-----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, IiYeLldAxCrldHn138BDEIAx9k6nQjNakWDSCAUmETbUuGk+uygzs5YZDjNhBkEV 1YuYM1omHMrHxOgnEKkm5g== 0000914749-96-000004.txt : 19960702 0000914749-96-000004.hdr.sgml : 19960702 ACCESSION NUMBER: 0000914749-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960701 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAI WIRELESS SYSTEMS INC CENTRAL INDEX KEY: 0000914749 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 061324691 STATE OF INCORPORATION: CT FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22888 FILM NUMBER: 96588919 BUSINESS ADDRESS: STREET 1: 18 CORPORATE WOODS BLVD STREET 2: THIRD FLOOR CITY: ALBANY STATE: NY ZIP: 12211 BUSINESS PHONE: 5184622632 MAIL ADDRESS: STREET 1: 18 CORPORATE WOODS BLVD STREET 2: 3RD FLOOR CITY: ALBANY STATE: NY ZIP: 12211 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 ( ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended March 31, 1996 OR ( TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number 0-22888 CAI WIRELESS SYSTEMS, INC. (Exact name of registrant as specified in its charter)
Connecticut 06-1324691 (State or other jurisdiction of (IRS Employer Identification No.) incorporation)
18 Corporate Woods Blvd., Third Floor, Albany, NY 12211 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (518) 462-2632 Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of Each Class Name of Each Exchange on Which Registered None
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934: Common Stock, No Par Value (Title of Each Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____. The aggregate market value of the voting stock held by non-affiliates of the Registrant at June 14, 1996 was approximately $308,600,000. The number of shares of Registrant's Common Stock outstanding on June 14, 1996 was 40,311,472. PART I ITEM 1. BUSINESS OVERVIEW CAI Wireless Systems, Inc. (the "Company" or "CAI"), directly and through its subsidiaries, is a leading developer, owner and operator of wireless cable television systems in terms of the number of subscribers, the number of estimated line-of-sight ("LOS") households and total capitalization. CAI is the first wireless cable company to enter into a strategic partnership with any of the Regional Bell Operating Companies ("RBOCs") through its strategic business relationship with affiliates of Bell Atlantic Corporation ("Bell Atlantic") and NYNEX Corporation ("NYNEX"). See "The BANX Transactions." CAI is the largest wireless cable television company in the United States in terms of television households and LOS households. CAI's 14 markets, concentrated in the mid-Atlantic and northeast regions of the United States and which are situated within the operating regions of Bell Atlantic and NYNEX, respectively, encompass approximately 18.9% (18.0 million) of all U.S. television households, approximately 13.1 million of which are LOS households. CAI provided wireless cable television services to approximately 85,100 subscribers as of March 31, 1996. In addition, a 54%-owned subsidiary of the Company, CS Wireless Systems, Inc. ("CS Wireless"), provided wireless cable television service to approximately 56,500 as of March 31, 1996. The Company consummated a series of transactions during the fiscal year ended March 31, 1996, including the acquisition of ACS Enterprises, Inc. ("ACS") and other transactions, consolidating the acquisitions of major wireless properties in the northeastern and mid-Atlantic regions, and in that connection, concluded certain financing and operating agreements with affiliates of Bell Atlantic and NYNEX. The consummation of the ACS acquisition significantly expanded CAI's wireless cable systems. The relationship with Bell Atlantic and NYNEX provides CAI with an important strategic partner, as well as access to capital and the ability to deploy new technology. Additionally, on February 23, 1996, the Company and Heartland Wireless Communications, Inc. ("Heartland") closed the transactions contemplated by the Participation Agreement (as defined below) among the Company, CS Wireless and Heartland. CAI and Heartland each contributed wireless cable assets and channel rights or the stock of subsidiaries owning wireless cable assets to CS Wireless in exchange for stock of CS Wireless, in the case of CAI, and stock, cash and notes, in the case of Heartland. CAI currently owns approximately 54% of CS Wireless. Wireless cable programming is transmitted through the air via microwave frequencies from a transmission facility to a small receiving antenna at each subscriber's location, which generally requires an unobstructed LOS from the transmission facility to the subscriber's receiving antenna. Traditional hard- wire cable television systems also transmit signals from a central transmission facility, but deliver the signal to a subscriber's location through an extensive network of fiber optic and/or coaxial cable and amplifiers. Since wireless cable systems do not require a network of fiber optic and coaxial cable, wireless cable operators such as CAI can provide subscribers with a high quality picture with fewer transmission disruptions at a significantly lower capital cost per installed subscriber than traditional hard-wire cable systems. In addition, not having to maintain a hard-wire transmission system results in lower ongoing maintenance costs for wireless cable systems. As a result of the generally low capital expenditure requirements and low maintenance costs, CAI believes it should be able to achieve positive cash flow at lower levels of subscriber penetration than hard-wire cable companies. CAI provides its subscribers with a variety of programming choices, including local television broadcast stations; cable television networks such as CNN, ESPN, A&E, MTV, Nickelodeon, Discovery, HBO, Showtime and Disney; pay- per-view programming services; and various feature films and sporting events. CAI currently offers variations of such programming packages in its six operating markets. The majority of CAI's subscribers are equipped with fully addressable converter boxes which enables CAI to offer pay-per-view and other pay video services to such subscribers. The channels that CAI offers vary in each market depending upon subscribers' viewing preferences. ITEM 1. BUSINESS (CONTINUED) Overview, (continued) The executive offices of the Company are located at 18 Corporate Woods Boulevard, Third Floor, Albany, New York 12211, and its telephone number is (518) 462-2632. Unless the context indicates otherwise, all references to the "Company" or "CAI" refer collectively to CAI Wireless Systems, Inc. and its subsidiaries. THE ACS MERGER AND OTHER ACQUISITIONS THE ACS MERGER On September 29, 1995, CAI merged with ACS pursuant to an Agreement and Plan of Merger dated March 28, 1995 (the "ACS Merger Agreement"), in which CAI acquired each share of common stock of ACS for $20.00 consisting of $3.50 in cash and the remainder in shares of common stock, without par value, of CAI (the "CAI Common Stock") at the ratio of 1.65 shares of CAI Common Stock