................... 14 6.2 Ownership and Removal of Fixtures and Equipment. 15 6.3 Preparation of Department Area.................. 15 6.4 Renovation...................................... 15 6.5 Liens........................................... 15 6.6 Relocation of Department........................ 16 6.7 Utilities, Services & Telephone................. 16 6.8 Delivery and Returns............................ 17 7.1 Third Party Liability........................... 17 7.2 Automobile and All Risks Liability Insurance.... 18 7.3 Deductibles..................................... 18 7.4 Notification to Licensor........................ 18 7.5 General Indemnity and Assurance................. 18 7.6 Risk of Loss or Damage.......................... 20 7.7 Exception....................................... 20 8.1 Termination of Agreement or Department.......... 20 8.2 Termination on Notice........................... 20 8.3 Termination on Disruption....................... 20 - iii - 8.4 Termination of Agreement on Destruction of Store 21 8.5 Discontinuance by Licensor...................... 21 8.6 Consequences On Termination or Expiry........... 21 8.7 Customer Service................................ 22 8.8 Holdback........................................ 22 8.9 Trade-mark Matters.............................. 22 8.10 Partial Termination............................. 23 8.11 Customer Lists.................................. 23 8.12 Confidentiality................................. 23 8.13 Condition of Licence............................ 24 9.1 Assignments; Binding Effect..................... 25 9.2 Corporate Ownership............................. 25 9.3 Partnership..................................... 25 9.4 No Goodwill..................................... 25 9.5 Relationship.................................... 25 9.6 Sales Contract.................................. 26 9.7 Severability.................................... 26 9.8 Waiver.......................................... 26 9.9 Notices......................................... 26 9.10 Language........................................ 27 9.11 Entirety of Agreement and Proper Law............ 27 - iv - LICENCE AGREEMENT ----------------- THIS AGREEMENT made and entered into as of the 1st day of July, 1993, between the Bay Department Stores Division of HUDSON'S BAY COMPANY ("Licensor") and ACC LONG DISTANCE INC. ("Licensee"). WHEREAS Licensee wishes to obtain a licence from Licensor and Licensor has agreed to grant a licence to Licensee subject to the terms and conditions of this Agreement. NOW THEREFORE in consideration of the premises and mutual covenants contained in this Agreement, the parties agree as follows: ARTICLE ONE INTERPRETATION 1.1 Definitions ----------- In this Agreement the following terms have the following meanings unless otherwise provided: "Activation Fee" means the one time fee incurred by a Customer f or activation ---------------- of the Long Distance Service, including without limitation, the auto dialer and express access fee, and charged to the Customer by Licensee or Licensor. "Agreement" means this agreement, including without limitation all appendices ----------- and schedules, and all instruments supplemental hereto, or in amendment or confirmation hereof. "Appendix" means the appendix, attached to and forming part of this Agreement, - ---------- as amended from time to time. "Business" means the sale and/or lease of Services by Licensee in a Department ---------- or Off-Premises upon and subject to the terms of this Agreement. "Completion Date" means the date on which all Services have been delivered and ----------------- installed pursuant to the Sales Contract. The Completion Date is to be determined by Licensee and the customer under the applicable Sales Contract. If there is a dispute as to the Completion Date between the customer and Licensee, Licensor shall work with Licensee to determine the Completion Date. "Contractor" means any direct or indirect sub-contractor of Licensee. - ------------ "Customer" means a customer of Licensor who requests the Long Distance Service - ---------- in a store of Licensor or by a mail or telephone arising directly or indirectly out of Promotion and Advertising Material or referrals or recommendations of another customer of the Long Distance Service. - 2 - "Department" means each department in each store, in which Licensee is licensed - ------------ under section 2.1 to sell and\or lease Services. "Department Area" means the actual floor area of the Department as determined - ----------------- under section 2.1 and specified in the Appendix. "Gross Sales" means the aggregate of the Activation Fee and the Toll Charges - ------------- but excluding therefrom (i) direct provincial retail sales and goods and services taxes in respect of such sales; and (ii) the amount of any cash or credit refund in respect of any sale and\or lease of Services where an adjustment is made, with the consent of Licensor, as a result of a customer complaint. "Licensor's Fee" has the meaning set forth in section 3.1(a) below. - ---------------- "Long Distance Service" means Licensee's service of providing discounted - ----------------------- residential long distance telecommunication services to customers of Licensor. "Off Premises" means premises other than those of Licensor, including without - -------------- limitation, premises of customers of Licensor. "Period" has the meaning set forth in section 4.4(a) below. - -------- "Permitted Use" means: - --------------- (i) use of the Trade-marks only in association with the sale and\or lease of Services in each case by Licensee in the Stores, Off- Premises, or at such other locations as may be permitted by this Agreement, including in Promotion and Advertising Material; (ii) incidental to the foregoing, use of the Trade-marks in connection with the promotion and acceptance by Licensee of Licensor's credit card; and (iii) to the extent permitted by this Agreement the use of the Trade- marks as part or all of the Trade Name of Licensee. "Promotion and Advertising Material" means labels, tags, packaging, displays, - ------------------------------------ signs for use in or in connection with a Department or the Business, printed materials, letterhead, advertising brochures, signs on vehicles, uniforms, pamphlets, catalogues, standard forms and other written or graphic material and all television, radio, newspaper or other promotion or advertising copy and any other promotional or advertising materials or items prepared by or on behalf of Licensee in connection with the sale and\or lease of Services or carrying on the Business under this Agreement. - 3 - "Sales Contract" means the contract between Licensee and the customer for the - ---------------- Long Distance Service substantially in the form set out in Schedule A to this Agreement as amended from time to time. "Services" means the Long Distance Service and any other services which - ---------- Licensor in writing permits Licensee to offer for sale in a Department or Off-Premises or which are provided by Licensee in connection with or incidental to the sale and\or lease of the wares. Services may be varied or terminated by Licensee in its sole discretion from time to time and upon notification to Licensor. "Store" means a store of Licensor in which Licensee is licensed under section - ------- 2.1(a) to operate a Department. "Taxes" means all taxes, rates, duties, levies, fees, and interest and - ------- penalties in respect thereof, contributions, premiums, assessments and other charges imposed, collected, assessed, levied or charged, directly or indirectly, after the date hereof, by any federal, provincial, regional, municipal, local, school, or other governmental body, corporation, agency or commission, but excluding income or profit taxes payable upon the net income of the person liable for such taxes. "Toll Charges" means all monthly charges, including without limitation any - -------------- minimum monthly charge and any charge for the use of long distance toll charges, incurred by a Customer for the Long Distance Service and charged to the Customer by Licensee or Licensor, whether or not such charges are incurred before or after termination of this Agreement. "Trade-marks" means "THE BAY", "the Bay", "LA BAIE", and "la Baie" in both - ------------- block letter and stylized form. "Trade Name" means the use of the Trade-marks as part or all of the names under - ------------ which Licensee shall carry on its business at or in connection with the Stores or Off-Premises. 1.2 Interpretation -------------- In case of conflict between the provisions of the Appendix and any other provision of this Agreement, the provisions of the Appendix shall prevail. 1.3 Currency -------- All dollar amounts referred to in this Agreement are in Canadian funds. - 4 - ARTICLE TWO LICENCE AND TRADEMARKS 2.1 Grant of Licence ---------------- Licensor grants to Licensee: (a) a licence to operate a department in each store specified in the Appendix, or otherwise agreed to in writing by Licensee and Licensor, upon and subject to the terms and conditions of this Agreement; (b) a licence to sell and\or lease Services to customers of Licensor Off- Premises under the name set out in section 2.2(a), upon and subject to the terms and conditions of this Agreement; (c) a limited, non-exclusive, non-transferable, non-assignable licence to use the Trade-marks in Canada only in accordance with the Permitted Use and subject to the terms and conditions of this Agreement. 2.2 Name ---- (a) Each Department and the Business are to be operated under the name Bay Long Distance, or such other name as Licensee requests and Licensor approves in writing prior to the adoption or use of such name. If Licensor allows the Trade-marks to be used as part of the business name or style by which Licensee identifies the Business to the public, and if any applicable law requires registration of such business name or style in any jurisdiction in which Licensee is licensed to use the Trade-marks, Licensee shall, at its expense, register such business name or style pursuant to all applicable laws and, in any such registration, where required, show Licensor as owner and licensor to Licensee of the Trade-marks in association with the Services. Licensee shall forthwith provide Licensor with a copy of such registration. (b) The name set forth in this section 2.2 shall be used only in connection with the Department or the Business and shall not otherwise be used by Licensee in connection with its business in Canada of elsewhere. 2.3 Rights of Ownership ------------------- Licensee acknowledges that the Trade-marks are the sole and exclusive property of Licensor. Nothing in this Agreement or otherwise shall give Licensee any right, title or interest in or to the Trade-marks by themselves or in combination with any other words, or any - 5 - right to use the Trade-marks by themselves or in combination with any other words, except in accordance with this Agreement. Any and all use, and any goodwill generated through any use of the Trade-marks, whether alone or in combination with other words, by Licensee shall enure to the benefit of Licensor exclusively, and Licensee shall not obtain any separate property, right or interest in the Trade-marks by themselves or in combination with any other words, or any such goodwill, by reason of the licence granted under this Agreement. 2.4 Becoming Registered User ------------------------ If required by applicable law, Licensee agrees to execute and deliver to Licensor an application for registration as a registered user of the Trade-marks. Licensee further agrees, upon request of Licensor, to promptly execute and deliver such documents and further assurances in form and substance satisfactory to Licensor and otherwise to cooperate in taking such reasonable action as may be deemed necessary by Licensor to protect Licensor's interest in the Trade- marks, provided that Licensor shall pay all Licensee's costs reasonably incurred. 2.5 No Objection ------------ Licensee agrees that it will not and will not assist any person to raise directly or indirectly any objection or otherwise make any challenge, on any grounds whatsoever to, the validity or distinctiveness of the Trade-marks, any registrations under the Trade-marks Act (Canada) or otherwise of the Trade- marks, the property of Licensor in the Trade-marks, the registration of any other persons as licensees or registered users of the Trade-marks or any use by Licensor or its licensees of the Trade-marks. 2.6 Standards --------- Licensee agrees that it will display and use the Trade-marks only in connection with the Permitted Use and only in association with the Services conforming in nature and quality to standards set or approved pursuant to this Agreement. Licensor shall use its best efforts to provide convenient advance approval procedures in respect of the services which Licensee requests to included as Services pursuant to this Agreement. Licensor may at any time, during regular business hours, conduct random or other inspections of, or request and receive samples for inspection of the Services in association with which the Trade-marks are being or are to be used to ensure compliance with its standards. Any Services not conforming to such standards shall be withheld or immediately withdrawn from public sale or performance. - 6 - 2.7 Standards: Trade-marks ----------------------- All display, use and advertising of the Trade-marks by Licensee shall be subject to the prior written approval of Licensor and shall conform exactly with the provisions of this Agreement. Licensor shall have the right to determine in its sole discretion the nature of the Promotion and Advertising Material upon which the Trade-marks can be displayed. Licensor shall use its best efforts to provide convenient and expeditious advance approval procedures. Licensor may at any time and from time to time, during regular business hours, conduct random or other inspections of, or request and receive as samples for inspection of, and Licensee shall provide to Licensor for approval before use samples of, any and all Promotion and Advertising Material containing any representation, display or use of Trade-marks, whether alone or in combination with other words, to ensure compliance with Licensor's approval standards and with the provisions of this Agreement. Any such Promotion and Advertising Material not conforming to Licensor's approval or not in compliance with the provisions of this Agreement shall not be used by the Licensee or if in use shall be immediately withdrawn from exposure to the public. Licensee shall accompany all display, advertising or use of any of the Trade-marks by a notice (in a form to be prescribed by Licensor from time to time) identifying Licensor as the owner of the Trade-marks and identifying Licensee as licensee. Initially the prescribed form in English shall be: "The Bay is a registered trade-mark of Hudson's Bay Company used under license by ACC Long Distance Inc." 2.8 Use of Trade-Marks ------------------ Licensee shall limit its use of the Trade-marks to the Permitted Use and shall not use, display or advertise the Trade-marks in any other manner or as part of a corporate name. Licensee will not use any other mark, name or style, including the word "Bay" or "la Baie", which is or could be confusing with any of the Trade-marks, or which might impair or lessen the distinctiveness of the Trade-marks or which might depreciate the goodwill of Licensor in the Trade- marks. 2.9 Infringement: Passing-Off ------------------------- Licensee shall notify Licensor promptly of any conflicting use or any act of infringement, passing-off or unfair competition involving the Trade-marks or any marks which may be confusing therewith which comes to its attention. Licensor shall have the sole right to engage in, institute, defend and settle litigation or proceedings involving any conflicting use, infringement, passing-off or unfair competition with respect to the Trade-marks, and Licensee waives any right of action it may have under S.50(3) of the Trade-marks Act. Licensee agrees to cooperate with Licensor in any way requested by Licensor in the prosecution or defence of any such litigation or proceeding. - 7 - Licensor shall reimburse Licensee for any expenses reasonably incurred by Licensee in connection with such cooperation. 2.10 Disclaimer ---------- Licensee accepts the licence granted by this Agreement on the following conditions: (a) Licensor makes no covenant, representation or warranty as to the distinctiveness, validity or registrability of the Trade-marks or any of them, generally or in connection with the Permitted Use, or that the Permitted Use of the Trade-marks will not infringe the rights of any other person; and (b) Licensor disclaims and will not be responsible for any liability, statutory or otherwise, to which Licensee may be subjected by reason of its use of the Trade-marks. Notwithstanding the foregoing, Licensor represents to Licensee that Licensor is not currently aware of any third person whose rights might be infringed by a Permitted Use of the Trade-marks. ARTICLE THREE FEE, TERM OPERATION 3.1 Licence Fee ----------- In consideration of the licence herein granted to Licensee to conduct and operate under the terms, provisions and conditions of this Agreement, Licensee, in addition to its other obligations under this Agreement, shall pay to Licensor and Licensor shall be entitled to receive from Licensee, as a license fee the aggregate of; (a) 27% of the Gross Sales of Activation Fee paid by a Customer prior to commencing to receive services in accordance with a Sales Contract. (b) 7% of the Gross Sales of Long Distance Toll Charges for per-minute voice calls to Canadian and U.S. destinations charged by Licensee to each Customer under a Sales Contract for the twelve month period after each such Customer's applicable activation date; (c) 5% of the Gross Sales of Long Distance Toll Charges for per-minute voice calls to Canadian and U.S. destinations charged by Licensee to each customer under a Sales Contract thereafter; and - 8 - (d) 1% of the Gross Sales of Long Distance Toll Charges for per-minute voice calls to destinations other than Canada and the U.S. charged by Licensee to each Customer under a Sales Contract. 3.2 Term ---- This Agreement shall commence on September 13, 1993 and unless terminated earlier in accordance with its terms shall terminate on September 30, 1995. Licensor shall give Licensee written notice of its intention to terminate this Agreement at least 60 days prior to the termination date. If no such notice is given, this Agreement shall remain in effect but shall be terminable by either party at any time on 60 days written notice to the other party. 3.3 Operation of Business --------------------- Licensee shall diligently and continuously conduct the operation of the Department and the Business to the satisfaction of Licensor and in accordance with Licensor's policy of "customer satisfaction" and other policies from time to time in effect and disclosed to or known by Licensee and in accordance with the operating practices of a first class department store. All Services (other than the Services) shall be approved by Licensor before being offered for sale and\or lease in a Department or the Business. Licensor shall use its best efforts to provide convenient and expeditious advance approval procedures in respect of the services which Licensee requests to have included as Services pursuant to this Agreement. In the event of a dispute with or complaint from any customer which Licensee is unable to settle in accordance with Licensor's applicable policy such dispute or complaint shall be referred to Licensee's Regional Manager and Licensor's Regional Manager for the region in which the Department is located, or the Services are sold Off-Premises. If the Regional Managers are unable to reach a mutually acceptable resolution, the dispute shall be referred to Licensor's General Manager, Licensed Departments and After Sales Service and the Vice-President, Sales of ACC Long Distance, and their decision shall be final and binding on Licensee. 3.4 Warranties ---------- Licensee shall: (i) endeavour at all times to provide uninterrupted Long Distance telephone call service to each Customer. If, however, any call is prevented, delayed, degraded, interrupted or discontinued for any reason any Licensee liability to any customer shall not exceed the amount paid by that customer to Licensee. - 9 - This section 3.4 shall survive termination of this Agreement for as long as the Customer receives billing for the Toll Charges by Licensee. 3.5 Compliance With Legislation --------------------------- Licensee shall, operate the Department and the Business in compliance with all applicable municipal, provincial and federal legislation including, without limitation, workers' compensation, health and safety and building construction legislation. Licensee represents and warrants to Licensor that it has obtained all necessary licenses, permits and approvals for the operation of the Business and that all such licenses, permits and approvals are in good standing. 3.6 Workers' Compensation Board --------------------------- Licensee shall at all times remain and shall ensure that its Contractors remain in good standing with the Workers' Compensation Board or similar authorities in the various provinces and territories in Canada. From time to time, Licensee shall furnish to Licensor evidence of such good standing, including without limitation, a valid certificate of clearance or similar confirmation. Licensee shall indemnify and save harmless Licensor from any and all liabilities resulting from Licensee's failure or the failure of its Contractors to remain in good standing with the Workers' Compensation Board or similar authorities in the various provinces and territories in Canada. 3. 7 Taxes ----- Licensee shall pay to Licensor the amount determined by Licensor in its sole discretion to be the amount of any Taxes (a) payable directly or indirectly by Licensor, or (b) payable by any owner or lessor of a store premises and recoverable by such owner or lessor from Licensor, to the extent that such Taxes are determined by Licensor in its sole discretion to be (c) attributable to a Department or Department Area in any Store or the Business, and (d) not otherwise actually recovered by or refunded to Licensor. - 10 - The amount payable by Licensee hereunder shall be determined from time to time by Licensor in its sole discretion and such determination shall be conclusive and binding on Licensee. 3.8 Taxes Indemnity --------------- Licensee shall indemnify Licensor in respect of all Taxes including any interest or penalties thereon, which may be charged or levied upon Licensor by reason of anything performed under this Agreement, excluding, however, any Taxes imposed on Licensor's net income. All payments made by Licensee under this Agreement shall be made without withholding or deduction on account of any Taxes unless such deduction or withholding is required by any government authority. If Licensee is so required to deduct or withhold with respect to any payment, such payment shall be increased as may be necessary so that, after all such deductions or withholdings and increases (including deductions or withholdings required in respect of additional amounts payable hereunder), Licensor shall receive such amounts as it would have received had no such Taxes been required to be withheld or deducted. 3.9 Inspection ---------- Licensor, its agents and employees have the right a t any time, during regular business hours, for whatever reason, to inspect all Services provided by Licensee Off-Premises or in a Department. If an inspection is made as a result of a customer complaint, Licensee shall immediately repay or reimburse Licensor for all reasonable expenses incurred in connection with such inspection. If an inspection is made for reasons other than a customer complaint, Licensor shall pay all expenses incurred in connection with such inspection. 3.10 Hours ----- Licensee shall operate each Department during the business hours of the Store in which the Department is located. Licensee shall operate the Business Off-Premises at the Licensee's address set out in section 9.9 during the hours of 8:30 a.m. to 6:00 p.m. on Monday to Saturday or as may be agreed to in writing by Licensor and Licensee. 3.11 Employees of Licensee --------------------- (a) Licensee is and shall continue to be an independent contractor and shall have sole authority and full control over its business operations and its employees including, without limitation, wages, hours, working conditions, hiring, discharge, promotion, assignment, discipline, transfer and lay-off of such employees. (b) Licensee, as an independent contractor, shall be solely responsible for and shall fulfil all of its contractual, statutory and common law obligations to its employees. Licensee - 11 - shall be solely responsible for all acts and omissions of its employees that arise out of the employment relationship with Licensee and shall cause its employees to observe the rules, policies and regulations prescribed by Licensor with respect to the Store from time to time in effect and which are disclosed in writing to the Licensee. Licensee covenants and agrees that while working in connection with this Agreement its employees shall comply with all laws, rules and regulations applicable to Licensee. (c) During the performance of any of the Services, Licensee's employees shall wear in a visible manner the form of identification badge designated by Licensor from time to time. 3.12 No Contractual Obligations -------------------------- Licensee shall not make any purchases or incur any obligations or expenses of any kind in the name of Licensor and shall make all purchases and incur all such obligations and expenses in Licensee's own name. Neither the name set forth in section 2.2(a) nor any of the Trade-marks shall be set out in any purchase orders or other purchase documentation used by Licensee for the purchase of Services. ARTICLE FOUR SALES AND REPORTING 4.1 Cash and Credit Sales --------------------- (a) All sales of Services shall be for cash or cheque. In addition, a customer may purchase Services on credit: (i) by charging an account then currently maintained by the customer directly with Licensor through Licensor's own authorized credit card; or (ii) with some other valid credit card accepted by Licensor in its Stores. (b) Credit card sales and sales paid by cheque in the Department shall be made in accordance with the practices and procedures from time to time prescribed by Licensor and communicated in writing to Licensee. Credit card sales and sales paid by cheque in a Department shall identify Licensor as the vendor and shall be subject to Licensor's pre-approval of credit procedures. (c) Credit card sales and sales paid by cheque shall be without recourse to Licensee in respect of delinquent customer accounts or the cost of their collection and shall be the responsibility of Licensor if Licensee has followed the credit and cheque authorization practices and procedures of Licensor which have been communicated in writing to Licensee. If Licensee - 12 - does not follow such credit and cheque authorization practices and procedures, Licensee shall be responsible for collecting from the customer or the credit card issuer, as the case may be. If any customer is delinquent in his/her account, owing to any act or omission of Licensee which constitutes a justifiable reason, as determined by Licensor in its sole discretion, Licensor shall have recourse against Licensee. 4.2 Audit of Records ---------------- (a) Licensee shall keep in each Department or at the address specified in the Appendix, complete and accurate records from which Gross Sales may be readily and accurately determined. Licensor shall have access to such records during regular business hours for the purpose of examination or audit. Licensee shall provide Licensor with any additional information relating to Gross Sales as Licensor may reasonably require. All records and related information shall be retained by Licensee for at least seven years from the expiration of the accounting period to which they relate. (b) Licensor may at any time during the year following the accounting period in question, have the records audited by a national firm of chartered accountants designated by Licensor, and communicated to Licensee and the findings of such firm shall be conclusive and binding on both Licensor and Licensee. If the amount of Gross Sales in any period covered by such audit is found to be one and one-half percent (1.5%) or more greater than the Gross Sales shown in the statements for such period delivered by Licensee, the costs and expenses of the audit shall be paid by Licensee, and Licensee shall forthwith pay to Licensor any deficiency in the Licensor's Fee payable hereunder relating to such period. 4.3 Daily Report and Settlement --------------------------- (a) Licensee shall deliver daily to Licensor a report, in the form prescribed from time to time by Licensor, of all sales of Services for such day, including sales pursuant to mail and telephone orders made in connection with each Department and the Business, but excluding Long Distance telephone services. (b) Licensee shall at the same time the report is delivered pay and remit to Licensor, at a Store in each region to be designated from time to time by Licensor, the gross proceeds of such sales in the form of cash, cheque or credit card sales. 4.4 Settlement by Licensor ---------------------- (a) Licensor shall during the term of this Agreement pay to Licensee, within 15 days after the end of each regular accounting period of Licensor ("Period") the amount that is equal to the - 13 - difference, if any, between: (i) Gross Sales for the Period; and (ii) the amount that is the sum of , (A) Licensor's Fee for the Period; (B) the amount of any cash or credit refund made to a customer by Licensor; and (C) all other amounts owing by Licensee to Licensor hereunder, such amounts to be verified by the presentation by Licensor of appropriate vouchers. (b) All cash or credit refunds to customers shall be processed through and paid by Licensor. 4.5 Right to Deduct --------------- If Licensor is held responsible by a Provincial Workers Compensation authority for employees of Licensee or a Contractor of Licensee because Licensee or such Contractor has failed to fulfil its legal obligations under the applicable Provincial Workers' Compensation laws or regulations, any payments or costs associated with the default of Licensee or any of its Contractors will be reimbursed to Licensor by Licensee and Licensor is hereby entitled to withhold sufficient amounts to satisfy demands made by the Provincial Workers Compensation authority from the amount otherwise payable to Licensee pursuant to section 4.4 above. 4.6 Sale of Services ---------------- Licensee shall decide upon the selling and/or leasing price for Services offered and sold in the Department and in the Business. Licensee shall use Licensor's wrappings, boxes, bags, paper, price tags, display signs, specialty supplies, invoices, purchase forms, business cards, receipts and other sales stationery and paraphernalia. Licensor shall sell to Licensee any such sales paraphernalia at Licensor's cost. Licensee shall comply with all applicable municipal, provincial and federal legislation pertaining to use of its corporate name. If the applicable legislation requires Licensee's corporate name to appear on its contracts, the name shall be indicated discretely. 4.7 Discounts --------- Licensee shall, at its own expense, allow a point of sale discount on Services as detailed in the Appendix. Licensee shall also, at its own expense, allow to customers in the Department any special promotional discounts. - 14 - ARTICLE FIVE PROMOTION 5.1 Advertising ----------- Licensee shall use all reasonable efforts, including adequate advertising and promotion, to sell and\or lease the Services to the best advantage of the parties. All Promotion and Advertising Material shall comply with all applicable legislation, shall be subject to the prior approval of Licensor (who shall act reasonably) and shall be paid for by Licensee. Licensor shall use its best efforts to provide convenient and expeditious advance approval procedures. Notwithstanding any prior approval by Licensor any claims, actions, damages or other liability or expense which result, for any reason whatsoever, from the advertising, publicity or other promotional activities of Licensee shall be the responsibility of Licensee. 5.2 Store-Wide Campaigns -------------------- Licensor may from time to time conduct store-wide or national advertising programs and Licensee shall, at Licensor's request, but at Licensee's expense, participate in up to six of such store-wide or national advertising programs. Details of each individual promotion to be reviewed between Licensee and Licensor. 5.3 No Publicity ------------ Except where required by law, neither Licensee or Licensor will issue any publicity or press release regarding any Department or the Business or its contractual relations with Licensor under this Agreement and will refrain from making any reference to this Agreement or to Licensor in the solicitation of business without obtaining Licensor's prior written consent to such action. Licensor shall use its best efforts to provide convenient and expeditious advance approval procedures. Neither Licensee or Licensor shall state in any Promotional and Advertising Material that it is going out of business or in any other manner make public announcement of the expiration or earlier termination of this Agreement. ARTICLE SIX DEPARTMENT AREA 6.1 Fixtures and Equipment ---------------------- Licensee shall at its sole cost furnish and install all free standing counters, display cases and other selling fixtures and equipment required for the proper operation of the Department. Licensee shall also provide all facilities, vehicles, tools and equipment as may be - 15 - necessary or desirable for the operation of the Business. Licensee shall at all times maintain its fixtures and equipment, facilities, vehicles and tools in good operating condition and repair, reasonable wear and tear, damage by fire, smoke and\or water, and acts of God excepted. 6.2 Ownership and Removal of Fixtures and Equipment ----------------------------------------------- Licensee's fixtures and equipment shall remain the property of Licensee except for those fixtures not capable of removal without damage to the Store which shall become the property of Licensor upon termination of this Agreement at no cost to Licensor. Any damage to the Store or other property of Licensor resulting from the removal of Licensee's fixtures or equipment shall be repaired at the expense of Licensee. No fixtures or equipment shall be removed by Licensee until all of its indebtedness to Licensor, arising under this Agreement or otherwise, has been paid or settled to the satisfaction of Licensor. 6.3 Preparation of Department Area ------------------------------ Licensee shall at its sole cost perform all work specified in the Appendix. All work shall be in accordance with plans and specifications previously approved in writing by Licensor. Licensor shall use its best efforts to provide convenient and expeditious advance approval procedures. 6.4 Renovation ---------- Licensee may, at its own expense, at any time and from time to time, with the prior written approval of Licensor renovate the Department Area or replace or repair any fixtures or equipment. All work performed shall be in accordance with plans and specifications previously approved in writing by Licensor. Licensor shall use its best efforts to provide convenient and expeditious advance approval procedures. If Licensor renovates the Store, Licensee shall at its own expense, at the request of Licensor, renovate the Department Area in accordance with plans and specifications approved in writing by Licensor. Licensor shall use its best efforts to advise Licensee of any planned renovations for a Store prior to Licensee setting a Department in that Store. 6.5 Liens ----- If any lien is registered against the Department Area relating to services or materials supplied to Licensee or any of Licensee's employees, agents or Contractors, Licensee shall notify Licensor of such lien within twenty-four (24) hours of receipt of notice of filing. Licensee shall discharge such lien by payment of the amount due the lien claimant within ten (10) days of receipt of notice of filing. Alternatively, Licensee may in good faith contest such lien, - 16 - provided that within such ten (10) day period, Licensee provides Licensor with a surety bond acceptable to Licensor in an amount at least equal to one and one- half (1 1/2) times the amount claimed as a lien. Licensor may, in its sole discretion, discharge the lien by paying the amount claimed and the amount so paid by Licensor and all costs and expenses incurred by Licensor, including reasonable legal fees, shall be immediately due and payable by Licensee to Licensor. 6.6 Relocation of Department ------------------------ Licensor shall have the right from time to time, upon not less than 60 days prior written notice to Licensee, to relocate any Department to other suitable space in the Store substantially equivalent in area and quality of locations but in any event not less than the Department Area specified in the Appendix. If Licensor relocates the Department, it shall pay the costs of moving Licensee's fixtures, and equipment to the new Department Area and preparing and decorating the new Department Area in a manner substantially equivalent to the original Department Area. Licensor shall pay to repair all fixtures, equipment damaged by such move. Licensor shall not be liable for any other costs, expenses or losses or damages incurred by Licensee in connection with the relocation including without limitation, loss of profits. If Licensee wishes to relocate a Department to another space in the Store and if such relocation is agreed to by Licensor, Licensee shall carry out such relocation at its expense and in accordance with the plans and time schedule previously approved in writing by Licensor. Licensor shall use its best efforts to provide convenient and expeditious advance approval procedures. 6.7 Utilities, Services & Telephone ------------------------------- a) Licensor shall be responsible for the cost of water,light, power, heat, air conditioning and janitor services for the Department as usually provided to other parts of the Store. b) Licensor shall during the term of this Agreement provide Licensee with the use of a telephone listing for each Store under the name specified in section 2.2(a). Licensee shall be responsible for all charges relating to such listing including all charges relating to installation, monthly charges and long distance. c) Licensee acknowledges that Licenser has an interest in all telephone numbers of the Department and the Business and agrees to execute and deliver to Licensor the agreement in the form of Schedule B attached to this Agreement to protect such interest. - 17 - 6.8 Delivery and Returns -------------------- Licensee shall be responsible for arranging and for the cost of transportation and delivery and, where applicable, return of wares and other property of Licensee to and from each Department and Off-Premises. All wares, if any, including without limitation wares to be used for display purposes in the Department Area, coming into a Store shall be processed through the Store's receiving and return facilities. Licensee shall have the right to attend at Licensor's receiving and return facilities and accompany all wares from such facilities to the Department Area. Licensor shall not be liable for any loss or damage whatsoever to the wares or other property of Licensee resulting from the use of the Store' s receiving and return facilities or otherwise. ARTICLE SEVEN INSURANCE AND INDEMNITY 7.1 Third Party Liability --------------------- Licensee shall obtain and maintain at its expense during the term of this Agreement, a policy of insurance from an insurer or insurers acceptable to Licensor. The policy of insurance shall insure Licensee and Licensor against all claims, demands, actions or proceedings for sums of money, damages, costs, penalties and losses (hereinafter, "Claims") and all liability which may be imposed by law for loss of life, personal injury or damage to property arising from or in any way connected with the operations of Licensee and including but not limited to Claims: (i) arising from or in connection with the sale of or the performance of any Services by Licensee whether in the Department, Off Premises or elsewhere in connection with the Business; (ii) relating to or asserting a defect or omission in connection with the sale of the Services by Licensee to any purchaser or user thereof; and (iii) relating to any act, error, omission or default, whether wilful or negligent, of Licensee, Licensor or any of their respective employees, Contractors, agents, visitors or customers (collectively the "Insurable Matters"). The policy of insurance shall provide coverage of at least two million dollars ($2,000,000) for each separate occurrence and shall contain cross liability and severability of interest clauses. - 18 - Licensee shall also obtain and maintain during the term of this Agreement, at its own expense "all risks" insurance coverage (including flood and earthquake) on a full replacement cost basis on its wares, fixtures and equipment in the Store. 7.2 Automobile and All Risks Liability Insurance -------------------------------------------- Licensee shall obtain from an insurer or insurers acceptable to Licensor and maintain during the term of this Agreement at its own expense, a policy of insurance covering all vehicles owned, leased, rented or otherwise used by Licensee in the Business. Licensee shall also ensure that its employees and Contractors comply with the obligations set forth in this section 7.1 with respect to any vehicles owned, leased, rented or otherwise used by such employees or Contractors, in connection with the Business. 7.3 Deductibles ----------- Licensee is responsible for all deductibles under all policies of insurance. 7.4 Notification to Licensor ------------------------ Licensee and Licensor shall both be named insureds for all policies of insurance referred to in this Article Seven. Licensee shall furnish to Licensor within ten (10) days after the execution of this Agreement and upon request Certificates of Insurance for all policies of insurance required by this Article Seven and shall not make any change to such insurance without the prior written consent of Licensor. Certificates of Insurance shall also be furnished to Licensor within ten (10) days after renewal of any of the insurance policies required by this Article Seven or at any time upon request. Licensee shall immediately notify Licensor of any changes to or cancellation, termination or expiry of any such insurance policies required by this Article Seven. Each insurance policy required under this Article Seven shall bear an endorsement or condition by the insurer that the insurance shall be changed or cancelled only upon thirty (30) days prior written notice by the insurer to Licensor. 7.5 General Indemnity and Assurance ------------------------------- (a) Licensee shall indemnify Licensor against and save it harmless from any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, claims, expenses or disbursements of any nature or kind whatsoever including all legal fees, disbursements and other expenses relating thereto, which arise from, are connected with or in any way relate to: - 19 - (i) the acts or omission , s of Licensee whether or not in compliance with this Agreement; (ii) Insurable Matters; (iii) manufacturers', suppliers' and Contractors' warranties, if any, in respect of the Services; (iv) the Sales Contract; (v) Licensor's satisfaction of customer complaints in accordance with the provisions of this Agreement; and (vi) the enforcement of this Agreement or any Sales Contract by Licensor. For example, but without limitation, Licensee shall reimburse Licensor for all costs, fines, penalties and damages, including out-of-pocket disbursements and legal expenses incurred as a result of charges brought against Licensor for its or Licensee's alleged failure to comply with all applicable legislation in respect of the operation of each Department and the Business, or as a result of claims made by customers of the Department and the Business in respect of the goods or services ordered or purchased by such customers in the Department or Off-Premises. It is the intention of both Licensee and Licensor that Licensee bear entirely and protect Licensor entirely from all risk associated with activities of Licensee in, through or in connection with Licensor. (b) Licensee shall not be permitted to sue any customer of the Department or the Business or defend or settle any matter, either directly or indirectly related to a customer of a Department or the Business or both unless prior written consent is granted by Licensor, such consent which may, notwithstanding any statutory provision to the contrary, be unreasonably withheld. (c) Licensor shall have the right to defend, compromise or settle any matter that is subject to the foregoing indemnity (the "Indemnified Claim") through its own legal counsel and Licensee shall immediately repay or reimburse Licensor for all amounts paid in respect of such Indemnified Claim and all expenses including all legal expenses incurred by Licensor in respect of such Indemnified Claim. If Licensor assumes carriage of the defence of any Indemnified Claim, Licensor shall keep Licensee reasonably informed as to the progress of such Indemnified Claim and shall advise Licensee prior to the settlement of any such Indemnified Claim. (d) The provisions set out in this section 7.5 shall survive indefinitely the expiry or termination of this Agreement generally or in respect of any Department. - 20 - 7.6 Risk of Loss or Damage ---------------------- Except as otherwise provided in this Agreement, including without limitation section 7.5, each of the parties hereto assumes all risk of loss, or destruction of or damage to its property in the Department or off-Premises and arising from or in connection with the Business for any reason whatsoever, excepting the wilful act, or omission or neglect of the other party or its agents, employees or Contractors. This section 7.6 shall survive indefinitely the expiry or termination of this Agreement generally or in respect of any Department. 7.7 Exception --------- Notwithstanding Section 7.5 of this Agreement, License shall not be required to indemnify Licensor for expenses incurred by Licensor in approving additional services pursuant to Section 3.3 of this Agreement. ARTICLE EIGHT TERMINATION 8.1 Termination of Agreement or Department -------------------------------------- Licensor may at its option terminate this Agreement generally or in respect of any Department and the Business immediately by written notice to Licensee (i) if Licensee makes an assignment for the benefit of its creditors, is adjudged bankrupt or becomes insolvent, if a receiver is appointed of Licensee or of a substantial part of its property, if its property or a substantial part thereof is seized in any process of execution or attachment, (ii) if Licensee breaches sections 6.5, 7.1, 8.13, 9.1, 9.2 or 9.3; (iii) if Licensee fails to observe any of the terms or conditions of this Agreement generally or in respect of any Department or the Business and such failure continues for, or is repeated during the ten (10) business days after written notice of such failure is given by Licensor to Licensee. 8.2 Termination on Notice --------------------- a) Notwithstanding section 3.2 of this Agreement, either party may, at its option, from time to time, terminate this Agreement without cause in respect of any one Department at any time on 90 days' prior written notice to Licensee. 8.3 Termination on Disruption ------------------------- If Licensee's operation of its Business, whether in the Store or elsewhere, for any reason whatsoever, including, without limitation, consumer protests or other picketing or any - 21 - strike or lockout, causes in the opinion of Licensor a disruption of the business of the Store, Licensor will advise Licensee, and Licensee will take immediate action to stop the disruption or Licensor may immediately and without notice terminate this Agreement in respect of such Store. Licensee shall thereupon cease its operations in and vacate the Store. 8.4 Termination of Agreement on Destruction of Store ------------------------------------------------ If any Store is destroyed or so substantially damaged as to be, in the reasonable opinion of Licensor, inoperable and Licensor decides not to rebuild or repair such Store, it shall notify Licensee of such decision as soon as practicable and the licence for the Department in such Store shall terminate on the third day after the giving of such notice. If notice is not given by Licensor, the Agreement shall continue in effect with respect to such Department. 8.5 Discontinuance by Licensor -------------------------- In the event that Licensor determines or is required: (a) to discontinue its operation of a Store for any reason whatsoever, or (b) to transfer the operation of a Store to a different division of Licensor or to an affiliate (as defined in the Canada Business Corporations Act) of Licensor, Licensor may, at its option, notwithstanding any other provision of this Agreement terminate this Agreement in respect of such Store on 30 days' prior written notice to Licensee. 