for each share of ACS common stock. The total cash consideration paid approximated $41.0 million, excluding acquisition costs, and the total value of the CAI Common Stock issued approximated $190.6 million. At the acquisition date, ACS operated wireless cable systems in Philadelphia, Pennsylvania; Cleveland, Ohio; and Bakersfield, California. CAI continues to operate the wireless cable system in Philadelphia. The Cleveland and Bakersfield systems were contributed by CAI to CS Wireless in connection with the closing of the transactions contemplated by the Participation Agreement in February 1996. See "The CAI-Heartland Transactions". OTHER ACQUISITIONS Eastern Cable Networks of Washington, Inc. CAI, Eastern Cable Networks Corp., a Connecticut corporation ("ECN"), and Eastern Cable Networks of Washington, Inc., a Delaware corporation and wholly-owned subsidiary of ECN ("ECNW") that operated a wireless cable system in Washington, D.C. (the "Washington System"), entered into an Agreement and Plan of Merger dated as of March 28, 1995 (the "Washington Merger Agreement"), pursuant to which CAI acquired all of the issued and outstanding common stock of ECNW in a merger transaction (the "Washington Merger") on September 29, 1995. The merger consideration paid by CAI in the Washington Merger was $28.2 million, of which approximately $18.7 million was paid by issuance of CAI Common Stock and the balance in cash and prior deposits. In addition, CAI paid an aggregate amount of $500,000 in cash pursuant to non-competition agreements between CAI and each of ECN and its principals. The Washington System has approximately 1.2 million LOS households and currently serves approximately 3,300 gross subscribers. BALTIMORE ASSETS. CAI, ECN, and Eastern Cable Networks of Michigan II, Inc., a Delaware corporation ("ECNMII"), entered into an Asset Purchase Agreement dated as of March 28, 1995 (the "Baltimore Purchase Agreement") pursuant to which ECNMII sold to CAI the wireless cable television assets in the Baltimore, Maryland market (the "Baltimore Assets") on September 29, 1995 for $16.4 million, subject to adjustments as contemplated by the Baltimore Purchase Agreement. The Baltimore Assets include (i) leases and licenses for wireless cable frequency rights for wireless cable channels transmitting within the greater Baltimore, Maryland metropolitan area, including but not limited to Kenton/ Townsend, Delaware, (ii) leases for tower sites, and (iii) certain related equipment. The Baltimore Assets represent approximately 741,000 LOS households in the Baltimore, Maryland market. ITEM 1. BUSINESS (CONTINUED) THE ACS MERGER AND OTHER ACQUISITIONS (CONTINUED) PITTSBURGH ASSETS. CAI purchased certain assets relating to wireless cable assets in the Pittsburgh, Pennsylvania market. The assets consisted of rights to 18 licensed channels; leases for 8 additional channels, as yet applied for at the FCC; 4 tower leases and certain items of related equipment (the "Pittsburgh Assets"). The assets were owned by a joint venture of Wireless Cable TV Associates #37, a California general partnership ("WCTV"), and American Wireless Systems, Inc., a Delaware corporation ("AWS"). CAI entered into purchase agreements, dated as of March 28, 1995, with both WCTV and AWS, purchasing their respective joint venture interests for $1.3 million and $11.0 million on September 29, 1995. HAMPTON ROADS WIRELESS. On July 13, 1995, the Company acquired the 49 percent minority interest in Hampton Roads Wireless, Inc. ("HRW"), which acquisition resulted in the Company owning 100 percent of HRW. The consideration paid to the minority shareholders of HRW was 652,523 shares of CAI Common Stock, valued at $8.0 million. CAI acquired its initial 51 percent interest in HRW in February 1994. THE BANX TRANSACTIONS CAI entered into the Securities Purchase Agreement dated as of March 28, 1995 (the "Purchase Agreement"), with BANX Partnership ("BANX"), a Delaware general partnership formed to enter into the Purchase Agreement, and a Business Relationship Agreement dated as of March 28, 1995 (the "BR Agreement") with MMDS Holdings, Inc. and NYNEX MMDS Company, each a Delaware corporation. The general partners of BANX are subsidiaries of Bell Atlantic and NYNEX. In this Form 10-K, Bell Atlantic and MMDS Holdings, Inc. are sometimes referred to as "Bell Atlantic"; NYNEX and NYNEX MMDS Company are sometimes referred to as "NYNEX"; and Bell Atlantic and NYNEX are sometimes referred to as the "BANX Affiliates." CAI has entered into a number of arrangements with the BANX Affiliates, the consummation of which were conditions to the consummation of an offering (the "Senior Notes Offering") of $275.0 million aggregate principal amount of 12 1/4 % Senior Notes due 2002 (the "Senior Notes") of CAI. See "Senior Notes Offering." The arrangements are reflected in the Purchase Agreement, the Term Notes, the Senior Preferred Stock, the Stage I and Stage II Warrants, the Voting Preferred Stock and the BR Agreement (collectively, the "BANX Documents"). These arrangements are further discussed below: Purchase Agreement. In accordance with the terms of the Purchase Agreement, on May 9, 1995 (the "Stage I Closing"), BANX paid CAI $30.0 million in cash to purchase term notes due May 9, 2005 (the "Term Notes"), in the aggregate principal amount of $30.0 million and the Stage I Warrants. Interest on the Term Notes is payable semi-annually commencing after the fifth anniversary of issue and at maturity at an initial annual rate of 12.5%. The Term Notes initially were collateralized by a security interest in and pledge of substantially all of the assets of CAI and its subsidiaries. Upon the occurrence of the Senior Notes Offering on September 29, 1995, the Term Notes became unsecured obligations of CAI, subordinated to the Senior Notes and certain other senior indebtedness of CAI, containing covenants similar to the covenants contained in the indenture governing the Senior Notes. From and after the September 29, 1995 closing of the Senior Notes Offering (the "Senior Notes Closing"), the Term Notes accrue interest at 14% (subject to a 2% penalty rate until certain channel license matters are resolved) per annum through 2000 (with cash interest payable thereafter), and are convertible into shares of 14% Senior Preferred Stock, par value $10,000 per share (the "Senior Preferred Stock") of CAI. On September 29, 1995 (the "Stage II Closing"), concurrently with the Senior Notes Closing, BANX purchased from CAI for $70.0 million (a) 7,000 shares of Senior Preferred Stock, which shares are convertible at the option of the holder at any time on or after the date of issuance of such shares and prior to the fifth anniversary of the original issue date into shares of Convertible Voting Preferred Stock, without par value (the "Voting Preferred Stock"), of CAI and (b) the Stage II Warrants. ITEM 1. BUSINESS (CONTINUED) THE BANX TRANSACTIONS (CONTINUED) The Stage I Warrants entitle the holder to purchase from CAI from time to time the number of shares of Voting Preferred Stock equal to $30 million divided by the Tier 1 Exercise Price as defined in, and as adjusted from time to time in accordance with, the Stage I Warrants; provided, however, that the number of shares of Voting Preferred Stock issuable upon exercise of the State I Warrant shall not exceed 43,353, subject to adjustment. The Stage I Warrants, to the extent not exercised, expire and become null and void on the fifth anniversary of the Stage II Closing. The Stage II Warrants entitle the holder to purchase from CAI from time to time the number of shares of Voting Preferred Stock at varying exercise prices, as such may be adjusted from time to time in accordance with the provisions of the Stage II Warrants. The Stage II Warrants, to the extent not exercised, expire and become null and void on the sixth anniversary of the Stage II Closing. If the BANX Affiliates fully exercise all of their purchase and conversion rights under the Warrants, and the Senior Preferred Stock (including the stock issuable upon full conversion of the Term Notes into Senior Preferred Stock), then the BANX Affiliates would hold approximately 45% of the fully diluted outstanding CAI Common Stock. CAI currently anticipates that if all securities held by the BANX Affiliates were currently converted into shares of CAI Common Stock then the BANX Affiliates would acquire approximately 27% of the fully diluted CAI Common Stock at a price of $6.01 per share of CAI Common Stock, approximately 9% of the fully diluted CAI Common Stock at a price of $8.27 per share of CAI Common Stock, approximately 4.5% of the fully diluted CAI Common Stock at a price of $12.78 per share of CAI Common Stock and approximately 4.5% of the fully diluted CAI Common Stock at a price of $17.29 per share of CAI Common Stock. The aggregate purchase price for such shares by the BANX Affiliates, including the consideration originally paid for the Term Notes, the Senior Preferred Stock and the Stage I and Stage II Warrants, would be approximately $302.0 million. BR AGREEMENT. The BR Agreement is structured as an election by Bell Atlantic and NYNEX to utilize CAI's transmission systems in specified service areas in their respective operating territories in which CAI currently has an operating wireless system or wireless spectrum rights including system or rights held by CAI after the ACS Merger and the Other Acquisitions located in the Bell Atlantic and NYNEX territories. The BR Agreement identifies several phases in the relationship between the parties: (i) a study phase during which a technology and operating plan is developed; (ii) after Bell Atlantic or NYNEX, as the case may be, gives notice of its election to implement the BR Agreement in a particular market, a preparatory phase for such market; and (iii) an implementation phase for each market in which a BANX Affiliate has elected to implement the BR Agreement, during which CAI commences transmission services. CAI will receive contractual monthly revenues for use, by the BANX Affiliates, of its transmission system services. Revenues are based on the number of serviceable homes and subscribers in each service area, subject to certain minimums, which range from $28.0 million to $34.0 million during the initial five-year term, assuming implementation of the BR Agreement. If the election has been made with respect to less than all of the service areas in both the Bell Atlantic or NYNEX territories, the minimum service revenues are adjusted on the basis of the ratio of the number of serviceable homes in the service areas where the election has been made as compared with the total number of serviceable homes in all of the service areas identified in the agreement. ITEM 1. BUSINESS (CONTINUED) THE BANX TRANSACTIONS (CONTINUED) CAI's initial Bell Atlantic and NYNEX service areas are as follows: BELL ATLANTIC SERVICE AREAS NYNEX SERVICE AREAS Baltimore, Maryland Albany, New York Norfolk/Virginia Beach, Virginia Boston, Massachusetts Northern New Jersey Buffalo, New York Philadelphia, Pennsylvania Long Island, New York Pittsburgh, Pennsylvania New York City, New York Washington, D.C. Providence, Rhode Island Syracuse, New York During the term of the BR Agreement, with respect to any service area where the election to implement the BR Agreement has been made, Bell Atlantic or NYNEX, as the case may be, will be the provider of video services to subscribers using CAI's transmission system. CAI will become a wholesale provider of the transmission service and cease to maintain a direct subscriber relationship in such markets. Bell Atlantic or NYNEX, as appropriate, will assume all costs associated with subscriber installation and service in that market. The BANX Affiliates have the right to transfer subscribers to an alternative delivery system during the term, and CAI would receive no payment for any former CAI subscriber so transferred. In addition, upon termination of the BR Agreement, the BANX Affiliates will have the right to transfer subscribers to CAI and to require CAI to purchase subscriber equipment and receivables. The BANX Affiliates have agreed to provide CAI with financing for such purchases on commercially reasonable market-based terms. The BR Agreement requires CAI to maintain and upgrade the transmission system during the term, and provides for joint cooperation in several areas. It is not anticipated that an election will be made by Bell Atlantic or NYNEX before the technology is in place that permits digitizing channels using not less than a four-to-one compression ratio of six MHz analog channels at each CAI antenna site. CAI is obligated to provide, at times specified in the BR Agreement, a spectrum of not less than 150 MHz in each service area capable of supporting 64/256 QAM-modulated compressed digital signals. The BR Agreement has an initial five-year term for each market beginning on the date transmission services commence pursuant to an election in such market and is renewable by the BANX Affiliates on a market-by-market basis for successive five-year terms on one year's prior notice if (i) service revenues paid to CAI have exceeded certain specified minimum service revenues in the applicable market and (ii) the BANX Affiliates have converted Senior Preferred Stock to Voting Preferred Stock or exercised Warrants for Voting Preferred Stock in an aggregate amount of at least 25% of the aggregate number of shares of Voting Preferred Stock issuable upon such conversion or exercise. Bell Atlantic or NYNEX, as the case may be, may extend the initial five-year term for any of their respective markets by a period of 1 or 2 additional years by written notice given to the Company not later than the end of the fourth year of the initial term. A price adjuster based on the GDP Implicit Price Deflator applies to increase the minimum service revenue schedule in a renewal period. CAI believes that there are significant advantages to its strategic relationship with the BANX Affiliates since each of the parties is committed to building a leading video services business. Both Bell Atlantic and NYNEX have substantial financial, engineering