8.6 Consequences On Termination or Expiry ------------------------------------- On termination or expiry of this Agreement in respect of any one or more Departments, Licensee shall surrender to Licensor all space in its possession or control relating to such Departments, cease to use the telephone numbers of the Department or the Business, in the case where there are no remaining Department(s) return all Advertising and Promotion Material showing or displaying any of the Trade-marks (except where at least one other Department continues in operation, in which case, the Promotion and Advertising Material may be used in another Department) and subject to section 6.2 remove all of its property in such Departments from the Store within 10 days from the date of termination or expiry. Except as otherwise provided in this Agreement, neither party shall be liable to the other for any costs, claims, damages or expenses whatsoever (including without limitation loss of future profits, revenue, cash flow or, generally, goodwill) arising from termination or expiry of this Agreement in accordance with its terms in respect of any one or more Departments. Notwithstanding such termination or expiry, the provisions of this Agreement requiring, payments to be made, including without limitation, costs or expenses to be assumed or indemnities to be given, the - 22 - provisions regarding confidentiality and handling of customer lists and other information, and section 8.7 regarding customer service shall survive indefinitely the termination or expiry of this Agreement in respect of any one or more Departments. 8.7 Customer Service ---------------- On termination or expiry of this Agreement in respect of any one or more Departments or any aspect of the Business, Licensee shall at its expense take all steps and do all things, as considered reasonable by Licensor, in a timely fashion to ensure that all pending, in process or outstanding customer transactions are properly completed to the full satisfaction of the customer. Licensee shall ensure that the customer is not (without the consent of Licensor) made aware of such termination or expiry and that the customer is referred to Licensor and not to Licensee or some other person, firm, corporation or other business entity. For greater certainty, Licensee shall complete all Work in Progress, subject to any written instructions from Licensor to the contrary. Furthermore, Licensee shall not enter into any Sales Contracts after termination date of this Agreement. 8.8 Holdback -------- Notwithstanding section 4.4 of the Agreement, on termination or expiry of this Agreement, Licensor shall be entitled to retain any amount owing by it to Licensee for a period of 120 days after such termination or expiry and to deduct from such amount any amount to be paid or owing to Licensor by Licensee. 8.9 Trade-mark Matters ------------------ If the license granted by this Agreement is terminated, then: (a) Licensee shall immediately take all steps necessary to change its legal name, business style, Trade Name or identification (including that, if any, included in the Permitted Use) to names wholly unrelated to the Trade-marks and provide Licensor with a copy of all documents effecting such change; (b) Licensee shall immediately cease to carry on business under, to use, display, advertise or to represent in any way that it has any interest in, the Trade-marks, or any combination thereof with any other words; (c) Licensee shall not thereafter make any use of the Trade Name, Trade-marks, or any combination thereof with any other words, or any trade-mark or trade name or trading style including any of the Trade-marks or confusing therewith; - 23 - (d) As required by Licensor, Licensee shall return to Licensor or cause to be destroyed, cancelled, obliterated or taken down all Promotion and Advertising Material containing any representation or use of the Trade-marks or any combination thereof with any other words; (e) As required by Licensor, Licensee shall dispose of all wares bearing the Trade-marks or otherwise modify the wares to remove such Trade-marks from the wares and shall discontinue the performance or sale of all Services and advertising of all Services in association with the Trade-marks; (f) Licensee shall remove all representations, depictions or displays of the Trade-marks or any of them, whether alone or in combination with any other words, from all vehicles, uniforms, identification badges and equipment, and from all other locations in which the Trade-marks were displayed or advertised; (g) Licensee shall take all steps necessary to remove, amend or cancel any public registration showing Licensee carrying on business under a name or style including any of the Trade-marks or any combination thereof with any other words and shall provide Licensor with a copy of the cancellation document. 8.10 Partial Termination ------------------- If the licence granted by this Agreement is terminated for fewer than all of the Departments, the provisions of section 8.9 shall apply only in respect of those Departments in respect of which the licence has been terminated. 8.11 Customer Lists -------------- All lists of customers of any Department, Store or Business, including without limitation, lists developed by Licensee, its employees, agents, or Contractors and any other information relating to such customers are the sole and exclusive property of Licensor. Licensee agrees to provide to Licensor forthwith on request all copies of all such customer lists and other information relating to such customers whether in hard copy or machine readable form. Licensee shall keep such customer lists and other customer information separately from any customer lists or other information that Licensee may maintain that does not relate to this Agreement. 8.12 Confidentiality --------------- Licensee shall not, either directly or indirectly, make known or disclose to any person, firm, corporation or other entity, or use or reproduce the customer lists or other customer information of customers of any Department, Store or the Business for purposes other than the sale and\or lease of Services in the Department, Store or the Business. For greater certainty, - 24 - Licensee shall not use such lists or other information to solicit customers other than for the Department, Store or the Business. Licensee agrees to request its employees, servants, agents and Contractors to execute such written confidentiality and non-disclosure agreements relating to the customer lists or other customer information of Licensor referred to in this section as may from time to time be requested by Licensor. 8.13 Condition of Licence -------------------- (a) Licensee and its employees, agents and Contractors shall only advertise or offer for sale and\or lease the Services to Customers in accordance with this Agreement. Licensee shall inform its employees, agents and Contractors who perform work in connection with the Trade Name of this condition of licence, breach of which condition by Licensee or its employees, agents and Contractors is grounds for immediate termination, pursuant to section 8.1 of this Agreement. (b) For the purposes of paragraph (a) above, "Customers" means customers of Licensor or any persons of whom Licensee or its employees, agents or Contractors became aware, directly or indirectly through Licensor. (c) During the term of this Agreement, except as contemplated in this Agreement, none of Licensee or any party controlling (whether though the ownership of shares or otherwise) or under direct or indirect common control (whether through the ownership of shares or otherwise) with Licensee shall engage in Canada in the retail sale of the services; (i) in any retail store (other than a store hereunder) in Canada and known as a department store or junior department store including without limitation any store of Eatons, Sears, K Mart, Woolco, [G.W. Robinson's] and Oglivies; (ii) in any Holt Renfrew retail store; (iii) in any retail grocery or convenience store whose retail square footage is 5,000 square feet or more. (d) Except as set out in section 8.13 (c) nothing in this Agreement shall be construed so as to prevent Licensee from conducting its business, aside from the Business, in any manner whatsoever. - 25 - ARTICLE NINE ------------ MISCELLANEOUS ------------- 9.1 Assignments; Binding Effect --------------------------- Licensee acknowledges that the rights granted by Licensor and the obligations assumed by Licensee under this Agreement are strictly personal in nature. Except for any sub-contract for Services to a Contractor, Licensee shall not assign this Agreement or any of its rights or obligations under this Agreement or grant any sub-licence or sub-contract of this Agreement or otherwise transfer or delegate any of its rights or obligations without the prior written consent of Licensor which consent may, notwithstanding any statutory provision to the contrary, be arbitrarily withheld. Licensor may at any time assign all or any part of its rights or obligations under this Agreement, Licensor will notify Licensee of it's intention to assign all or any part of its rights or obligations under this Agreement. Subject to the foregoing, this Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 9.2 Corporate Ownership ------------------- No change in the direct or indirect voting control of the Licensee shall be made without the written consent of Licensor which consent may, notwithstanding any statutory provision to the contrary, be arbitrarily withheld. 9.3 Partnership ----------- If Licensee is a partnership, no change in the members of the partnership or if a partner is a corporation, the changes outlined in section 9.2 shall be made without the prior written consent of Licensor which consent may, notwithstanding any statutory provision to the contrary, be arbitrarily withheld. 9.4 No Goodwill ----------- Licensee shall not obtain, develop or sell or purport to sell any goodwill related to its operation of any one or more Departments, its right to occupy any one or more Department Area or its operation of the Business. 9.5 Relationship ------------ Licensee is an independent contractor. Nothing contained in or done pursuant to this Agreement shall be construed as creating a partnership, agency or joint venture and, except as otherwise expressly provided in this Agreement, neither party shall become bound by any representation, act or omission of the other party. - 26 - 9.6 Sales Contract -------------- Prior to the provision by Licensee of any Services to a Customer, the Sales Contract must be properly executed. Licensee must use only the Sales Contract. No supplement, modification or waiver of the terms and conditions of the Sales Contract, other than the Services to be provided or the Completion Date shall be binding unless executed in writing by the party to be bound thereby. Neither the customer nor Licensee may assign the Sales Contract, without the prior written consent of Licensor. Licensee shall not bring any action, suit, claim or any proceeding against Licensor, nor claim any damages, penalties, losses, expenses or disbursements of any nature or kind whatsoever which arise from, are connected with or in any way relate to the adequacy or enforcement of the Sales Contract. Licensor shall not cancel, attempt to cancel, or otherwise interfere with Licensee's relationship with the Sales Contract without the Licensee's prior consent, such consent not to be unreasonably withheld. The prices, charges and terms of sale of the Services shall be as set forth by Licensee in tariffs and\or other Licensee authorized written documents and releases from time to time. 9.7 Severability - All clauses, terms and conditions hereof are severable ------------ and the invalidity, illegality or unenforceability of any clause, term or condition shall not affect the validity, enforceability or legality of the remaining clauses, terms and conditions. 9.8 Waiver - No supplement, modification, waiver or termination of this ------ Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions (whether or not similar) nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 9.9 Notices - Any notice required or permitted to be given hereunder shall ------- be in writing and may be given by delivery (by hand or courier), facsimile or ordinary mail, addressed to the party to whom the notice is to be given at the following addresses: In the case of Licensor: HUDSON'S BAY COMPANY 401 Bay Street Toronto, Ontario M5H 2Y4 - 27 - Attention: General Sales Manager, Licensed Departments Facsimile: 416-861-4646 In the case of Licensee: ACC Long Distance Inc. 5343 Dundas Street West Suite 401 Etobicoke, Ontario M9B 6K5 Attention: President Facsimile: (416) 236-4749 Any notice shall be deemed to have been received at the time of delivery, if delivered, on the next business day following transmission, if sent by facsimile, or on the fourth day after mailing if mailed. 9.10 Language - At the request of both parties, this Agreement has been -------- drawn in the English language. Le detenteur de permis et l'octroyeur de permis demandent que ce contract de permit soit preparee et signe en anglais. 9.11 Entirety of Agreement and Proper Law - This Agreement constitutes the ------------------------------------ entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings both formal and informal. This Agreement shall be construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed as of the date first above written. Recommended by: ACC LONG DISTANCE INC. [illegible] By: [illegible] - ----------------------- -------------------- Regional Licensed Department Manager By: [illegible] -------------------- - 28 - HUDSON'S BAY COMPANY By: [illegible] ------------- By: ------------- - 29 - APPENDIX -------- To the Licence Agreement made as of the 1st day of July, 1993 between the Bay Department Stores Division of Hudson's Bay company as Licensor and ACC Long Distance Inc. as Licensee. The terms and provisions of this Appendix shall form part of, and shall be in addition to and not in substitution for the terms and provisions of, the Licence Agreement, provided that where there is a conflict between provisions of the Appendix and this Licence Agreement, the terms and provisions of the Appendix shall prevail. All references in the body of the Appendix to clause numbers are to those clause numbers in the Licence Agreement unless otherwise stated. The Licence Agreement is supplemented and amended by adding or substituting the following terms and provisions: 1. Section 1.1. (a) Store Bloor Street Yorkdale Centrepoint 2. Section 4.2 (a) 5343 Dundas St. West Suite 401 Etobicoke, Ontario M9B 6K5 3. Section 4.2 Discounts --------- Licensee will offer a discount to be established and agreed to by Licensee and Licensor to any person entitled to receive an employee discount from Licensor. 4. Section 6.3 Preparation of Department Area ------------------------------ Licensee shall complete at its own cost and expense, in accordance with plans, designs and specifications approved in writing by Licensor, in accordance with section 6.3, all work necessary to finish and prepare each Department Area and to open and operate each Department (including without limitation all work relating to the shell and decoration of each Page 2 of 2 Department). All such work, together with any other work on a Department Area undertaken by Licensee in accordance with the Licence Agreement, shall be completed expeditiously and efficiently using new materials, shall be performed by competent contractors, subcontractors and workmen approved by Licensor, shall be of a uniformly high quality and shall be performed in accordance with all laws, rules, regulations and codes applicable to such work. 5. Licensee shall furnish to Licensor copies of reseller registrations filed by Licensee with the CRTC. 6. While this Agreement is in effect, and during any additional period that Licensor's Fee is payable, Licensor shall use it's best efforts to not target existing Bay Long Distance customers with marketing for a similar long distance program. Licensee recognizes and acknowledges that the Licensor's marketing approach is broad and encompasses all Bay card holders across the country. 7. Sale of Services ---------------- Bay Long Distance Activation Fees and Long Distance Toll Charges will be competitively priced with all other ACC programs. For greater clarity the Bay Long Distance Activation Fees and Long Distance Toll Charges will be the best total price package offered to any ACC customer. EX-99.24 27 REGISTRATION STATEMENT ON FORM S-3 EXHIBIT 99.24 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 1996 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- ACC CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------- DELAWARE 16-1175232 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 400 WEST AVENUE ROCHESTER, NEW YORK 14611 (716) 987-3000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) MICHAEL R. DALEY EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER ACC CORP. 400 WEST AVENUE ROCHESTER, NEW YORK 14611 (716) 987-3000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------- COPIES TO: RICHARD F. LANGAN, JR. JERRY V. ELLIOTT JOHN C. PARTIGAN SHEARMAN & STERLING NIXON, HARGRAVE, DEVANS & DOYLE LLP 599 LEXINGTON AVENUE 437 MADISON AVENUE NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022 (212) 848-4000 (212) 940-3000 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED NUMBER OF PROPOSED MAXIMUM TITLE OF EACH CLASS OF SHARES MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING PRICE REGISTRATION REGISTERED REGISTERED (1) PER SHARE (2) (2) FEE - ----------------------------------------------------------------------------------- Class A Common Stock, par value $.015 per share................ 2,012,500 $27.50 $55,343,750 $19,084.01
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Includes 262,500 shares the Underwriters may purchase from the Company to cover over-allotments, if any. (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 and based upon prices reported on the Nasdaq Stock Market on February 20, 1996. -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY THE SECURITIES DESCRIBED HEREIN, NOR + +SHALL THERE BE ANY SALE OF SUCH SECURITIES IN ANY JURISDICTION IN WHICH SUCH + +OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR + +QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) Issued February 22, 1996 1,750,000 Shares [LOGO] ACC(R) CLASS A COMMON STOCK ----------- ALL OF THE SHARES OF CLASS A COMMON STOCK, PAR VALUE $0.015 PER SHARE, OFFERED HEREBY ARE BEING SOLD BY ACC CORP. THE CLASS A COMMON STOCK IS TRADED ON THE NASDAQ STOCK MARKET UNDER THE SYMBOL "ACCC." ON FEBRUARY 20, 1996, THE REPORTED LAST SALE PRICE OF THE CLASS A COMMON STOCK ON THE NASDAQ STOCK MARKET WAS $27.50 PER SHARE. ----------- SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------- PRICE $ A SHARE -----------
PRICE UNDERWRITING TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) ------ -------------- ----------- Per Share....................................... $ $ $ Total(3)........................................ $ $ $
- ----- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 262,500 additional Shares of Class A Common Stock at the price to public less underwriting discounts and commissions, for the purpose of covering over- allotments, if any. If the Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Company will be $ , $ and $ , respectively. See "Underwriters." ----------- The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters and subject to approval of certain legal matters by Shearman & Sterling, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1996 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ----------- MORGAN STANLEY & CO. WHEAT FIRST BUTCHER SINGER Incorporated , 1996 [Graphic indicating location of ACC Corp.'s switches and certain leased facilities appears here.] 2 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ---------------- NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE CLASS A COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF THE CLASS A COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS. ---------------- TABLE OF CONTENTS
PAGE ---- Incorporation of Certain Documents by Reference......... 4 Prospectus Summary.............. 5 Risk Factors.................... 8 Use of Proceeds................. 17 Price Range of Class A Common Stock and Dividend Policy...... 18 Capitalization.................. 19 Selected Historical Consolidated Financial and Operations Data.. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 22 Business........................ 31
PAGE ---- Management....................... 50 Principal Shareholders........... 52 Description of Capital Stock..... 53 Shares Eligible for Future Sale.. 58 Certain United States Federal Tax Considerations for Non-U.S. Holders of Class A Common Stock. 60 Underwriters..................... 62 Legal Matters.................... 63 Experts.......................... 63 Available Information............ 64 Index to Consolidated Financial Statements...................... F-1
---------------- The Company intends to continue to furnish to its stockholders annual reports containing audited consolidated financial statements and a report thereon by the Company's independent public accountants and quarterly reports containing unaudited condensed consolidated financial information for each of the first three quarters of each fiscal year. In this Prospectus, references to "dollar" and "$" are to United States dollars, references to "Cdn. $" are to Canadian dollars, references to "(Pounds)" are to English pounds sterling, the terms "United States" and "U.S." mean the United States of America and, unless the context otherwise requires, its states, territories and possessions and all areas subject to its jurisdiction, and the terms "United Kingdom" and "U.K." mean England, Scotland and Wales. ---------------- The Company was originally incorporated in New York in 1982 under the name A. C. Teleconnect Corp. and was reincorporated in Delaware in 1987 under the name ACC Corp. As used herein, unless the context otherwise requires, the "Company" and "ACC" refer to ACC Corp. and its subsidiaries, including ACC Long Distance Corp. ("ACC U.S."), ACC TelEnterprises Ltd., the Company's 70% owned Canadian subsidiary ("ACC Canada"), and ACC Long Distance UK Ltd. ("ACC U.K."). The Company's principal executive offices are located at 400 West Avenue, Rochester, New York 14611 and its telephone number at that address is (716) 987-3000. 3 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the Securities and Exchange Commission ("Commission") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are incorporated by reference in this Prospectus: (1) the Company's Annual Report on Form 10-K (as amended on April 27, 1995) for the year ended December 31, 1994; (2) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995; (3) the Company's Current Reports on Form 8-K filed on April 13, 1995, June 22, 1995, October 27, 1995 (as amended on December 8, 1995) and February 22, 1996; and (4) the description of the Company's Common Stock contained in the Company's Registration Statement on Form 8-A (as amended on November 14, 1995). All documents filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this Prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference herein and to be a part hereof from the respective dates of the filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon written or oral request of any such person, a copy of any and all of such documents (other than exhibits to such documents which are not specifically incorporated by reference into such documents). Requests for such copies should be directed to the Chief Financial Officer, ACC Corp., 400 West Avenue, Rochester, New York 14611 (telephone number (716) 987-3000). ---------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITERS." 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including risk factors, and consolidated financial statements, and notes thereto, appearing elsewhere or incorporated by reference in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. Certain of the information contained in this summary and elsewhere in this Prospectus, including under "Management's Discussion and Analysis of Financial Condition and Results of Operations," including information with respect to the Company's plans and strategy for its business and related financing, are forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see "Risk Factors" and the Company's periodic reports incorporated by reference herein. THE COMPANY ACC is a switch-based provider of telecommunications services in the United States, Canada and the United Kingdom. The Company primarily provides long distance telecommunications services to a diversified customer base of businesses, residential customers and educational institutions. As a result of the Company's historical focus on providing long distance services in the Northeastern United States and recent regulatory changes, ACC has begun to provide local telephone service as a switch-based local exchange reseller in upstate New York and as a reseller of local exchange services in Ontario, Canada. ACC operates an advanced telecommunications network consisting of seven long distance international and domestic switches located in the U.S., Canada and the U.K., a local exchange switch located in the U.S., leased transmission lines, and network management systems designed to optimize traffic routing. The Company's objective is to grow its long distance telecommunications customer base in its existing markets and to establish itself in deregulating Western European markets that have high density telecommunications traffic, such as France and Germany, when the Company believes that business and regulatory conditions warrant. The key elements of the Company's business strategy are: (1) to broaden ACC's penetration of the U.S., Canadian and U.K. telecommunications markets by expanding its long distance, local and other service offerings and geographic reach; (2) to utilize ACC's operating experience as an early entrant in deregulating markets in the U.S., Canada and the U.K. to penetrate other deregulating telecommunications markets that have high density telecommunications traffic; (3) to achieve economies of scale and scope in the utilization of ACC's network; and (4) to seek acquisitions, investments or strategic alliances involving assets or businesses that are complementary to ACC's current operations. The Company's principal competitive strengths are: (1) ACC's sales and marketing organization and the customized service ACC offers to its customers; (2) ACC's ability to offer competitive prices which the Company believes generally are lower than prices charged by the major carriers in each of its markets; (3) ACC's position as an early entrant in the U.S., Canadian and U.K. markets as an alternative carrier; (4) ACC's focus on more profitable international telecommunications traffic between the U.S., Canada and the U.K.; and (5) ACC's switched-based networking capabilities. The Company believes that switch ownership reduces reliance on other carriers and enables the Company to efficiently route telecommunications traffic over multiple leased transmission lines and to control costs, call record data and customer information. The availability of existing transmission capacity in its markets makes leasing of transmission lines attractive to the Company and enables it to grow network usage without having to incur the significant capital and operating costs associated with the development and operation of a transmission line infrastructure. ACC primarily targets business customers with approximately $500 to $15,000 of monthly usage, selected residential customers and colleges and universities. The Company believes that, in addition to being price-driven, these customers tend to be focused on customer service, more likely to rely on a single carrier for their telecommunications needs and less likely to change carriers than larger commercial customers. The diversity of ACC's targeted customer base enhances network utilization by combining business-driven workday traffic with night and weekend off-peak traffic from student and residential customers. The Company strives to be more cost effective, flexible, innovative and responsive to the needs of its customers than the major carriers, which principally focus their direct sales efforts on large commercial accounts and residential customers. 5 THE OFFERING Class A Common Stock offered................. 1,750,000 shares Class A Common Stock to be outstanding after the offering (1)............................ 9,670,776 shares Use of proceeds.............................. To repay bank indebtedness, fund capital expenditures and for working capital and other general corporate purposes, including possible acquisitions. See "Use of Proceeds." Nasdaq Stock Market symbol................... ACCC
- -------- (1) Based on the number of shares outstanding on January 31, 1996. Does not include approximately (i) 1,485,394 shares of Class A Common Stock issuable upon the exercise of options and warrants outstanding as of January 31, 1996 at a weighted average exercise price of $16.17 per share, (ii) 625,000 shares of Class A Common Stock issuable upon the conversion of the Series A Preferred Stock outstanding as of January 31, 1996, which is convertible at $16.00 per share or (iii) 20,000 shares of Class A Common Stock issuable upon the exercise of additional options outstanding as of January 31, 1996 at an exercise price of $23.00 per share, which are subject to approval of the Company's shareholders. SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE AMOUNTS)
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1991 1992 1993 1994 1995 (1) --------- --------- --------- --------- --------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: United States........... $33,360 $39,278 $45,150 $54,599 $65,975 Canada.................. 17,766 42,402 60,643 67,728 84,421 United Kingdom.......... -- -- 153 4,117 38,470 --------- --------- --------- --------- --------- Total................. 51,126 81,680 105,946 126,444 188,866 Gross profit: United States........... $13,913 $15,587 $18,768 $23,568 $29,282 Canada.................. 4,870 13,779 17,046 22,010 32,025 United Kingdom.......... -- -- (154) 1,428 12,718 --------- --------- --------- --------- --------- Total................. 18,783 29,366 35,660 47,006 74,025 Income (loss) from operations (2).......... $3,446 $5,788 $(11,786) $(8,314) $218 Net income (loss) per common and common equivalent share applicable to common stock from continuing operations (3).......... $.36 $.52 $.24 $(1.60) $(.76) Weighted average number of common shares used in computing net income (loss) per common share................... 5,801,769 6,882,033 7,024,925 7,068,481 7,789,886
6
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1991 1992 1993 1994 1995 (1) -------- -------- -------- -------- ---------- OTHER FINANCIAL AND OPERATIONS DATA: EBITDA (4): United States.............. $ 5,473 $ 6,184 $ 6,017 $ 5,847 $ 8,653 Canada..................... 737 3,523 2,423 (203) 7,299 United Kingdom............. -- -- (1,587) (5,026) (4,120) -------- -------- -------- -------- ---------- Total.................... 6,210 9,707 6,853 618 11,832 ======== ======== ======== ======== ========== Billable minutes of use (in thousands) (5)............. 296,119 475,422 683,073 882,993 1,181,663 Customer accounts at period end........................ 25,846 50,318 98,400 202,991 310,815 Revenue per billable minute of use..................... $.17 $.17 $.16 $.14 $.16 Network cost per billable minute of use.............. $.11 $.11 $.10 $.09 $.10
DECEMBER 31, 1995 ------------------------ ACTUAL AS ADJUSTED (6) -------- --------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................ $ 518 $ 23,903 Total assets......................................... 123,984 147,369 Short-term debt, including current maturities of long term debt........................................... 4,885 4,885 Long-term debt, excluding current maturities......... 28,050 7,077 Redeemable preferred stock........................... 9,448 9,448 Shareholders' equity................................. 26,407 70,765
- -------- (1) Includes the results of operations of Metrowide Communications from August 1, 1995, the date of acquisition. (2) Reflects, in 1993, an asset write-down of $12,807. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- 1994 Compared With 1993." (3) Includes (i) in 1993, a gain on sale of common stock of the Company's Canadian subsidiary of $1.33 per share and (ii) in 1995, a loss of $.07 per share related to redeemable preferred stock dividends and accretion. (4) Represents income (loss) from operations plus depreciation and amortization and asset write-down ("EBITDA"). In 1993, the Company recorded an asset write-down of $12,807. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--1994 Compared With 1993." The Company has included information concerning EBITDA herein because it understands that such information is used by certain investors as one measure of an issuer's operating performance and historical ability to service debt. EBITDA is not determined in accordance with generally accepted accounting principles, is not indicative of cash used (provided) by operating activities and should not be considered in isolation or as an alternative to, or more meaningful than, measures of performance determined in accordance with generally accepted accounting principles. (5) Defined as billable voice long distance minutes of use. (6) Adjusted to give effect to this offering at an assumed public offering price of $27.50 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 7 RISK FACTORS Prospective purchasers of the Class A Common Stock should consider carefully the following risk factors, as well as the other information contained or incorporated by reference in this Prospectus, before purchasing shares of the Class A Common Stock offered hereby. RECENT LOSSES; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS Although the Company has recently experienced revenue growth on an annual basis, it has incurred net losses and losses from continuing operations during each of its last two fiscal years. There can be no assurance that revenue growth will continue or that the Company will achieve profitability in the future. The Company intends to focus in the near term on the expansion of its service offerings, including its local telephone business, and geographic markets, which may adversely affect cash flow and operating performance. As each of the telecommunications markets in which the Company operates continues to mature, growth in the Company's revenues and customer base is likely to decrease over time. The Company's operating results have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, some of which are outside of the Company's control, including general economic conditions, specific economic conditions in the telecommunications industry, the effects of governmental regulation and regulatory changes, user demand, capital expenditures and other costs relating to the expansion of operations, the introduction of new services by the Company or its competitors, the mix of services sold and the mix of channels through which those services are sold, pricing changes and new service introductions by the Company and its competitors and prices charged by suppliers. As a strategic response to a changing competitive environment, the Company may elect from time to time to make certain pricing, service or marketing decisions or enter into strategic alliances, acquisitions or investments that could have a material adverse effect on the Company's business, results of operations and cash flow. The Company's sales to other long distance companies have been increasing. Because these sales are at margins that are lower than those derived from most of the Company's other revenues, this increase may reduce the Company's gross margins as a percentage of revenue. See "--Risks Associated With Acquisitions, Investments and Strategic Alliances" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON TRANSMISSION FACILITIES-BASED CARRIERS AND SUPPLIERS The Company does not own telecommunications transmission lines. Accordingly, telephone calls made by the Company's customers are connected through transmission lines that the Company leases under a variety of arrangements with transmission facilities-based long distance carriers, some of which are or may become competitors of the Company, including AT&T Corp. ("AT&T"), Bell Canada and British Telecommunications PLC ("British Telecom"). Most inter-city transmission lines used by the Company are leased on a monthly or longer-term basis at rates that currently are less than the rates the Company charges its customers for connecting calls through these lines. Accordingly, the Company is vulnerable to changes in its lease arrangements, such as price increases and service cancellations. ACC's ability to maintain and expand its business is dependent upon whether the Company continues to maintain favorable relationships with the transmission facilities-based carriers from which the Company leases transmission lines, particularly in the U.K., where British Telecom and Mercury Communications Ltd. ("Mercury") are the two principal, dominant carriers. The Company's U.K. operations are highly dependent upon the transmission lines leased from British Telecom. The Company generally experiences delays in billings from British Telecom and needs to reconcile billing discrepancies with British Telecom before making payment. Although the Company believes that its relationships with carriers generally are satisfactory, the deterioration or termination in the Company's relationships with one or more of those carriers could have a material adverse effect upon the Company's business, results of operations and financial condition. Certain of the vendors from whom the Company leases transmission lines, including 22 regional operating companies ("RBOCs") and other local exchange carriers, currently are subject to tariff controls and other price constraints which in the future may be changed. Under recently enacted U.S. legislation, constraints 8 on the operations of the RBOCs have been dramatically reduced, which will bring additional competitors to the long distance market. In addition, regulatory proposals are pending that may affect the prices charged by the RBOCs and other local exchange carriers to the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "--Regulation" and "Business--Regulation." The Company currently acquires certain of its equipment from one vendor. A failure by a supplier to deliver quality products on a timely basis, or the inability to develop alternative sources if and as required, could result in delays which could have a material adverse effect on the Company's business, results of operations and financial condition. REGULATION Legislation that substantially revises the U.S. Communications Act of 1934 (the "U.S. Communications Act") was signed into law on February 8, 1996. The legislation provides specific guidelines under which the RBOCs can provide long distance services, which will permit the RBOCs to compete with the Company in the provision of domestic and international long distance services. The legislation opens all local service markets to competition from any entity (including long distance carriers, such as AT&T, cable television companies and utilities). Because the legislation opens the Company's markets to additional competition, particularly from the RBOCs, the Company's ability to compete is likely to be adversely affected. Moreover, as a result of and to implement the legislation, certain federal and other governmental regulations will be amended or modified, and any such amendment or modification could have a material adverse effect on the Company's business, results of operations and financial condition. In the U.S., the Federal Communications Commission ("FCC") and relevant state public service commissions ("PSCs") have the authority to regulate interstate and intrastate rates, respectively, ownership of transmission facilities, and the terms and conditions under which the Company's services are provided. Federal and state regulations and regulatory trends have had, and in the future are likely to have, both positive and negative effects on the Company and its ability to compete. The recent trend in both Federal and state regulation of telecommunications service providers has been in the direction of lessened regulation. In general, neither the FCC nor the relevant state PSCs currently regulate the Company's long distance rates or profit levels, but either or both may do so in the future. However, the general recent trend toward lessened regulation has also given AT&T, the largest long distance carrier in the U.S., increased pricing flexibility that has permitted it to compete more effectively with smaller interexchange carriers, such as the Company. There can be no assurance that changes in current or future Federal or state regulations or future judicial changes would not have a material adverse effect on the Company. In order to provide their services, interexchange carriers, including the Company, must generally purchase "access" from local exchange carriers to originate calls from and terminate calls in the local exchange telephone networks. Access charges presently represent a significant portion of the Company's network costs in all areas in which it operates. In the U.S., access charges generally are regulated by the FCC and the relevant state PSCs. Under the terms of the AT&T Divestiture Decree, a court order entered in 1982 which, among other things, required AT&T to divest its 22 wholly-owned RBOCs from its long distance division ("AT&T Divestiture Decree"), the RBOCs were required to price the "local transport" portion of such access charges on an "equal price per unit of traffic" basis. In November 1993, the FCC implemented new interim rules governing local transport access charges while the FCC considers permanent rules regarding new rate structures for transport pricing and switched access competition. These interim rules have essentially maintained the "equal price per unit of traffic" rule. However, under alternative access charge rate structures being considered by the FCC, local exchange carriers would be permitted to allow volume discounts in the pricing of access charges. If these rate structures are adopted, access charges for AT&T and other large interexchange carriers would decrease, and access charges for small interexchange carriers would increase. While the outcome of these proceedings is uncertain, should the FCC adopt permanent access charge rules along the lines of the proposed structures it is currently considering, the Company would be at a cost disadvantage with regard to access charges in comparison to AT&T and larger interexchange carrier competitors. 9 The Company currently competes with local exchange carriers in the provision of "short haul" toll calls completed within a Local Access and Transport Area ("LATA"), and will in the future, under provisions of recently enacted federal legislation, compete with such carriers in the long-haul, or inter-LATA, toll business. To complete long-haul and short-haul toll calls, the Company must purchase "access" from the local exchange carriers. The Company must generally price its toll services at levels equal to or below the retail rates established by the local exchange carriers for their own short-haul or long- haul toll rates. To the extent that the local exchange carriers are able to reduce the margin between the access costs to the Company and the retail toll prices charged by local exchange carriers, either by increasing access costs or lowering retail toll rates, or both, the Company will encounter adverse pricing and cost pressures in competing against local exchange carriers in both the short-haul and long-haul toll markets. In Canada, services provided by ACC Canada are subject to or affected by certain regulations of the Canadian Radio-Television and Telecommunications Commission (the "CRTC"). The CRTC annually reviews the "contribution charges" (the equivalent of access charges in the U.S.) it has assessed against the access lines leased by Canadian long distance resellers, including the Company, from the local telephone companies in Canada. The Company expects that, based on existing regulations and rulings, its Canadian contribution charges will increase by approximately Cdn. $1.5 million in 1997 over 1995 levels. Additional increases in these contribution charges could have a material adverse effect on the Company's business, results of operations and financial condition. The Canadian long distance telecommunications industry is the subject of ongoing regulatory change. These regulations and regulatory decisions have a direct and material effect on the ability of the Company to conduct its business. The recent trend of such regulations has been to open the market to commercial competition, generally to the Company's benefit. There can be no assurance, however, that any future changes in or additions to laws, regulations, government policy or administrative rulings will not have a material adverse effect on the Company's business, results of operation and financial condition. The telecommunications services provided by ACC U.K. are subject to and affected by regulations introduced by the U.K. telecommunications regulatory authority, The Office of Telecommunications ("Oftel"). Since the break up of the U.K. telecommunications duopoly consisting of British Telecom and Mercury in 1991, it has been the stated goal of Oftel to create a competitive marketplace from which detailed regulation could eventually be withdrawn. The regulatory regime currently being introduced by Oftel has a direct and material effect on the ability of the Company to conduct its business. Although the Company is optimistic about its ability to continue to compete effectively in the U.K. market, there can be no assurance that future changes in regulation and government will not have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Regulation." COMPETITION The long distance telecommunications industry is highly competitive and is significantly influenced by the marketing and pricing decisions of the larger industry participants. The industry has relatively insignificant barriers to entry, numerous entities competing for the same customers and high churn rates (customer turnover), as customers frequently change long distance providers in response to the offering of lower rates or promotional incentives by competitors. In each of its markets, the Company competes primarily on the basis of price and also on the basis of customer service and its ability to provide a variety of telecommunications services. The Company expects competition on the basis of price and service offerings to increase. Although many of the Company's university customers are under multi-year contracts, several of the Company's largest customers (primarily other long distance carriers) are on month-to-month contracts and are particularly price sensitive. Revenues from other resellers accounted for approximately 22%, 8% and 9%, of the revenues of ACC U.S., ACC Canada and ACC U.K., respectively, in 1995, and are expected to account for a higher percentage in the future. With respect to these customers, the Company competes almost exclusively on price. Many of the Company's competitors are significantly larger, have substantially greater financial, technical and marketing resources and larger networks than the Company, control transmission lines and have long-standing relationships with the Company's target customers. These competitors include, among others, 10 AT&T, MCI Telecommunications Corporation ("MCI") and Sprint Corp. ("Sprint") in the U.S.; Bell Canada, BC Telecom, Inc., Unitel Communications Inc. ("Unitel") and Sprint Canada (a subsidiary of Call-Net Telecommunications Inc.) in Canada; and British Telecom, Mercury and IDB WorldCom Services Inc. in the U.K. AT&T and other U.S. carriers are also expected to enter the U.K. market. The Company also competes with numerous other long distance providers, some of which focus their efforts on the same business customers targeted by the Company and selected residential customers and colleges and universities, the Company's other target customers. In addition, through its local telephone service business in New York, the Company competes with New York Telephone Company ("New York Telephone"), Frontier Corp., Citizens Telephone Co., MFS Communications Co., Inc. and Time Warner Cable and others, including cellular and other wireless providers. Furthermore, the recently announced joint venture between MCI and Microsoft Corporation ("Microsoft"), under which Microsoft will promote MCI's services, the recently announced joint venture among Sprint, Deutsche Telekom AG and France Telecom, and other strategic alliances, could also increase competitive pressures upon the Company and have a material adverse effect on the Company's business, results of operations and financial condition. In addition to these competitive factors, recent and pending deregulation in each of the Company's markets may encourage new entrants. For example, as a result of legislation recently enacted in the U.S., RBOCs will be allowed to enter the long distance market, AT&T, MCI and other long distance carriers will be allowed to enter the local telephone services market, and any entity (including cable television companies and utilities) will be allowed to enter the telecommunications market. In addition, the FCC has, on several occasions since 1984, approved or required price reductions by AT&T and, in October 1995, the FCC reclassified AT&T as a "non-dominant" carrier, which substantially reduces the regulatory constraints on AT&T. As the Company expands its geographic coverage, it will encounter increased competition. Moreover, the Company believes that competition in non-U.S. markets is likely to increase and become more similar to competition in the U.S. markets over time as such non-U.S. markets continue to experience deregulatory influences. Prices in the long distance industry have declined from time to time in recent years and, as competition increases in Canada and the U.K., prices are likely to continue to decrease. For example, Bell Canada substantially reduced its rates during the first quarter of 1994. The Company's competitors may reduce rates or offer incentives to existing and potential customers of the Company. To maintain its competitive position, the Company believes that it must be able to reduce its prices in order to meet reductions in rates, if any, by others. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Competition." The Company has only limited experience in providing local telephone services, having commenced providing such services in 1994, and, although the Company believes the local business will enhance its ability to compete in the long distance market, to date the Company has experienced an operating cash flow deficit in the operation of that business in the U.S. on a stand-alone basis. The Company's revenues from local telephone services in 1995 were $1.35 million. In order to attract local customers, the Company must offer substantial discounts from the prices charged by local exchange carriers and must compete with other alternative local companies that offer such discounts. The local telephone service business requires significant initial investments in capital equipment as well as significant initial promotional and selling expenses. Larger, better capitalized alternative local providers, including AT&T and Time Warner Cable, among others, will be better able to sustain losses associated with discount pricing and initial investments and expenses. There can be no assurance that the Company will achieve positive cash flow or profitability in its local telephone service business. NEED FOR ADDITIONAL CAPITAL The Company will need to continue to enhance and expand its operations in order to maintain its competitive position, expand its service offerings and geographic markets and continue to meet the increasing demands for service quality, availability and competitive pricing. As of the end of its last five fiscal years, the Company has experienced a working capital deficit. During 1995, the Company's EBITDA minus capital 11 expenditures and changes in working capital was $(7.0) million. In addition, the Company's indebtedness requires significant repayments over the next five years. The Company may need to raise additional capital from public or private equity or debt sources in order to finance its anticipated growth, including local service expansion, which is capital intensive, working capital needs, debt service obligations, contemplated capital expenditures and the optional redemption of the Series A Preferred Stock if it is not converted. In addition, the Company may need to raise additional funds in order to take advantage of unanticipated opportunities, including more rapid international expansion or acquisitions of, investments in or strategic alliances with companies that are complementary to the Company's current operations, or to develop new products or otherwise respond to unanticipated competitive pressures. If additional funds are raised through the issuance of equity securities, the percentage ownership of the Company's then current shareholders would be reduced and, if such equity securities take the form of Preferred Stock or Class B Common Stock, the holders of such Preferred Stock or Class B Common Stock may have rights, preferences or privileges senior to those of holders of Class A Common Stock. There can be no assurance that the Company will be able to raise such capital on satisfactory terms or at all. If the Company decides to raise additional funds through the incurrence of debt, the Company would need to obtain the consent of its lenders under the Credit Facility (as defined below) and would likely become subject to additional or more restrictive financial covenants. In the event that the Company is unable to obtain such additional capital or is unable to obtain such additional capital on acceptable terms, the Company may be required to reduce the scope of its presently anticipated expansion, which could materially adversely affect the Company's business, results of operations and financial condition and its ability to compete. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources" and "Description of Capital Stock." RISKS OF GROWTH AND EXPANSION The Company plans to expand its service offerings and principal geographic markets in the United States, Canada and the United Kingdom. In addition, the Company may establish a presence in deregulating Western European markets that have high density telecommunications traffic, such as France and Germany, when the Company believes that business and regulatory conditions warrant. There can be no assurance that the Company will be able to add service or expand its markets at the rate presently planned by the Company or that the existing regulatory barriers will be reduced or eliminated. The Company's rapid growth has placed, and in the future may continue to place, a significant strain on the Company's administrative, operational and financial resources and increased demands on its systems and controls. As the Company increases its service offerings and expands its targeted markets, there will be additional demands on the Company's customer support, sales and marketing and administrative resources and network infrastructure. There can be no assurance that the Company's operating and financial control systems and infrastructure will be adequate to maintain and effectively monitor future growth. The failure to continue to upgrade the administrative, operating and financial control systems or the emergence of unexpected expansion difficulties could materially adversely affect the Company's business, results of operations and financial condition. RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS A key component of the Company's strategy is its planned expansion in international markets. To date, the Company has only limited experience in providing telecommunications service outside the United States and Canada. There can be no assurance that the Company will be able to obtain the capital it requires to finance its expansion in international markets on satisfactory terms or at all. In many international markets, protective regulations and long-standing relationships between potential customers of the Company and their local providers create barriers to entry. Pursuit of international growth opportunities may require significant investments for an extended period before returns, if any, on such investments are realized. In addition, there can be no assurance that the Company will be able to obtain the permits and operating licenses required for it to operate, to hire and train employees or to market, sell and deliver high quality services in these markets. In addition to the uncertainty as to the Company's ability to expand its international presence, there are certain risks inherent to doing business on an international level, such as unexpected changes in regulatory requirements, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in 12 collecting accounts receivable, political risks, fluctuations in currency exchange rates, foreign exchange controls which restrict or prohibit repatriation of funds, technology exports and import restrictions or prohibitions, delays from custom brokers or government agencies, seasonal reductions in business activity during the summer months in Europe and certain other parts of the world and potentially adverse tax consequences resulting from operating in multiple jurisdictions with different tax laws, which could materially adversely impact the success of the Company's international operations. In many countries, the Company may need to enter into a joint venture or other strategic relationship with one or more third parties in order to successfully conduct its operations. As its revenues from its Canadian and U.K. operations increase, an increasing portion of the Company's revenues and expenses will be denominated in currencies other than U.S. dollars, and changes in exchange rates may have a greater effect on the Company's results of operations. There can be no assurance that such factors will not have a material adverse effect on the Company's future operations and, consequently, on the Company's business, results of operations and financial condition. In addition, there can be no assurance that laws or administrative practices relating to taxation, foreign exchange or other matters of countries within which the Company operates will not change. Any such change could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS To complete its billing, the Company must record and process massive amounts of data quickly and accurately. While the Company believes its management information system is currently adequate, it has not grown as quickly as the Company's business and substantial investments are needed. The Company has made arrangements with a consultant and a vendor for the development of new information systems and has budgeted approximately $6.0 million for this purpose in 1996. The Company believes that the successful implementation and integration of these new information systems is important to its continued growth, its ability to monitor costs, to bill customers and to achieve operating efficiencies, but there can be no assurance that the Company will not encounter delays or cost-overruns or suffer adverse consequences in implementing the systems. The principal vendor of the Company's software has a unique knowledge of such software and the Company may be dependent on the vendor for any modifications to the software. The Company believes that it currently is the only customer of the vendor and, as a result, the vendor is financially dependent on the Company. In addition, as the Company's suppliers revise and upgrade their hardware, software and equipment technology, there can be no assurance that the Company will not encounter difficulties in integrating the new technology into the Company's business or that the new systems will be appropriate for the Company's business. See "Business-- Information Systems." RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES As part of its business strategy, the Company expects to seek to develop strategic alliances both domestically and internationally and to acquire assets and businesses or make investments in companies that are complementary to its current operations. The Company has no present commitments or agreements with respect to any such strategic alliance, investment or acquisition. Any such future strategic alliances, investments or acquisitions would be accompanied by the risks commonly encountered in strategic alliances with or acquisitions of or investments in companies. Such risks include, among other things, the difficulty of assimilating the operations and personnel of the companies, the potential disruption of the Company's ongoing business, the inability of management to maximize the financial and strategic position of the Company by the successful incorporation of licensed or acquired technology and rights into the Company's service offerings, the maintenance of uniform standards, controls, procedures and policies and the impairment of relationships with employees and customers as a result of changes in management. In addition, the Company has experienced higher attrition rates with respect to customers obtained through acquisitions, and may continue to experience higher attrition rates with respect to any customers resulting from future acquisitions. Moreover, to the extent that any such acquisition, investment or alliance involved a business located outside the United States, the transaction would involve the risks associated with international expansion. See "--Risks Associated with International Expansion." There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered with such strategic alliances, investments or acquisitions. 13 In addition, if the Company were to proceed with one or more significant strategic alliances, acquisitions or investments in which the consideration consists of cash, a substantial portion of the Company's available cash (including proceeds of this offering) could be used to consummate the strategic alliances, acquisitions or investments. If the Company were to consummate one or more significant strategic alliances, acquisitions or investments in which the consideration consists of stock, shareholders of the Company could suffer a significant dilution of their interests in the Company. Many of the businesses that might become attractive acquisition candidates for the Company may have significant goodwill and intangible assets, and acquisitions of these businesses, if accounted for as a purchase, would typically result in substantial amortization charges to the Company. The financial impact of acquisitions, investments and strategic alliances could have a material adverse effect on the Company's business, financial condition and results of operations and could cause substantial fluctuations in the Company's quarterly and yearly operating results. See "Business--Acquisitions, Investments and Strategic Alliances." TECHNOLOGICAL CHANGES The telecommunications industry is characterized by rapid and significant technological advancements and introductions of new products and services utilizing new technologies. There can be no assurance that the Company will maintain competitive services or that the Company will obtain appropriate new technologies on a timely basis or on satisfactory terms. DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant degree upon the continued contributions of its management team and technical, marketing and sales personnel. The Company's employees may voluntarily terminate their employment with the Company at any time. Competition for qualified employees and personnel in the telecommunications industry is intense and, from time to time, there are a limited number of persons with knowledge of and experience in particular sectors of the telecommunications industry. The Company's success also will depend on its ability to attract and retain qualified management, marketing, technical and sales executives and personnel. The process of locating such personnel with the combination of skills and attributes required to carry out the Company's strategies is often lengthy. The loss of the services of key personnel, or the inability to attract additional qualified personnel, could have a material adverse effect on the Company's results of operations, development efforts and ability to expand. There can be no assurance that the Company will be successful in attracting and retaining such executives and personnel. Any such event could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management." RISK ASSOCIATED WITH FINANCING ARRANGEMENTS; DIVIDEND RESTRICTIONS The Company's financing arrangements are secured by substantially all of the Company's assets and require the Company to maintain certain financial ratios and restrict the payment of dividends. These financial arrangements will require the repayment of significant amounts and significant reductions in borrowing capacity thereunder during the next five years. The Company's secured lenders would be entitled to foreclose upon those assets in the event of a default under the financing arrangements and to be repaid from the proceeds of the liquidation of those assets before the assets would be available for distribution to the Company's other creditors and shareholders in the event that the Company is liquidated. In addition, the collateral security arrangements under the Company's existing financing arrangements may adversely affect the Company's ability to obtain additional borrowings or other capital. The Company may need to raise additional capital from equity or debt sources to finance its projected growth and capital expenditures contemplated for periods after 1996. See "--Need for Additional Capital" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." HOLDING COMPANY STRUCTURE ACC Corp. is a holding company, the principal assets of which are its operating subsidiaries in the U.S., Canada and the U.K. ACC Canada, a 70% owned subsidiary of ACC Corp., is a public company listed on the Toronto Stock Exchange and the Montreal Stock Exchange. The ability of ACC Canada to declare and pay 14 dividends is restricted by the terms of the agreement under which the Company's Series A Preferred Stock was issued. In addition, ACC Canada's ability to make other payments to ACC Corp. and its other subsidiaries may be dependent upon the taking of action by ACC Canada's Board of Directors, applicable Canadian and provincial law and stock exchange regulations, in addition to the availability of funds. At the present time, three of ACC Canada's seven directors are representatives of ACC Corp. ACC Corp.'s percentage ownership interest in ACC Canada may decrease over time as a result of stock issuances or sales or, alternatively, may increase over time as a result of stock purchases, investments or other transactions. ACC U.S., ACC Canada, ACC U.K. and other operating subsidiaries of the Company are subject to corporate law restrictions on their ability to pay dividends to ACC Corp. There can be no assurance that ACC Corp. will be able to cause its operating subsidiaries to declare and pay dividends or make other payments to ACC Corp. when requested by ACC Corp. The failure to pay any such dividends or make any such other payments could have a material adverse effect upon the Company's business, financial condition and results of operations. POTENTIAL VOLATILITY OF STOCK PRICE The market price of the Class A Common Stock has been, and following this offering may continue to be, highly volatile. See "Price Range of Class A Common Stock and Dividend Policy." Factors such as variations in the Company's revenue, earnings and cash flow, the difference between the Company's actual results and the results expected by investors and analysts and announcements of new service offerings, marketing plans or price reductions by the Company or its competitors could cause the market price of the Class A Common Stock to fluctuate substantially. In addition, the stock markets recently have experienced significant price and volume fluctuations that particularly have affected telecommunications companies and resulted in changes in the market prices of the stocks of many companies that have not been directly related to the operating performance of those companies. Such market fluctuations may materially adversely affect the market price of the Class A Common Stock. ANTI-TAKEOVER PROVISIONS The Company's Board of Directors has the authority to issue up to 1,990,000 additional shares of Preferred Stock and 25,000,000 shares of Class B Common Stock, and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the shareholders. The rights of the holders of any Class A Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock or Class B Common Stock that may be issued in the future. While the Company has no present intention to issue any additional shares of Preferred Stock or Class B Common Stock, any such issuance or the perception that such issuances may occur could have the effect of making it more difficult for a third party to acquire control of the Company. The issuance of Preferred Stock or Class B Common Stock could also decrease the amount of earnings and assets available for distribution to holders of Class A Common Stock or could adversely affect the rights and powers, including voting rights, of holders of Class A Common Stock. In addition, the Company is and, subject to certain conditions, will continue to be, subject to the anti-takeover provisions of the Delaware General Corporation Law, which could have the effect of delaying or preventing a change of control of the Company. Furthermore, the Company's Series A Preferred Stock is required to be redeemed and the Company's indebtedness under the Credit Agreement is required to be repaid upon a change in control, and certain contractual arrangements with executive officers and directors of the Company may have the effect of delaying or preventing changes in control or management of the Company. All of these factors could materially adversely affect the market price of the Company's Class A Common Stock. See "Description of Capital Stock--Certain Charter, By-law and Statutory Provisions and Other Anti-takeover Considerations." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Future sales of substantial numbers of shares of Class A Common Stock in the public market, or the perception that such sales could occur, could adversely affect the market price of the Class A Common Stock and make it more difficult for the Company to raise funds through equity offerings in the future. Several of the Company's principal shareholders hold a significant portion of the Company's outstanding Class A Common Stock and a decision by one or more of these shareholders to sell their shares could materially adversely affect the market price of the Class A Common Stock. See "Principal Shareholders." 15 Upon completion of this offering, the Company will have approximately 9,700,000 shares of Class A Common Stock outstanding, assuming (i) no exercise of the Underwriters' over-allotment option and (ii) no exercise of options or warrants outstanding as of January 31, 1996. Of the Class A Common Stock outstanding upon completion of this offering, the 1,750,000 shares of Class A Common Stock sold in this offering as well as approximately 4,200,000 shares previously issued by the Company will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except for any shares held by "affiliates" of the Company or persons who have been affiliates within the preceding three months. The remaining approximately 3,700,000 outstanding shares of Class A Common Stock are currently eligible for sale under Rule 144 or Rule 144(k). Approximately 1,235,000 shares of Class A Common Stock or securities exercisable for or convertible into Class A Common Stock held by directors, officers and certain other shareholders are subject to 120-day lock-up agreements with the Underwriters. See "Underwriters." The Commission has recently proposed amendments to Rule 144 and Rule 144(k) that would shorten by one year the applicable holding periods and could result in resales of restricted securities sooner than would be the case under Rule 144 and Rule 144(k) as currently in effect. The holders of 10,000 shares of Series A Preferred Stock (which as of January 31, 1996 are convertible into 625,000 shares of Class A Common Stock) and warrants to purchase 130,000 shares of Class A Common Stock are entitled to certain registration rights with respect to such shares. In addition, the Company registered on Form S-8 under the Securities Act approximately 2,163,000 shares of Class A Common Stock, and intends to register on Form S-8 an additional 500,000 shares of Class A Common Stock, issuable under certain options issued to employees as well as shares of Class A Common Stock issued or reserved for issuance under the Company's Employee Stock Purchase Plan. Subject to obtaining shareholder approval, the Company has adopted a stock option plan for non-employee directors and has granted options to purchase 20,000 shares thereunder. The Company intends to register on Form S-8 the 250,000 shares of Class A Common Stock issuable under options granted pursuant to such plan. See "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriters." 16 USE OF PROCEEDS The net proceeds to the Company from the offering are estimated to be approximately $44.4 million ($51.2 million if the Underwriters' over-allotment option is exercised in full), after deduction of estimated underwriting discounts and commissions and estimated offering expenses. The Company expects to use the net proceeds of this offering to repay all of its existing indebtedness under the Credit Facility ($19.0 million was outstanding as of January 31, 1996), $10.0 million to finance capital expenditures and the balance for working capital and general corporate purposes, including, as described below, possible future investments, acquisitions or strategic alliances. The Company expects to use the net proceeds of this offering to repay borrowings under its revolving credit facility with First Union National Bank of North Carolina and Fleet Bank of Connecticut (formerly Shawmut Bank Connecticut, N.A.), as agents (the "Agents"), which expires on July 1, 2000 (the "Credit Facility"), and thereafter to reborrow all or a portion of such funds as required for working capital and general corporate purposes, including investments, acquisitions and strategic alliances. Borrowings under the Credit Facility were used to repay previously existing lines of credit, to finance the Company's acquisition of Metrowide Communications, to pay licensing fees to a software development company relating to information systems, and to provide working capital and funding for general corporate purposes. The Credit Facility bears interest at a floating rate, the weighted average of which was 8.4% during 1995. In addition, the Company is obligated to pay the Agents a contingent interest payment in an amount ranging from $0.75 million to $2.1 million based on the appreciation in market value of 140,000 shares of Class A Common Stock from $14.92 per share. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company also expects to use approximately $10.0 million of the net proceeds of this offering to finance proposed capital expenditures, including expansion and upgrading of the Company's eight switches, further development and integration of its billing and information systems, and new product offerings, including frame relay and Internet services. The remainder of the net proceeds will be used for working capital and general corporate purposes. The Company's 1996 budget for capital expenditures is approximately $26.0 million and, therefore, the amount of net offering proceeds actually expended by the Company for the foregoing types of capital expenditures and for working capital and general corporate purposes may vary significantly depending on a number of factors, including future revenue growth, the amount of cash generated by the Company's operations and the progress of the Company's product and service development efforts. The Credit Facility currently would not allow the Company to make $26.0 million of capital expenditures in 1996. The Company is seeking an amendment to the Credit Facility to, among other things, permit increased capital expenditures. Proceeds from this offering also could be used for possible future investments, acquisitions or strategic alliances in companies that are complementary to the Company's current operations. See "Risk Factors--Risks Associated with Acquisitions, Investments and Strategic Alliances." While the Company periodically evaluates investment, acquisition and strategic alliance candidates, the Company has no present commitments or agreements with respect to any such investment, acquisition or strategic alliance. 17 PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY The Class A Common Stock is quoted on the Nasdaq National Market System ("Nasdaq Stock Market") under the symbol "ACCC." The following table sets forth, for the periods indicated, the high and low sale prices of the Class A Common Stock, as reported by the Nasdaq Stock Market, and the cash dividends declared per share of Class A Common Stock.
COMMON STOCK PRICE CASH DIVIDENDS ------------------- DECLARED PER HIGH LOW SHARE --------- --------- -------------- 1994: First Quarter....................... $26 1/4 $17 $0.03 Second Quarter...................... 24 1/4 13 0.03 Third Quarter....................... 19 3/4 12 3/4 0.03 Fourth Quarter...................... 19 13 3/4 0.03 1995: First Quarter....................... $19 1/4 $14 $0.03 Second Quarter...................... 17 13 0.03 Third Quarter....................... 19 1/4 14 1/2 -- Fourth Quarter...................... 24 1/8 15 3/4 -- 1996: First Quarter (through February 20, 1996).............................. $29 1/2 $22 1/4 --
For a recent last sale price reported on the Nasdaq Stock Market for the Class A Common Stock see the cover page of this Prospectus. As of January 31, 1996, the Company had approximately 477 holders of record of the Class A Common Stock. The Company ceased paying quarterly cash dividends on its Class A Common Stock in 1995 to use its cash to invest in the growth of its business. The Company anticipates that all future earnings, if any, generated from operations will be retained by the Company to develop and expand its business. Any future determination with respect to the payment of dividends on the Class A Common Stock will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's operating results, financing condition and capital requirements, the terms of then-existing indebtedness and preferred stock, general business conditions, Delaware corporate law limitations and such other factors as the Board of Directors deems relevant. The terms of the Company's Credit Facility prohibit the payment of dividends without the Agents' consent. In addition, the Company is prohibited, under the terms of the Company's Series A Preferred Stock, from paying or declaring any dividend upon the Company's Class A Common Stock unless the prior written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock is obtained. The Company's holding company structure may adversely affect the Company's ability to obtain payments when needed from ACC Corp.'s operating subsidiaries. See "Risk Factors--Holding Company Structure" and Note 5 of Notes to Consolidated Financial Statements. 18 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as of December 31, 1995 and as adjusted for the sale of shares of Class A Common Stock offered hereby (at an assumed price of $27.50 per share) and the application of the estimated net proceeds therefrom as described under "Use of Proceeds."
DECEMBER 31, 1995 ------------------------ ACTUAL AS ADJUSTED (1) ------- --------------- (DOLLARS IN THOUSANDS) Notes payable......................................... $ 1,966 $ 1,966 ======= ======= Current maturities of long-term debt.................. $ 2,919 $ 2,919 ======= ======= Long-term debt, including capital lease obligations and Credit Facility.................................. $28,050 $ 7,077 Series A Preferred Stock, $1.00 par value, $1,000 liquidation value, cumulative, convertible; 10,000 shares authorized, issued and outstanding, actual and as adjusted.......................................... 9,448 9,448 Minority interest..................................... 1,428 1,428 Shareholders' equity: Preferred Stock, $1.00 par value; 1,990,000 shares authorized, actual and as adjusted; and no shares issued or outstanding, actual and as adjusted...... -- -- Class A Common Stock $.015 par value; 50,000,000 shares authorized, actual and as adjusted; 8,617,259 shares issued and 7,890,670 shares outstanding, actual; and 10,367,259 shares issued and 9,640,670 shares outstanding, as adjusted (2)....................................... 129 155 Class B Common Stock, $.015 par value; 25,000,000 shares authorized, actual and as adjusted; and no shares issued or outstanding, actual and as adjusted........................................... -- -- Capital in excess of par value...................... 32,911 77,243 Cumulative translation adjustment................... (950) (950) Retained earnings................................... (4,073) (4,073) Treasury stock, 726,589 shares of Class A Common Stock, actual and as adjusted...................... (1,610) (1,610) ------- ------- Total shareholders' equity........................ 26,407 70,765 ------- ------- Total capitalization............................ $65,333 $88,718 ======= =======
- -------- (1) Following completion of this offering, the Company intends to use a portion of the net proceeds received by it therefrom to repay all indebtedness outstanding under the Credit Facility and, thereafter, will reborrow funds under the Credit Facility as required to finance its working capital requirements and for general corporate purposes. At January 31, 1996, $19.0 million was outstanding under the Credit Facility. See "Use of Proceeds." (2) Does not include approximately (i) 1,485,394 shares of Class A Common Stock issuable upon the exercise of options and warrants outstanding as of January 31, 1996 at a weighted average exercise price of $16.17 per share, (ii) 625,000 shares (as of January 31, 1996) of Class A Common Stock issuable upon the conversion of the Series A Preferred Stock outstanding, which is convertible at $16.00 per share or (iii) 20,000 shares of Class A Common Stock issuable upon the exercise of additional options outstanding as of January 31, 1996 at an exercise price of $23.00 per share, which are subject to approval of the Company's shareholders. See "Description of Capital Stock." 19 SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATIONS DATA The following selected historical consolidated financial data for each of the years presented have been derived from the Company's audited consolidated financial statements. The consolidated financial statements of the Company as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, together with the notes thereto and related report of Arthur Andersen LLP, independent accountants, are included elsewhere in this Prospectus. The following data should be read in conjunction with, and is qualified by, the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere herein.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1991 1992 1993 1994 1995 (1) --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Toll revenue.......... $ 49,563 $ 78,988 $ 100,646 $ 118,331 $ 175,269 Leased lines and other................ 1,563 2,692 5,300 8,113 13,597 --------- --------- --------- --------- --------- Total revenue....... 51,126 81,680 105,946 126,444 188,866 Network costs........... 32,343 52,314 70,286 79,438 114,841 --------- --------- --------- --------- --------- Gross profit............ 18,783 29,366 35,660 47,006 74,025 Other operating expenses: Depreciation and amortization......... 2,764 3,919 5,832 8,932 11,614 Selling expenses...... 2,295 3,350 8,726 14,497 21,617 General and administrative....... 10,278 16,309 20,081 29,731 40,576 Other charges (2)..... -- -- -- 2,160 -- Asset write-down (3).. -- -- 12,807 -- -- --------- --------- --------- --------- --------- Total other operating expenses. 15,337 23,578 47,446 55,320 73,807 --------- --------- --------- --------- --------- Income (loss) from operations............. 3,446 5,788 (11,786) (8,314) 218 Other income (expense): Interest income....... 39 276 205 124 198 Interest expense...... (240) (197) (420) (2,023) (5,131) Terminated merger costs................ -- -- -- (200) -- Gain on sale of subsidiary stock..... -- -- 9,344 -- -- Foreign exchange gain (loss)............... -- -- (1,094) 169 (110) --------- --------- --------- --------- --------- Total other income (201) 79 8,035 (1,930) (5,043) (expense).......... --------- --------- --------- --------- --------- Income (loss) from continuing operations before provision for (benefit from) income taxes and minority interest............... 3,245 5,867 (3,751) (10,244) (4,825) Provision for (benefit from) income taxes..... 1,155 2,267 (3,743) 3,456 396 Minority interest in loss (earnings) of consolidated subsidiary............. -- -- 1,661 2,371 (133) --------- --------- --------- --------- --------- Income (loss) from continuing operations.. 2,090 3,600 1,653 (11,329) (5,354) Loss from discontinued operations (net of income tax benefit of $616 in 1991, $878 in 1992 and $667 in 1993). (1,197) (1,660) (1,309) -- -- Gain on disposal of discontinued operations (net of income tax provision of $8,350 in 1993).................. -- -- 11,531 -- -- --------- --------- --------- --------- --------- Net income (loss)....... $ 893 $ 1,940 $ 11,875 $ (11,329) $ (5,354) ========= ========= ========= ========= ========= Net income (loss) per common and common equivalent share applicable to common stock from continuing opera- tions (4)............. $ .36 $ .52 $ .24 $ (1.60) $ (.76) Discontinued opera- tions................ (.21) (.24) (.18) -- -- Gain on disposal of discontinued operations........... -- -- 1.64 -- -- --------- --------- --------- --------- --------- Net income (loss) per common and common equivalent share (4).......... $ .15 $ .28 $ 1.70 $ (1.60) $ (.76) ========= ========= ========= ========= ========= Weighted average number of common shares....... 5,801,769 6,882,033 7,024,925 7,068,481 7,789,886 ========= ========= ========= ========= =========
(table continued, and footnotes appear, on next page) 20 (continued from previous page)
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1991 1992 1993 1994 1995 (1) ------- ------- -------- ------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE DATA) OTHER FINANCIAL AND OPERATIONS DATA: Net cash provided by (used in) operating activities.......... $ 3,141 $ 7,761 $(11,828) $ 1,093 $ 3,967 ======= ======= ======== ======= ========= EBITDA(5) United States................ $ 5,473 $ 6,184 $ 6,017 $ 5,847 $ 8,653 Canada....................... 737 3,523 2,423 (203) 7,299 United Kingdom............... -- -- (1,587) (5,026) (4,120) ------- ------- -------- ------- --------- Total...................... $ 6,210 $ 9,707 $ 6,853 $ 618 $ 11,832 ======= ======= ======== ======= ========= Billable minutes of use (in thousands)(6)................. 296,119 475,422 683,073 882,993 1,181,663 Customer accounts at period end........................... 25,846 50,318 98,400 202,991 310,815 Revenue per billable minute of use........................... $ .17 $ .17 $ .16 $ .14 $ .16 Network cost per billable minute of use................. $ .11 $ .11 $ .10 $ .09 $ .10 CONSOLIDATED BALANCE SHEET DATA (7): Cash and cash equivalents...... $ 327 $ 353 $ 1,467 $ 1,021 $ 518 Current assets................. 11,120 16,251 22,476 28,045 45,726 Current liabilities............ 12,577 27,889 23,191 32,016 56,074 Net working capital (deficit).. (1,457) (11,638) (715) (3,971) (10,348) Property, plant and equipment, net........................... 15,794 21,951 27,077 44,081 56,691 Total assets................... 29,292 45,450 61,718 84,448 123,984 Short-term debt, including current maturities of long term debt .................... 3,071 11,525 2,424 1,613 4,885 Long-term debt, excluding current maturities............ 6,111 12,747 1,795 29,914 28,050 Redeemable preferred stock..... -- -- -- -- 9,448 Shareholders' equity........... 21,670 22,711 31,506 19,086 26,407
- -------- (1) Includes the results of operations of Metrowide Communications from August 1, 1995, the date of acquisition. (2) Represents $2.2 million of charges incurred in 1994 in connection with conversion of the Company's network to equal access for its Canadian customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--1995 Compared With 1994." (3) In 1993, the Company recorded an asset write-down of $12,807. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--1994 Compared With 1993." (4) Includes (i) in 1993, a gain on sale of common stock of the Company's Canadian subsidiary of $1.33 per share and (ii) in 1995, a loss of $.07 per share related to redeemable preferred stock dividends and accretion. (5) Represents income (loss) from operations plus depreciation and amortization and asset write-down. In 1993, the Company recorded an asset write-down of $12,807. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--1994 Compared With 1993." The Company has included information concerning EBITDA herein because it understands that such information is used by certain investors as one measure of an issuer's operating performance and historical ability to service debt. EBITDA is not determined in accordance with generally accepted accounting principles, is not indicative of cash used (provided) by operating activities and should not be considered in isolation or as an alternative to, or more meaningful than, measures of performance determined in accordance with generally accepted accounting principles. (6) Defined as billable voice long distance minutes of use. (7) Balance sheet data from discontinued operations is excluded. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes certain forward-looking statements. For a discussion of important factors including, but not limited to continued development of the Company's markets, actions of regulatory authorities and competitors and dependence on management information systems, that could cause actual results to differ materially from the forward-looking statements, see "Risk Factors" and the Company's periodic reports incorporated herein by reference. GENERAL The Company's revenue is comprised of toll revenue and leased lines and other revenue. Toll revenue consists of revenue derived from ACC's long distance and operator-assisted services. Leased lines and other revenue consists of revenue derived from the resale of local exchange services, data line services, direct access lines and monthly subscription fees. Network costs consist of expenses associated with the leasing of transmission lines, access charges and certain variable costs associated with the Company's network. The following table shows the total revenue (net of intercompany revenue) and billable minutes of use attributable to the Company's U.S., Canadian and U.K. operations during each of 1993, 1994 and 1995:
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1993 1994 1995 ---------------- ---------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- --------- ------- (DOLLARS AND MINUTES IN THOUSANDS) TOTAL REVENUE: United States............... $ 45,150 42.6% $ 54,599 43.2% $ 65,975 34.9% Canada...................... 60,643 57.2 67,728 53.6 84,421 44.7 United Kingdom.............. 153 .2 4,117 3.2 38,470 20.4 -------- ----- -------- ----- --------- ----- Total..................... $105,946 100.0% $126,444 100.0% $ 188,866 100.0% ======== ===== ======== ===== ========= ===== BILLABLE MINUTES OF USE: United States............... 378,778 55.5% 445,619 50.5% 486,618 41.2% Canada...................... 304,295 44.5 422,149 47.8 522,764 44.2 United Kingdom.............. -- -- 15,225 1.7 172,281 14.6 -------- ----- -------- ----- --------- ----- Total..................... 683,073 100.0% 882,993 100.0% 1,181,663 100.0% ======== ===== ======== ===== ========= =====
The following table presents certain information concerning toll revenue per billable minute and network cost per billable minute attributable to the Company's U.S., Canadian and U.K. operations during each of 1993, 1994 and 1995:
1993 1994 1995 ----- ----- ----- TOLL REVENUE PER BILLABLE MINUTE: United States................................................ $.115 $.115 $.126 Canada....................................................... .187 .149 .146 United Kingdom............................................... -- .268 .220 NETWORK COST PER BILLABLE MINUTE: United States................................................ $.070 $.070 $.075 Canada....................................................... .143 .108 .100 United Kingdom............................................... -- .177 .149
The Company believes that its historic revenue growth as well as its historic network costs and results of operations for each of its U.S., Canadian and U.K. operations generally reflect the state of development of the Company's operations, the Company's customer mix and the competitive and deregulatory environment in each of those markets. The Company entered the U.S., Canadian and U.K. telecommunications markets in 1982, 1985 and 1993, respectively. 22 Deregulatory influences have affected the telecommunications industry in the U.S. since 1984 and the U.S. market has experienced considerable competition for a number of years. The competitive influences on the pricing of ACC U.S.'s services and network costs have been stabilizing during the past few years. This may change in the future as a result of recent U.S. legislation that further opens the market to competition, particularly from RBOCs. The Company expects competition based on price and service offerings to increase. See "Risk Factors--Regulation" and "Risk Factors--Competition." Because the deregulatory trend in Canada, which commenced in 1989, has increased competition, ACC Canada experienced significant downward pressure on the pricing of its services during 1994. The Company expects such downward pressure to continue, although it is expected that the pricing pressure may abate over time as the market matures. The impact of this pricing pressure on revenues of ACC Canada is being offset, in part, by an increase in the Canadian residential and student billable minutes of usage as a percentage of total Canadian billable minutes of usage. Toll revenue per billable minute attributable to residential and student customers in Canada generally exceeds the toll revenue per billable minute attributable to commercial customers. The Company expects that the net effect of changes to contribution charges will be minimal in 1996 and will cause an increase of approximately Cdn $1.5 million in the Company's 1997 network costs. However, additional reductions in contribution rates may offset this increase. The Company also believes that its network costs per billable minute in Canada may decrease during periods after 1996 if there is an anticipated increase in long distance transmission facilities available for lease from Canadian transmission facilities-based carriers as a result of expected growth in the number and capacity of transmission networks in that market. The foregoing forward-looking statements are based upon expectations of actions that may be taken by third parties, including Canadian regulatory authorities and transmission facilities-based carriers. If such third parties do not act as expected, the Company's actual results may differ materially from the foregoing discussion. The Company believes that, because deregulatory influences have only recently begun to impact the U.K. telecommunications industry, the Company will continue to experience a significant increase in revenue from that market during the next few years. The foregoing belief is based upon expectations of actions that may be taken by U.K. regulatory authorities and the Company's competitors; if such third parties do not act as expected, the Company's revenues in the U.K. might not increase. If ACC U.K. were to experience increased revenues, the Company believes it should be able to enhance its economies of scale and scope in the use of the fixed cost elements of its network. Nevertheless, the deregulatory trend in that market is expected to result in competitive pricing pressure on the Company's U.K. operations which could adversely affect revenues and margins. Since the U.K. market for transmission facilities is dominated by British Telecom and Mercury, the downward pressure on prices for services offered by ACC U.K. may not be accompanied by a corresponding reduction in ACC U.K.'s network costs and, consequently, could adversely affect the Company's business, results of operations and financial condition, particularly in the event revenue derived from the Company's U.K. operations accounts for an increasing percentage of the Company's total revenue. Moreover, the Company's U.K. operations are highly dependent upon the transmission lines leased from British Telecom. See "Risk Factors--Dependence on Transmission Facilities-Based Carriers and Suppliers." As each of the telecommunications markets in which it operates continues to mature, growth in its revenue and customer base in each such market is likely to decrease over time. The Company believes that competition in non-U.S. markets is likely to increase and become more like competition in the U.S. markets over time as such non-U.S. markets continue to experience deregulatory influences. Prices in the long distance industry have declined from time to time in recent years and, as competition in Canada and the U.K. increases, prices are likely to continue to decrease. Since the commencement of the Company's operations, the Company has undertaken a program of developing and expanding its service offerings, geographic focus and network. In connection with this development and expansion, the Company has made significant investments in telecommunications circuits, switches, equipment and software. These investments generally are made significantly in advance of anticipated customer growth and resulting revenue. The Company also has increased its sales and marketing, customer support, network operations and field services commitments in anticipation of the expansion of its customer base and targeted geographic markets. The Company expects to continue to expand the breadth and scale of its 23 network and related sales and marketing, customer support and operations activities. These expansion efforts are likely to cause the Company to incur significant increases in expenses from time to time, in anticipation of potential future growth in the Company's customer base and targeted geographic markets. The Company's operating results have fluctuated in the past and they may continue to fluctuate significantly in the future as a result of a variety of factors, some of which are beyond the Company's control. The Company expects to focus in the near term on building and increasing its customer base, service offerings and targeted geographic markets, which will require it to increase significantly its expenses for marketing, and development of its network and new services and may adversely impact operating results from time to time. The Company's sales to other long distance carriers have been increasing. Revenues from other resellers accounted for approximately 22%, 8% and 9% of the revenues of ACC U.S., ACC Canada and ACC U.K., respectively, in 1995, and are expected to account for a higher percentage in the future. With respect to these customers, the Company competes almost exclusively on price, does not have long term contracts and generates lower gross margins as a percentage of revenue. See "Risk Factors--Recent Losses; Potential Fluctuations in Operating Results." RESULTS OF OPERATIONS The following table presents, for the three years ended December 31, 1995, certain statement of income data expressed as a percentage of total revenue:
YEAR ENDED DECEMBER 31, ----------------------- 1993 1994 1995 (1) ----- ----- -------- Revenue: Toll revenue......................................... 95.0% 93.6% 92.8% Leased lines and other............................... 5.0 6.4 7.2 ----- ----- ----- Total revenue...................................... 100.0 100.0 100.0 Network costs.......................................... 66.3 62.8 60.8 ----- ----- ----- Gross profit........................................... 33.7 37.2 39.2 Other operating expenses: Depreciation and amortization........................ 5.5 7.1 6.1 Selling expenses..................................... 8.2 11.5 11.4 General and administrative........................... 19.0 23.5 21.5 Other charges........................................ -- 1.7 -- Asset write-down..................................... 12.1 -- -- ----- ----- ----- Total other operating expenses..................... 44.8 43.8 39.0 ----- ----- ----- Income (loss) from operations.......................... (11.1) (6.6) .2 Total other income (expense)........................... 7.6 (1.5) (2.7) Loss from continuing operations before provision for (benefit from) income taxes and minority interest..... (3.5) (8.1) (2.5) Provision for (benefit from) income taxes.............. (3.5) 2.7 .2 Minority interest in (earnings) loss of consolidated subsidiary............................................ 1.6 1.9 (0.1) ----- ----- ----- Income (loss) from continuing operations............... 1.6% (8.9)% (2.8)% ===== ===== =====