and marketing resources not otherwise available to CAI. The BANX Affiliates have indicated that their investment in CAI was based, in large part, on CAI's cost-efficient systems, which have the potential to rapidly deploy a delivery system for quality digital video signals in their respective markets. CAI views the BANX Affiliates' investment as an endorsement of CAI's business strategy and wireless cable technology, and CAI believes that this investment significantly improves CAI's access to additional capital, state-of-the-art technologies and other operating synergies. SENIOR NOTES OFFERING. On September 29, 1995, the Company also closed an offering of $275.0 million aggregate principal amount of its Senior Notes. Interest on the Senior Notes is payable semi-annually on March 15 and September 15 of each year, and commenced on March 15, 1996. The Senior Notes mature on September 15, ITEM 1. BUSINESS (CONTINUED) THE BANX TRANSACTIONS (CONTINUED) 2002. The net proceeds of the Senior Notes Offering, after deducting underwriting costs and interest, were $265.9 million, and were used to fund an escrow account containing funds that together, with the proceeds from the investment thereof will be sufficient to pay three years' interest on the Senior Notes, to consummate the ACS Merger and other acquisitions, to repay interim financing obtained by the Company and to pay for budgeted and other capital expenditures, working capital and general corporate expenses. FCC AUCTIONS. CAI participated in the Federal Communications Commission's ("FCC") auctions (the "FCC Auction") for awarding available commercial wireless spectrum in 493 markets (the "Auction Markets") throughout the United States, identified as Basic Trading Areas( in accordance with material copyrighted by Rand McNally & Company. The winner of an Auction Market has the right to develop the vacant MMDS frequencies throughout the Auction Market, consistent with certain specified interference criteria that protect existing ITFS and MMDS channels. Existing ITFS and MMDS channel right holders also must protect the Auction Market winner's spectrum from power increases or tower relocations. CAI was the successful bidder for 32 Auction Markets costing CAI a total of $48.8 million. Pursuant to an agreement with CS Wireless, CAI will transfer 7 Auction Markets located in CS Wireless' operating regions and for which CAI was the successful bidder, costing an aggregate of $12.6 million, to CS Wireless at cost. THE CAI-HEARTLAND TRANSACTIONS Pursuant to the terms of a Participation Agreement dated December 12, 1995 between CAI, CS Wireless and Heartland, CAI and Heartland agreed to contribute to CS Wireless certain wireless cable assets, including related operating liabilities, or the stock of subsidiaries owning wireless cable assets for systems located principally in the Midwestern and Southwestern regions of the country. The combination of these assets into CS Wireless resulted in a company with approximately 5.7 million LOS households and 56,500 subscribers, as of March 31, 1996, making it one of the largest wireless cable companies in the United States in terms of subscribers and LOS households. The transaction closed on February 23, 1996 (the "CS Closing"). CAI owns approximately 54% of CS Wireless, Heartland approximately 35%, and affiliates of Bell Atlantic and NYNEX own approximately 10%. The remaining 1% equity interest was sold to purchasers of an aggregate of 100,000 units ("the "Unit Offering"), each unit consisting of four $1,000 principal amount at maturity of 11 3/8% Senior Discount Notes due 2006 and 1.1 shares of common stock of CS Wireless in a private placement closing contemporaneously with the CS Closing. The notes will accrete in value for five years and cash interest will be paid beginning 2001. The gross proceeds to CS Wireless were approximately $230.0 million. The net proceeds of the Unit Offering were used in part to make the cash payment to Heartland at the CS Closing, as required under the Participation Agreement, and the remaining net proceeds will be used by CS Wireless for capital expenditures to build-out its systems and to add subscribers, for certain formation costs, working capital, and general corporate purposes. Prior to the contributions contemplated by the Participation Agreement, CS Wireless, a wholly-owned subsidiary of the Company, operated a wireless cable system in Cleveland, Ohio. Under the Participation Agreement, CS Wireless acquired, or had contributed to it, stock of subsidiaries of CAI owning wireless cable systems or channel rights, and operating wireless cable systems or wireless channel rights held by CAI in Bakersfield, CA, Charlotte, NC, and Stockton/Modesto, CA and held by Heartland in Dallas, Fort Worth, and San Antonio, TX, Dayton, OH, Maysville and Sweet Springs, MO, Minneapolis, MN, Grand Rapids, MI, and Salt Lake City, UT. The CAI assets contributed in the transactions consisted of the above-mentioned four properties located outside the operating territories of Bell Atlantic and NYNEX. The Heartland contribution was valued at approximately $138,663,000, the estimated fair value. Heartland received 3,578,834 shares of CS Wireless common stock, approximately $28.3 million of cash, and $40.0 million of notes from CS Wireless. FUTURE ACQUISITIONS It is likely that CAI will consider acquisitions of wireless cable companies or licenses from time to time, subject to the covenants and restrictions imposed by the BANX Affiliates and Senior Notes. These acquisitions, if ITEM 1. BUSINESS (CONTINUED) FUTURE ACQUISITIONS (CONTINUED) any, would be financed by the sale or exchange of securities of CAI, borrowings from existing lenders or others, or a combination thereof. It is CAI's policy not to discuss or comment upon negotiations regarding such acquisitions until a definitive agreement is signed, unless the law otherwise requires. There can be no assurance that CAI will be successful in identifying, negotiating and completing such transactions. INDUSTRY OVERVIEW SUBSCRIPTION TELEVISION INDUSTRY The subscription television industry began in the late 1940s to serve the needs of residents in predominantly rural areas with limited access to local broadcast television stations. The industry expanded to metropolitan areas due to, among other things, the fact that it offered better reception and more programming. Currently, such systems offer various types of programming, which generally include basic service, enhanced basic, premium service and, in some instances, pay-per-view service. A subscription television customer generally pays an initial connection charge and a fixed monthly fee for basic service. The amount of the monthly basic service fee varies from one area to another and is a function, in part, of the number of channels and services included in the basic service package and the cost of such services to the television system operator. In most instances, a separate monthly fee for each premium service and certain other specific programming is charged to customers, with discounts generally available to customers receiving multiple premium services. Monthly service fees for basic, enhanced basic and premium services constitute the major source of revenue for subscription television systems. Converter rentals, remote control rentals, installation charges and reconnect charges for customers who were previously disconnected are also included in a subscription television system's revenues, but generally are not a major component of such revenues. Traditional cable systems, as defined in Section 602 of the Communications Act of 1934 (the "Communications Act"), are subject to both federal and local regulation. In addition, the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") imposed strict federal and local rules governing aspects of cable prices for programming and equipment. See "Industry Overview 3/4 Regulation." WIRELESS CABLE INDUSTRY BACKGROUND In 1983, the FCC reallocated a portion of the electromagnetic radio spectrum located between 2.5 and 2.7 GHz, permitted this spectrum to be used for commercial purposes, and modified its rules on the usage of the remaining portion of such spectrum. Regulatory and other obstacles nevertheless impeded the growth of the wireless cable industry through the remainder of the 1980s. In addition, before the 1992 Cable Act became effective, wireless cable operators' ability to obtain programming from cable-controlled, hard-wire cable owned programmers was not assured. The factors contributing to the increasing growth of wireless cable systems since that time include (i) regulatory reforms by the FCC to facilitate competition with hard-wire cable, (ii) federal legislation that increased the availability of programming for wireless cable systems, (iii) consumer demand for alternatives to traditional hard-wire cable service, (iv) enhanced ability of wireless cable operators to aggregate a sufficient number of channels in each market to create a competitive product, and (v) increased availability of capital to wireless cable operators in the public and private markets. According to Paul Kagan Associates, Inc. ("Kagan"), there were approximately 200 wireless cable systems currently operating in the United States, serving approximately 850,000 subscribers at the end of 1995. Wireless cable systems can provide subscribers with the same or superior video television signal as that of traditional hard-wire systems. Both hard- wire cable systems and wireless cable systems receive programming at a headend. Wireless cable programming, however, is then retransmitted by microwave transmitters from an antenna ITEM 1. BUSINESS (CONTINUED) WIRELESS CABLE INDUSTRY BACKGROUND (CONTINUED) located on a tower associated with the headend to a small receiving antenna located on a subscriber's rooftop. At the customer's location, the signals are converted to frequencies that can pass through conventional coaxial cable into a descrambling converter located on top of a television set. Wireless cable requires a clear LOS, because the microwave frequencies used will not pass through dense foliage, hills, buildings or other obstructions. To ensure the clearest line-of-sight possible in CAI's markets, CAI has placed, and plans to place, such towers on top of tall buildings or accessible mountain tops located in such markets. There exists, in each of CAI's operating and targeted markets, a number of acceptable locations for the placement of its towers, and CAI does not believe that the failure to secure any one location for such placement in any single market will materially affect CAI's operations in such market. Additionally, some LOS obstructions can be overcome with the use of signal repeaters and beam benders which retransmit an otherwise blocked signal over a limited area. CAI believes that its coverage will be further enhanced upon the implementation of digital technology and/or cellularization. Since wireless cable systems do not require an extensive cable plant, wireless cable operators can provide customers with a high quality picture resulting in a reliable signal with few transmission disruptions at a significantly lower system capital cost per installed customer than traditional hard-wire cable systems. REGULATION GENERAL. The wireless cable industry is subject to regulation by the FCC pursuant to the Communications Act of 1934, as amended (the "Communications Act"). The Communications Act empowers the FCC, among other things, to issue, revoke, modify and renew licenses within the spectrum available to wireless cable; to approve the assignment and/or transfer of control of such licenses; to approve the location of wireless cable system headends; to regulate the kind, configuration and operation of equipment used by wireless cable systems; and to impose certain equal employment opportunity and other obligations and reporting requirements on wireless cable channel license holders and operators. The FCC has determined that wireless cable systems are not "cable systems" for purposes of the Communications Act. Accordingly, a wireless cable system does not require a local franchise and is subject to fewer local regulations than a hard-wire cable system. Moreover, all transmission and reception equipment for a wireless cable system can be located on private property; hence, there is no need to make use of utility poles or dedicated easements or other public rights of way. Although wireless cable operators typically have to lease the right to use wireless cable channels from the holders of channel licenses, unlike hard-wire cable operators they do not have to pay local franchise fees. Recently, legislation has been introduced in some states, including Illinois, Maryland, Pennsylvania and Virginia, to authorize state and local authorities to impose on all video program distributors (including wireless cable operators) a tax on the distributors' gross receipts comparable to the franchise fees cable operators pay. Similar legislation might be introduced in several other states. While the proposals vary among states, the bills all would require, if passed, as much as 5.0% of gross receipts to be paid by wireless distributors to local authorities. Efforts are underway by the industry trade association to preempt such state taxes through federal legislation. In addition, the industry is opposing the state bills as they are introduced, and, in Virginia, it has succeeded in being exempted from the video tax that was eventually enacted into law. However, it is not possible to predict whether new state laws will be enacted which impose new taxes on wireless cable operators. In 50 large markets, 33 analog channels are available for wireless cable (in addition to any local broadcast television channels that are not retransmitted over the microwave channels). The FCC licenses and regulates the use of channels by license holders and system operators. In each geographic service area of all other markets, 32 analog channels are available for wireless cable (in addition to any local broadcast television channels that are not retransmitted over the microwave channels). Except