- -------- (1) Includes the results of operations of Metrowide Communications from August 1, 1995, the date of acquisition. 1995 COMPARED WITH 1994 Revenue. Total revenue for 1995 increased by 49.4% to $188.9 million from $126.4 million in 1994, reflecting growth in both toll revenue and leased lines and other revenue. Toll revenue for 1995 increased by 48.1% to $175.2 million from $118.3 million in 1994. In the United States, toll revenue increased 19.3% as a result of a 9.2% increase in billable minutes of use and a more favorable mix of toll services provided, offset slightly by a decrease in prices per minute. The volume increases are a result of increased revenue attributable to other carriers, large commercial customers and universities and colleges, and an increased focus on small to medium-sized commercial customers in the Company's service region. In Canada, toll revenue increased 20.9%, primarily as a result of a 23.8% increase in billable minutes (primarily because of a 47.3% increase in the number 24 of customer accounts), offset by a slight decline in prices. The price declines are a result of the price competition, particularly in Canada, in 1994 which decreased rates in the middle of that year. Since the end of 1994, ACC's average revenues per minute have been increasing slightly as a result of the increasing percentage of U.K. revenues and the Company's successful introduction of higher price per minute products. In the United Kingdom, toll revenue increased 830.7%, due to significant volume increases (including a 310% increase in the number of customer accounts), offset by lower prices that resulted from entering the commercial and residential markets and from competitive pricing pressure. Exchange rates did not have a material impact on revenue in either the U.K. or in Canada. At December 31, 1995, the Company had approximately 311,000 customer accounts compared to approximately 203,000 customer accounts at December 31, 1994, an increase of 53%. For 1995, leased lines and other revenue increased by 67.6% to $13.6 million from $8.1 million in 1994. This increase was due to the Metrowide Communications acquisition as of August 1, 1995, local service revenue generated through the university program in the U.S. and the local exchange operations in upstate New York, which generated nominal revenues in 1994. Network Costs. Network costs increased to $114.8 million for 1995, from $79.4 million in 1994, due to the increase in billable long distance minutes. However, network costs, expressed as a percentage of revenue, decreased to 60.8% for 1995 from 62.8% in 1994 due to reduced access charges and increased volume efficiencies in Canada and volume efficiencies in the U.K. Other Operating Expenses. Depreciation and amortization expense increased to $11.6 million for 1995 from $8.9 million in 1994. Expressed as a percentage of revenue, these costs decreased to 6.1% in 1995 from 7.1% in 1994, reflecting the increases in revenue realized during 1995. The $2.7 million increase in depreciation and amortization expense was primarily attributable to assets placed in service in the fourth quarter of 1994 and during 1995, particularly equipment at U.S. university sites, switching centers in London and Manchester in the U.K., and switch upgrades in Rochester, Syracuse, Vancouver and Toronto. Amortization associated with the customer base and goodwill recorded in the Metrowide Communications acquisition also contributed to the increase. Selling expenses for 1995 increased by 49.1% to $21.6 million compared with $14.5 million in 1994. Expressed as a percentage of revenue, selling expenses were 11.4% for 1995 compared to 11.5% for 1994. The $7.1 million increase in selling expenses was primarily attributable to increased marketing costs and sales commissions associated with the rapid growth of the Company's operations in Canada and the U.K. General and administrative expenses for 1995 were $40.6 million compared with $29.7 million in 1994. Expressed as a percentage of revenue, general and administrative expenses were 21.5% for 1995, compared to 23.5% in 1994. The $10.9 million increase in general and administrative expenses was primarily attributable to increased personnel costs and customer service costs associated with the growth of the Company's customer bases and geographic expansion in each country. Included in the 1995 costs was $1.3 million related to management restructuring costs. These costs consisted of a $0.8 million payment in consideration of a non-compete agreement with the Chairman of the Board in connection with his resignation as Chief Executive Officer and $0.5 million related to severance expenses relating to three other members of executive management. Also included in general and administrative expenses for 1995 was approximately $1.8 million related to the Company's local service market sector in New York State. Other Charges. During the third quarter of 1994, the Company initiated the process of converting its network to equal access for its Canadian customers. Costs associated with this process included maintaining duplicate network facilities during transition, recontacting customers and the administrative expenses associated with accumulating the data necessary to convert the Company's customer base to equal access. This process was completed during the fourth quarter of 1994 at a total cost of $2.2 million, which has been reflected as a charge to income from operations for 1994. Other Income (Expense). Net interest expense increased to $4.9 million for 1995 compared to $1.9 million in 1994, due primarily to the Company's increased borrowings on revolving lines of credit related to financing of university projects in the U.S., expansion of the U.K. and the local service businesses during 1995, write-off of deferred financing costs related to the Company's lines of credit which were refinanced in July 1995, and 25 debt service costs associated with 12% subordinated notes issued in May 1995. On September 1, 1995, the subordinated notes were exchanged for Series A Preferred Stock and, consequently, there will be no further interest expense associated with the 12% subordinated notes. The Series A Preferred Stock accrues dividends at the rate of 12% per annum. Upon any conversion of Series A Preferred Stock, the accrued and unpaid dividends thereon will be extinguished and no longer deemed payable. See "Description of Capital Stock." Foreign exchange gains and losses reflect changes in the value of Canadian and British currencies relative to the U.S. dollar for amounts lent to foreign subsidiaries. Foreign exchange rate changes resulted in a net loss of $0.1 million for 1995, compared to a $0.2 million gain in 1994. The Company continues to hedge all foreign currency transactions in an attempt to minimize the impact of transaction gains and losses on the income statement. The Company does not engage in speculative foreign currency transactions. During 1994, the Company increased its income tax provision to provide for a valuation allowance equal to 100% of the amount of the Company's foreign tax benefits which had been recorded at December 31, 1993. No income tax benefits have been recorded for the 1995 operating losses in Canada or the U.K. due to the uncertainty of recognizing the income tax benefit of those losses in the future. Minority interest in loss of consolidated subsidiary reflects the portion of the Company's Canadian subsidiary's income or loss attributable to the approximately 30% of that subsidiary's common stock that is publicly traded in Canada. For 1995, minority interest in earnings of the consolidated subsidiary was a loss of $0.1 million compared to a gain of $2.4 million in 1994. For the foregoing reasons, the Company's net loss for 1995 was $5.4 million, compared to $11.3 million in 1994. 1994 COMPARED WITH 1993 Revenue. Total revenue for 1994 increased by 19.3% to $126.4 million from $105.9 million in 1993, reflecting growth in toll revenue and leased lines and other revenue. Toll revenue for 1994 increased by 17.6% to $118.3 million from $100.6 million in 1993. This increase was due to the continued expansion of the Company's university program in the U.S., Canada, and the U.K., and growth in both the commercial and residential customer bases in Canada through affinity programs and expansion throughout Western Canada. At December 31, 1994, the Company had approximately 203,000 customer accounts compared to approximately 98,000 customer accounts at December 31, 1993, an increase of more than 100%. For 1994, leased lines and other revenue increased by 53.1% to $8.1 million from $5.3 million in 1993. This increase was due to growth in data line sales in Canada as well as increased local service revenue generated through the university program in the U.S. Network Costs. Network costs increased to $79.4 million for 1994, from $70.3 million in 1993, due to the increase in billable long distance minutes. Network costs, as a percentage of revenue, decreased to 62.8% for 1994 from 66.3% in 1993 due to the Company's more efficient utilization of its leased facilities through economies of scale, reduced contribution rates in Canada, and a more favorable mix of traffic from increased residential and student usage during off peak hours. Other Operating Expenses. Depreciation and amortization expense increased to $8.9 million for 1994, from $5.8 million in 1993. Expressed as a percentage of revenue, these costs increased to 7.1% in 1994 from 5.5% in 1993, reflecting the cost of investments in additional equipment in the U.S., Canada and the U.K. incurred in advance of anticipated billable minute volume growth. The $3.1 million increase in depreciation and amortization expense was primarily attributable to assets placed in service in the fourth quarter of 1993 and the first three quarters of 1994 related to the Company's continued expansion of its network throughout Canada, the installation of additional switches and increased on-site equipment at universities in the U.S. Selling expenses for 1994 increased by 66.1% to $14.5 million from $8.7 million in 1993. Expressed as a percentage of revenue, selling expenses were 11.5% for 1994 compared to 8.2% in 1993. This increase was primarily attributable to the aggressive expansion of the Company's marketing territory into Western Canada, 26 the expansion following the installation of a switch in Vancouver, British Columbia, the opening of sales offices in Calgary, Alberta and Winnipeg, Manitoba and the start-up of a nationwide marketing campaign in the U.K. during the second half of 1994. During 1994, the Company added over 100,000 customers compared to approximately 46,000 added in 1993. The total costs of the marketing effort related to these customers are reflected in the results for the year while the revenue generated by the majority of these customers (universities and students) did not begin until the end of the third quarter corresponding to the beginning of the fall semester for most colleges and universities. General and administrative expenses for 1994 increased by 48.1% to $29.7 million from $20.1 million in 1993. Expressed as a percentage of revenue, general and administrative expenses were 23.5% for 1994 compared to 19.0% in 1993. The increase was primarily attributable to increased personnel costs and customer service costs associated with the growth of the Company's customer bases in each country. Also included in general and administrative expenses for 1994 was approximately $3.0 million in start-up costs related to the Company's entry into the local service market sector in New York state which occurred during the fourth quarter of 1994. During 1993, the Company recorded a non-cash expense of $12.8 million related to the write-down of the carrying value of certain assets of its U.S. and Canadian operations. This charge included approximately $5.1 million relating to certain fixed assets, including equipment used in connection with a microwave network deemed obsolete due to technological changes, $1.2 million related to the goodwill and customer bases from U.S. acquisitions, $2.8 million pertaining to an acquired customer base and accounts receivable relating to acquisitions made by ACC Canada and $3.8 million relating to autodialing equipment of ACC Canada resulting from the anticipated implementation by the CRTC of equal ease of access regulations in July 1994. Other Income (Expense). Net interest expense increased to $1.9 million for 1994 compared to $0.2 million in 1993, due primarily to the Company's increased borrowings on lines of credit throughout 1994. During 1994, the Company incurred terminated merger costs of $0.2 million resulting from a transaction which was not completed. During 1993, the Company recognized gains of $9.3 million from the sale of stock in its Canadian subsidiary and $10.2 million (net of provision for income taxes) from the sale of the Company's cellular assets. Foreign exchange gains and losses reflect changes in the value of Canadian and British currencies relative to the U.S. dollar for amounts lent to these foreign subsidiaries. Foreign exchange rate changes resulted in a net gain of $0.2 million for 1994, compared to a $1.1 million loss in 1993 due to the Company's program of hedging against foreign currency exposures for intercompany indebtedness which began at the end of 1993. During 1994, the Company increased its income tax provision to provide for a valuation allowance equal to 100% of the amount of the Company's foreign tax benefits which had been recorded at December 31, 1993. These benefits had been accrued based on the Company's history of profitability in Canada. However, given the magnitude of the Canadian subsidiary's losses in 1994, the Company believed that a valuation allowance was necessary to reflect the uncertainty of realizing the income tax benefits of those losses in the future. Minority interest in loss of consolidated subsidiary reflects the portion of the Company's Canadian subsidiary's income or loss attributable to the approximately 30% of that subsidiary's common stock that is publicly traded in Canada. For 1994, minority interest in loss of consolidated subsidiary increased to $2.4 million from $1.7 million in 1993 due to the increase in net losses generated by ACC Canada in 1994 when compared to 1993. During the third quarter of 1993, the Company recognized a gain of $11.5 million, net of taxes, from the sale of the operating assets and liabilities of its former cellular subsidiary, Danbury Cellular Telephone Co. The operating loss from these discontinued operations was $1.3 million for 1993, resulting in a net gain on the disposition of these operations of $10.2 million. For the foregoing reasons, the Company's net loss for 1994 was $11.3 million compared to net income of $11.9 million in 1993. 27 QUARTERLY RESULTS The following tables set forth certain unaudited quarterly financial data for the preceding eight quarters through the quarter ended December 31, 1995. In the opinion of management, the unaudited information set forth below has been prepared on the same basis as the audited information set forth elsewhere herein and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth herein. The operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED ---------------------------------------------------------------------- 1994 1995 ---------------------------------- ---------------------------------- MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31 JUNE 30 SEP. 30 DEC. 31 ------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Revenue................. $32,335 $28,807 $28,409 $36,893 $39,708 $41,633 $45,911 $61,607 Gross profit............ 11,970 9,933 10,660 14,443 14,963 15,319 17,806 25,929 Depreciation and amortization........... 1,960 2,107 2,259 2,640 2,532 2,863 3,011 3,212 Income (loss) from operations............. 955 (1,808) (6,005) (1,490) (446) (855) (364) 1,876 Total other income (expense).............. (277) (243) (706) (670) (948) (1,473) (1,354) (1,265) Net income (loss)....... $ 346 $(1,024) $(8,456) $(2,195) $(1,654) $(2,250) $(1,849) $ 395
The Company's quarterly operating results have fluctuated and will continue to fluctuate from period to period depending upon factors such as the success of the Company's efforts to expand its geographic and customer base, changes in, and the timing of expenses relating to, the expansion of the Company's network, regulatory and competitive factors, the development of new services and sales and marketing and changes in pricing policies by the Company or its competitors. In view of the significant historic growth of the Company's operations, the Company believes that period-to-period comparisons of its financial results should not be relied upon as an indication of future performance and that the Company may experience significant period-to-period fluctuations in operating results in the future. See "Risk Factors--Recent Losses; Potential Fluctuations in Operating Results." Historically, a significant percentage of the Company's revenue has been derived from university and college administrators and students, which caused its business to be subject to seasonal variation. To the extent that the Company continues to derive a significant percentage of its revenues from university and college customers, the Company's results of operations could remain susceptible to seasonal variation. During the third quarter of 1994, the Company initiated the process of converting its network to equal access for its Canadian customers. See "--1995 Compared With 1994--Other Charges." LIQUIDITY AND CAPITAL RESOURCES The Company historically has satisfied its working capital requirements through cash flow from operations, through borrowings and financings from financial institutions, vendors and other third parties, and through the issuance of securities. In addition, the Company used the proceeds from the 1993 sale of ACC Canada common stock and the 1993 sale of its cellular operations to fund the expansion of its operations in Canada and the U.K. During 1995, the Company raised $20.0 million, through the issuance of 825,000 shares of Class A Common Stock for $11.1 million (net of issuance expense) and notes which were exchanged for 10,000 shares of Series A Preferred Stock for $8.9 million (net of issuance expenses). In July 1995, the Company entered into the five-year $35.0 million Credit Facility. The Company's principal need for working capital is to meet its selling, general and administrative expenses as its business expands. In addition, the Company's capital resources have been used for the Metrowide Communications acquisition, capital expenditures, various customer base acquisitions and, prior to the termination thereof during the second quarter of 1995, payments of dividends to holders of its Class A Common 28 Stock. The Company has had a working capital deficit at the end of the last several years and, at December 31, 1995, the Company had a working capital deficit of approximately $10.3 million. This related to short term debt associated with the Metrowide Communications acquisition and delays in billings from, or the resolution of billing discussions with, vendors. The Company has experienced delays from time to time in billings from carriers from which it leases transmission lines. In addition, prior to making payment to the carriers, the Company typically needs to resolve discrepancies between the amount billed by the carriers and the Company's records concerning usage of leased lines. The Company accrues an expense for the amount of its estimated obligation to the carriers pending the resolution of such discussions. During 1995, the Company's EBITDA minus capital expenditures and changes in working capital was $(7.0) million. The Company anticipates that, during 1996, its capital expenditures will be approximately $26.0 million for the expansion of its network, the acquisition, upgrading and development of switches and other telecommunications equipment as conditions warrant, the development, licensing and integration of its management information system and other software, the development and expansion of its service offerings and customer programs and other capital expenditures. ACC expects that it will continue to make significant capital expenditures during future periods. The Company's actual capital expenditures and cash requirements will depend on numerous factors, including the nature of future expansion (including the extent of local exchange services, which is particularly capital intensive) and acquisition opportunities, economic conditions, competition, regulatory developments, the availability of capital and the ability to incur debt and make capital expenditures under the terms of the Company's financing arrangements. The Credit Facility currently would not allow the Company to make $26.0 million of capital expenditures in 1996. The Company is seeking an amendment to the Credit Facility to, among other things, permit increased capital expenditures. Prior to 1995, the Company had funded capital expenditures through its credit facilities and other short term debt arrangements, which were refinanced in 1995 with the Credit Facility. The Company is obligated to pay the lenders under the Credit Facility a contingent interest payment based on the appreciation in market value of 140,000 shares of the Company's Class A Common Stock from $14.92 per share, subject to a minimum of $0.75 million and a maximum of $2.1 million. The payment is due upon the earlier of (i) January 21, 1997, (ii) any material amendment to the Credit Facility, (iii) the signing of a letter of intent to sell the Company or any material subsidiary, or (iv) the cessation of active trading of the Company's Class A Common Stock on other than a temporary basis. The Company is accruing this obligation over the 18-month period ending January 21, 1997. Any holder of Series A Preferred Stock has the right to cause the Company to redeem such Series A Preferred Stock upon the occurrence of certain events, including the entry of a judgment against the Company or a default by the Company under any obligation or agreement for which the amount involved exceeds $500,000. See "Description of Capital Stock--Preferred Stock--Series A Preferred Stock." As of January 31, 1996, the Company had approximately $0.9 million of cash and cash equivalents and maintained the $35.0 million Credit Facility, subject to availability under a borrowing base formula and certain other conditions (including borrowing limits based on the Company's operating cash flow), under which borrowings of approximately $19.0 million were outstanding, approximately $13.0 million was available for borrowing and $3.0 million was reserved for letters of credit. The maximum aggregate principal amount of the Credit Facility is required to be reduced by $2.45 million per quarter commencing on July 1, 1997 and by $2.91 million per quarter commencing on January 1, 1999 until maturity on July 1, 2000. During 1995 the Company entered into swap agreements with respect to $11.5 million of indebtedness under the Credit Facility. The swap agreements expire at various times through December 1998 and require the Company to pay interest at rates ranging from 5.98% to 6.02% per annum and permit the Company to receive interest at variable rates. The Company also is obligated to pay, on demand commencing in August of 1996, the remaining $0.9 million pursuant to a note issued in connection with the Metrowide Communications acquisition. In addition, the Company has $2.9 million, $2.6 million and $2.1 million of capital lease obligations which mature during 1996, 1997 and 1998, respectively. The Company's financing arrangements, which are secured by substantially all of the Company's assets and the stock of certain subsidiaries, require the Company to maintain certain financial ratios and prohibit the payment of dividends. 29 The Company believes that, under its present business plan, the net proceeds from the sale by the Company of the Class A Common Stock offered hereby, together with borrowings under the Credit Facility, vendor financing and cash from operations will be sufficient to meet anticipated working capital and capital expenditure requirements of its existing operations. The forward- looking information contained in the previous sentence may be affected by a number of factors, including the matters described in this paragraph and under "Risk Factors." The Company may need to raise additional capital from public or private equity or debt sources in order to finance its operations, capital expenditures and growth for periods after 1996 and for the optional redemption of Series A Preferred Stock if it is not converted. Moreover, the Company believes that continued growth and expansion through acquisitions, investments and strategic alliances is important to maintain a competitive position in the market and, consequently, a principal element of the Company's business strategy is to develop relationships with strategic partners and to acquire assets or make investments in businesses that are complementary to its current operations. The Company may need to raise additional funds in order to take advantage of opportunities for acquisitions, investments and strategic alliances or more rapid international expansion, to develop new products or to respond to competitive pressures. If additional funds are raised through the issuance of equity securities, the percentage ownership of the Company's then current shareholders may be reduced and such equity securities may have rights, preferences or privileges senior to those of holders of Class A Common Stock. There can be no assurance that the Company will be able to raise such capital on acceptable terms or at all. In the event that the Company is unable to obtain additional capital or is unable to obtain additional capital on acceptable terms, the Company may be required to reduce the scope of its presently anticipated expansion opportunities and capital expenditures, which could have a material adverse effect on its business, results of operations and financial condition and could adversely impact its ability to compete. The Company may seek to develop relationships with strategic partners both domestically and internationally and to acquire assets or make investments in businesses that are complementary to its current operations. Such acquisitions, strategic alliances or investments may require that the Company obtain additional financing and, in some cases, the approval of the holders of debt or preferred stock of the Company. The Company's ability to effect acquisitions, strategic alliances or investments may be dependent upon its ability to obtain such financing and, to the extent applicable, consents from its debt or preferred stock holders. SFAS NO. 123 The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based Compensation" in 1996. This Statement encourages entities to adopt a fair value based method of accounting for employee stock option plans (whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the employee service period) rather than the current intrinsic value based method of accounting (whereby compensation cost is measured at the grant date as the difference between market value and the price for the employee to acquire the stock). If the Company elects to continue using the intrinsic value method of accounting, pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting had been applied, will need to be disclosed. Management has not decided if the Company will adopt the fair value based method of accounting for the Company's stock option plans. The Company believes that adopting the fair value basis of accounting could have a material impact on the financial statements and such impact is dependent upon future stock option activity. 30 BUSINESS ACC is a switch-based provider of telecommunications services in the United States, Canada and the United Kingdom. The Company primarily provides long distance telecommunications services to a diversified customer base of businesses, residential customers and educational institutions. As a result of the Company's historical focus on providing long distance services in the Northeastern United States and recent regulatory changes, ACC has begun to provide local telephone service as a switch-based local exchange reseller in upstate New York and as a reseller of local exchange services in Ontario, Canada. ACC operates an advanced telecommunications network consisting of seven long distance international and domestic switches located in the U.S., Canada and the U.K., a local exchange switch located in the U.S., leased transmission lines, and network management systems designed to optimize traffic routing. The Company's objective is to grow its long distance telecommunications customer base in its existing markets and to establish itself in deregulating Western European markets that have high density telecommunications traffic, such as France and Germany, when the Company believes that business and regulatory conditions warrant. The key elements of the Company's business strategy are: (1) to broaden ACC's penetration of the U.S., Canadian and U.K. telecommunications markets by expanding its long distance, local and other service offerings and geographic reach; (2) to utilize ACC's operating experience as an early entrant in deregulating markets in the U.S., Canada and the U.K. to penetrate other deregulating telecommunications markets that have high density telecommunications traffic; (3) to achieve economies of scale and scope in the utilization of ACC's network; and (4) to seek acquisitions, investments or strategic alliances involving assets or businesses that are complementary to ACC's current operations. The Company's principal competitive strengths are: (1) ACC's sales and marketing organization and the customized service ACC offers to its customers; (2) ACC's ability to offer competitive prices which the Company believes generally are lower than prices charged by the major carriers in each of its markets; (3) ACC's position as an early entrant in the U.S., Canadian and U.K. markets as an alternative carrier; (4) ACC's focus on more profitable international telecommunications traffic between the U.S., Canada and the U.K.; and (5) ACC's switched-based networking capabilities. The Company believes that switch ownership reduces reliance on other carriers and enables the Company to efficiently route telecommunications traffic over multiple leased transmission lines and to control costs, call record data and customer information. The availability of existing transmission capacity in its markets makes leasing of transmission lines attractive to the Company and enables it to grow network usage without having to incur the significant capital and operating costs associated with the development and operation of a transmission line infrastructure. ACC primarily targets business customers with approximately $500 to $15,000 of monthly usage, selected residential customers and colleges and universities. The Company believes that, in addition to being price-driven, these customers tend to be focused on customer service, more likely to rely on a single carrier for their telecommunications needs and less likely to change carriers than larger commercial customers. The diversity of ACC's targeted customer base enhances network utilization by combining business-driven workday traffic with night and weekend off-peak traffic from student and residential customers. The Company strives to be more cost effective, flexible, innovative and responsive to the needs of its customers than the major carriers, which principally focus their direct sales efforts on large commercial accounts and residential customers. INDUSTRY OVERVIEW The global telecommunications industry has dramatically changed during the past several years, beginning in the U.S. with AT&T's divestiture of its 22 RBOCs in 1984 and culminating with the recently enacted amendments to the U.S. Communications Act, and continuing in Canada, the U.K. and other countries with various regulatory changes. Previously, the long distance telecommunications industry in the U.S., Canada and the U.K. consisted of one or a few large facilities-based carriers, such as AT&T, Bell Canada and British Telecom. As a result of the AT&T divestiture and the recent legislative changes in the U.S. and fundamental 31 regulatory changes in Canada and the U.K., coupled with technological and network infrastructure developments which increased significantly the voice and data telecommunications transmission capacity of dominant carriers, the long distance industry has developed into a highly competitive one consisting of numerous alternative long distance carriers in each of these countries. In addition, since the AT&T divestiture in 1984, competition has heightened in the local exchange market in the U.S. and Canada. The Company anticipates that deregulatory and economic influences will promote the development of competitive telecommunications markets in other countries. Long Distance Market. The U.S. long distance market has grown to approximately $67 billion in annual revenues during 1994, according to FCC estimates. AT&T has remained the largest long distance carrier in the U.S. market, retaining slightly more than 55% of the market, with MCI and Sprint increasing their respective market shares to approximately 17% and 10% of the market during 1994. AT&T, MCI and Sprint constitute what generally is regarded as the first tier in the U.S. long distance market. Large regional long distance companies, some with national capabilities, such as Worldcom, Inc. (formerly LDDS Metromedia Communications, Inc.), Cable & Wireless Communications, Inc., Frontier Corp. and LCI International, constitute the second tier of the industry. The remainder of the U.S. long distance market share is comprised of several hundred smaller companies, including ACC U.S., known as third-tier carriers. In addition, recent U.S. legislation, which removes certain long-standing restrictions on the ability of the RBOCs to provide long distance services, will have a substantial impact on the long distance market. Since 1990, competition has existed in the Canadian long distance market. The Canadian long distance market is dominated by a consortium of facilities- based local and long distance telephone companies (e.g., Bell Canada, BC Tel, Maritime Tel) operating as the "Stentor" group of companies. A second group of long distance providers, consisting principally of Unitel, Sprint Canada and fONOROLA Inc., own and operate transmission lines through which they provide long distance voice and data services in the Canadian markets. Other long distance providers, including ACC Canada, generally lease transmission lines through which they resell long distance services in the Canadian market. The international, national and local markets for voice telephone services in the U.K. and Northern Ireland accounted for approximately (Pounds)1.4 billion, (Pounds)2.1 billion and (Pounds)2.2 billion, respectively, in revenues during the 12 months ended March 31, 1995, accordingly to Oftel estimates. In the U.K., British Telecom historically has dominated the telecommunications market. British Telecom was the largest carrier during such 12 month period, with approximately 69%, 83% and 94% of the revenues from international, national and local voice telephone services, respectively. Mercury, which owns and operates interexchange transmission facilities, is the second largest carrier of voice telecommunications in the U.K. The remainder of the U.K. long distance market is comprised of emerging licensed public telephone operators, such as Energis Communications Ltd., ("Energis") and switched-based resellers such as ACC U.K., IDB Worldcom Services Inc., Esprit Telecom of the U.K. Ltd. ("Esprit") and Sprint. Long distance carriers in the U.S., Canada and the U.K. can be categorized by several distinctions. One distinction is between transmission facilities- based companies and non-transmission facilities-based companies, or resellers. Transmission facilities-based carriers, such as AT&T, Bell Canada and British Telecom, own their own long distance interexchange or transmission facilities and originate and terminate calls through local exchange systems. Profitability for transmission facilities-based carriers is dependent not only upon their ability to generate revenues but also upon their ability to manage complex networking and transmission costs. All of the first- and most of the second-tier long distance companies in the U.S. markets are transmission facilities-based carriers and generally offer service nationwide. Most transmission facilities-based carriers in the third tier of the market offer their service only in a limited geographic area. Some transmission facilities- based carriers contract with other transmission facilities-based carriers to provide transmission where they have geographic gaps in their facilities. Switched-based resellers, such as the Company, carry their long distance traffic over transmission lines leased from transmission facilities-based carriers, originate and terminate calls through local exchange systems, and contract with transmission facilities-based carriers to provide transmission of long distance traffic either on a fixed rate lease basis or a call volume basis. Profitability for non-transmission 32 facilities-based carriers is dependent largely on their ability to generate and retain sufficient revenue volume to negotiate attractive pricing with one or more transmission facilities-based carriers. A second distinction among long distance companies is that of switch-based versus switchless resellers. Switch-based resellers, such as the Company, have one or more switches, which are computers that direct telecommunications traffic to form a transmission path between a caller and the recipient of a call. All transmission facilities-based carriers are switch-based carriers, as are many non-transmission facilities-based carriers, including ACC. Switchless resellers depend on one or more transmission facilities-based carriers or switch-based resellers for transmission and switching facilities. The Company believes that switch ownership reduces reliance on other carriers and enables the Company to efficiently route telecommunications traffic over multiple leased transmission lines and to control costs, call record data and customer information. The availability of existing transmission capacity in its markets makes leasing of transmission lines attractive to the Company and enables it to grow network usage without having to incur the significant capital and operating costs associated with the development and operation of a transmission line infrastructure. Local Exchange Market. The U.S. local exchange market has given to approximately $13 billion in annual revenues during 1994, according to FCC estimates. In the U.S., the existing structure of the telecommunications industry principally resulted from the AT&T divestiture. As part of the divestiture, seven RBOCs were created to offer services in specified geographic areas called LATAs. The RBOCs were separated from the long distance provider, AT&T, resulting in the creation of distinct local exchange and long distance markets. Since the AT&T divestiture, several factors have served to promote competition in the local exchange market, including (i) the local exchange carriers' monopoly position, which provided little incentive for the local exchange companies to reduce prices, improve service or upgrade their networks, and related regulations which required the local exchange carriers to, among other things, lease transmission facilities to alternative carriers, such as the Company, (ii) customer desire for an alternative to the local exchange carriers, which developed in part as a result of competitive activities in the long distance market and increasing demand for lower cost, high quality, reliable services, and (iii) the advancement of fiber optic and digital electronic technology, which combined the ability to transmit voice, data and video at high speeds with increased capacity and reliability. During the past several years, regulators in some states and at the federal level issued rulings which favored competition and promoted the opening of markets to new entrants. These rulings allowed competitive access providers of telecommunications services to offer a number of new services, including, in certain states, a broad range of local exchange services. The Company believes the trend toward increased competition and deregulation of the telecommunications industry is continuing, and will be accelerated by the recently enacted U.S. legislation. In Canada, similar factors promoting competition in the local exchange market developed in response to regulatory developments in the Canadian long distance telecommunications market and to technological advances in the telecommunications industry. The CRTC has approved, in concept, the reduction of the remaining restrictions on local exchange services in Canada and a proceeding is being conducted to determine the appropriate timetable and terms for implementation of its decision. BUSINESS STRATEGY The Company was an early entrant as an alternative carrier in the U.S., Canada and the U.K. The Company's objective is to grow its telecommunications customer base in its existing markets and to establish itself in other deregulating Western European markets with high density telecommunications traffic. The key elements of the Company's business strategy are to increase penetration of existing markets, enter new markets, improve operating efficiency, and pursue acquisitions, investments and strategic alliances. Increase Penetration of Existing Markets. ACC's consolidated revenue and customer accounts have grown from $105.9 million and 98,400 to $188.9 million and 310,815, respectively, over the three fiscal years ended December 31, 1995, although the Company expects its growth to decrease over time. The Company plans to 33 increase further its revenue and customer base in the U.S., Canadian and U.K. markets by expanding its service offerings and geographic reach. The expansion of the Company's service offerings is designed to reduce the effects of price per minute decreases for long distance service and to decrease the likelihood that customers will change telecommunications carriers. Through this strategy, the Company will seek to build a broad base of recurring revenues in the U.S., Canada and the U.K. The Company also intends to offer local telephone services in selected additional U.S. and Canadian markets, initially in New York, Massachusetts and Ontario, as well as additional data communications services in the U.S. and Canada. The Company believes that offering local services will enhance its ability to attract and retain long distance customers and reduce the Company's access charges as a percentage of revenues. In addition, the Company is conducting feasibility studies to identify the market potential and regulatory environment for adding or expanding distribution of video conferencing, paging, domestic and international call back, Internet access, smart card, facsimile and frame relay services in certain of its targeted markets, and plans to introduce certain of those services in selected markets during 1996. Enter New Markets. The Company believes that its operating experience in deregulating markets in the U.S., Canada and the U.K. and its experience as an early entrant as an alternative carrier in those markets will assist ACC in identifying opportunities in other deregulating countries with high density telecommunications traffic. In particular, the Company believes that its position in the U.S., Canadian and U.K. telecommunications markets and its experience in providing international telecommunications service will assist it in establishing a presence in France and Germany and other countries when the Company believes that business and regulatory conditions warrant. Improve Operating Efficiency. The Company strives to achieve economies of scale and scope in the use of its network, which consists of leased transmission facilities, seven international and domestic switches, a local exchange switch and information systems. In order to enhance the efficiency of the fixed cost elements of its network, the Company seeks to increase its traffic volume and balance business-driven workday traffic with night and weekend off-peak traffic from student and residential customers. The Company anticipates that competition among transmission facilities-based providers of telecommunications services in the U.S. and Canadian markets will afford ACC opportunities for reductions in the cost of leased line facilities. The Company seeks to reduce its network cost per billable minute of use by more than any reduction in revenue per billable minute. The Company also intends to acquire additional switches to enhance its network in anticipation of growth in the Company's customer base and provide additional telecommunications services. The Company believes that its network switches enable the Company to efficiently route telecommunications traffic over multiple transmission facilities to reduce costs, control access to customer information and grow network usage without a corresponding increase in support costs. Pursue Acquisitions, Investments and Strategic Alliances. As the Company expands its service offerings and its network, the Company anticipates that it will seek to develop strategic alliances both domestically and internationally and to acquire assets and businesses or make investments in companies that are complementary to the Company's current operations. The Company believes that the pursuit of an active acquisition strategy is an important means toward achieving growth and economies of scale and scope in its targeted markets. Through acquisitions, the Company believes that it can further increase its traffic volume to further improve the usage of the fixed cost elements of its network. SERVICES Commercial Long Distance Services. The Company offers its commercial customers in the U.S. and Canada an array of customized services and has developed a similar range of service offerings for commercial customers in the U.K. In the U.S., although the Company historically has originated long distance voice services principally in New York and Massachusetts, ACC is currently authorized to originate long distance voice and data services in 44 states. The Company's U.S. services include "1+" inter-LATA long distance service, and private line service for which a customer is charged a fixed monthly rate for transmission capacity that is reserved for that customer's 34 traffic. The Company's U.S. business services also include toll-free "800" or "888" services. In addition, the Company currently provides intra-LATA service in certain areas for customers who make a large number of intra-LATA calls. The Company installs automatic dialing equipment to enable customers to place such calls over the Company's network without having to dial an access code. However, various states, including New York, are moving to implement "equal access" for intra-LATA toll calls, such that, the Company's customers in such jurisdictions will be able to use the Company's network on a "1 +" basis to complete intra-LATA toll calls. The Company's ability to compete in the intra- LATA toll market depends upon the margin which exists between the access charges it must pay to the local exchange company for originating and terminating intra-LATA calls, and the retail toll rates established by the local exchange carriers for the local exchange carriers' own intra-LATA toll service. The Company's commercial services generally are priced below the rates charged by the major carriers for similar services and are competitive with those of other carriers. See "Risk Factors--Competition." In Canada, ACC currently originates long distance voice and data services in the Montreal, Toronto and Vancouver metropolitan areas as well as throughout Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario and Quebec. The Company offers its Canadian commercial customers both voice and data telecommunications services. The Company's long distance voice services are offered to its business customers in a nine-level discount structure marketed under the name "Edge." Discounts are based on calling volume and call destination and typically result in savings ranging from 10% to 20% when compared to Stentor member rates. Calls to the U.S. are priced at a flat rate regardless of the destination and international calls are priced at a percentage discount to the rates charged by the Stentor group. The Company also offers toll-free "800" services within Canada, as well as to and from the U.S., and offers an ACC Travel Card providing substantial savings off Stentor member "Calling Card" rates. ACC Canada has introduced a frame relay network and Internet access services and now provides these services in all provinces except Saskatchewan and Newfoundland. ACC originates long distance voice services throughout the U.K. The Company presently offers its U.K. customers voice telecommunications services. These services include indirect access (known as "ACCess 1601") to the public switched telephone network ("PSTN") and the use of direct access lines to the Company's network (known as "ACCess Direct") for higher-volume business users. Because ACCess 1601 is a mass market service, the prices offered are built around a standard price list with volume discounts for high-volume users. ACCess Direct is generally cost effective only for customers making at least (Pounds)5,000 per month in calls. The Company's U.S. and Canadian commercial customers are offered customized services, such as comprehensive billing packages and its "Travel Service Elite" domestic calling cards, which allow the customer to place long distance calls at competitive rates from anywhere in the U.S. and Canada. The Company's standard monthly