in limited circumstances, 20 wireless cable channels in each of these geographic service areas are generally licensed to qualified non-profit educational organizations (commonly referred to as ITFS channels). In general, each of these channels must be used a minimum of 20 hours per week for instructional programming. The remaining "excess air time" on an ITFS channel may be leased to wireless cable ITEM 1. BUSINESS (CONTINUED) REGULATION (CONTINUED) operators for commercial use, without further restrictions (other than the right of the ITFS license holder, at its option, to recapture up to an additional 20 hours of air time per week for educational programming, or such other restrictions, including the recapture of additional hours of air time, as may be included in any lease). Lessees of ITFS' "excess air time," including the Company, generally have the right to transmit to their customers the educational programming provided by the lessor at no incremental cost. The FCC recently amended its rules to permit ITFS license holders to consolidate their educational programming on one or more of their ITFS channels, thereby providing wireless cable operators leasing such channels, including the Company, with greater flexibility in their use of ITFS channels. The remaining 13 analog channels available in most of the Company's operating and targeted markets are made available by the FCC for full-time usage without programming restrictions. LICENSING PROCEDURES. The actual number of wireless cable channels available for licensing in any market is determined by the FCC's interference protection and channel allocation rules. The FCC awards ITFS and MMDS licenses based upon applications demonstrating that the applicant is legally, financially and technically qualified to hold the license and that the operation of the proposed station will not cause interference to other stations or proposed stations entitled to interference protection. The FCC recently conducted the FCC Auction of available commercial wireless cable spectrum in 493 Auction Markets around the country. The winner of an Auction Market has the right to develop the vacant MMDS frequencies throughout the Auction Market, consistent with certain specified interference criteria that protect existing ITFS and MMDS channels. Existing ITFS and MMDS channel rights holders also must protect the Auction Market winner's spectrum from interference caused by power increases or tower relocations. CAI was the successful bidder in the FCC Auction with respect to 32 Auction Markets for $48.8 million, including 7 Auction Markets located in CS Wireless' operating regions at a cost of $12.6 million that will be transferred to CS Wireless at cost. The Company's obligation of $36.2 million ($48.8 million less the $12.6 million for which CS Wireless is obligated) is payable to the FCC 5 days after issuance of a Public Notice by the FCC stating that the Auction Market authorization is ready to be issued. In order to be eligible for the FCC Auction, CAI, prior to the start of the auctions, was required to file applications and make up-front payments in accordance with the rules of the FCC Auction. CAI, as the winning bidder, is in the process of fulfilling certain post-auction filing obligations, including, but not limited to, applications that propose new transmission facilities, exhibits concerning its involvement in bidding consortia, and its plans to build-out two-thirds of the market over a five-year period. Due to the unique nature of the FCC Auction, there is no prior regulatory history regarding the scope and nature of the information the FCC will require, or how the FCC will treat the information. Under rules and policies for applications for new MMDS facilities filed before the FCC Auction, the FCC would generally issue a conditional license that permits the conditional licensee to commence construction of its facilities upon the satisfaction of specified conditions. Construction of MMDS stations generally must be completed within one year of grant of the conditional license. In February 1995, the FCC amended its rules and established "windows" for the filing of new ITFS applications or major modifications to authorized ITFS facilities. The first filing "window" was October 16-20, 1995. Where two or more ITFS applicants file applications for the same channels and the proposed facilities could not be operated without impermissible interference, the FCC employs a set of comparative criteria to select from among the competing applicants. Construction of ITFS stations generally must be completed within 18 months of the date of grant of the authorization. If construction of MMDS or ITFS stations is not completed within the authorized construction period, the licensee must file an application with the FCC seeking additional time to construct the station and demonstrate therein compliance with certain FCC standards. If the extension application is not filed or is not granted, the license ITEM 1. BUSINESS (CONTINUED) REGULATION (CONTINUED) will be deemed forfeited. ITFS and MMDS licenses generally have terms of 10 years. Licenses must be renewed thereafter, and may be revoked for cause in a manner similar to other FCC licenses. FCC rules prohibit the sale for profit of a conditional MMDS license or a controlling interest in the conditional licensee prior to construction of the station or, in certain circumstances, prior to the completion of one year of operation. However, the FCC does permit the leasing of 100% of an MMDS licensee's spectrum to a wireless cable operator and the granting of options to purchase a controlling interest in a license even before such holding period has lapsed. Wireless cable transmissions are subject to FCC regulations governing interference and reception quality. These regulations specify important signal characteristics such as modulation (i.e., AM/FM) or encoding formats (analog or digital). Current FCC regulations require wireless cable systems to transmit only analog signals and those regulations will have to be modified, either by rulemaking or by individual application, to permit the use of digital transmissions. CAI is a party to a pending petition for declaratory ruling filed in July 1995 seeking adoption of interim regulations authorizing digital transmission. When granted, the declaratory ruling will permit the Company to commence installation and operations in a digital mode under existing FCC technical interference criteria. It is likely that, in the longer term, the FCC will consider adopting both new technical and service rules tailored to digital operations. The service rules could modify the respective rights and obligations of the ITFS lessors and their commercial lessees of "excess air time" in light of the increased capacity that would result from digital compression. Even if the FCC does adopt new service rules governing the allocation of "excess air time" in a digital environment, it is anticipated that there would be a dramatic increase in the number of channels that will be available to the Company