statement includes a management summary report, a call detail report recording every long distance call and facsimile call, and a pricing breakdown by call destination. Optional calling pattern reports, which are available at no extra cost, include call summaries by account code, area or city code, LATA (for U.S. bound calls), international destination and time-of- day. This information is available to customers in the form of hard copy, magnetic tape or disk. In the U.S., the Company is conducting feasibility studies to identify the market potential and regulatory environment for offering additional services, including video conferencing, paging, international call back, Internet access, facsimile and frame relay services, and expects to introduce Internet access, enhanced travel cards and video conferencing in 1996. In Canada, the Company plans to expand frame relay and Internet access services in 1996. In the U.K., the Company is also considering additional service offerings, including teleconferencing, voice mail, calling cards, call-back and smart card services and plans to introduce Internet access and prepaid calling cards in 1996. University Program. The Company's university program offers a variety of telecommunications services to educational institutions ranging from long distance service for administration and faculty, to integrated on-campus services, including local and long distance service, voice mail, intercom calling and operator services for 35 students, administrators and faculty. The Company's sales, marketing and engineering professionals work directly with college and university administrators to design and implement integrated solutions for providing and managing telecommunications equipment and services to meet the current and prospective communications needs of their institutions. As part of its program, the Company often installs telecommunications equipment which, depending upon the circumstances, may include a switch or private branch exchange, voice mail, cabling and, in the U.K., pay telephones. Pay phone usage in the U.K., particularly at universities, is more prevalent than in the U.S. and Canada. To access this market directly, the Company has established a pay phone division in the U.K., which supplies pay phones that will automatically route calls from universities and other institutions over ACC U.K.'s network. As of December 31, 1995, the Company had entered into a total of approximately 140 contracts with colleges and universities in its three geographic regions, of which approximately 75 were long-term agreements with terms which generally range from three to 10 years in length. The Company provided services to approximately 129,000 student accounts in the U.S., Canada and the U.K., as of December 31, 1995. The Company's long distance rates in the U.S. for students generally are priced at a 10% discount from those charged by the largest long distance carriers. The contracts in the U.S. typically provide the Company with a right of first refusal to provide the institution with any desired additional telecommunications services or enhancements (based on market prices) during the term of the contract. The Company's university contracts in Canada generally provide it with the exclusive right, and in the U.K. the opportunity, to market to the school's students, faculty and administration. Most of the Company's contracts in Canada also provide for exclusive university support for marketing to alumni. These arrangements allow the Company to market its services to these groups through its affinity programs. The Company offers university customers in the U.S., Canada and the U.K. certain customized services. The Company offers academic institutions a comprehensive billing package to assist them in reviewing and controlling their telecommunications costs. For its university student customers in the U.S. and Canada, the Company provides a billing format that indicates during each statement period the savings per call (in terms of the discount from the largest long distance carrier's rates) realized during the billing period, and for all university customers the Company provides a call detail report recording every long distance call. In addition, for university student customers, the Company provides individual bills for each user of the same telephone in a dormitory room or suite so that each student in the dormitory room or suite can be billed for the calls he or she made. Many of the Company's university customers in the U.S. are offered operator services, which are available 24 hours per day, seven days per week. The Company also offers its U.S. university customers its "Travel Service Elite" domestic calling card. In addition, the Company sells a prepaid calling card in the U.S., which allows customers to prepay for a predetermined number of "units" representing long distance minutes. The rate at which the units are used is determined by the destination of the calls made by the customer. The Company's sales group targets university customers in the U.S., Canada and in the U.K. In the U.S. university market, the Company generally targets small to medium size universities and colleges with full time enrollments in the range of 1,000 to 5,000 students. In Canada, the Company has been able to establish relationships with several large universities. The Company believes that, while its marketing approach in Canada is similar to that in the U.S., its nationwide presence in Canada assists it in marketing to larger academic institutions. In the U.K., the Company has been able to establish long-term relationships with several large universities. The Company believes that, while its marketing approach in the U.K. is similar to that in the U.S., it is able to access larger educational institutions because of its nationwide presence and because transmission facilities-based carriers have not focused on this market. The Company believes that competition in the university market is based on price, as well as the marketing of unique programs and customizing of telecommunications services to the needs of the particular institution and that its ability to adapt to customer needs has enhanced its development of relationships with universities. Residential Long Distance Services. The Company offers its residential customers in the U.S. and Canada a variety of long distance service plans and is currently offering and developing similar plans for its residential 36 customers in the U.K. In the U.S., the Company's "Save Plus" program provides customers with competitively priced long distance service. In addition, U.S. customers are provided with a "Phone Home" long distance service through which, by dialing an 800 number plus an access code, callers can call home at competitive rates. In general, the Company's residential services are priced below AT&T's premium rates for similar services. In Canada, the Company offers three different residential service plans. The basic offering is a discount plan, with call pricing discounted from the Stentor companies' tariffed rates for similar services depending on the time of day and day of the week. The Company also offers its "Sunset Savings Plan," which allows calling across Canada and to the continental U.S. at a flat rate per minute. In the Toronto metropolitan area, the Company offers "Extended Metro Toronto" calling, which provides flat rate calling within areas adjacent to Toronto that are long distance from each other. Customized billing services are also offered to the Company's U.S. and Canadian residential customers. In the U.K., all residential customers use the Company's ACCess 1601 service, which provides savings of as much as 28% off the standard rates charged for residential service by British Telecom or Mercury, but requires the customer to dial a four digit access code before dialing the area code and number. International Long Distance Services. The Company offers international products and services to both its existing customer base and to potential customers in the U.S., Canada and the U.K. The Company's international simple resale licenses (the "ISR Licenses") allow the Company to resell international long distance service on leased international circuits connected to the PTSN at both ends between the U.S. and U.K., Canada and the U.K., and certain other countries. The Company believes it can compete effectively for international traffic due to the ISR Licenses it has obtained for traffic between the U.S., Canada and the U .K. which allow it to price its services at cost-based rates that are lower than the international settlement-based rates that would otherwise apply to such traffic. However, numerous other carriers also have international simple resale licenses. The Company has leased fixed cost facilities between these countries and is developing services for customers with high volumes of traffic between and among the U.S., Canada and the U.K. Local Exchange Services. Building on its experience in providing local telephone service to various university customers, the Company took advantage of recent regulatory developments in New York State and in 1994 began offering local telephone service to commercial customers in upstate New York. As a result of its August 1995 acquisition of Metrowide Communications, the Company provides local telephone service as a reseller in Ontario, Canada. The Company believes that it can strengthen its relationships with existing commercial, university and college and residential customers in New York State and in Ontario, Canada and can attract new customers by offering them local and long distance services, thereby providing a single source for comprehensive telecommunications services. Providing local telephone service will also enable the Company to serve new local exchange customers even if they are already under contract with a different interexchange carrier for long distance service. Commencing in 1996, the Company plans to expand its local telephone operations to selected other metropolitan areas in New York and Massachusetts. The Company has only limited experience in providing local telephone services, having commenced providing such services in 1994, and to date has experienced an operating cash flow deficit in that business. In order to attract local customers, the Company must offer substantial discounts from the prices charged by local exchange carriers and must compete with other alternative local companies that offer such discounts. Larger, better capitalized alternative local providers, including AT&T and Time Warner Cable, among others, will be better able to sustain losses associated with discount pricing and initial investments and expenses. The local telephone service business requires significant initial investments and expenses in capital equipment, as well as significant initial promotional and selling expenses. There can be no assurance that the Company will be able to lease transmission facilities from local exchange carriers at wholesale rates that will allow the Company to compete effectively with the local exchange carriers or other alternative providers or that the Company will generate positive operating margins or attain profitability in its local telephone service business. SALES AND MARKETING The Company markets its services in the U.S., Canada and the U.K. through a variety of channels, including ACC's internal sales forces, independent sales agents, co-marketing arrangements and affinity programs. The 37 Company has a total of approximately 130 internal sales personnel and approximately 200 independent sales agents serving its U.S., Canadian and U.K. markets. Although it has not experienced significant turnover in recent periods, a loss of a significant number of independent sales agents could have a significant adverse effect on the Company's ability to generate additional revenue. The Company maintains a number of sales offices in the Northeastern U.S., Canada, and in London, Manchester and Cambridge, England. In addition, with respect to its university and student customers in each country, the Company has designated representatives to assist in customer enrollment, dissemination of marketing information, complaint resolution and, in some cases, collection of customer payments, with representatives located on some campuses. The Company actively seeks new opportunities for business alliances in the form of affinity programs and co-marketing arrangements to provide access to alternative distribution channels. The following table indicates the approximate number of commercial, residential and student customer accounts maintained by the Company as of December 31, 1994 and 1995 in the U.S., Canada and the U.K., respectively:
CUSTOMER ACCOUNTS AS OF DECEMBER 31, -------------------------------------------------------------- 1994 1995 ------------------------------ ------------------------------- UNITED UNITED 1994 UNITED UNITED 1995 STATES CANADA KINGDOM TOTAL STATES CANADA KINGDOM TOTAL ------ ------- ------- ------- ------- ------- ------- ------- Commercial...... 9,397 16,940 794 27,131 10,858 22,685 11,938 45,481 Residential..... 19,979 53,103 517 73,599 20,909 100,239 14,825 135,973 Student......... 59,213 33,492 9,556 102,261 81,950 29,580 17,831 129,361 ------ ------- ------ ------- ------- ------- ------ ------- Total......... 88,589 103,535 10,867 202,991 113,717 152,504 44,594 310,815 ====== ======= ====== ======= ======= ======= ====== =======
United States. The Company markets its services in the U.S. through ACC's internal sales personnel and independent sales agents as well as through attendance and representation at significant trade association meetings and industry conferences of target customer groups. The Company's sales and marketing efforts in the U.S. are targeted primarily at business customers with $500 to $15,000 of monthly usage, selected residential customers and universities and colleges. The Company also markets its services to other resellers and rebillers. The Company plans to leverage its market base in New York and Massachusetts into other New England states and Pennsylvania and to eventually extend its marketing focus in other states. ACC has obtained authorization to originate long distance voice services in 44 states. The Company plans to expand its local telephone service operations to selected other New York and Massachusetts metropolitan areas. Canada. The Company markets its long distance services in Canada through internal sales personnel and independent sales agents, co-marketing arrangements and affinity programs. The Company focuses its direct selling efforts on medium-sized and large business customers. The Company also markets its services to other resellers and rebillers. The Company uses independent sales agents to target small to medium-sized business and residential customers throughout Canada. These independent sales agents market the Company's services under contracts that generally provide for the payment of commissions based on the revenue generated from new customers obtained by the representative. The use of an independent agent network allows the Company to expand into additional markets without incurring the significant initial costs associated with a direct sales force. In addition to marketing its residential services in Canada through independent sales agents, the Company has developed several affinity programs designed to attract residential customers within specific target groups, such as clubs, alumni groups and buying groups. The use of affinity programs allows the Company to target groups with a nationwide presence without engaging in costly nationwide advertising campaigns. For example, ACC Canada has established affinity programs with such groups as the Home Service Club of Canada, the University of Toronto and the University of British Columbia. In addition, the Company has developed a co-marketing arrangement with Hudson's Bay Company (a large Canadian retailer) through which the Company's telecommunications services are marketed under the name "The Bay Long Distance Program." 38 United Kingdom. In the U.K., the Company markets its services to business and residential customers, as well as other telecommunications resellers, through a multichannel distribution plan including its internal sales force, independent sales agents, co-marketing arrangements and affinity programs. The Company generally utilizes its internal sales force in the U.K. to target medium and large business customers which typically have enough volume to warrant a direct access line to the Company's switch, thereby bypassing the PSTN. The Company markets its services to small and medium-sized businesses through independent sales agents. Telemarketers also are used to market services to small business customers and residential customers and to generate leads for the other members of the Company's internal sales force and independent sales agents. ACC U.K. has established an internal marketing group that is focused on selling its service to other telecommunications resellers in the U.K. and other European countries on a wholesale basis. In October 1995, the Company entered into a co-marketing arrangement with London Electricity PLC through which the electric utility offers long distance telephone services to its London customers which are co-branded with ACC. NETWORK In the U.S., Canada and the U.K., the Company utilizes a network of lines leased under volume discount contracts with transmission facilities-based carriers, much of which is fiber optic cable. To maximize efficient utilization, the Company's network in each country is configured with two-way transmission capability that combines over the same network the delivery of both incoming and outgoing calls to and from the Company's switches. The selection of any particular circuit for the transmission of a call is controlled by routing software, located in the switches, that is designed to cause the most efficient use of the Company's network. The Company evaluates opportunities to install switches in selected markets where the volume of its customer traffic makes such an investment economically viable. Utilization of the Company's switches allows ACC to route customer calls over multiple networks to reduce costs. As of December 31, 1995, the Company operated switches for its call traffic in eight locations and maintained 19 additional points of presence ("POPs") in the U.S., Canada and the U.K. Some of the Company's contracts with transmission facilities-based carriers contain under-utilization provisions. These provisions require the Company to pay fees to the transmission facilities-based carriers if the Company does not meet minimum periodic usage requirements. The Company has not been assessed with any underutilization charges in the past. However, there can be no assurance that such charges would not be assessed in the future. Other resellers generally contract with the Company on a month-to-month basis, select the Company almost exclusively on the basis of price and are likely to terminate their arrangements with the Company if they can obtain better pricing terms elsewhere. The Company uses projected sales to other resellers in evaluating the trade-offs between volume discounts and minimum utilization rates it negotiates with transmission facilities-based carriers. If sales to other resellers do not meet the Company's projected levels, the Company could incur underutilization charges and be placed at a disadvantage in negotiating future volume discounts. ACC generally utilizes redundant, highly automated advanced telecommunications equipment in its network and has diverse alternate routes available in cases of component or facility failure. Automatic traffic re- routing enables the Company to provide a high level of reliability for its customers. Computerized automatic network monitoring equipment facilitates fast and accurate analysis and resolution of network problems. The Company provides customer service and support, 24-hour network monitoring, trouble reporting and response, service implementation coordination, billing assistance and problem resolution. In the U.S., the Company maintains two long distance switches, one local exchange switch and nine additional points of presence. These switches and POPs provide an interface with the PSTN to service the Company's customers. Lines leased from transmission facilities-based carriers link the Company's U.S. POPs to its switches. ACC U.S. maintains a leased, direct trans-Atlantic link with ACC U.K. that it established in 1994 following the Company's receipt of its ISR License for U.K.-U.S. calls and international private line resale authority in the U.S. The remaining term of the lease for the trans-Atlantic link is 18 years. 39 In Canada, the Company maintains switches in Toronto, Montreal and Vancouver, together with seven POPs to provide an interface with the Canadian PSTN. The Company also maintains frame relay nodes for switched data in Toronto, Montreal, Vancouver and Calgary. The Company uses transmission lines leased from transmission facilities-based carriers to link its Canadian POPs to its switches. This network is also linked with the Company's switches in the U.S. and the U.K. ACC Canada also maintains a leased, direct trans- Atlantic link with ACC U.K. that it established in 1993 following the grant to ACC U.K. of its ISR License. This transmission line enables ACC Canada to send traffic to the U.K. at rates below those charged by Teleglobe Canada ("Teleglobe Canada"), the exclusive Canadian transmission facilities-based carrier for international calls, other than those to and from the U.S. and Mexico. In the U.K., the Company maintains switches in London and Manchester, England. ACC U.K. maintains three additional POPs providing interfaces with the PSTN in the U.K., which are linked to its switches through transmission lines leased from the major transmission facilities-based carriers. This network is also linked with the Company's switches in the U.S. and Canada. Customers can access the Company's U.K. network through direct access lines or by dial-up access using either auto dialing equipment or indirect access code dialing. Network costs are the single largest expense incurred by the Company. The Company strives to control its network costs and its dependence on other carriers by leasing transmission lines on an economical basis. The Company also has negotiated leases of private line circuits with carriers that operate fiber optic transmission systems at rates independent of usage, particularly on routes over which ACC carries high volumes of calls such as between the U.S., Canada and the U.K. The Company attempts to maximize the efficient utilization of its network in the U.S., Canada and the U.K. by marketing to commercial and academic institution customers, who tend to use its services most frequently on weekdays during normal business hours, and residential and student customers, who use these services most often during night and weekend off-peak hours. INFORMATION SYSTEMS The Company believes that maintaining sophisticated and reliable billing and customer services information systems that integrate billing, accounts receivables and customer support is a core capability necessary to record and process the data generated by a telecommunications service provider. While the Company believes its management information system is currently adequate, it has not grown as quickly as the Company's business and substantial investments are needed. In order to meet this challenge, ACC has made arrangements with consultants and vendors to develop new proprietary information systems which ACC has licensed to integrate customer services, management information, billing and financial reporting. The Company has budgeted approximately $6.0 million for these systems, which are expected to be installed during 1996. The systems are designed to (i) enhance the Company's ability to monitor and respond to the evolving needs of its customers by developing new and customized services, (ii) improve least-cost routing of traffic on ACC's international network, (iii) provide sophisticated billing information that can be tailored to meet the requirements of its customer base, (iv) provide high quality customer service, (v) detect and minimize fraud, (vi) verify payables to suppliers of telecommunications transmission facilities and (vii) integrate additions to its customer base. A variety of problems are often encountered in connection with the implementation of new information systems. There can be no assurance that the Company will not suffer adverse consequences or cost over-runs in the implementation of the new information systems or that the new systems will be appropriate for the Company. See "Risk Factors--Dependence on Effective Information Systems." COMPETITION The telecommunications industry is highly competitive and is significantly influenced by the marketing and pricing decisions of the larger industry participants. In each of its markets, the Company competes primarily on the basis of price and also on the basis of customer service and its ability to provide a broad array of telecommunications services. The industry has relatively insignificant barriers to entry, numerous entities competing for the same customers and a high average churn rate, as customers frequently change long distance 40 providers in response to the offering of lower rates or promotional incentives by competitors. Although many of the Company's customers are under multi-year contracts, several of the Company's largest customers (primarily other long distance carriers) are on month-to-month contracts and are particularly price sensitive. Revenues from other resellers accounted for approximately 22%, 8% and 9% of the revenues of ACC U.S., ACC Canada and ACC U.K., respectively, in 1995, and are expected to account for a higher percentage in the future. With respect to these customers, the Company competes almost exclusively on price and does not have long term contracts. The industry has experienced and will continue to experience rapid regulatory and technological change. Many competitors in each of the Company's markets are significantly larger than the Company, have substantially greater resources than the Company, control transmission lines and larger networks than the Company and have long-standing relationships with the Company's target customers. There can be no assurance that the Company will remain competitive in this environment. Regulatory trends have had, and may have in the future, significant effects on competition in the industry. As the Company expands its geographic coverage, it will encounter increased competition. Moreover, the Company believes that competition in non-U.S. markets is likely to increase and become more like competition in the U.S. markets over time as such non-U.S. markets continue to experience deregulatory influences. See "Risk Factors--Regulation," "Risk Factors--Competition" and "--Regulation." Competition in the long distance industry is based upon pricing, customer service, network quality and value-added services. The success of a non- transmission facilities-based carrier such as the Company depends largely upon the amount of traffic that it can commit to the transmission facilities-based carrier and the resulting volume discount it can obtain. Subject to contract restrictions and customer brand loyalty, resellers like the Company may competitively bid their traffic among other national long distance carriers to gain improvement in the cost of service. The relationship between resellers and the larger transmission facilities-based carriers is twofold. First, a reseller is a customer of the services provided by the transmission facilities-based carriers, and that customer relationship is predicated primarily upon the pricing strategies of the first tier companies. The reseller and the transmission facilities-based carriers are also competitors. The reseller will attract customers to the extent that its pricing for customers is generally more favorable than the pricing offered the same size customers by larger transmission facilities-based carriers. However, transmission facilities-based carriers have been aggressive in developing discount plans which have had the effect of reducing the rates they charge to customers whose business is sought by the reseller. Thus, the business success of a reseller is significantly tied to the pricing policies established by the larger transmission facilities-based carriers. There can be no assurance that favorable pricing policies will be continued by those larger transmission facilities-based carriers. United States. In the U.S., the Company is authorized to originate long distance service in 44 states (although it currently derives most of its U.S. revenues from a limited number of states). The Company competes for customers, transmission facilities and capital resources with numerous long distance telecommunications carriers and/or resellers, some of which are substantially larger, have substantially greater financial, technical and marketing resources, and own or lease larger transmission systems than the Company. AT&T is the largest supplier of long distance services in the U.S. inter-LATA market. The Company also competes within its U.S. call origination areas with other national long distance telephone carriers, such as MCI, Sprint and regional companies which resell transmission services. In the intra-LATA market, the Company also competes with the local exchange carriers servicing those areas. In its local service areas in New York State, the Company presently competes or in the future will compete with New York Telephone, Frontier Corp., AT&T, Citizens Telephone Co., MFS Communications Co., Inc., Time Warner Cable and with cellular and other wireless carriers. These local exchange carriers all have long-standing relationships with their customers and have financial, personnel and technical resources substantially greater than those of the Company. Furthermore, the recently announced joint venture between MCI and Microsoft, under which Microsoft will promote MCI's services, the recently announced joint venture among Sprint, Deutsche Telekom AG and France Telecom, to be called Global One, and other strategic alliances could increase competitive pressures upon the Company. In addition to these competitive factors, recent and pending deregulation in each of the Company's markets may encourage new entrants. For example, as a result of legislation recently enacted in the U.S., RBOCs will be 41 allowed to enter the long distance market, AT&T, MCI and other long distance carriers and utilities will be allowed to enter the local telephone services market and cable television companies will be allowed to enter the telecommunications market. In addition, the FCC has, on several occasions since 1984, approved or required price reductions by AT&T and, in October 1995, the FCC reclassified AT&T as a "non-dominant" carrier, which substantially reduces the regulatory constraints on AT&T. The Company believes that the principal competitive factors affecting its market share in the U.S. are pricing, customer service and variety of services. By offering high quality telecommunications services at competitive prices and by offering a portfolio of value-added services including customized billing packages, call management and call reporting services, together with personalized customer service and support, the Company believes that it competes effectively with other local and long distance telephone carriers and resellers in its service areas. The Company's ability to continue to compete effectively will depend on its continued ability to maintain high quality, market-driven services at prices generally below those charged by its competitors. Canada. In Canada, the Company competes with facilities-based carriers, other resellers and rebillers. The Company's principal transmission facilities-based competitors are the Stentor group of companies, in particular, Bell Canada, the dominant suppliers of long distance services in Canada, Unitel, which provides certain facilities-based and long distance services to business and residential customers, and Sprint Canada and fONOROLA Inc., which provide certain transmission facilities-based services and also acts as reseller of telecommunications services. The Company also competes against CamNet, Inc., a reseller of telecommunications services. The Company believes that, for some of its customers and potential customers, it has a competitive advantage over other Canadian resellers as a result of its operations in the U.S. and the U.K. In particular, the trans-Atlantic link that it established in June 1993 between the U.K. and Canada allows ACC Canada to sell traffic to the U.K. with a significantly lower cost structure than many other resellers. United Kingdom. In the U.K. the Company competes with facilities-based carriers and other resellers. The Company's principal competitors in the U.K. are British Telecom, the dominant supplier of telecommunications services in the U.K., and Mercury. The Company also faces competition from emerging licensed public telephone operators (who are constructing their own facilities-based networks) such as Energis, and from other resellers including IDB WorldCom Services Inc., Esprit and Sprint. The Company believes its services are competitive, in terms of price and quality, with the service offerings of its U.K. competitors primarily because of its advanced network- related hardware and software systems and the network configuration and traffic management expertise employed by it in the U.K. REGULATION United States The services which the Company's U.S. operating subsidiaries provide are subject to varying degrees of federal, state and local regulation. The FCC exercises jurisdiction over all facilities of, and services offered by, telecommunications common carriers to the extent that they involve the provision, origination or termination of jurisdictionally interstate or international communications. The state regulatory commissions retain jurisdiction over the same facilities and services to the extent they involve origination or termination of jurisdictionally intrastate communications. In addition, many regulations may be subject to judicial review, the result of which the Company is unable to predict. Telecommunications Act of 1996. In February 1996, the "Telecommunications Act of 1996" was enacted. The legislation is intended to introduce increased competition in U.S. telecommunication markets. The legislation opens the local services market by requiring local exchange carriers to permit interconnection to their networks and by establishing local exchange carrier obligations with respect to unbundled access, resale, number portability, dialing parity, access to rights-of-way, mutual compensation and other matters. In addition, the legislation codifies the local exchange carriers' equal access and nondiscrimination obligations and preempts inconsistent state regulation. The legislation also contains special provisions that eliminate the AT&T Divestiture 42 Decree (and similar antitrust restrictions on the GTE Operating Companies ("GTOCs")) which restricts the RBOCs from providing long distance services. These new provisions permit an RBOC to enter the "out-of-region" long distance market immediately and the "in-region" long distance market if it satisfies several procedural and substantive requirements, including showing that facilities-based competition is present in its market and that it has entered into interconnection agreements which satisfy a 14-point "checklist" of competitive requirements. The Company is likely to face significant additional competition, including from NYNEX Corp., the regional RBOC in the Company's Northeastern U.S. service area, which may be among the first RBOCs permitted to offer in-region long distance services. The new legislation provides for certain safeguards to protect against anticompetitive abuse by the RBOCs, but whether these safeguards will provide adequate protection to alternative carriers, such as the Company, and the impact of anticompetitive conduct if such conduct occurs, is unknown. Under the legislation, any entity, including long distance carriers such as AT&T, cable television companies and utilities, may enter any telecommunications market, subject to reasonable state consumer protection regulations. The legislation also eliminates the statutory barrier which prevented local telephone companies from providing video programming services in their regions. The FCC may also forbear from regulating, in whole or in part, certain types of carriers upon compliance with certain procedural requirements. Such legislation, and the regulations that implement it will subject the Company to increased competition and may have other, as yet unknown, effects on the Company. Federal. The FCC has classified ACC U.S. as a non-dominant interexchange carrier. Generally, the FCC has chosen not to exercise its statutory power to closely regulate the charges or practices of non-dominant carriers. Nevertheless, the FCC acts upon complaints against such carriers for failure to comply with statutory obligations or with the FCC's rules, regulations and policies. The FCC also has the power to impose more stringent regulatory requirements on the Company and to change its regulatory classification. The Company believes that, in the current regulatory environment, the FCC is unlikely to do so. Until October 1995, AT&T was classified as a dominant carrier but AT&T successfully petitioned the FCC for non-dominant status in the domestic interstate and interexchange market. Therefore, certain pricing restrictions that once applied to AT&T have been eliminated, which could result in increased prices for services the Company purchases from AT&T and more competitive retail prices offered by AT&T to customers. However, to date, the Company has not found rate changes attributable to the price cap regulation of AT&T and the local exchange carriers to have substantially adversely affected its business. AT&T is, however, still classified as a dominant carrier for international services. AT&T's application for reclassification as non- dominant in the international market is currently pending. Both domestic and international non-dominant carriers must maintain tariffs on file with the FCC. Prior to a recent court decision which reversed the FCC's "forbearance policy" that had excused non-dominant interexchange carriers from filing tariffs with the FCC, domestic non-dominant carriers were permitted by the FCC to file tariffs with a "reasonable range of rates" instead of the detailed schedules of individual charges required of dominant carriers. However, the Company must now file tariffs containing detailed actual rate schedules. In reliance on the FCC's past relaxed tariff filing requirements for non-dominant domestic carriers, the Company and most of its competitors did not maintain detailed rate schedules for domestic offerings in their tariffs. AT&T has filed suit against three of its major competitors for failing to file tariffs during the period preceding the court decision. Until the two year statute of limitations expires, the Company could be held liable for damages for its past failure to file tariffs containing actual rate schedules. Recent legislative changes may, however, result in the FCC's adopting a new forbearance policy, and the FCC is expected to institute a rule-making proceeding to consider the merits of reinstating a forbearance policy. There can be no assurance in this regard, however. In contrast to these recent developments affecting domestic long distance service, the Company's U.S. subsidiaries have long been subject to certification and tariff filing requirements for all international resale 43 operations. The Company's U.S. subsidiaries' international rates are not subject to either rate-of-return or price cap regulation. The Company must seek separate certification authority from the FCC to provide private line service or to resell private line services between the U.S. and any foreign country. The Company's ACC Global Corp. subsidiary has received authority from the FCC to resell private lines on a switched service basis between the U.S. and Canada, and was the first entity to file to obtain such authority between the U.S. and the United Kingdom, which it received in September 1994. Among domestic local carriers, only the incumbent local exchange carriers are currently classified as dominant carriers. Thus, the FCC regulates many of the local exchange carriers' rates, charges and services to a greater degree than the Company's, although FCC regulation of the local exchange carriers is expected to decrease over time, particularly in light of recent U.S. legislation. To date, the FCC has exercised its regulatory authority to supervise closely the rates only of dominant carriers. However, the FCC has increasingly relaxed its control in this area. For example, the FCC is in the process of repricing local transport charges (the fee for the use of the local exchange carrier's transmission facility connecting the local exchange carrier's central offices and the interexchange carrier's access point). In addition, the local exchange carriers have been afforded a degree of pricing flexibility in setting access charges where adequate competition exists, and the FCC is considering certain proposals which would relax further local exchange carriers access regulation. Under interim rate structures adopted by the FCC, projected access charges for AT&T, and possibly other large interexchange carriers, would decrease while access charges for smaller interexchange carriers, including the Company, would increase. While the outcome of these proceedings is uncertain, should the FCC adopt permanent access charge rules along the lines of the interim structures it has allowed to take effect, it could place the smaller interexchange carriers, such as the Company, at a cost disadvantage, thereby adversely affecting their ability to compete with AT&T and larger interexchange carriers. The FCC had previously required local exchange carriers to allow "collocation" of "competitive access providers" ("CAPs") in or near the central office switching areas of the local exchange carriers, to enable such CAPs to provide transport service between a local exchange carrier's central office switch and an interexchange carrier's point-of-presence or end user location. However, a 1995 decision of the Federal Court of Appeals struck down the FCC's Order as beyond its statutory authority. The FCC has replaced the requirement of "collocation" with a requirement of "virtual collocation", which similarly expands the authority and ability of CAPs to provide competing transport service. The recently enacted Telecommunications Act of 1996 provides the FCC with additional statutory authority to mandate collocation. In addition to its status as an access customer, the Company is now an access provider in connection with its provision of local telephone service in upstate New York. However, at present, the Company's provision of local telephone service in New York State is not subject to most Federal access rules and rate structure prescriptions applicable to the RBOCs and dominant local exchange carriers. State The Company's intrastate long distance operations are subject to various state laws and regulations including, in most jurisdictions, certification and tariff filing requirements. The Company provides long distance service in all or some portion of 40 states and has received the necessary certificate and tariff approvals to provide intrastate long distance service in 44 states. All states today allow some form of intrastate telecommunications competition. However, some states restrict or condition the offering of intrastate/intra- LATA long distance services by the Company and other interexchange carriers. In the majority of those states that do permit interexchange carriers to offer intra-LATA services, customers desiring to access those services are generally required to dial special access codes, which puts the Company at a disadvantage relative to the local exchange carrier's intrastate long distance service, which generally requires no such access code dialing. Increasingly, states are reexamining this policy and some states, such as New York, have ordered that this disadvantage be removed. The Telecommunications Act of 1996 requires local exchange companies to adopt 44 "intra-LATA equal access" as a pre-condition for the local exchange carriers entering into the inter-LATA long distance business. Accordingly, it is expected that the dialing disparity for intra-LATA toll calls will be removed in the future. The Company expects to have "equal access", with respect to intra-LATA calls, for over 90% of its New York State subscribers by the end of 1996. Implementation in other states may take longer. PSCs also regulate access charges and other pricing for telecommunications services within each state. The RBOCs and other local exchange carriers have been seeking reduction of state regulatory requirements, including greater pricing flexibility. This could adversely affect the Company in several ways. The regulated prices for intrastate access charges that the Company must pay could increase both relative to the charges paid by the largest interexchange carriers, such as AT&T, and in absolute terms as well. Additionally, the Company could face increased price competition from the RBOCs and other local exchange carriers for intra-LATA long distance services, which may also be increased by the removal of former restrictions on long distance service offerings by the RBOCs as a result of recently enacted legislation. New York State Regulation of Long Distance Service. Beginning in 1992, the New York Public Service Commission ("NYPSC") commenced several proceedings to investigate the manner in which local exchange carriers should be regulated. In July 1995, the NYPSC ordered the acceptance of a Performance Regulation Plan for New York Telephone. The terms of the plan, as ordered, included: (i) a limitation on increases in basic local rates for the 5-year term of the plan, (ii) implementation of intra-LATA equal access by no later than March 1996, (iii) reductions in the intrastate inter-LATA equal access charges which the Company and other interexchange carriers pay over the next five years totaling 33%, (iv) reductions in the intra-LATA toll rates charged to the end user customer over the next five years totaling 21%, and (v) an intercarrier compensation plan that reduced the rates paid by the competitive local exchange carriers (including the Company's subsidiaries) by one-half. New York Telephone does have some increased ability to restructure rates and to request rate reductions, but all rate changes are still subject to NYPSC approval. New York Telephone is also required to meet various service quality measurements, and will be subject to financial penalties for failure to meet these objectives. In a manner similar to the FCC, the NYPSC has adopted revised rules governing the manner in which intrastate local transport elements of access charges are to be priced. These revisions accompanied its decision ordering local exchange carriers to permit "collocation" for intrastate special access and switched access transport services. In general, where CAPs have established interconnections at the switches of individual local exchange carriers, the local exchange carriers will be given expanded authority to enter into individually negotiated contracts with interexchange carriers for transport service. At the same time, the access charges to other interexchange carriers located at the same switching facilities generally will be lowered. If insufficient competition is present at that switching facility, the pre- existing intrastate "equal price per unit of traffic" rule will remain in effect. While the presence of switch interconnections may actually lower the price the Company may pay for local transport services, the ability of carriers that handle large traffic volumes, such as AT&T, to negotiate flat rate direct transport charges may result in the Company paying more per unit of traffic than its competitors for local transport service. New York State Regulation of Local Telephone Service. The NYPSC has determined that it will allow competition in the provision of local telephone service in New York State, including "alternate access," private line services and local switched services. The Company applied to the NYPSC for authority to provide such services, and received certifications in early 1994 to offer these services. The NYPSC has also authorized resale of local exchange services, which may allow significant market entry by large toll carriers such as AT&T and MCI. The Company's ability to offer competing local services profitably will depend on a number of factors. For the Company to compete effectively against New York Telephone, Frontier Corp. and other local exchange carriers in the Company's upstate New York service areas, it must be able to interconnect with the network of local exchange carriers in the markets in which it plans to offer local services, obtain direct telephone number assignments and, in most cases, negotiate with those local exchange carriers for certain services such as leased 45 lines, directory assistance and operator services on commercially acceptable terms. The order issued in the New York Telephone Performance Regulation Plan (described above) established prices for interconnection and required New York Telephone to tariff this service, making it generally available to all competitors, including the Company. The actual monies paid by the Company to New York Telephone for terminating the Company's traffic, and the monies received by the Company from New York Telephone for terminating New York Telephone traffic, are subject to NYPSC regulation and will depend upon the Company's compliance with certain service obligations imposed by the NYPSC, including the obligation to serve residential customers. The rates will also affect the Company's competitive position in the intra-LATA toll market relative to the local exchange carrier and major interexchange carriers such as AT&T and MCI, which may offer intra-LATA toll services. The NYPSC has also issued orders assuring local telephone service competitors access to number resources, listing in the local exchange carrier's directory and the right to reciprocal intercarrier compensation arrangements with the local exchange carriers, and also establishing interim rules under which competitive providers of local telephone service are entitled to comparable access to and inclusion in local telephone routing guides and access to the customer information of other carriers necessary for billing or other services. The Company has obtained number assignments in 12 upstate New York markets and has applications pending in 11 additional cities. The NYPSC has also adopted interim rules that would subject competitive providers of local telephone service to a number of rules, service standards and requirements not previously applicable to "nondominant" competitors such as the Company. These rules include requirements involving "open network architecture," provision of reasonable interconnection to competitors, and compliance with the NYPSC's service quality standards and consumer protection requirements. As part of its "open network architecture" obligations, the Company could be required to allow collocation with its local toll switch upon receipt of a bona fide request by an interexchange carrier or other carrier. Compliance with these rules in connection with the Company's provision of local telephone service may impose new and significant operating and administrative burdens on the Company. This proceeding will also determine the responsibilities of new local service providers with respect to subsidies inherent in existing local exchange carrier rates. Local Telephone Service in Massachusetts. The Massachusetts Department of Public Utilities ("DPU") has initiated a docket (currently in its briefing stages) to determine the format for local competition in that state. The format appears to be similar to the structure developing in New York State. Pending the outcome of this proceeding, the DPU is allowing companies to apply for certification as local exchange carriers and to begin operations under interim agreements. The Company is in the process of applying for certification. The Company's ability to construct and operate competitive local service networks for both local private line and switched services will depend upon, among other things, implementation of the structural market reforms discussed above, favorable determinations with respect to obligations by the state and federal regulators, and the satisfactory implementation of interconnection with the local exchange carriers. Canada Long distance telecommunications services in Canada generally are subject to regulation by the CRTC. As a result of significant regulatory changes during the past several years, the historical monopolies for long distance service granted to regional telephone companies in Canada have been terminated. This has resulted in a significant increase in competition in the Canadian long distance telecommunications industry. CRTC Decisions. In March 1990, the CRTC for the first time permitted non- facilities-based carriers, such as ACC Canada, to aggregate the traffic of customers on the same leased interexchange circuits in order to provide discounted long distance voice services in the provinces of Ontario, Quebec and British Columbia. In September 1990, the CRTC also authorized carriers in addition to members of the Stentor consortium to interconnect their transmission facilities with the Message Toll Service ("MTS") facilities of Teleglobe Canada, for the purpose of allowing resellers, such as ACC Canada, to resell international long distance MTS service. Prior to this decision, Bell Canada and other members of Stentor were the exclusive long distance carriers interconnected to Teleglobe Canada's MTS facilities. 46 In June 1992, the CRTC effectively removed the monopoly rights of those Stentor member companies that were parties to this proceeding with respect to the provision of transmission facilities-based long distance voice services in the territories in which they operate and opened the provision of these services to substantial competition in all provinces of Canada other than Alberta, Saskatchewan and Manitoba. Competition has subsequently been introduced in Alberta and Manitoba, which are subject to CRTC regulation, and Saskatchewan, which has not yet become subject to CRTC regulation. Among other things, the CRTC also directed the telephone companies that were subject to this decision to provide Unitel with "equal ease of access;" i.e., to allow Unitel to directly connect its network to the telephone companies' toll and end office switches to allow Unitel's customers to make long distance calls without dialing extra digits. In July 1993, the CRTC ordered the same telephone companies to provide resellers with equal ease of access upon payment of contribution, network modification and ongoing access charges on the same general basis as for transmission facilities-based carriers. At the same time, the CRTC also required telephone company competitors to assume certain financial obligations, including the payment of "contribution charges" designed to ensure that each long distance carrier bears a fair proportion of the subsidy that long distance services have traditionally contributed to the provision of local telephone service. As a result, contribution charges payable by resellers were increased. These charges are levied on resellers as a monthly charge on leased access lines. The charges vary for each telephone company based on that company's estimated loss on local services. Contribution charges were reduced by a discount which was initially 25%, and which declines over time to zero in 1998. Resellers, whose access lines were connected only to end offices on a non-equal access basis, initially paid contribution charges of 65% of the equal access contribution rates, rising over a five-year period to an 85% rate thereafter. The CRTC also established a mechanism under which contribution rates will be re-examined on a yearly basis. In March 1995, the CRTC decreased the contribution charges required to be paid by alternate long distance service providers to the local telephone companies, and made such decreases retroactive to January 1, 1994. Contribution charges payable to Bell Canada were reduced by 23%, and those payable to BC Tel by 13%. Transmission facilities-based competitors and resellers that obtained equal ease of access also assumed approximately 30% of the estimated Cdn. $240 million cost required to modify the telephone companies' networks to accommodate interconnection with competitors as well as a portion of the ongoing costs of the telephone companies to provide such interconnection. Initial modification charges are spread over a period of 10 years. These charges and costs are payable on the basis of a specified charge per minute. In September 1994, the CRTC established substantial changes to Canadian telecommunications regulation, including: (i) initiation of a program of rate rebalancing, which would entail three annual increases of Cdn. $2 per month in rates for local service, with corresponding decreases in rates for basic toll service, and an indication from the CRTC that there would be no price changes which would result in an overall price increase for North American basic toll schedules combined; (ii) the telephone companies' monopoly local and access services, including charges for bundled services provided to competitors (the Utility segment), would remain in the regulated rate base, and the CRTC would replace earnings regulation for the Utility segment with price caps effective January 1, 1998; (iii) other services (the Competitive segment) would not be subject to earnings regulation after January 1, 1995, after which a Carrier Access Tariff would become effective, which would include charges for contribution, start-up cost recovery and charges for bundled services applicable to the telephone companies' and competitors' traffic based on a per minute calculation, rather than the per trunk basis previously used to calculate contribution charges; (iv) while the CRTC considered it premature to forebear from regulating interexchange services, it considered that the framework set forth in the decision may allow forbearance in the future (such forbearance has subsequently occurred in the case of certain non-dominant transmission facilities-based carriers); (v) the CRTC concluded that barriers to entry should be reduced for the local service market, including basic local telephone service and switched network alternatives, and has subsequently initiated proceedings to implement unbundled tariffs, co-location of facilities and local number portability; and (vi) the intention to consider applying contribution charges to other services using switched access, not only to long distance voice services. 47 Changes to these matters that were announced in October 1995 were the following: (i) rate rebalancing, with Cdn. $2 per month local rate increases commencing in each of January 1996 and January 1997 and another unspecified increase in 1998 (the contribution component of the Carrier Access Tariff is to be reduced correspondingly, but a corresponding reduction of basic North American long distance rates ordered by the CRTC was reversed by the Federal Cabinet in December 1995); (ii) reductions in contribution charges effective January 1, 1995, with contribution charges payable to Bell Canada reduced from 1994 levels by 16%, and those payable to BC Tel by 27%; (iii) changes to the costing methodology of the telephone companies including (a) the establishment of strict rules governing telephone company investments in competitive services involving broadband technology, (b) the requirement that the Competitive segment pay its fair share of joint costs incurred by both the Utility and Competitive segments, and (c) a directive specifying that revenues for many unbundled items must be allocated to the Utility segment thereby reducing the local shortfall and therefore contribution charges; (iv) directory operations of the telephone companies will continue to remain integral to the Utility segment, meaning that revenues from directory operations will continue to be assigned to the Utility segment to help reduce the local shortfall and therefore contribution payments; and (v) Stentor's request to increase the allowed rate of return of the Utility segment was denied and the CRTC restated its intention to retain the fifty basis point downward adjustment to the total company rate of return used to derive the Utility segment rates of return for the telephone companies. In December 1995, the CRTC announced that the per trunk basis for calculating contribution charges would be replaced by a per minute basis for calculating contribution charges starting June 1, 1996. The off-peak contribution rate will be one-half the peak rate, with the peak rate applicable between 8 a.m. and 5 p.m., Monday through Friday. The Company expects that the net effect of this change together with anticipated contribution rate reductions will be minimal in 1996, and will cause an increase of approximately Cdn. $1.5 million in the Company's 1997 network costs. However, additional reductions in contribution rates may offset this increase. The Company cannot predict the timing or the outcome of any of the pending and ongoing proceedings described above, or the impact they may have on the competitive position of ACC Canada. Telecommunications Act. In October 1993, the Telecommunications Act replaced the Railway Act (Canada) as the principal telecommunications regulatory statute in Canada. This Act provides that all federally-regulated telecommunications common carriers as defined therein (essentially all transmission facilities-based carriers) are under the regulatory jurisdiction of the CRTC. It also gives the federal government the power to issue directions to the CRTC on broad policy matters. The Act does not subject non- facilities-based carriers, such as ACC Canada, to foreign ownership restrictions, tariff filing requirements or other regulatory provisions applicable to facilities-based carriers. However, to the extent that resellers acquire their own facilities in order to better control the carriage and routing of their traffic, certain provisions of this Act may be applicable to them. United Kingdom Until 1981, British Telecom was the sole provider of public telecommunications services throughout the U.K. This monopoly ended when, in 1981, the British government granted Mercury a license to run its own telecommunications system under the British Telecommunications Act 1981. Both British Telecom and Mercury are licensed under the subsequent Telecommunications Act 1984 to run transmission facilities-based telecommunications systems and provide telecommunications services. See "Risk Factors--Dependence on Transmission Facilities-Based Carriers and Suppliers." In 1991, the British government established a "multi-operator" policy to replace the duopoly that had existed between British Telecom and Mercury. Under the multi-operator policy, the U.K. Department of Trade and Industry (the "DTI") will recommend the grant of a license to operate a telecommunications network to any applicant that the DTI believes has a reasonable business plan and where there are no other overriding considerations not to grant such license. All public telecommunications operators and international simple resellers operate under individual licenses granted by the Secretary of State for Trade and Industry pursuant to the Telecommunications Act 1984. Any telecommunications system with compatible equipment that is 48 authorized to be run under an individual license granted under this Act is permitted to interconnect to British Telecom's network. Under the terms of British Telecom's license, it is required to allow any such licensed operator to interconnect its system to British Telecom's system, unless it is not reasonably practicable to do so (e.g., due to incompatible equipment). ACC U.K. was granted an ISR License in September 1992 by the DTI and, for a period of approximately 18 months thereafter, was involved in protracted negotiations with British Telecom concerning the terms and conditions under which it could interconnect its leased line network and switching equipment with British Telecom's network. The ISR License allows the Company to offer domestic and international long distance services via connections to the PSTN of certain originating and terminating countries at favorable leased-line rates, rather than per call international settlement rates. Over time, larger carriers will be able to match the Company's rates because they also have, or are expected to obtain, international simple resale licenses. Although the ISR License applies to service between Australia, Canada, Finland, New Zealand, Sweden, the United Kingdom and the United States, the Company presently utilizes the license primarily for traffic between the U.K. and the U.S. or Canada. ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES As the Company expands its service offerings, geographic focus and its network, the Company anticipates that it will seek to acquire assets and businesses of, make investments in or enter into strategic alliances with, companies providing services complementary to ACC's existing business. The Company believes that, as the global telecommunications marketplace becomes increasingly competitive, expands and matures, such transactions will be critical to maintaining a competitive position in the industry. The Company's ability to effect acquisitions and strategic alliances and make investments may be dependent upon its ability to obtain additional financing and, to the extent applicable, consents from the holders of debt and preferred stock of the Company. While the Company may in the future pursue an active strategic alliance, acquisition or investment policy, no specific strategic alliances, acquisitions or investments are currently in negotiation and the Company has no immediate plans to commence such negotiations. If the Company were to proceed with one or more significant strategic alliances, acquisitions or investments in which the consideration consists of cash, a substantial portion of the Company's available cash (including proceeds of this offering) could be used to consummate the acquisitions or investments. If the Company were to consummate one or more significant strategic alliances, acquisitions or investments in which the consideration consists of stock, shareholders of the Company could suffer a significant dilution of their interests in the Company. Many business acquisitions must be accounted for as purchases. Most of the businesses that might become attractive acquisition candidates for the Company are likely to have significant goodwill and intangible assets, and the acquisitions of these businesses, if accounted for as a purchase, would typically result in substantial amortization charges to the Company. In the event the Company consummates additional acquisitions in the future that must be accounted for as purchases, such acquisitions would likely increase the Company's amortization expenses. In connection with acquisitions, investments or strategic alliances, the Company could incur substantial expenses, including the fees of financial advisors, attorneys and accountants, the expenses of integrating the business of the acquired company or the strategic alliance with the Company's business and any expenses associated with registering shares of the Company's capital stock, if such shares are issued. The financial impact of such acquisitions, investments or strategic alliances could have a material adverse effect on the Company's business, financial condition and results of operations and could cause substantial fluctuations in the Company's quarterly and yearly operating results. See "Risk Factors-- Need for Additional Capital" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." EMPLOYEES As of December 31, 1995, the Company had 631 full-time employees worldwide. Of this total, 222 employees were in the U.S., 266 were in Canada and 143 were in the U.K. The Company has never experienced a work stoppage and its employees are not represented by a labor union or covered by a collective bargaining agreement. The Company considers its employee relations to be good. 49 MANAGEMENT The following sets forth information concerning the directors and executive officers of the Company and its principal operating subsidiaries as of January 31, 1996:
NAME AGE POSITION(S) ---- --- ---------- Richard T. Aab...................... 46 Chairman of the Board of Directors David K. Laniak..................... 60 Chief Executive Officer, Director Arunas A. Chesonis.................. 33 President and Chief Operating Officer, Director Michael R. Daley.................... 34 Executive Vice President, Chief Financial Officer and Treasurer Steve M. Dubnik..................... 33 Chairman of the Board of Directors, President and Chief Executive Officer, ACC TelEnterprises Ltd. Michael L. LaFrance................. 36 President, ACC Long Distance Corp. Christopher Bantoft................. 48 Managing Director, ACC Long Distance UK Ltd. John J. Zimmer...................... 37 Vice President--Finance George H. Murray.................... 49 Vice President--Human Resources and Corporate Communications Sharon L. Barnes.................... 29 Controller Hugh F. Bennett..................... 38 Director Willard Z. Estey.................... 76 Director Daniel D. Tessoni................... 48 Director Robert M. Van Degna................. 51 Director
Richard T. Aab is a co-founder of the Company who has served as Chairman of the Board of Directors since March 1983 and as a director since October 1982. Mr. Aab also served as Chief Executive Officer from August 1983 through October 1995, and as Chairman of the Board of Directors of ACC TelEnterprises Ltd. from April 1993 through February 1994. David K. Laniak was elected the Company's Chief Executive Officer in October 1995. Mr. Laniak has been a director of the Company since February 1989. Prior to joining the Company, Mr. Laniak was Executive Vice President and Chief Operating Officer of Rochester Gas and Electric Corporation, Rochester, New York, where he worked in a variety of positions for more than 30 years. Mr. Laniak also has served since October 1995 and from May 1993 through July 1994 served as a director of ACC TelEnterprises Ltd. Arunas A. Chesonis was elected President and Chief Operating Officer of the Company in April 1994. He previously served as President of the Company and of its North American operations since April 1994, and as President of ACC Long Distance Corp. from January 1989 through April 1994. From August 1990 through March 1991, he also served as President of ACC TelEnterprises Ltd., and from May 1987 through January 1989, Mr. Chesonis served as Senior Vice President of Operations for ACC Long Distance Corp. Mr. Chesonis was elected a Director of the Company in October 1994. Michael R. Daley was elected the Company's Executive Vice President and Chief Financial Officer in February 1994, and has served as Treasurer of the Company since March 1991. He previously served as the Company's Vice President-Finance from August 1990 through February 1994, as Treasurer and Controller from August 1990 through March 1991, as Controller from January 1989 through August 1990, and various other positions with the Company from July 1985 through January 1989. Mr. Daley has served as a director of ACC TelEnterprises Ltd. since October 1994. Steve M. Dubnik was elected the Chairman of the Board of Directors, President and Chief Executive Officer of ACC TelEnterprises Ltd. in July 1994. Previously, he served from 1992 through June 1994 as President, Mid-Atlantic Region, of RCI Long Distance. For more than five years prior thereto, he served in progressively senior positions with Rochester Telephone Corporation (now Frontier Corp.) including assignments in engineering, operations, information technology and sales. 50 Michael L. LaFrance was elected the President of ACC Long Distance Corp. in April 1994. From May 1992 through May 1994, he served as Executive Vice President and General Manager of Axcess USA Communications Corp., from June 1990 through May 1992, as Director of Regulatory Affairs and Administration of LDDS Communications, Inc. and from February 1987 through June 1990, as Vice President of Comtel-TMC Telecommunications. Since April 1994, Mr. LaFrance has served as the President of ACC National Telecom Corp., the Company's local service subsidiary. Christopher Bantoft was elected Managing Director of ACC Long Distance UK Ltd. in February 1994. From 1986 through 1993, he served as Sales and Marketing Director, Deputy Managing Director, and most recently as Managing Director of Alcatel Business Systems Ltd., the U.K. affiliate of Alcatel, N.V. John J. Zimmer, a certified public accountant, was elected the Company's Vice President-Finance in September 1994. He previously served as the Company's Controller from March 1991 through September 1994. Prior to March 1991, he served as a staff accountant and then as a manager of accounting with Arthur Andersen LLP. George H. Murray was elected the Company's Vice President-Human Resources and Corporate Communications in August 1994. For more than five years prior to his joining the Company, he served in various senior management positions with First Federal Savings and Loan of Rochester, New York. Sharon L. Barnes, a certified public accountant, was elected the Company's Controller in September 1994. Previously, she served as Accounting Manager from April 1993 through September 1994. Prior to joining the Company in 1993, she served for more than four years as a staff and senior accountant with Arthur Andersen LLP. Hugh F. Bennett has been a director of the Company since June 1988. Since March 1990, Mr. Bennett has been a Vice President, Director and Secretary- Treasurer of Gagan, Bennett & Co., Inc., an investment banking firm. The Hon. Willard Z. Estey, C.C., Q.C., was elected a director of the Company at its 1994 Annual Meeting. Mr. Estey is Counsel to the Toronto, Ontario law firm of McCarthy, Tetrault. After serving as Chief Justice of Ontario, Mr. Estey was a Justice of the Supreme Court of Canada from 1977 through 1988. From 1988 through 1990, Mr. Estey was Deputy Chairman of Central Capital Corporation, Toronto, Ontario. Since May 1993, Mr. Estey has also served as a director of ACC TelEnterprises Ltd. Daniel D. Tessoni has been a director of the Company since May 1987. Mr. Tessoni is an Associate Professor of Accounting at the College of Business of the Rochester Institute of Technology, where he has taught since 1977. He holds a Ph.D. degree, is a certified public accountant and is Treasurer of several privately-held business concerns. Robert M. Van Degna has been a director of the Company since May 1995. Mr. Van Degna is Managing Partner of Fleet Equity Partners, an investment firm affiliated with Fleet Financial Group, Inc. and based in Providence, Rhode Island. Mr Van Degna joined Fleet Financial Group in 1971 and held a variety of lending and management positions until he organized Fleet Equity Partners in 1982 and became its general partner. Mr. Van Degna currently serves on the Board of Directors of Orion Network Systems, Inc. as well as several privately-held companies. Mr.Van Degna was initially elected to the Company's Board of Directors pursuant to the terms of the investment in the Company by Fleet Venture Resources, Inc. and affiliated entities described under "Principal Shareholders" and "Description of Capital Stock--Series A Preferred Stock." For a description of certain employment arrangements which may have anti- takeover effects, see "Description of Capital Stock--Certain Charter, By-law and Statutory Provisions and Other Anti-takeover Considerations." 51 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the Class A Common Stock as of January 31, 1996 and as adjusted to reflect the sale of Class A Common Stock being offered hereby (i) by each person known by the Company to beneficially own more than five percent of the Class A Common Stock, (ii) by each director, (iii) by each executive officer of the Company named in the Summary Compensation Table contained in the Company's Proxy Statement dated June 12, 1995 and incorporated by reference herein, and (iv) by all directors and executive officers as a group.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR OWNED AFTER TO OFFERING (1) OFFERING (1) ----------------------- ----------------------- BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT ---------------- ------------ ---------- ------------ ---------- Richard T. Aab (2)................. 931,904 11.8% 931,904 9.6% 400 West Avenue Rochester, New York 14611 Robert M. Van Degna (3)............ 725,000 9.2 725,000 7.5 c/o Fleet Venture Resources, Inc. 111 Westminster Street Providence, RI 02903 Fleet Venture Resources, Inc (4)... 456,750 5.8 456,750 4.7 111 Westminster Street Arunas A. Chesonis (5)............. 90,883 1.1 90,883 * Michael R. Daley (6)............... 46,021 * 46,021 * David K. Laniak (7)................ 43,626 * 43,626 * Christopher Bantoft (8)............ 22,550 * 22,550 * Daniel D. Tessoni (9).............. 22,500 * 22,500 * Hugh F. Bennett (10)............... 3,000 * 3,000 * Willard Z. Estey (11).............. -- -- -- -- All Directors and Executive Officers as a Group (14 persons, including those named above)(12).. 1,237,058 15.6 1,237,058 12.8
- -------- *Less than one percent. (1) Except as otherwise indicated, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Class A Common Stock shown as owned by them. (2) Includes options to purchase 16,672 shares of Class A Common Stock that are or will become exercisable within the next 60 days. Excludes 15,000 shares directly owned by Mr. Aab's wife and 1,500 shares that she controls as custodian for their minor children, as to which shares Mr. Aab disclaims beneficial ownership. Does not include 25,372 shares issuable upon the exercise of options which are not deemed to be presently exercisable. (3) Includes (i) 456,750 shares of Class A Common Stock beneficially owned by Fleet Venture Resources, Inc. ("Fleet Venture Resources"), of which 393,750 shares are issuable upon the conversion of Series A Preferred Stock and 63,000 shares are issuable upon the exercise of warrants; (ii) 195,750 shares of Class A Common Stock beneficially owned by Fleet Equity Partners VI, L.P. ("Fleet Equity Partners"), of which 168,750 shares are issuable upon the conversion of Series A Preferred Stock and 27,000 shares are issuable upon the exercise of warrants; and (iii) 72,500 shares of Class A Common Stock beneficially owned by Chisholm Partners II, L.P. ("Chisholm"), of which 62,500 shares are issuable upon the conversion of Series A Preferred Stock and 10,000 shares are issuable upon the exercise of warrants. As of January 31, 1996, the conversion price for the Series A Preferred Stock and the exercise price of such warrants was $16.00 per share. Does not include a total of 625,000 shares of Class A Common Stock 52 issuable to Fleet Venture Resources, Fleet Equity Partners and Chisholm upon the exercise of warrants, which warrants would become exercisable upon an optional redemption of the Series A Preferred Stock by the Company or an option to purchase 5,000 shares of Class A Common Stock granted to him, subject to shareholder approval, under the non-employee directors' stock option plan. See "Description of Capital Stock--Warrants." Mr. Van Degna is the Chief Executive Officer of Fleet Venture Resources and the Chief Executive Officer or President of each general partner of Fleet Equity Partners and Chisholm. Mr. Van Degna disclaims beneficial ownership of the shares held by these entities, except for his limited partnership interest in the general partner of Chisholm. (4) Does not include shares beneficially owned by Fleet Equity Partners or Chisholm (see note (3) above). (5) Includes 488 shares owned by Mr. Chesonis's spouse, options to purchase 80,725 shares that are or will become exercisable by Mr. Chesonis within the next 60 days and options to purchase 6,950 shares that are currently exercisable by Mr. Chesonis's spouse. Does not include 79,525 shares issuable upon the exercise of options which are not deemed to be presently exercisable. (6) Includes options to purchase 42,850 shares that are or will become exercisable within the next 60 days. Does not include 58,250 shares issuable upon the exercise of options which are not deemed to be presently exercisable. (7) Includes options to purchase 37,627 shares that are or will become exercisable within the next 60 days. Does not include 56,473 shares issuable upon the exercise of options which are not deemed to be presently exercisable. (8) Includes options to purchase 22,550 shares that are or will become exercisable within the next 60 days. Does not include 47,450 shares issuable upon the exercise of options which are not deemed to be presently exercisable or an option to purchase 5,000 shares of Class A Common Stock granted to him, subject to shareholder approval, under the non-employee directors' stock option plan. (9) Mr. Tessoni and his wife share investment and voting power with respect to all shares which he beneficially owns. Does not include an option to purchase 5,000 shares of Class A Common Stock granted to him, subject to shareholder approval, under the non-employee directors' stock option plan. (10) Mr. Bennett shares investment and voting power with his wife with respect to 1,500 of these shares. Does not include an option to purchase 5,000 shares of Class A Common Stock granted to him, subject to shareholder approval, under the non-employee directors' stock option plan. (11) Does not include an option to purchase 5,000 shares of Class A Common Stock granted to Mr. Estey, subject to shareholder approval, under the non-employee directors' stock option plan. (12) See notes (2), (3), (5), (6), (7), (8), (9), (10) and (11) above. Includes options to purchase a total of 68,425 shares that are currently or will become exercisable within the next 60 days by five executive officers of the Company, in addition to those named above. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares of Class A Common Stock, par value $0.015 per share, 25,000,000 shares of Class B Common Stock, par value $0.015 per share, and 2,000,000 shares of Preferred Stock, par value $1.00 per share. As of January 31, 1996, 7,920,776 shares of Class A Common Stock were issued and outstanding and held by approximately 477 shareholders of record and 10,000 shares of Series A Preferred Stock were issued and outstanding. No shares of Class B Common Stock have been issued by the Company. In addition, as of January 31, 1996, there were outstanding options to purchase an aggregate of up to approximately 1,347,894 shares of Class A Common Stock, of which options with respect to 544,974 shares were exercisable at a weighted average exercise price of approximately $14.01 per share, and, exclusive of the 625,000 Springing Warrants (defined below), warrants to purchase an aggregate of up to 137,500 shares of Class A Common Stock also were outstanding and exercisable as of such date. Subject to obtaining shareholder approval, the Company has adopted a stock option plan for non-employee directors and has granted options to purchase 20,000 shares thereunder at an exercise price of $23.00 per share. 53 CLASS A COMMON STOCK The holders of shares of Class A Common Stock are entitled to one vote per share on all matters to be voted on by shareholders. Except as described below, the Series A Preferred Stock votes together with the Class A Common Stock. The holders of shares of Class A Common Stock are not entitled to cumulate their votes in the election of directors and, as a consequence, minority shareholders will not be able to elect directors on the basis of their votes alone. Subject to the dividend preferences of the Series A Preferred Stock and any dividend preferences that may be applicable to any shares of Preferred Stock or Class B Common Stock issued in the future, holders of shares of Class A Common Stock are entitled to receive ratably such dividends as may be declared from time to time by the Board of Directors, in its discretion, from any assets legally available therefor. The Credit Facility and the Series A Preferred Stock prohibit the payment of dividends and the Company does not intend to pay dividends on the Class A Common Stock for the foreseeable future. See "Price Range of Class A Common Stock and Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of the Class A Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of the Series A Preferred Stock and any liquidation preferences that may be applicable to any shares of Preferred Stock or Class B Common Stock issued in the future. The holders of Class A Common Stock are not entitled to preemptive, subscription or conversion rights, and there are no redemption or sinking fund provisions applicable to the Class A Common Stock. The holders of Class A Common Stock are not subject to further calls or assessments by the Company. All outstanding shares of Class A Common Stock are validly issued, fully paid and non-assessable. The Class A Common Stock is quoted on the Nasdaq Stock Market under the symbol "ACCC." The Company's transfer agent and registrar for its Class A Common Stock is Society National Bank, Cleveland, Ohio. CLASS B COMMON STOCK The Board of Directors has the authority to fix the rights, preferences, privileges and restrictions of Class B Common Stock, including dividend rights, conversion rights, terms of redemption, liquidation preferences and sinking fund provisions, without any further vote or action by shareholders; provided, however, that holders of Class B Common Stock shall not be entitled to vote on any matters brought before the shareholders of the Company, shall not be entitled to vote as a class upon any proposed increase or decrease in the aggregate number of authorized shares of Class B Common Stock and shall be subject to the rights, preferences and privileges of the Series A Preferred Stock with respect to liquidation, dividends and redemptions and the rights, preferences and privileges of any other series of Preferred Stock. The Class B Common Stock was originally authorized for possible issuance to foreign investors due to FCC limitations on foreign control of wireless communications facilities. PREFERRED STOCK The Board of Directors has the authority to issue shares of Preferred Stock in one or more series and to fix the relative rights and preferences of the shares, including voting powers, dividend rights, liquidation provisions, redemption provisions, sinking fund provisions and conversion privileges, without any further vote or action by the shareholders. As a result, the Board of Directors could, without shareholder approval, issue shares of Preferred Stock with voting, dividend, liquidation, conversion or other rights that could adversely affect the holders of Class A Common Stock and that may have the effect of delaying, deferring or preventing a change of control of the Company. In addition, because the terms of such Preferred Stock may be fixed by the Board of Directors without shareholder action, the Preferred Stock could be designated and issued quickly in the event the Company requires additional equity capital. Under certain circumstances, this could have the effect of decreasing the market price of the Class A Common Stock. SERIES A PREFERRED STOCK General. The Board has designated 10,000 shares of Preferred Stock as Series A Preferred Stock. The holders of Series A Preferred Stock have the right to vote, on all matters to be voted on by the Company's 54 shareholders, on an as-converted basis with the shares of Class A Common Stock and also have the right to vote as a separate class to elect one director so long as at least 3,300 shares of Series A Preferred Stock remain outstanding. The holders of Series A Preferred Stock are entitled to receive a dividend payable at the rate of 12% per annum, which shall be cumulative and compounded if not paid. No dividends have been paid to date on the Series A Preferred Stock. The Company is not permitted to pay any dividends on the Class A or Class B Common Stock, and no shares of Class A or Class B Common Stock may be redeemed or repurchased by the Company without the prior written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock. Upon the liquidation, distribution of assets, dissolution or winding up of the Company, a holder of Series A Preferred Stock shall be entitled to receive, prior to the holders of Class A and Class B Common Stock, $1,000 per share plus all accrued and unpaid dividends thereon. Conversion. At any time, any holder of Series A Preferred Stock may convert all or any portion thereof into Class A Common Stock of the Company. As of January 31, 1996, the shares of Series A Preferred Stock outstanding were convertible into 625,000 shares of Class A Common Stock based on the conversion price as of such date of $16.00 per share. The conversion price is subject to certain antidilution adjustments, including (i) a ratchet antidilution adjustment of the conversion price (a) if shares of Class A or Class B Common Stock, or securities convertible into or exchangeable for Class A or Class B Common Stock, are issued or sold (including, without limitation, by way of consolidation, merger or sale of all or substantially all of the Company's assets) for consideration which is less than the conversion price then in effect, down to the aggregate consideration per share of Class A or Class B Common Stock issued or sold pursuant to such transaction or issuable upon the conversion or exchange of convertible or exchangeable securities issued or sold pursuant to such transaction or (b) if options (other than options or similar rights granted to employees or directors of the Company to purchase an aggregate of up to 1,596,702 shares of Class A or Class B Common Stock, subject to adjustment for stock splits, stock dividends, recapitalizations and the like), warrants or similar rights to purchase Class A or Class B Common Stock are issued having an exercise price less than the conversion price then in effect, down to the aggregate consideration per share of Class A or Class B Common Stock which would be paid upon the sale or grant and exercise of such options, warrants or rights and (ii) upon stock splits, stock dividends, recapitalizations and the like. The Series A Preferred Stock will convert automatically into Class A Common Stock at any time after May 19, 1997 if (i) the daily trading volume of the Class A Common Stock in the public market exceeds 5% of the number of shares of Class A Common Stock issuable upon conversion of all shares of Series A Preferred Stock for a period of 45 consecutive trading days; (ii) the market price per share of Class A Common Stock equals or exceeds the following levels (the "Target Prices"), subject to adjustment for stock splits, stock dividends and the like, on any of the following dates: $32.00 on May 22, 1997, $32.00 on May 22, 1998, $39.06 on May 22, 1999, $39.81 on May 22, 2000, $47.78 on May 22, 2001 and $57.33 on May 22, 2002, provided that, in the event that any measurement of the market price of Class A Common Stock is to occur between any of the foregoing dates, the Target Prices shall be prorated based upon the number of days elapsed from the earlier date; and (iii) no holder of Series A Preferred Stock is subject to any underwriters' lockup agreement with respect to the shares of Class A Common Stock issuable upon the conversion thereof. Upon any conversion, the accrued and unpaid dividends on the Series A Preferred Stock being converted will be extinguished and no longer deemed payable. The dividend rate on the Series A Preferred Stock will increase to 15%, and the conversion price then in effect will be reduced by one-third, if certain defaults by the Company occur, including the failure to make any redemption payment when due and the Company's breach or failure to perform certain representations, warranties or covenants set forth in the Certificate of Designations or the purchase agreement under which the Series A Preferred Stock was issued ("Events of Noncompliance"). Redemption. The Company has the option to redeem the Series A Preferred Stock at any time for $1,000 per share plus all accrued and unpaid dividends thereon, and is required to redeem the Series A Preferred Stock on May 19, 2002 at a price per share equal to the greater of $1,000 or the market price of the Class A Common into which such shares of Series A Preferred Stock are convertible as of 4 p.m., New York time, on May 14, 2002. Any holder of Series A Preferred Stock has the option to cause the Company to redeem his shares in the case of a change of control, certain merger or consolidation transactions, a sale of more than 50% of the Company's assets, an Event of Noncompliance or the entry of a judgment against the Company or default by the 55 Company under any obligation or agreement for which the amount involved exceeds $500,000. The Series A Preferred Stock is subject to immediate redemption upon an assignment by the Company for the benefit of creditors or voluntary or involuntary bankruptcy. Holders of Series A Preferred Stock have preemptive rights to purchase on an as-converted basis a pro rata portion of any Company issuance of Class A Common Stock or rights to purchase Class A Common Stock, subject to certain exceptions, including the issuance of Class A or Class B Common Stock pursuant to a public offering registered under the Securities Act (which includes this offering), an acquisition of another company or business, a strategic investment in the Company by other entities in the telecommunications or other utilities business, stock options granted to Company employees and stock issued in connection with the provision or extension of senior debt financing to the Company or any of its subsidiaries. WARRANTS As of January 31, 1996, warrants to purchase an aggregate of 100,000 shares of Class A Common Stock at an exercise price of $16.00 per share (subject to adjustment for stock splits, stock dividends and the like and other antidilution adjustments, including a ratchet antidilution adjustment similar to that described in the preceding section with respect to the Series A Preferred Stock), a warrant to purchase 30,000 shares of Class A Common Stock at an exercise price of $16.00 per share (subject to adjustment for stock splits, stock dividends and the like), and a warrant to purchase 7,500 shares of Class A Common Stock at an exercise price of $18.75 per share (subject to adjustment for stock splits, stock dividends and the like), were outstanding and exercisable. As of January 31, 1996, the Company also had outstanding springing warrants (the "Springing Warrants") to purchase an aggregate of up to 625,000 additional shares of Class A Common Stock at an exercise price of $16.00 per share (assuming a conversion price of $16.00 per share as of the redemption date), which warrants become exercisable upon and to the extent of an optional redemption of the Series A Preferred Stock by the Company. The exercise price and number of shares issuable under the Springing Warrants are subject to adjustment for stock splits, stock dividends and the like and other antidilution adjustments, including a ratchet antidilution adjustment similar to that described in the preceding section with respect to the Series A Preferred Stock. REGISTRATION RIGHTS The holders of the Series A Preferred Stock (collectively, the "Holders") are entitled to certain registration rights with respect to the shares of Class A Common Stock issuable upon a conversion of the Series A Preferred Stock, the exercise of the Springing Warrants and warrants to purchase up to 100,000 shares of Class A Common Stock (all such shares of Class A Common Stock and certain other securities, the "Registrable Shares"). If the Company proposes to register any of its securities under the Securities Act, the Holders will be entitled to notice thereof and, subject to certain restrictions, to include their Registrable Shares in such registration. Holders of Registrable Shares may make up to two demands of the Company to file a registration statement under the Securities Act, subject to certain conditions and limitations and provided that any demand must be at an aggregate offering price to the public of at least $7.5 million and no demand may be made within 180 days after the effective date of a prior demand registration. Furthermore, one or more Holders of Registrable Shares may require the Company on up to five occasions to register their shares on Form S-3 or similar short-form registration forms, subject to certain conditions and limitations and provided that any such demand must be at an aggregate offering price to the public of at least $5.0 million. A Holder's right to include shares in an underwritten registration is subject to the right of the underwriters to limit the number of shares included in the offering. Subject to certain limitations, the Company is required to bear all registration, legal (for no more than one independent legal counsel for all selling Holders) and other expenses in connection with these registrations (other than underwriting discounts and commissions) and must provide appropriate indemnification. The holders of warrants for the purchase of up to 30,000 shares of Class A Common Stock are entitled to make one demand of the Company to file a registration statement under the Securities Act with respect to all of such 30,000 shares of Class A Common Stock, subject to certain conditions and limitations, including the 56 Company's right to defer commencement of registration for up to 90 days if such deferral is deemed necessary or appropriate by counsel to the Company. The Company is required to bear all registration, legal and other expenses in connection with the demand registration (other than underwriting discounts and commissions and all legal and accounting fees of advisors for the selling shareholders) and must provide appropriate indemnification. CERTAIN CHARTER, BY-LAW AND STATUTORY PROVISIONS AND OTHER ANTI-TAKEOVER CONSIDERATIONS The Company's Certificate of Incorporation requires the affirmative vote of the holders of at least 80% of all outstanding shares of Class A Common Stock to alter, amend, adopt any provision inconsistent with or repeal certain provisions of the Certificate of Incorporation, including the ability of the shareholders to amend the Company's By-laws, the prohibition on shareholder action by written consent, the prohibition on the calling of special meetings by shareholders, and limitations on the personal liability of the Company's directors for breach of their fiduciary duty as directors. The Company's By- laws also provide that the Company's shareholders can only alter, amend, adopt or repeal any provision of the Company's By-laws by the affirmative vote of the holders of at least 80% of all outstanding shares of Class A Common Stock. So long as any shares of the Series A Preferred Stock remain outstanding, the Company will not be able to take any of the following actions without obtaining the prior written consent of the holders of a majority of the Series A Preferred Stock: (i) declare dividends on any class of capital stock other than the Series A Preferred Stock; (ii) redeem any capital stock other than Series A Preferred Stock; (iii) make any amendment to the Company's Certificate of Incorporation or By-laws that would include or make any changes to any anti-takeover provisions in the Company's Certificate of Incorporation or By-laws; (iv) make any amendment to the Company's Certificate of Incorporation or By-laws that would have an adverse effect on or impair the rights or relative priority of the Series A Preferred Stock; (v) make any changes in the nature of the Company's business beyond the telecommunications field; or (vi) engage in any transactions with affiliates (except for transactions with subsidiaries and compensation and benefit matters approved by the Executive Compensation Committee of the Company's Board or other transactions approved by an independent committee of the Board). Under the Credit Facility, the lenders have the right to demand payment of all loans outstanding upon a change in control of the Company, unless the person or group of persons acquiring control are members of the Company's current management. The Credit Facility also prohibits the Company from engaging in certain merger or consolidation transactions, selling, leasing or otherwise disposing of its property, business or assets other than the sale of inventory in the ordinary course of business and certain other permitted dispositions, or dissolving or liquidating the Company. In addition, any holder of Series A Preferred Stock has the right, upon a change in control of the Company, a sale of more than 50% of the assets of the Company or certain mergers or consolidations, to require the Company to redeem all or any portion of the Series A Preferred Stock owned by such holder at a price equal to the greater of $1,000 per share or the market price or value (as of the consummation of the transaction) of the Class A Common Stock into which such shares of Series A Preferred Stock are convertible. It is possible that these provisions may have the effect of delaying, deterring or preventing a change in control of the Company. The Company's Employee Long Term Incentive Plan provides that in the event of a change in control, as may be determined at the discretion of the Compensation Committee of the Company, all options then outstanding under such Plan shall automatically become exercisable in full. The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder unless prior to the date the stockholder became an interested stockholder the board approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder or unless one of two exceptions to the prohibitions are satisfied: (i) upon consummation of the transaction that resulted in such person becoming an interested stockholder, the interested stockholder owned at least 85% of the Company's voting stock outstanding at the time the transaction commenced (excluding, for purposes of determining the number of shares outstanding, shares owned by certain directors or certain employee stock plans) or (ii) on or after the date the stockholder became an interested stockholder, the 57 business combination is approved by the board of directors and authorized by the affirmative vote (and not by written consent) of at least two-thirds of the outstanding voting stock excluding that stock owned by the interested stockholder. A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation), together with affiliates and associates, owns (or, as an affiliate or associate, within three years prior, did own) 15% or more of the corporation's outstanding voting stock. It is possible that these provisions may have the effect of delaying, deterring or preventing a change in control of the Company. The Company has entered into a salary continuation and deferred compensation agreement dated October 6, 1995 with Mr. Aab which provides for a severance payment of $1 million if, as a result of or within one year following a change in control of the Company, Mr. Aab's employment is terminated with or without cause by the Company or the acquiror, or Mr. Aab voluntarily terminates his employment. The severance payment is payable in full within 30 days following the change in control and is conditioned on Mr. Aab's agreement not to compete with the Company during and for three years following termination of his employment and to maintain confidentiality of trade secrets. The Company is obligated to pay Mr. Aab the severance payment if his employment or his position as Chairman of the Board of ACC Corp. terminates for any reason (including his voluntary resignation) other than a termination by the Company for cause, except that, if no change in control has occurred, the amount is payable in three equal annual installments. The Company has entered into an employment agreement dated October 6, 1995 with Mr. Laniak for a term of two years. The agreement with Mr. Laniak provides for payment of his then current compensation and benefits for the remainder of the term of the agreement and vesting of all outstanding stock options if, as a result of or within one year following a change in control of the Company, Mr. Laniak's employment is terminated without cause by the Company or the acquiror or Mr. Laniak voluntarily terminates his employment as a result of certain events, including a significant change in the nature or scope of his duties, relocation outside of the Rochester, New York area or a reduction in his compensation or benefits. The severance payment to Mr. Laniak is conditioned on his agreement not to compete with the Company during and for one year following termination of his employment and to maintain confidentiality of trade secrets. The Company has also entered into employment continuation and incentive agreements with 27 officers and managers, which provide for continuation of the employee's then current salary and benefits for up to 12 months following termination if, as a result of or within one year following a change in control of the Company, the Company or the acquiror terminates his employment or the employee resigns due to a significant change in the nature or scope of his duties or authority or a reduction in compensation. The agreements provide for each employee's agreement not to compete with the Company so long as the employee is receiving payments thereunder. It is possible that the agreements described above may have the effect of delaying, deterring or preventing a change in control or management of the Company. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have approximately 9,670,776 outstanding shares of Class A Common Stock, assuming (i) no exercise of the Underwriters' over-allotment option, and (ii) no exercise of options or warrants outstanding. Upon the consummation of this offering, assuming no exercise of options or warrants outstanding as of January 31, 1996 except as stated above, the Company will have outstanding options exercisable for an aggregate of approximately 1,347,894 shares of Class A Common Stock, of which options with respect to 544,974 shares will then be exercisable at a weighted average exercise price of $14.01 per share, warrants to purchase up to 762,500 shares of Class A Common Stock, of which warrants to purchase 137,500 shares will then be exercisable, and 625,000 shares of Class A Common Stock which will be issuable upon conversion of the Series A Preferred Stock. 58 Of the Class A Common Stock outstanding upon completion of this offering, the 1,750,000 shares of Class A Common Stock sold in this offering as well as approximately 4,200,000 shares previously issued by the Company will be freely tradeable without restriction or further registration under the Securities Act, except for any shares held by "affiliates" of the Company, as that term is defined under the Securities Act and the regulations promulgated thereunder (an "Affiliate"), or persons who have been Affiliates within the preceding three months. The remaining approximately 3,700,000 outstanding shares of Class A Common Stock are currently eligible for sale under Rule 144 or Rule 144(k). Approximately 1,235,000 shares of Class A Common Stock or securities exercisable for or convertible into Class A Common Stock are subject to 120- day lock-up agreements with the Underwriters. For a description of certain 120-day lock-up agreements, see "Underwriters." In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an Affiliate, who has beneficially owned "restricted securities" (defined generally in Rule 144 as unregistered securities) for a period of at least two years from the later of the date such restricted securities were acquired from the Company and the date they were acquired from an Affiliate, is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding shares of Class A Common Stock (approximately 96,708 shares immediately after this offering) and the average weekly trading volume in the Class A Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain provisions relating to the number and notice of sale and the availability of current public information about the Company. Further, under Rule 144(k), if a period of at least three years has elapsed between the later of the date restricted securities were acquired from the Company and the date they were acquired from an Affiliate of the Company, a holder of such restricted securities who is not an Affiliate at the time of the sale and has not been an Affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume and manner of sale limitations described above. The Commission has recently proposed amendments to Rule 144 and Rule 144(k) that would permit resales of restricted securities under Rule 144 after a one- year, rather than a two-year holding period, subject to compliance with the other provisions of Rule 144, and would permit resale of restricted securities by non-Affiliates under Rule 144(k) after two-year, rather than a three-year holding period. Adoption of such amendments could result in resales of restricted securities sooner than would be the case under Rule 144 and Rule 144(k) as currently in effect. In addition, the Company has registered on Forms S-8 under the Securities Act a total of approximately 2,163,000 shares of Class A Common Stock, and intends to register on Form S-8 an additional 500,000 shares of Class A Common Stock, issuable under certain options issued to employees as well as shares of Class A Common Stock issued or reserved for issuance pursuant to the Company's Employee Stock Purchase Plan. Shares issued under the plans (other than shares issued to Affiliates) generally may be sold immediately in the public market, subject to vesting requirements and the lock-up agreements described above. Subject to obtaining shareholder approval, the Company has adopted a stock option plan for non-employee directors and has granted options to purchase 20,000 shares of Class A Common Stock thereunder. The Company intends to register on Form S-8 the 250,000 shares of Class A Common Stock issuable under such plan. The holders of the Series A Preferred Stock (which is convertible into 625,000 shares of Class A Common Stock based on the conversion price in effect on January 31, 1996) and warrants to purchase 130,000 shares of Class A Common Stock are entitled to certain registration rights with respect to their shares. See "Description of Capital Stock--Registration Rights." 59 CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK The following discussion concerns the material United States federal income and estate tax consequences of the ownership and disposition of shares of Class A Common Stock applicable to Non-U.S. Holders of such shares of Class A Common Stock. In general, a "Non-U.S. Holder" is any holder other than (i) a citizen or resident, as specifically defined for U.S. federal income and estate tax purposes, of the United States, (ii) a corporation, partnership or any entity treated as a corporation or partnership for U.S. federal income tax purposes created or organized in the United States or under the laws of the United States or of any State thereof, or (iii) an estate or trust whose income is includible in gross income for United States federal income tax purposes regardless of its source. The discussion is based on current law, which is subject to change retroactively or prospectively, and is for general information only. The discussion does not address all aspects of United States federal income and estate taxation and does not address any aspects of state, local or foreign tax laws. The discussion does not consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder. Accordingly, prospective investors are urged to consult their tax advisors regarding the current and possible future United States federal, state, local and non-U.S. income and other tax consequences of holding and disposing of shares of Class A Common Stock. Dividends. In general, dividends paid to a Non-U.S. Holder will be subject to United States withholding tax at a 30% rate (or a lower rate as may be specified by an applicable tax treaty) unless the dividends are (i) effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States, and (ii) if a tax treaty applies, attributable to a United States permanent establishment maintained by the Non- U.S. Holder. Dividends effectively connected with such a trade or business or, if a tax treaty applies, attributable to such permanent establishment will generally not be subject to withholding (if the Non-U.S. Holder files certain forms annually with the payor of the dividend) but will generally be subject to United States federal income tax on a net income basis at regular graduated individual or corporate rates. In the case of a Non-U.S. Holder which is a corporation, such effectively connected income also may be subject to the branch profits tax (which is generally imposed on a foreign corporation on the deemed repatriation from the United States of effectively connected earnings and profits) at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. The branch profits tax may not apply if the recipient is a qualified resident of certain countries with which the United States has an income tax treaty. To determine the applicability of a tax treaty providing for a lower rate of withholding, dividends paid to an address in a foreign country are presumed under current Treasury Regulations to be paid to a resident of that country, unless the payor has definite knowledge that such presumption is not warranted or an applicable tax treaty (or United States Treasury Regulations thereunder) requires some other method for determining a Non-U.S. Holder's residence. Treasury Regulations proposed in 1984, if finally adopted, however, would require Non-U.S. Holders to file certain forms to obtain the benefit of any applicable tax treaty providing for a lower rate of withholding tax on dividends. Such forms would be required to contain the holder's name and address and, subject to a de minimis payment exception, an official statement by the competent authority in the foreign country (as designated in the applicable tax treaty) attesting to the holder's status as a resident thereof. Under current regulations, the Company must report annually to the United States Internal Revenue Service and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, each Non-U.S. Holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of these information returns also may be made available under the provisions of a specific treaty or agreement with the tax authorities of the country in which the Non-U.S. Holder resides. Sale of Class A Common Stock. Generally, a Non-U.S. Holder will not be subject to United States federal income tax on any gain realized upon the sale or other disposition of such holder's shares of Class A Common Stock unless (i) the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States and, if a tax treaty applies, the gain is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States; (ii) the Non-U.S. Holder is an individual who holds the shares of Class A Common Stock as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition, and either (a) such Non-U.S. Holder has a "tax home" (as specifically defined 60 for U.S. federal income tax purposes) in the United States (unless the gain from disposition is attributable to an office or other fixed place of business maintained by such non-U.S. Holder in a foreign country and a foreign tax equal to at least 10% of such gain has been paid to a foreign country), or (b) the gain from the disposition is attributable to an office or other fixed place of business maintained by such Non-U.S. Holder in the United States; (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law applicable to certain United States expatriates, or (iv) the Company is or has been during certain periods a "U.S. real property holding corporation" for U.S. federal income tax purposes (which the Company does not believe that it has been, currently is or is likely to become) and, assuming that the Class A Common Stock is deemed for tax purposes to be "regularly traded on an established securities market," the Non-U.S. holder held, at any time during the five-year period ending on the date of disposition (or such shorter period that such shares were held), directly or indirectly, more than five percent of the Class A Common Stock. Estate Tax. Shares of Common stock owned or treated as owned by an individual who is not a citizen or resident (as specially defined for United States federal estate tax purposes) of the United States at the time of death will be includible in the individual's gross estate for United States federal estate tax purposes, unless an applicable tax treaty provides otherwise, and may be subject to United States federal estate tax. Backup Withholding and Information Reporting. Under current United States federal income tax law, backup withholding tax (which generally is a withholding tax imposed at the rate of 31 percent on certain payments to persons that fail to furnish the information required under the U.S. information reporting requirements) and information reporting requirements apply to payments of dividends (actual and constructive) made to certain non- corporate United States persons. The United States back-up withholding tax and information reporting requirements generally will not apply to dividends paid on Class A Common Stock to a Non-U.S. Holder at an address outside the United States that are either subject to the 30% withholding discussed above or that are not so subject because a tax treaty applies that reduces or eliminates such 30% withholding, unless the payer has knowledge that the payee is a U.S. person. Backup withholding and information reporting generally will apply to dividends paid to addresses inside the United States on shares of Class A Common Stock to beneficial owners that are not "exempt recipients" and that fail to provide in the manner required certain identifying information. The payment of the proceeds from the disposition of shares of Class A Common Stock to or through the United States office of a broker will be subject to information reporting and backup withholding unless the holder, under penalties of perjury, certifies, among other things, its status as a Non-U.S. Holder, or otherwise establishes an exemption. Generally, the payment of the proceeds from the disposition of shares of Class A Common Stock to or through a non-U.S. office of a broker will not be subject to backup withholding and will not be subject to information reporting. In the case of the payment of proceeds from the disposition of shares of Class A Common Stock to or through a non-U.S. office of a broker that is a U.S. person or a "U.S.-related person," existing regulations require information reporting on the payment unless the broker receives a statement from the owner, signed under penalties of perjury, certifying, among other things, its status as a Non-U.S. Holder, or the broker has documentary evidence in its files that the owner is a Non- U.S. Holder and the broker has no actual knowledge to the contrary. For this purpose, a "U.S.-related person" is (i) a "controlled foreign corporation" for United States federal income tax purposes or (ii) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a United States trade or business. The backup withholding and information reporting rules are currently under review by the Treasury Department and their application to the shares of Class A Common Stock is subject to change. Non-U.S. Holders should consult their tax advisors regarding the application of these rules to their particular situations, the availability of an exemption therefrom and the procedure for obtaining such an exemption, if available. Backup withholding is not an additional tax. Any amounts withheld from a payment to a Non-U.S. Holder under the backup withholding rules will be allowed as a credit against such holder's United States federal income tax liability, if any, and may entitle such holder to a refund, provided that the required information is furnished to the United States Internal Revenue Service. 61 UNDERWRITERS Under the terms and subject to the conditions in the Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters named below (the "Underwriters") have severally agreed to purchase, and the Company has agreed to sell to them, severally, the respective number of shares of Class A Common Stock set forth opposite the names of such Underwriters below:
NUMBER OF NAME SHARES ---- --------- Morgan Stanley & Co. Incorporated.................................. Wheat, First Securities, Inc. ..................................... ------- Total........................................................ =======
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Class A Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Class A Common Stock offered hereby (other than those covered by the Underwriters' over-allotment option described below) if any such shares are taken. The Underwriters initially propose to offer part of the shares of Class A Common Stock directly to the public at the Price to Public set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $. per share under the Price to Public. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $. per share to other Underwriters or to certain dealers. After the initial offering of the shares of Class A Common Stock, the offering price and other selling terms may from time to time be varied by the Underwriters. Pursuant to the Underwriting Agreement, the Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 262,500 additional shares of Class A Common Stock at the Price to Public set forth on the cover page hereof, less underwriting discounts and commissions. The Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of Class A Common Stock hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Class A Common Stock as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares of Class A Common Stock offered by the Underwriters hereby. The Company has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not for a period of 120 days after the date of this Prospectus (A) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Class A Common Stock or any securities convertible into or exercisable or exchangeable for Class A Common Stock or (B) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Class A Common Stock, whether any such transaction described in clause (A) 62 or (B) above is to be settled by delivery of Class A Common Stock or such other securities, in cash or otherwise, other than (i) the shares to be sold hereunder, (ii) any shares of Class A Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and described in this Prospectus and (iii) any options or similar securities issued pursuant to the Company's Employee Long- Term Incentive Plan or Employee Stock Purchase Plan as such plans are in effect on the date hereof. In addition, certain executive officers, directors, Fleet Venture Resources, Fleet Equity Partners and Chisholm have agreed to the same restrictions (subject to certain additional exceptions) with respect to an aggregate of 1,235,000 shares of Class A Common Stock or securities exercisable for or convertible into Class A Common Stock held by them for 120 days after the date hereof without the prior written consent of Morgan Stanley & Co. Incorporated. See "Shares Eligible For Future Sale." Each of the Underwriters (i) has not offered or sold and will not offer or sell any shares of Class A Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purpose of their business or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 (the "Regulations"); (ii) has complied and will comply with all applicable provisions of the Financial Services Act 1986 and the Regulations with respect to anything done by it in relation to the shares of Class A Common Stock in, from or otherwise involving the United Kingdom; and (iii) has only issued or passed on and will only issue or pass on to any person in the United Kingdom any document received by it in connection with the issue of the shares of Class A Common Stock if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom such document may otherwise lawfully be issued or passed on. In connection with the offering of Class A Common Stock hereby, the Underwriters and selling group members may engage in passive market making transactions in the Company's Class A Common Stock on the Nasdaq Stock Market immediately prior to the commencement of the sale of shares in this offering, in accordance with Rule 10b-6A under the Exchange Act. Passive market making consists of displaying bids on the Nasdaq Stock Market limited by the bid prices of market makers not connected with this offering and purchases limited by such prices and effected in response to order flow. Net purchases by a passive market maker on each day are limited in amount to 30% of the passive market maker's average daily trading volume in the Class A Common Stock during the period of the two full consecutive calendar months prior to the filing with the Commission of the Registration Statement of which this Prospectus is a part and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Class A Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the issuance of the shares of Class A Common Stock offered hereby will be passed upon for the Company by Nixon, Hargrave, Devans & Doyle LLP, New York, New York. Certain legal matters in connection with the Class A Common Stock offered hereby will be passed upon for the Underwriters by Shearman & Sterling, New York, New York. EXPERTS The consolidated financial statements and schedules of the Company included or incorporated by reference in this Prospectus and elsewhere in this Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. 63 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at prescribed rates at the public reference facilities maintained by the Commission at its offices at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports and other information concerning the Company may be inspected at the offices of the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission a registration statement on Form S-3 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act with respect to the shares of Class A Common Stock offered hereby. This Prospectus, which forms a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by reference to such contract or document. For further information regarding the Company and the Class A Common Stock offered hereby, reference is hereby made to the Registration Statement and the exhibits and schedules thereto which can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. 64 ACC CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995
PAGE ---- Report of Independent Public Accountants................................ F-2 Consolidated Balance Sheets............................................. F-3 Consolidated Statements of Operations................................... F-5 Consolidated Statements of Changes in Shareholders' Equity.............. F-6 Consolidated Statements of Cash Flows................................... F-7 Notes to Consolidated Financial Statements.............................. F-9
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of ACC Corp.: We have audited the accompanying consolidated balance sheets of ACC Corp. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ACC Corp. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Arthur Andersen LLP Rochester, New York February 6, 1996 (Except with respect to the matters discussed in Notes 10 and 11.A., as to which the dates are February 20, 1996 and February 8, 1996, respectively) F-2 ACC CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Current assets: Cash and cash equivalents.......................... $ 1,021 $ 518 Restricted cash.................................... 272 -- Accounts receivable, net of allowance for doubtful accounts of $1,035 in 1994 and $2,085 in 1995..... 20,499 38,978 Other receivables.................................. 5,433 3,965 Prepaid expenses and other assets.................. 820 2,265 -------- -------- Total current assets............................. 28,045 45,726 -------- -------- Property, plant and equipment: At cost............................................ 62,618 83,623 Less-accumulated depreciation and amortization..... (18,537) (26,932) -------- -------- 44,081 56,691 -------- -------- Other assets: Restricted cash.................................... 157 -- Goodwill and customer base, net.................... 6,884 14,072 Deferred installation costs, net................... 1,639 3,310 Other.............................................. 3,642 4,185 -------- -------- 12,322 21,567 -------- -------- Total assets..................................... $ 84,448 $123,984 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 ACC CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Current liabilities: Notes payable...................................... $ -- $ 1,966 Current maturities of long-term debt............... 1,613 2,919 Accounts payable................................... 10,498 7,340 Accrued network costs.............................. 10,443 28,192 Other accrued expenses............................. 9,254 15,657 Dividends payable.................................. 208 -- ------- -------- Total current liabilities........................ 32,016 56,074 ------- -------- Deferred income taxes................................ 2,170 2,577 ------- -------- Long-term debt....................................... 29,914 28,050 ------- -------- Redeemable Series A Preferred Stock, $1.00 par value, $1,000 liquidation value, cumulative, convertible; Authorized--10,000 shares; Issued--10,000 shares.... -- 9,448 ------- -------- Minority interest.................................... 1,262 1,428 ------- -------- Shareholders' equity: Preferred Stock, $1.00 par value, Authorized-- 1,990,000 shares; Issued--no shares................................. -- -- Class A Common Stock, $.015 par value, Authorized-- 50,000,000 shares; Issued-- 7,652,601 shares in 1994 and 8,617,259 shares in 1995................. 115 129 Class B Common Stock, $.015 par value, Authorized-- 25,000,000 shares; Issued--no shares.............. -- -- Capital in excess of par value..................... 20,070 32,911 Cumulative translation adjustment.................. (1,013) (950) Retained earnings (deficit)........................ 1,524 (4,073) ------- -------- 20,696 28,017 Less-- Treasury stock, at cost (726,589 shares)........... (1,610) (1,610) ------- -------- Total shareholders' equity....................... 19,086 26,407 ------- -------- Total liabilities and shareholders' equity..... $84,448 $123,984 ======= ========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-4 ACC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------- 1993 1994 1995 -------- -------- -------- Revenue: Toll revenue.................................... $100,646 $118,331 $175,269 Leased lines and other.......................... 5,300 8,113 13,597 -------- -------- -------- Total revenue..................................... 105,946 126,444 188,866 Network costs..................................... 70,286 79,438 114,841 -------- -------- -------- Gross profit...................................... 35,660 47,006 74,025 Other Operating Expenses: Depreciation and amortization................... 5,832 8,932 11,614 Selling expenses................................ 8,726 14,497 21,617 General and administrative...................... 20,081 29,731 40,576 Equal access costs.............................. -- 2,160 -- Asset write-down................................ 12,807 -- -- -------- -------- -------- Total other operating expenses.................... 47,446 55,320 73,807 -------- -------- -------- Income (loss) from operations..................... (11,786) (8,314) 218 Other Income (Expense): Interest income................................. 205 124 198 Interest expense................................ (420) (2,023) (5,131) Terminated merger costs......................... -- (200) -- Gain on sale of subsidiary stock................ 9,344 -- -- Foreign exchange gain (loss).................... (1,094) 169 (110) -------- -------- -------- Total other income (expense)...................... 8,035 (1,930) (5,043) -------- -------- -------- Loss from continuing operations before provision for (benefit from) income taxes and minority interest......................................... (3,751) (10,244) (4,825) Provision for (benefit from) income taxes......... (3,743) 3,456 396 Minority interest in (earnings) loss of consolidated subsidiary.......................... 1,661 2,371 (133) -------- -------- -------- Income (loss) from continuing operations.......... 1,653 (11,329) (5,354) Loss from discontinued operations (net of income tax benefit of $667 in 1993)..................... (1,309) -- -- Gain on disposal of discontinued operations (net of income tax provision of $8,350 in 1993)....... 11,531 -- -- -------- -------- -------- Net Income (Loss)................................. $ 11,875 $(11,329) $ (5,354) ======== ======== ======== Net income (loss) per common and common equivalent share applicable to common stock from continuing operations....................................... $ 0.24 $ (1.60) $ (.76) Discontinued operations......................... (.18) -- -- Gain on disposal of discontinued operations..... 1.64 -- -- -------- -------- -------- Net Income (Loss) per Common and Common Equivalent Share............................. $ 1.70 $ (1.60) $ (0.76) ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 ACC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CAPITAL IN COMMON STOCK EXCESS CUMULATIVE RETAINED ---------------- OF PAR TRANSLATION EARNINGS TREASURY SHARES AMOUNT VALUE ADJUSTMENT (DEFICIT) STOCK TOTAL --------- ------ ------- ----------- -------- -------- ------- Balance, December 31, 1992................... 7,450,120 $112 $18,798 $ (957) $ 6,042 $(1,283) $22,712 Stock options exercised. 87,352 1 759 -- -- -- 760 Dividends ($.62 per common share).......... -- -- -- -- (4,233) -- (4,233) Cumulative translation adjustment............. -- -- -- 392 -- -- 392 Net income............ -- -- -- -- 11,875 -- 11,875 --------- ---- ------- ------- ------- ------- ------- Balance, December 31, 1993................... 7,537,472 $113 $19,557 $ (565) $13,684 $(1,283) $31,506 Stock options exercised. 102,375 2 363 -- -- -- 365 Employee stock purchase plan shares issued..... 12,754 -- 150 -- -- -- 150 Repurchase of shares to exercise options....... -- -- -- -- -- (327) (327) Dividends ($.12 per common share).......... -- -- -- -- (831) -- (831) Cumulative translation adjustment............. -- -- -- (448) -- -- (448) Net loss.............. -- -- -- -- (11,329) -- (11,329) --------- ---- ------- ------- ------- ------- ------- Balance, December 31, 1994................... 7,652,601 $115 $20,070 $(1,013) $ 1,524 $(1,610) $19,086 Stock options exercised. 33,525 1 479 -- -- -- 480 Sale of stock........... 825,000 12 11,084 -- -- -- 11,096 Employee stock purchase plan shares issued..... 23,633 -- 297 -- -- -- 297 Stock warrants exercised.............. 82,500 1 1,187 -- -- -- 1,188 Stock warrants issued... -- -- 200 -- -- -- 200 Accretion of Series A Preferred Stock........ -- -- (139) -- -- -- (139) Series A Preferred Stock dividends.............. -- -- (401) -- -- -- (401) Acceleration of stock option vesting......... -- -- 134 -- -- -- 134 Dividends ($.03 per common share).......... -- -- -- -- (243) -- (243) Cumulative translation adjustment............. -- -- -- 63 -- -- 63 Net loss.............. -- -- -- -- (5,354) -- (5,354) --------- ---- ------- ------- ------- ------- ------- Balance, December 31, 1995................... 8,617,259 $129 $32,911 $ (950) $(4,073) $(1,610) $26,407 ========= ==== ======= ======= ======= ======= =======
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 ACC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 1993 1994 1995 ---------- ----------- ---------- Cash flows from operating activities: Net income (loss)...................... $ 11,875 $ (11,329) $ (5,354) ---------- ----------- ---------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......... 5,832 8,932 11,614 Deferred income taxes.................. (3,826) 3,906 609 Minority interest in earnings (loss) of consolidated subsidiary............... (1,661) (2,371) 133 Gain on sale of subsidiary stock....... (9,344) -- -- Unrealized foreign exchange loss....... 109 150 180 Amortization of deferred financing costs................................. -- -- 263 Foreign exchange loss on repayment of intercompany debt..................... 760 -- -- Gain on disposal of discontinued operations............................ (11,531) -- -- Current income taxes on gain........... (7,575) -- -- Loss from discontinued operations...... 1,309 -- -- Asset write-down....................... 12,807 -- -- (Increase) decrease in assets: Accounts receivable, net............. (3,184) (5,019) (17,437) Other receivables.................... (666) (3,621) 1,782 Prepaid expenses and other assets.... (1,798) 1,030 (1,057) Deferred installation costs.......... (1,037) (1,147) (2,983) Other................................ (961) (2,206) 846 Increase (decrease) in liabilities: Accounts payable..................... (607) 7,784 (7,013) Accrued network costs................ 738 1,754 17,824 Other accrued expenses............... (3,068) 3,230 4,560 ---------- ----------- ---------- Total adjustments.................. (23,703) 12,422 9,321 ---------- ----------- ---------- Net cash provided by (used in) operating activities.............. (11,828) 1,093 3,967 ---------- ----------- ---------- Cash flows from investing activities: Cash received from sale of discontinued operations............................ 41,000 2,538 -- Capital expenditures, net.............. (17,594) (20,682) (12,424) Payments on notes receivable........... 244 -- -- Payment for purchase of subsidiary, net of cash acquired...................... -- -- (2,313) Acquisition of customer base........... (2,786) (2,861) (557) ---------- ----------- ---------- Net cash provided by (used in) investing activities.............. 20,864 (21,005) (15,294) ---------- ----------- ----------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 ACC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1993 1994 1995 ----------- ---------- ----------- Cash flows from financing activities: Net (payments) borrowings under lines of credit............................. (8,536) 25,102 (5,602) Repayment of long-term debt, other than lines of credit....................... (10,286) (1,591) (3,078) Repurchase of minority interest........ -- (226) -- Proceeds from issuance of common stock. 15,815 189 13,261 Proceeds from issuance of convertible debt.................................. -- -- 10,000 Financing costs........................ -- -- (2,876) Dividends paid......................... (816) (4,241) (451) ----------- ---------- ----------- Net cash provided by (used in) financing activities.............. (3,823) 19,233 11,254 ----------- ---------- ----------- Effect of exchange rate changes on cash.. (20) 233 (430) ----------- ---------- ----------- Net increase (decrease) in cash from continuing operations................... 5,193 (446) (503) Cash used in discontinued operations..... (4,080) -- -- Cash and cash equivalents at beginning of year.................................... 354 1,467 1,021 ----------- ---------- ----------- Cash and cash equivalents at end of year. $ 1,467 $ 1,021 $ 518 =========== ========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest............................... $ 1,847 $ 1,656 $ 4,146 =========== ========== =========== Income taxes........................... $ 8,633 $ 280 $ 203 =========== ========== =========== Supplemental schedule of noncash investing and financing activities: Equipment purchased through capital leases................................ $ 390 $ 3,077 $ 7,389 =========== ========== =========== Fair value of Metrowide assets acquired.............................. -- -- $ 10,800 Less-- cash paid at acquisition date. -- -- (1,500) Less --short term notes payable...... -- -- (2,966) ----------- ---------- ----------- Metrowide liabilities assumed.......... -- -- $ 6,334 =========== ========== =========== Other assets purchased with long-term debt.................................. -- $ 540 -- =========== ========== =========== Purchase of customer base with long- term debt............................. $ 942 -- -- =========== ========== =========== Conversion of convertible debt to preferred stock....................... -- -- $10,000 =========== ========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-8 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include all accounts of ACC Corp. (a Delaware Corporation) and its direct and indirect subsidiaries (the "Company" or "ACC"). Principal operating subsidiaries include: ACC Long Distance Corp. (U.S.), ACC TelEnterprises Ltd. (Canada), ACC Long Distance UK Ltd., and ACC National Telecom Corp. All operating subsidiaries are wholly-owned, with the exception of ACC TelEnterprises Ltd. (See B. below). All significant intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements reflect the results of operations of acquired companies since their respective acquisition dates. B. SALE OF SUBSIDIARY STOCK: On July 6, 1993, the Company's then wholly-owned Canadian subsidiary, ACC TelEnterprises Ltd., completed an initial public offering of 2 million common shares for Cdn. $11.00 per share. The Company received net proceeds of approximately Cdn. $20.7 million after underwriters' fees and before other direct costs of the offering of Cdn. $1.3 million. As a result of the offering, ACC Corp.'s ownership was reduced to approximately 70 percent. The Company recognized a gain of $9.3 million after related expenses on this transaction due to the increase in the carrying amount of the Company's investment in ACC TelEnterprises Ltd. No deferred taxes have been provided for on this gain as the Company has the ability to defer the recognition of taxable income related to this transaction indefinitely. Minority interest represents the approximately 30 percent non-Company owned shareholder interest in ACC TelEnterprises Ltd.'s equity primarily resulting from the 1993 public offering. Assuming the sale of subsidiary stock occurred on January 1, 1993, then, on a pro forma basis, the minority interest in loss of the consolidated subsidiary would have been approximately $1.6 million for the year ended December 31, 1993. This pro forma information has been prepared for comparative purposes only. During 1994, the Company repurchased 58,300 shares of ACC TelEnterprises Ltd. stock for approximately $3.69 per share. C. REVENUE: The Company records as revenue the amount of communications services rendered, as measured by the related minutes of toll traffic processed or flat-rate services billed, after deducting an estimate of the traffic or services which will neither be billed nor collected. D. PROPERTY, PLANT AND EQUIPMENT: The Company's property, plant and equipment consisted of the following at December 31, 1994 and 1995 (dollars in thousands):
1994 1995 ------- ------- Equipment................................................... $53,700 $69,174 Computer software and software licenses..................... 4,648 6,869 Other....................................................... 4,270 7,580 ------- ------- TOTAL....................................................... $62,618 $83,623 ======= =======
F-9 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Depreciation and amortization of property, plant and equipment is computed using the straight-line method over the following estimated useful lives: Leasehold improvements......................................... Life of lease Equipment, including assets under capital leases............... 2 to 15 years Computer software and software licenses........................ 5 to 7 years Office equipment and fixtures.................................. 3 to 10 years Vehicles....................................................... 3 years
Equipment and computer software include assets financed under capital lease obligations. A summary of these assets at December 31, 1994 and 1995 is as follows (dollars in thousands):
1994 1995 ------ ------- Cost........................................................ $7,360 $13,935 Less--accumulated amortization.............................. (3,482) (4,538) ------ ------- Total, net.................................................. $3,878 $ 9,397 ====== =======
Betterments, renewals, and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance are expensed. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in income. E. DEFERRED INSTALLATION COSTS: Costs incurred for the installation of local access lines are amortized on a straight-line basis over a three-year period which represents the average estimated useful life of these lines. Accumulated amortization of deferred installation costs totaled approximately $3.3 million and $4.5 million at December 31, 1994 and 1995, respectively. F. GOODWILL AND CUSTOMER BASE: All of the Company's acquisitions have been accounted for as purchases and, accordingly, the purchase prices were allocated to the assets and liabilities of the acquired companies based on their fair values at the acquisition date. As of August 1, 1995, ACC TelEnterprises Ltd. acquired Metrowide Communications ("Metrowide") in a business combination accounted for as a purchase. Metrowide is based in Toronto, Canada, and provides local and long distance services to Ontario, Canada based customers. The results of operations of Metrowide are included in the accompanying financial statements since the date of acquisition. The total cost of the acquisition was Cdn. $14.7 million (U.S. $10.8 million) including Cdn. $8.7 million (U.S. $6.3 million) of liabilities assumed, of which Cdn. $2.0 million (U.S. $1.5 million) was paid at the date of purchase, with the remaining Cdn. $4.0 million (U.S. $3.0 million) due in installments through August 1, 1996. Goodwill associated with the Metrowide purchase of Cdn. $7.0 million (U.S. $5.0 million) is being amortized over 20 years, and customer base of Cdn. $4.2 million (U.S. $3.1 million) is being amortized over five years. Accumulated amortization of goodwill approximated U.S. $108,000 at December 31, 1995. The Company amortizes acquired customer bases on a straight-line basis over five to seven years. Accumulated amortization of customer base totaled $1.7 million and $3.1 million at December 31, 1994 and 1995, respectively. F-10 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and requires that an impairment loss be recognized based on the existence of certain conditions. This Statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of their carrying amount or fair value less cost to sell. The effect of adopting SFAS No. 121 was immaterial to the consolidated financial statements. The Company continually evaluates its intangible assets in light of events and circumstances that may indicate that the remaining estimated useful life may warrant revision or that the remaining value may not be recoverable. When factors indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of the undiscounted cash flow over the remaining life of the intangible asset in measuring whether that asset is recoverable. G. COMMON AND COMMON EQUIVALENT SHARES: Primary earnings per common share are based on the weighted average number of common shares outstanding during the year and the assumed exercise of dilutive stock options and warrants, less the number of treasury shares assumed to be purchased from the proceeds using the average market prices of the Company's Class A Common Stock. The weighted average number of common shares outstanding for the fiscal years ended December 31, 1993, 1994, and 1995 were approximately 7.025 million shares, 7.068 million shares and 7.789 million shares, respectively. Primary earnings per share were computed by adjusting net income (loss) for dividends and accretion applicable to Series A Preferred Stock, as follows (dollars in thousands):
1993 1994 1995 ------- -------- ------- Income (loss) from continuing operations............ $ 1,653 $(11,329) $(5,354) Income from discontinued operations................. 10,222 -- -- ------- -------- ------- Net income (loss)................................... 11,875 (11,329) (5,354) Less Series A Preferred Stock dividend.............. -- -- (401) Less Series A Preferred Stock accretion............. -- -- (139) ------- -------- ------- Income (loss) applicable to Common Stock............ $11,875 $(11,329) $(5,894) ======= ======== =======