following the conversion to digital transmission. The Company intends to demonstrate transmission of digital satellite television programming and digital local broadcast television signals in its Rochester, NY market in June 1996. The Company believes that the necessary FCC approvals will be obtained to permit use of digital compression by the time it becomes commercially available; however, there can be no assurance that these approvals will be forthcoming or timely. In addition, such modifications filed with the FCC after the FCC Auction will be subject to the interference protection rights of adjacent FCC Auction winners. The FCC also regulates transmitter locations and signal strength. The operation of a wireless cable television system requires the co-location of a commercially viable number of transmitting antennas and operations with transmission characteristics (such as power and polarity). In order to commence the operations of certain of the Company's markets, applications have been or will be filed with the FCC to relocate and modify existing transmission facilities. Under current FCC regulations, a wireless cable operator generally may serve subscribers anywhere within the LOS of its transmission facility, provided that it complies with interference standards. Under new rules adopted by the FCC on June 15, 1995, an MMDS channel license holder generally has a protected service area of 35 miles around its transmitter site. The new rules became effective on September 15, 1995. An ITFS channel license holder has protection as to all of its receive sites, but the same protected service area during excess capacity use by a wireless cable operator as an MMDS license holder. In launching or upgrading a system, the Company may wish to relocate its transmission facility or increase its height or power. If such changes cause the Company's signal to violate interference standards with respect to the protected area of other wireless license holders, the Company would be required to obtain the consent of such other license holders; however, there can be no assurance that such consents would be received. INTERFERENCE ISSUES. Interference from other wireless cable systems can limit the ability of a wireless cable system to serve any particular point. In licensing ITFS and MMDS systems, a primary concern of the FCC is avoiding situations where proposed stations are predicted to cause interference with the reception of previously proposed stations. Pursuant to FCC rules, a wireless cable system is generally protected from interference within a radius of 35 miles of the transmission site. In addition, modification applications submitted after the FCC Auction will be required to protect FCC Auction winners from interference. The FCC's interference protection standards may ITEM 1. BUSINESS (CONTINUED) REGULATION (CONTINUED) make one or more of these proposed modifications or new grants unavailable. In such event, it may be necessary to negotiate interference agreements with the licensees of the systems which would otherwise block such modifications or grants. There can be no assurance that the Company will be able to negotiate all necessary interference agreements that are on terms acceptable to the Company. In the event the Company cannot obtain interference agreements required to implement the Company's plans for a market, the Company may have to curtail or modify operations in that market, utilize a less optimal tower location, or reduce the height or power of the transmission facility, any of which could have a material adverse effect on the growth of the Company in that market. In addition, while the Company's leases with ITFS and MMDS licensees require their cooperation, it is possible that one or more of the Company's channel lessors may hinder or delay the Company's efforts to use the channels in accordance with the Company's plans for the particular market. THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the 1992 Cable Act, which compels the FCC to, among other things, (i) adopt comprehensive federal standards for the local regulation of certain rates charged by hard- wire cable operators, (ii) impose customer service standards on hard-wire cable operators, (iii) govern carriage of certain broadcast signals by all multi- channel video providers, and (iv) compel non-discriminatory access to programming owned or controlled by vertically-integrated cable operators. The rate regulations adopted by the FCC do not regulate cable rates once other multi-channel video providers serve, in the aggregate, at least 15% of the households within the cable franchise area. The customer service rules adopted by the FCC establish certain minimum standards to be maintained by traditional hard-wire cable operators. These standards include prompt responses to customer telephone inquiries, reliable and timely installations and repairs, and readily understandable billing practices. These rules do not apply to wireless cable operators, although the Company believes that it provides and will continue to provide customer service superior to its hard-wire cable competitors. Under the retransmission consent provisions of the 1992 Cable Act and the FCC's implementing regulations, all multi-channel video providers (including both hard-wire and wireless cable) seeking to retransmit certain commercial broadcast signals must first obtain the permission of the broadcast station. Hard-wire cable systems, but not wireless cable systems, are required under the 1992 Cable Act and the FCC's "must carry" rules to retransmit a specified number of local commercial television or qualified low power television signals. See "Retransmission Consent." The 1992 Cable Act and the FCC's implementing regulations impose limits on exclusive programming contracts and prohibit programmers in which a cable operator has an attributable interest from discriminating against cable competitors with respect to the price, terms and conditions of programming. Certain provisions of the 1992 Cable Act and the FCC's implementing regulations have been challenged in the courts and before the FCC. Under the Telecommunications Act of 1996 (the "1996 Act"), Congress has directed the FCC to eliminate cable rate regulations for "small systems," as defined in the 1996 Act, and for large systems under certain prescribed circumstances, and for all cable systems effective three years after enactment of the 1996 Act. While current FCC regulations are intended to promote the development of a competitive subscription television industry, the rules and regulations affecting the wireless cable industry may change, and any future changes in FCC rules, regulations, policies and procedures could have a material adverse effect on the Company. In addition, a number of legal challenges to the 1992 Cable Act and the regulations promulgated thereunder have been filed, both in the courts and before the FCC. These challenges, if successful, could result in increases in the Company's operating costs and otherwise have a material adverse effect on the Company. The Company's