Fully diluted earnings per share are not presented for the year ended December 31, 1995, because the effect of the assumed conversion of the Series A Preferred Stock shares, which were authorized and issued during 1995, would be anti-dilutive. All references to common and common equivalent shares have been retroactively restated to reflect a February 4, 1993 three-for-two stock dividend. F-11 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) H. FOREIGN CURRENCY TRANSLATION: Assets and liabilities of ACC TelEnterprises Ltd. and ACC Long Distance UK Ltd., operating in Canada and the United Kingdom, respectively, are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are included as part of the cumulative translation adjustment component of shareholders' equity, while gains and losses resulting from foreign currency transactions are included in net income. In 1993, the Company recognized a foreign exchange loss of approximately $0.8 million due to the repayment of intercompany debt from its Canadian subsidiary. This debt had previously been considered of a long-term investment nature and gains and losses had been included in cumulative translation adjustment on the Company's balance sheet. I. INCOME TAXES: The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" in 1993. Deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. The cumulative effect of this change was not material to the financial statements of the Company. J. CASH EQUIVALENTS AND RESTRICTED CASH: The Company considers investments with a maturity of less than three months to be cash equivalents. In connection with an agreement described in Note 8, the Company had placed approximately $0.6 million in an escrow account. During 1994 and 1995, approximately $0.2 million and $0.4 million, respectively, was paid to an officer of the Company in accordance with the agreement. The $0.4 million was reflected as "restricted cash" on the balance sheet at December 31, 1994. K. CURRENCY FORWARD CONTRACTS: The Company enters into contracts to buy and sell foreign currencies in the future in order to protect the U.S. dollar value of certain currency positions and future foreign currency transactions. The gains and losses on these contracts are included in income in the period in which the exchange rates change. The discounts and premiums on the forward contracts are amortized over the life of the contracts. At December 31, 1995, the Company had foreign currency contracts outstanding to sell forward the equivalent of Cdn. $37.9 million and 5.3 million pounds sterling and to buy forward the U.S. dollar equivalent of Cdn. $10.0 million and 2.7 million pounds sterling. These contracts mature throughout 1996. At December 31, 1994, the Company had foreign currency contracts outstanding to sell forward the equivalent of Cdn. $19.0 million and 7.9 million pounds sterling and to buy forward the U.S. dollar equivalent of 2.4 million pounds sterling. The aggregate fair value, based on published market exchange rates, of foreign currency contracts at December 31, 1994 and 1995, was $22.7 million and $24.5 million, respectively. L. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-12 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) M. RECLASSIFICATIONS: Certain reclassifications have been made to previously reported balances for 1994 and 1993 to conform to the 1995 presentation. 2. OPERATING INFORMATION ACC is a switch-based provider of telecommunications services in the United States, Canada and the United Kingdom. The Company primarily offers long distance telecommunications services to a diversified customer base of businesses, residential customers, and educational institutions. ACC has begun to provide local telephone service as a switch-based local exchange reseller in upstate New York and as a reseller of local exchange services in Ontario, Canada. ACC primarily targets business customers with approximately $500 to $15,000 of monthly long distance usage, selected residential customers and colleges and universities. For the year ended December 31, 1995, long distance revenues account for approximately 93% of total Company revenues, while local exchange revenues and data-line sales are 2% and 3%, respectively, of total Company revenues. Geographic area information is included in Note 9. ACC operates an advanced telecommunications network consisting of seven long distance international and domestic switches located in the United States, Canada and the United Kingdom; a local exchange switch in the United States; leased transmission lines; and network management systems designed to optimize traffic routing. At December 31, 1995, approximately $14.8 million of the Company's telecommunications equipment was located on 50 university, college, and preparatory school campuses in the Northeastern United States and in the United Kingdom. Each of these institutions has signed agreements, with terms ranging from three to eleven years, for the provision of a variety of services by the Company. In the United States, the Federal Communications Commission ("FCC") and relevant state Public Service Commissions ("PSCs") have the authority to regulate interstate and intrastate rates, respectively, ownership of transmission facilities, and the terms and conditions under which the Company's services are provided. In Canada, services provided by ACC TelEnterprises Ltd. are subject to or affected by certain regulations of the Canadian Radio-Television and Telecommunications Commission (the "CRTC"). The telecommunications services provided by ACC Long Distance U.K. Ltd. are subject to and affected by regulations introduced by The Office of Telecommunications, the U.K. telecommunications regulatory authority ("Oftel"). In addition to regulation, the Company is subject to various risks in connection with the operation of its business. These risks include, among others, dependence on transmission facilities-based carriers and suppliers, price competition and competition from larger industry participants. (See "Risk Factors" in the Company's recently filed Registration Statement on Form S-3). Concentrations with respect to trade receivables are limited, except with respect to resellers, due to the large number of customers comprising the Company's customer base and their dispersion across many different industries and geographic regions. At December 31, 1995, approximately 14% of the Company's billed accounts receivable balance was due from resellers. The Company has contracted with a vendor to purchase license rights to certain software used in its operations. The Company believes that it is currently the only customer of the vendor and, as a result, the vendor is financially dependent on the Company. Any future modifications or enhancements to such software are dependent on the continued viability of the vendor. A. DISCONTINUED OPERATIONS: In 1993, the Company recorded a gain of $11.5 million, or $1.64 per share, net of a provision for income taxes of $8.4 million, related to the sale of the operating assets and liabilities of its cellular subsidiary, Danbury F-13 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Cellular Telephone Co. The proceeds of the sale were approximately $43.0 million, of which $41.0 million was received in October, 1993 with the remaining $2.0 million received in October, 1994. Revenue related to this business segment for the nine months ended September 30, 1993 was $3.9 million. The results of the cellular business segment have been reported separately as discontinued operations in the consolidated statements of operations. B. ASSET WRITE-DOWN: In 1993, the Company recorded a non-cash pretax charge of $12.8 million related to write-downs of certain assets of the Company's U.S. and Canadian operations. The U.S. write-down of intangibles amounted to approximately $1.2 million. The intangibles written off resulted from the acquisition of a number of businesses since 1985. Changes in the Company's operations since those companies were acquired, as well as an evaluation of the future undiscounted cash flow from those acquisitions, led the Company to the conclusion that the purchased intangibles no longer had value. The write-down of fixed assets in the U.S. totaled approximately $5.1 million which represented the excess of net book value over estimated recoverable value for certain assets. These assets were written down due to technological changes which made it uneconomical for the Company to continue to use these assets in the production of revenue. Included in this amount was approximately $3.0 million of equipment related to the Company's 180 mile microwave network in New York State. The Canadian write-down included approximately $2.8 million for acquired customer base and accounts receivable and $3.8 million for autodialing equipment. The write-down of the customer base and accounts receivable was due to the future undiscounted cash flow from those acquisitions being significantly less than originally anticipated. The write-down of autodialing equipment reflected the excess of net book value over estimated recoverable value for those assets as a direct effect of the decision of the Canadian Radio-Television and Telecommunications Commission on July 23, 1993, which resulted in the implementation, starting in July, 1994, of equal access in Canada. These assets were fully depreciated at December 31, 1994. C. EQUAL ACCESS COSTS: During 1994, the Company initiated the process of converting its network to equal access for its Canadian customers. Costs associated with this process were approximately $2.2 million and include maintaining duplicate network facilities during transition, recontacting customers, and the administrative expenses associated with accumulating the data necessary to convert the Company's customer base to equal access. 3. DEBT, LINES OF CREDIT, AND FINANCING ARRANGEMENTS A. DEBT: The Company had the following debt outstanding as of December 31, 1994 and 1995 (dollars in thousands):
1994 1995 ------- ------- Senior Credit Facility/Lines of Credit.................... $26,602 $20,973 Capitalized lease obligations payable in total monthly installments of $250 including interest rates ranging from 8% to 21.5%, maturing through 2000, collateralized by related equipment..................................... 4,925 9,996 Notes payable to previous Metrowide owners, interest rates ranging from 7.5% to 9%.................................. -- 1,966 ------- ------- $31,527 $32,935 Less current maturities................................... (1,613) (4,885) ------- ------- $29,914 $28,050 ======= =======
F-14 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR AMOUNT ---------- ------- (DOLLARS IN THOUSANDS) Maturities of debt, including capital lease obligations, are as follows at December 31, 1995: 1996 $ 4,885 1997 2,563 1998 5,712 1999 13,248 2000 6,527 Thereafter -- ------- $32,935 =======
Based on borrowing rates currently available to the Company for loans and lease agreements with similar terms and average maturities, the fair value of its debt approximates its recorded value. B. SENIOR CREDIT FACILITY AND LINES OF CREDIT: On July 21, 1995, the Company entered into an agreement for a $35.0 million five year senior revolving credit facility with two financial institutions. Borrowings are limited individually to $5.0 million for ACC Long Distance UK Ltd. and $2.0 million for ACC National Telecom Corp., with total borrowings for the Company limited to $35.0 million. Initial borrowings under the agreement were used to pay down and terminate the Company's previously existing lines of credit and to pay fees related to the transaction. Subsequent borrowings have been, and will be, used to finance capital expenditures and to provide working capital. Fees associated with obtaining the financing are being amortized over the term of the agreement. In conjunction with the closing, the Company issued to a financial advisor warrants to purchase 30,000 shares of the Company's Class A Common Stock at an exercise price of $16.00 per share. The warrants expire on January 21, 1999. The agreement limits the amount that may be borrowed against this facility based on the Company's operating cash flow. The agreement also contains certain covenants including restrictions on the payment of dividends, maintenance of a maximum leverage ratio, minimum debt service coverage ratio, maximum fixed charge coverage ratio and minimum net worth, all as defined under the agreement, and subjective covenants. Regarding a certain subjective covenant related to transactions with affiliates (see Note 10), a waiver was obtained covering such transactions through December 31, 1995. At December 31, 1995, the Company had available $8.7 million under this facility. The total available facility will be reduced in quarterly increments of $2.450 million from July 1, 1997 to October 1, 1998, $2.905 million from January 1, 1999 to April 1, 2000 and by $2.870 million on maturity at July 1, 2000. Borrowings under the facility are secured by certain of the Company's assets and will bear interest at either the LIBOR rate or the base rate (base rate being the greater of the prime interest rate or the federal funds rate plus 1/2%), with additional percentage points added based on a ratio of debt to operating cash flow, as defined in the facility agreement. The weighted average interest rate for borrowings during 1995 was 8.4%. Under the agreement, the Company is obligated to pay the financial institutions an aggregate contingent interest payment based on the minimum of $750,000 or the appreciation in value of 140,000 shares of the Company's Class A Common Stock over the 18 month period ending January 21, 1997, but not to exceed $2.1 million. The contingent interest is due upon the earlier of the occurrence of a triggering event, as defined, or 18 months after the closing date. In connection with the agreement, the Company must enter into hedging agreements with respect to interest rate exposure. The agreements have certain conditions regarding the interest rates, are subject to minimum aggregate balances of $10.0 million and must have durations of at least two years. The Company entered into three interest rate swap agreements in 1995 to convert the variable interest rate charged on $11.5 million of the outstanding credit facility to a fixed rate. Under these agreements, the Company is required to pay a fixed rate of F-15 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) interest on a notional principal balance. In return, the Company receives a payment of an amount equal to the variable rate calculated as of the beginning of the month. The interest rate swap agreements in effect as of December 31, 1995, are as follows:
NOTIONAL VARIABLE FIXED BALANCE RATE RATE -------- -------- ----- $2,000,000 5.938% 5.98% $7,500,000 5.938% 6.25% $2,000,000 5.938% 6.02%
These agreements expire at various times through November, 1998. At December 31, 1995, the Company has issued letters of credit totaling $1.4 million which reduce the available balance of the credit facility. The letters of credit guarantee performance to third parties. Management does not expect any material losses to result from these off-balance sheet instruments because the Company will meet its obligations to the third parties, and therefore, management is of the opinion that the fair value of these instruments is zero. As of December 31, 1994, the Company had available up to $30.0 million under two separate bank-provided line of credit agreements. During 1995, the Company obtained a commitment letter to extend its then existing lines of credit for a period greater than twelve months. In accordance with SFAS No. 6, "Classification of Short-Term Obligations Expected to be Refinanced," the outstanding lines of credit borrowings at December 31, 1994 were classified as long-term debt. Each agreement was an unsecured working capital line for up to $15.0 million at the respective bank's prime rate. Outstanding principal under each line of credit was due on demand. At December 31, 1994, the Company had available approximately $3.1 million under one line of credit. The weighted average interest rate for borrowings on this line during 1994 and 1995 was 7.4% and 8.9% respectively. At December 31, 1994, the Company had available $66,000 under the second line of credit. The weighted average interest rate for borrowings on this line during 1994 and 1995 was 7.8% and 8.8%, respectively. 4. INCOME TAXES Effective January 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by SFAS No. 109, "Accounting for Income Taxes." The cumulative effect of adopting this Statement as of January 1, 1993 was immaterial to net income. The following is a summary of the U.S. and non-U.S. income (loss) from continuing operations before provision for (benefit from) income taxes and minority interest, the components of the provision for (benefit from) income taxes and deferred income taxes, and a reconciliation of the U.S. statutory income tax rate to the effective income tax rate. Income (loss) from continuing operations before provision for (benefit from) income taxes and minority interest (dollars in thousands):
1993 1994 1995 ------- -------- ------- U.S. ............................................... $ 6,177 $ 1,301 $ 1,510 Non-U.S. ........................................... (9,928) (11,545) (6,335) ------- -------- ------- $(3,751) $(10,244) $(4,825) ======= ======== =======
F-16 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Provision for (benefit from) income taxes (dollars in thousands):
1993 1994 1995 ------- ------ ----- Current: U.S.................................................. $ -- $ (867) $581 Non-U.S.............................................. (410) -- -- ------- ------ ----- $ (410) $ (867) $581 ======= ====== ===== Deferred: U.S.................................................. (865) 1,298 (185) Non-U.S.............................................. (2,468) 3,025 -- ------- ------ ----- (3,333) 4,323 (185) ------- ------ ----- $(3,743) $3,456 $ 396 ======= ====== =====
Provision for (benefit from) deferred income taxes (dollars in thousands):
1993 1994 1995 ------- ------- ------- Difference between tax and book depreciation and amortization................................... $(2,023) $ 2,178 $ 772 Difference between tax and book basis of assets written down................................... (1,298) -- -- Valuation allowance............................. 603 6,851 2,223 Software development costs...................... -- 502 (502) Other temporary differences..................... (12) 171 (103) Net operating loss.............................. (603) (5,379) (2,575) ------- ------- ------- $(3,333) $ 4,323 $ (185) ======= ======= =======
Reconciliation of U.S. statutory income tax rate to effective income tax rate:
1993 1994 1995 ----- ----- ----- U.S. statutory income tax rate............... (35.0%) (34.0%) (34.0%) Non-deductible goodwill and customer base...... 20.3 1.2 2.7 Foreign income taxes, including valuation allowance.............. (2.4) 66.6 44.6 Gain on sale of subsidiary stock....... (87.2) -- -- State tax benefit....... -- -- (2.4) Other................... 4.5 -- (2.7) ----- ----- ----- Effective income tax rate................... (99.8%) 33.8% 8.2% ===== ===== =====
Deferred income tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1995, the Company had unused tax benefits of approximately $9.8 million related to non-U.S. net operating loss carryforwards totaling $25.3 million for income tax purposes, of which $14.4 million have an unlimited life, $2.6 million expire in 2000, $7.7 million expire in 2001, and $0.6 million expire in 2002. In addition, the Company had $1.1 million of deferred tax assets related to non-U.S. temporary differences. The valuation allowance was increased by $3.5 million to approximately $10.9 million to offset the related non-U.S. deferred tax assets due to the uncertainty of realizing the benefit of the non-U.S. loss carryforwards. F-17 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following is a summary of the significant components of the Company's deferred tax assets and liabilities as of December 31, (dollars in thousands):
1994 1995 ------- -------- Deferred tax assets: Depreciation and amortization--non-U.S................... $1,472 $ 1,122 Other non-deductible reserves and accruals............... 40 647 Non-U.S. operating loss carryforwards.................... 5,982 9,816 Less--valuation allowance for non-U.S. deferred tax assets.................................................. (7,454) (10,938) ------- -------- Net deferred tax assets.................................. 40 647 Deferred tax liabilities: Depreciation and amortization............................ (2,170) (2,577) ------- -------- $(2,130) $ (1,930) ======= ========
5. REDEEMABLE PREFERRED STOCK On May 22, 1995, the Company completed a $10.0 million private placement of 12% subordinated convertible debt to a group of investors. The notes were converted into 10,000 shares of cumulative, convertible Series A Preferred Stock on September 1, 1995. The Series A Preferred Stock has a liquidation value of $1,000 per share, and accrues cumulative dividends, compounded on the accumulated and unpaid balance, as defined, at a rate of 12% annually. The dividends shall accrue whether or not the dividends have been declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. The dividends are payable upon redemption unless the Series A Preferred Stock is converted into Class A Common Stock at an initial conversion price of $16.00 per share, or 625,000 shares, subject to certain adjustments and conditions. The conversion price can fluctuate if the Company, among other actions, grants or sells options at prices less than the conversion price of the Series A Preferred Stock, or issues or sells convertible securities at a price per share less than the conversion price of the Series A Preferred Stock. On the seventh anniversary of the private placement, all of the outstanding shares of Series A Preferred Stock shall be redeemed in cash or in a combination of cash and Class A Common Stock. Redemption may be made at the price per share equal to the greater of (i) the liquidation value ($1,000 per share) plus all accrued and unpaid dividends; or (ii) the fair market value of the underlying Class A Common Stock into which the Series A Preferred Stock is convertible. Optional redemptions of all or a portion of shares, as defined, of the then outstanding shares are permitted at any time. All of the issued and outstanding Series A Preferred Stock will be automatically converted into Class A Common Stock if, after the second anniversary of the closing: (i) the daily trading volume of the Class A Common Stock exceeds 5% of the number of shares of Class A Common Stock issuable upon conversion of the Series A Preferred Stock for 45 consecutive trading days; (ii) the holders of the Series A Preferred Stock are not subject to any underwriters' lockup agreement restricting transferability of the shares of Class A Common Stock issuable upon conversion of such Series A Preferred Stock; and (iii) the average closing price of the Class A Common Stock for 15 consecutive trading days, through July 2002, equals or exceeds the price, as defined, ranging from $32.00 to $57.33 per share. Noncompliance with the terms of the Series A Preferred Stock and the agreement under which the Series A Preferred Stock was issued, can result depending on the cause of the default in an increase of the dividend rate to 15 percent, a one-third reduction in the conversion price which existed prior to the event of default, or immediate redemption at the liquidation value plus accrued and unpaid dividends. F-18 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Concurrent with the private placement, warrants to purchase 100,000 shares of the Company's Class A Common Stock were issued at an initial exercise price of $16.00 per share. These warrants expire in July 2002. In addition, the Company issued warrants to purchase Class A Common Stock that will become exercisable upon one or more optional repayments of the Series A Preferred Stock at an exercise price of $16.00 per share, subject to adjustments, as defined, and will permit each holder to acquire initially the same number of shares of Class A Common Stock into which the Series A Preferred Stock is convertible as of the relevant repayment date. These warrants expire in July 2002. The Series A Preferred Stock is senior to all classes and series of preferred stock and Class A Common Stock as to the payment of dividends and redemptions, and upon liquidation at liquidation value, senior to all other classes of the Company's capital stock. In certain circumstances, the holders of the Series A Preferred Stock will have preemptive rights to purchase, on an as-converted basis, a pro rata portion of certain Class A Common Stock issuances by the Company. The holders of the Series A Preferred Stock are entitled to elect one director to the Company's Board of Directors, so long as at least 33% of the Series A Preferred Stock is outstanding. The holders also have the right to approve certain transactions, as defined, including the payment of dividends and acquisition of shares of treasury stock. At December 31, 1995, the Series A Preferred Stock is reflected on the accompanying balance sheet as redeemable preferred stock, and is shown inclusive of cumulative unpaid dividends, and net of unamortized issuance costs of approximately $1.1 million. The carrying value of the redeemable preferred stock will be accreted to the liquidation value, as defined, over the seven year term. 6. EQUITY During 1995, the Company's shareholders approved an amendment to the Company's Certificate of Incorporation that authorized the creation of 2,000,000 shares of Series A Preferred Stock, par value $1.00 per share, authorized the creation of 25,000,000 shares of Class B non-voting Common Stock, par value $.015 per share, and redesignated the 50,000,000 shares of Common Stock, par value $.015 per share, that were previously authorized for issuance as 50,000,000 shares of Class A Common Stock. A. PRIVATE PLACEMENT: During 1995, the Company made an offshore sale of 825,000 shares of its Class A Common Stock at an average price of $14.53 per share. The sale raised net proceeds of $11.1 million, after deduction of fees and expenses of $0.9 million. In conjunction with this transaction, warrants to purchase 82,500 shares of Class A Common Stock at an exercise price of $14.40 per share were issued. These warrants were exercised prior to December 31, 1995. B. EMPLOYEE STOCK OPTION PLAN: In October, 1994, the Company's shareholders approved an amendment to the Employee Stock Option Plan whereby options to purchase an aggregate of 2,000,000 shares of Class A Common Stock may be granted to officers and key employees of the Company. In July, 1995, shareholders of the Company approved an additional 500,000 shares of Class A Common Stock to be reserved for issuance under this plan. The exercise price of the stock options must not be less than the market value per share at the date of grant, and no options shall be exercisable after ten years and one day from the date of grant. Options generally become exercisable on a pro-rata basis over a four-year period beginning on the date of grant and 25% on each of the three anniversary dates thereafter. F-19 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Changes in the status of the stock option plan during 1993, 1994, and 1995 are summarized as follows:
1993 1994 1995 ------------ ------------ ------------ Options outstanding at beginning of year.......................... 531,000 464,125 785,250 Options granted.................. 145,000 655,000 291,335 Options exercised................ (87,375) (102,375) (33,525) Options forfeited................ (124,500) (231,500) (22,750) ------------ ------------ ------------ Options outstanding at end of year............................. 464,125 785,250 1,020,310 ============ ============ ============ Number of options at end of year: Exercisable...................... 196,125 193,125 405,333 Available for grant.............. 375,803 302,303 533,717 Range of prices: Granted during year.............. $15.00-19.75 $14.25-19.25 $13.75-17.25 Outstanding at end of year....... $ 2.83-19.75 $ 2.83-19.75 $ 2.83-19.75 Exercised during the year........ $ 2.83-10.92 $ 3.30-11.33 $ 9.67-18.75
The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based Compensation" in 1996. This Statement encourages entities to adopt a fair value based method of accounting for employee stock option plans (whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the employee service period) rather than the current intrinsic value based method of accounting (whereby compensation cost is measured at the grant date as the difference between market value and the price for the employee to acquire the stock). If the Company elects to continue using the intrinsic value method of accounting, pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting had been applied, will need to be disclosed. Management has not decided if the Company will adopt the fair value based method of accounting for their stock option plans. The Company believes that adopting the fair value basis of accounting could have a material impact on the financial statements and such impact is dependent upon future stock option activity. C. EMPLOYEE STOCK PURCHASE PLAN: In October, 1994, the Company's shareholders approved an employee stock purchase plan which allows eligible employees to purchase shares of the Company's Class A Common Stock at 85% of market value on the date on which the annual offering period begins, or the last business day of each calendar quarter in which shares are purchased during the offering period, whichever is lower. Class A Common Stock reserved for future employee purchases aggregated 463,684 shares at December 31, 1995. There were 12,754 shares issued at an average price of $11.89 per share during the year ended December 31, 1994 and 23,562 shares issued at an average price of $12.56 per share during the year ended December 31, 1995. There have been no charges to income in connection with this plan other than incidental expenses related to the issuance of shares. 7. TREASURY STOCK In January, 1994, an officer of the Company exercised stock options to acquire 99,000 shares of the Company's Class A Common Stock at $3.30 per share by delivering to the Company 16,542 common shares at the then current market price of $19.75 per share. The average cost of all treasury stock currently held by the Company is $2.22 per share. F-20 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. COMMITMENTS AND CONTINGENCIES A. OPERATING LEASES: The Company leases office space and other items under various agreements expiring through 2004. At December 31, 1995, the minimum aggregate payments under non-cancelable operating leases are summarized as follows (dollars in thousands):
YEAR AMOUNT ---- ------- 1996........................................... $ 3,804 1997........................................... 3,734 1998........................................... 3,314 1999........................................... 4,458 2000........................................... 1,924 Thereafter..................................... 7,134 ------- $24,368 =======
B. EMPLOYMENT AND OTHER AGREEMENTS: In October 1995, the Company's former Chief Executive Officer resigned his position, but remains an employee and Chairman of the Company's Board of Directors. A new Chief Executive Officer was hired. In conjunction with the management changes, the Company entered into agreements with both executives. The contract with the Chief Executive Officer has a two year term and provides for continuation of salary and benefits for the term of the agreement, in the event of a change in control of the Company. At December 31, 1995, the Company's maximum potential liability under this agreement was approximately $660,000. The contract with the Chairman of the Board provides for an annual base salary, including an annual bonus and other benefits, and also for a payment of $1.0 million, payable over a three year term, in the event that he resigns or is terminated without cause. Payments under this agreement are accelerated and are due in full within 30 days following a change in control of the Company. In consideration for a non-compete agreement, the Chairman of the Board received a payment of $750,000, which was expensed in 1995. The Company has entered into employee continuation incentive agreements with certain other key management personnel. These agreements provide for continued compensation for a period equal to the lesser of one year or until the individual finds new employment, in the event of termination without cause or in the event of termination after a change in control of the Company. The agreements also provide for continued participation in the Employee Long Term Incentive Plan for a period of either six months or one year after termination of employment for any reason. At December 31, 1995, the Company's maximum potential liability under these agreements totaled approximately $2.5 million. In connection with the sale of cellular assets, the Company entered into an agreement with an officer. The agreement called for a fee of approximately $0.6 million to be paid as a result of the closing of the sale of the Company's cellular assets. This amount was placed in an escrow account at the time of the sale. The agreement requires, among other things, that the officer remain an employee of the Company through July 1, 1996. During 1994, the officer had an outstanding loan from the Company in the amount of $0.2 million. Subsequent to December 31, 1994, the agreement was amended to accelerate the vesting provisions and funds from the escrow account were used to repay the loan. F-21 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) C. PURCHASE COMMITMENT: In 1993, ACC Long Distance Ltd., a subsidiary of ACC TelEnterprises Ltd., entered into an agreement with one of its vendors to lease long distance facilities totaling a minimum of Cdn. $1.0 million per month for eight years. The Company currently leases more than Cdn. $1.0 million per month of such facilities from this vendor. This commitment allows the Company to receive up to a 60 percent discount on certain monthly charges from this vendor. D. DEFINED CONTRIBUTION PLANS: The Company provides a defined contribution 401(k) plan to substantially all U.S. employees. Amounts contributed to this plan by the Company were approximately $137,000, $167,000, and $183,000 in 1993, 1994 and 1995, respectively. The Company's Canadian subsidiary provides a registered retirement savings plan to substantially all Canadian employees. Amounts contributed to this plan by the Company were Cdn. $28,000, Cdn. $62,000 and Cdn. $106,000 in 1993, 1994 and 1995, respectively. E. ANNUAL INCENTIVE PLAN: During 1995, the Company's Board of Directors authorized incentive bonuses based upon the Company's sales, gross margin, operating expenses and operating income. Prior to 1995, incentive bonuses were discretionary as determined by the Company's management and approved by the Board of Directors. The amounts included in operations for these incentive bonuses were approximately $619,000, $633,000 and $1.4 million for the years ended December 31, 1993, 1994 and 1995, respectively. F. LEGAL MATTERS: The Company is subject to litigation from time to time in the ordinary course of business. Although the amount of any liability with respect to such litigation cannot be determined, in the opinion of management, such liability as of December 31, 1995 will not have a material adverse effect on the Company's financial condition or results of operations. F-22 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. GEOGRAPHIC AREA INFORMATION (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, 1993:
UNITED UNITED STATES CANADA KINGDOM ELIMINATIONS CONSOLIDATED -------- ------- ------- ------------ ------------ Revenue from unaffiliated customers................. $ 45,150 $60,643 $ 153 $ -- $105,946 Intercompany revenue...... 9,039 2,939 185 (12,163) -- -------- ------- ------- --------- -------- Total revenue............. $ 54,189 $63,582 $ 338 $ (12,163) $105,946 ======== ======= ======= ========= ======== Income (loss) from continuing operations before income taxes...... $ 6,177 $(8,150) $(1,778) $ -- $ (3,751) ======== ======= ======= ========= ======== Identifiable assets at December 31, 1993......... $142,821 $28,620 $ 1,832 $(111,555) $ 61,718 ======== ======= ======= ========= ======== YEAR ENDED DECEMBER 31, 1994: UNITED UNITED STATES CANADA KINGDOM ELIMINATIONS CONSOLIDATED -------- ------- ------- ------------ ------------ Revenue from unaffiliated customers................. $ 54,599 $67,728 $ 4,117 $ -- $126,444 Intercompany revenue...... 6,698 2,175 1,004 (9,877) -- -------- ------- ------- --------- -------- Total revenue............. $ 61,297 $69,903 $ 5,121 $ (9,877) $126,444 ======== ======= ======= ========= ======== Income (loss) from continuing operations before income taxes...... $ 1,300 $(5,742) $(5,802) $ -- $(10,244) ======== ======= ======= ========= ======== Identifiable assets at December 31, 1994......... $119,021 $30,073 $10,422 $( 75,068) $ 84,448 ======== ======= ======= ========= ======== YEAR ENDED DECEMBER 31, 1995: UNITED UNITED STATES CANADA KINGDOM ELIMINATIONS CONSOLIDATED -------- ------- ------- ------------ ------------ Revenue from unaffiliated customers................. $ 65,975 $84,421 $38,470 $ -- $188,866 Intercompany revenue...... 15,256 4,071 1,143 (20,470) -- -------- ------- ------- --------- -------- Total revenue............. $ 81,231 $88,492 $39,613 $(20,470) $188,866 ======== ======= ======= ========= ======== Income (loss) from continuing operations before income taxes...... $ 1,512 $ 456 $(6,793) $ -- $ (4,825) ======== ======= ======= ========= ======== Identifiable assets at December 31, 1995......... $105,995 $43,775 $31,593 $ (57,379) $123,984 ======== ======= ======= ========= ========
Intercompany revenue is recognized when calls are originated in one country and terminated in another country over the Company's leased network. This revenue is recognized at rates similar to those of unaffiliated companies. Income from continuing operations before income taxes of the Canadian and United Kingdom operations includes corporate charges for general corporate expenses and interest. Corporate general and administrative expenses are allocated to subsidiaries based on actual time dedicated to each subsidiary by members of corporate management and staff. F-23 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. RELATED PARTY TRANSACTIONS In February 1994, the Company's Board of Directors approved a plan to move the Company's headquarters to a new facility in Rochester, New York. The new location is in a building owned by a partnership in which the Company's Chairman of the Board has a fifty percent ownership interest. A Special Committee of the Company's Board of Directors reviewed the lease to ensure that the terms and conditions were commercially reasonable and fair to the Company prior to approval of the plan. Minimum monthly lease payments for this space range from $44,000 to $60,000 over the ten year term of the lease, which began on May 1, 1994. The Company also pays a pro-rata share of maintenance costs. Total rent and maintenance payments under this lease were approximately $0.2 million and $0.6 million during 1994 and 1995, respectively. During 1994 and early 1995, the Company initiated efforts to obtain new telecommunications software programs from a software development company. The Company's Chairman of the Board and former Chief Executive Officer was a controlling shareholder of the software development company during such period. In May 1995, anticipating material agreements with the software development company, all of the common shares owned by the Company's Chairman of the Board were placed in escrow under the direction of a Special Committee of the Company's Board of Directors. The Special Committee, its outside consultants and the Company's management then proceeded to review and evaluate the software technology and the terms and conditions of the proposed transactions. Subsequent to December 31, 1995, the Special Committee approved a software license agreement between the Company and a newly formed company (the purchaser of the software development company's intellectual property and other assets and an affiliate of such company). Immediately prior to entering into the agreement, the shares of the software development company held in escrow were returned to such company and the related party nature of the Company's relationship with the software development company was thereby extinguished. Total amounts accrued at December 31, 1994 and 1995 relating to this vendor were $0 and $44,000, respectively. For an aggregate consideration of $1.8 million, the Company in return will receive a perpetual right to use the newly developed telecommunications software programs. During 1995, the Company paid the software development company $1.2 million, of which $772,000, relating to the purchase of certain hardware and acquisition of certain software licenses, was capitalized and recorded on the balance sheet as a component of property, plant and equipment and $500,000 relating to software development was expensed. During 1994, the Company paid the software development company $132,000, all of which related to software development, which was expensed. 11. SUBSEQUENT EVENTS A. TELECOMMUNICATIONS LEGISLATION REVISIONS: Legislation that substantially revises the U.S. Communications Act of 1934 (the "U.S. Communications Act") was recently enacted by Congress and was signed into law on February 8, 1996. The legislation provides specific guidelines under which the regional operating companies ("RBOCs") can provide long distance services, which will permit the RBOCs to compete with the Company in the provision of domestic and international long distance services. Further, the legislation, among other things, opens local service markets to competition from any entity (including long distance carriers, such as AT&T, cable television companies and utilities). Because the legislation opens the Company's markets to additional competition, particularly from the RBOCs, the Company's ability to compete is likely to be adversely affected. Moreover, as a result of and to implement the legislation, certain federal and other governmental regulations will be amended or modified, and any such amendment or modification could have a material adverse effect on the Company's business, results of operations and financial condition. F-24 ACC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) B. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN: On January 19, 1996, subject to shareholder approval, the Company's Board of Directors adopted a Non-Employee Directors' Stock Option Plan (the Directors' Stock Option Plan). The Directors' Stock Option Plan provides for grants of options to purchase 5,000 shares of Class A Common Stock at an exercise price of 100% of the fair market value of the stock on the date of grant, which options vest at the first anniversary of the date of grant. The maximum number of shares with respect to which options may be granted under the Directors' Stock Option Plan is 250,000 shares, subject to adjustment for stock splits, stock dividends and the like. Options to purchase 20,000 shares of Class A Common Stock were granted in January 19, 1996, pursuant to this plan. Each option shall be exercisable for ten years and one day after its date of grant. Any vested option is exercisable during the holder's term as a director (in accordance with the option's terms) and remains exercisable for one year following the date of termination as a director (unless the director is removed for cause). Exercise of the options would involve payment in cash, securities, or a combination of cash and securities, at the discretion of the respective director. F-25 [Logo] ACC (R) PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table is an itemized listing of expenses to be incurred by the Company in connection with the issuance and distribution of the shares of Class A Common Stock being registered hereby, other than underwriting discounts and commissions. All amounts shown are estimates, except the SEC registration fee and the NASD filing fee: SEC Registration Fee............................................. $ 19,084 NASD Filing Fee.................................................. 6,035 Nasdaq Additional Listing Fee.................................... 7,500 Printing and Engraving Expenses.................................. 200,000 Legal Fees and Expenses.......................................... 300,000 Accounting Fees and Expenses..................................... 150,000 Transfer Agent and Registrar Fees and Expenses................... 5,000 Blue Sky Fees and Expenses....................................... 23,500 Miscellaneous.................................................... 288,881 ---------- Total.......................................................... $1,000,000 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law ("DGCL") provides that a corporation may indemnify any director or officer against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred in defense of any threatened, pending or completed action, suit or proceeding whether civil, criminal or investigative (other than an action by or in the right of the corporation) arising by reason of the fact that he/she is or was an officer or director, if he/she acted in good faith and in a manner he/she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, it is determined that he/she had no reasonable cause to believe his/her conduct was unlawful. Section 145 also provides that a corporation may indemnify any such officer or director against expenses incurred in an action by or in the right of the corporation if he/she acted in good faith and in a manner he/she reasonably believed to be in or not opposed to the best interests of the Company, except in respect of any matter as to which such person is adjudged to be liable to the Company, unless allowed by the court in which such action is brought. This statute requires indemnification of such officers and Directors against expenses to the extent they may be successful in defending any such action. The statute also permits purchase of liability insurance by the Company on behalf of its officers and Directors. Article SEVEN, Section 2 of the Company's Certificate of Incorporation and Article V of its By-laws (collectively its "charter documents") generally provide for the mandatory indemnification of and advancement of litigation expenses to the Company's Directors, officers and employees to the fullest extent permitted by the DGCL against all liabilities, losses and expenses incurred in connection with any action, suit or proceeding in which any of them become involved by reason of their service rendered to the Company or, at its request, to another entity; provided that it is determined, in connection with any civil action, that the indemnitee acted in good faith and in a manner that he/she reasonably believed to be in or not opposed to the Company's best interests, and in connection with any criminal proceeding, that the indemnitee had no reasonable cause to believe his/her conduct was unlawful. These provisions of the Company's charter documents are not exclusive of any other indemnification rights to which an indemnitee may be entitled, whether by contract or otherwise. The Company may also purchase liability insurance on behalf of its Directors and officers, whether or not it would have the obligation or power to indemnify any of them under the terms of its charter documents or the DGCL. The Company has acquired and maintains liability insurance for the benefit of its Directors and officers for serving in such capacities, and it also has entered into indemnification agreements with each of its Directors and executive officers for serving in such capacities. II-1 Reference is made to the Underwriting Agreement filed as Exhibit 1.1 hereto for provisions relating to the indemnification of the Underwriters and persons who control the Underwriters within the meaning of Section 15 of the Securities Act of 1933, and to indemnification of the Company by the Underwriters. The Company has entered into indemnification agreements with each of its directors and executive officers pursuant to which the Company has agreed to indemnify, subject to the terms thereof, each of them to the full extent (i) authorized or permitted by the DGCL as well as any other law authorizing or permitting such indemnification adopted after the respective dates of such agreements and (ii) to the fullest extent permitted by law against litigation costs and liabilities incurred in connection with any threatened, pending or completed action, suit, proceeding or investigation by reason of the fact that such director or executive officer is, was or at any time becomes a director, officer, employee or agent of the Company or is or was serving or at any time serves at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. See also the undertaking made with respect to indemnification matters involving the Company's directors, officers and controlling persons, found in Item 17 below. ITEM 16. EXHIBITS. The following exhibits are filed herewith:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1.1 Form of Underwriting Agreement* 4.1 Specimen of Class A Common Stock Certificate+ 4.2 First Restated Certificate of Incorporation of the Company++ 4.3 Certificate of Designations of 10,000 Shares of Series A Preferred Stock, par value $1.00 per share, of the Company+++ 4.4 By-laws of the Company, as amended++++ 5.1 Opinion of Nixon, Hargrave, Devans & Doyle LLP* 23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP (contained in the opinion filed as Exhibit 5)* 23.2 Consent of Arthur Andersen LLP 24.1 Powers of Attorney (contained in the signature page) 27.1 Financial Data Schedule
- -------- * To be filed by Amendment. + Incorporated by reference from Exhibit 4-1 to the Company's Registration Statement on Form S-2 (Commission File No. 33-41588). ++ Incorporated by reference from Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 (Commission File No. 0-14567). +++ Incorporated by reference from Exhibit 4-1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 (Commission File No. 0-14567). ++++ Incorporated by reference from Exhibit 3.1 to the Company's Current Report on Form 8-K dated February 22, 1996 (Commission File No. 0-14567). II-2 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933 ("Securities Act"), each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") (and, where applicable, each filing of an employee benefit plan's Annual Report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 15 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in that Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any such action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby further undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Rochester, State of New York, on February 22, 1996. ACC CORP. /s/ David K. Laniak By___________________________________ David K. Laniak Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby severally constitutes and appoints David K. Laniak, Michael R. Daley and John J. Zimmer, and each of them, his true and lawful attorneys-in- fact and agent, with full power of substitution, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ David K. Laniak Chief Executive Officer and February 22, 1996 ____________________________________ a Director (Principal David K. Laniak Executive Officer) /s/ Richard T. Aab Chairman of the Board and February 22, 1996 ____________________________________ Director Richard T. Aab /s/ Arunas A. Chesonis President and Chief February 22, 1996 ____________________________________ Operating Officer, and Arunas A. Chesonis Director /s/ Michael R. Daley Executive Vice President and February 22, 1996 ____________________________________ Chief Financial Officer Michael R. Daley (Principal Financial and Accounting Officer) /s/ Hugh F. Bennett Director February 22, 1996 ____________________________________ Hugh F. Bennett Director February , 1996 ____________________________________ Hon. Willard Z. Estey /s/ Daniel D. Tessoni Director February 22, 1996 ____________________________________ Daniel D. Tessoni /s/ Robert M. Van Degna Director February 22, 1996 ____________________________________ Robert M. Van Degna
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