costs to acquire satellite- delivered programming may be affected by the outcome of those challenges. Other aspects of the 1992 Cable Act that have been challenged, the outcome of which could adversely affect the Company, include the 1992 Cable Act's provisions governing rate regulation to be met by traditional hard-wire cable companies. The 1992 ITEM 1. BUSINESS (CONTINUED) REGULATION (CONTINUED) Cable Act empowered the FCC to regulate the basic subscription rates charged by traditional hard-wire cable operators. The FCC recently issued rules requiring such cable operators, under certain circumstances, to reduce the rates charged for non-premium services by as much as 17%. Should these regulations withstand court and regulatory challenges, the extent to which wireless cable operators may continue to maintain a price advantage over traditional hard-wire cable operators could be diminished. On the other hand, continued strict rate regulation of cable rates would tend to impede the ability of hard-wire cable operators to upgrade their cable plant and gain a competitive advantage over wireless cable. Due to the regulated nature of the subscription television industry, the Company's growth and operations may be adversely impacted by the adoption of new, or changes to existing, laws or regulations or the interpretations thereof. COPYRIGHT. Under the federal copyright laws, permission from the copyright holder generally must be secured before a video program may be retransmitted. Under Section 111 of the Copyright Act, certain "cable systems" are entitled to engage in the secondary transmission of programming without the prior permission of the holders of copyrights in the programming. In order to do so, a cable system must secure a compulsory copyright license. Such a license may be obtained upon the filing of certain reports with and the payment of certain fees to the U.S. Copyright Office. In 1994, Congress enacted the Satellite Home Viewers Act of 1994 which enables operators of wireless cable television systems to rely on the cable compulsory license under Section 111 of the Copyright Act. RETRANSMISSION CONSENT. Under the retransmission consent provisions of the 1992 Cable Act, wireless and hard-wire cable operators seeking to retransmit certain commercial television broadcast signals must first obtain the permission of the broadcast station in order to cover their signal. However, wireless cable systems, unlike hard-wire cable systems, are not required under the FCC's "must carry" rules to retransmit a specified number of local commercial television or qualified low power television signals. Although there can be no assurances that the Company will be able to obtain requisite broadcaster consents, the Company believes in most cases it will be able to do so for little or no additional cost. THE 1996 ACT The 1996 Act will result in comprehensive changes to the regulatory environment for the telecommunications industry as a whole. The 1996 Act will, among other things, substantially reduce regulatory authority over cable rates. The legislation affords hard-wire cable operators greater flexibility to offer lower rates to certain of their customers and will thereby permit hard-wire cable operators to target discounts to the Company's current or prospective subscribers. The legislation will permit telephone companies to enter the video distribution business, subject to certain conditions. The entry of telephone companies in the video distribution business, with greater access to capital and other resources, could provide significant competition to the wireless cable industry, including the Company. In addition, the legislation will afford relief to wireless cable operators and DBS by exempting them from local restrictions on reception antennae and preempting the authority of local governments to impose certain taxes. The Company cannot reasonably predict the substance of rules and policies to be adopted by the FCC in implementing the provisions of the legislation. OTHER REGULATIONS Wireless cable license holders are subject to regulation by the FAA with respect to the construction, marking, and lighting of transmission towers and to certain local zoning regulations affecting construction of towers and other facilities. There may also be restrictions imposed by local authorities. There can be no assurance that the Company will not be required to incur additional costs in complying with such regulations or restrictions. ITEM 1. BUSINESS (CONTINUED) COMPETITION Wireless cable television operators face competition from a number of sources, including potential competition from emerging technologies in the subscription television industry, some of which are described below. While CAI believes that its value pricing strategy provides a competitive advantage, aggressive price competition by other companies in the subscription television industry could have a material adverse effect on CAI's results of operations and financial condition. HARD-WIRE CABLE. CAI's principal subscription television competitors in each market are traditional hard-wire cable operators. Hard-wire cable companies are generally well established and known to potential customers and have significantly greater financial and other resources than CAI. The hard- wire cable companies competing in CAI's markets generally offer between 34 to 82 channels to their subscribers, compared to between 22 to 42 channels (consisting of between 17 and 33 wireless cable channels and between 5 and 10 local off-air VHF/UHF broadcast channels) generally offered by CAI in its markets. DIRECT-TO-HOME ("DTH"). DTH satellite television services originally were available via satellite receivers which generally were 7-to-12 foot dishes mounted in the yards of homes to receive television signals from orbiting satellites. Until the implementation of encryption, these dishes enabled reception of any and all signals without payment of fees. Having to purchase decoders and pay for programming has reduced their popularity, although CAI will to some degree compete with these systems in marketing its services. DIRECT BROADCAST SATELLITE ("DBS"). DBS involves the transmission of an encoded signal direct from a satellite to the customer's home. Because the signal is at a higher power level and frequency than most satellite-transmitted signals, its reception can be accomplished with a relatively small (18-inch) dish mounted on a rooftop or in the yard. DBS cannot, for technical and legal reasons, provide local VHF/UHF broadcast channels as part of its service, although many DBS subscribers receive such channels via standard over-the air receive antennas. Moreover, DBS may provide subscribers with access to broadcast network distant signals only when such subscribers reside in areas unserved by any broadcast station. The cost to a DBS subscriber for equipment and service is generally substantially higher than the cost to wireless cable subscribers. Three DBS services currently are available nationwide, and two more are expected to commence service in 1996. AT&T Corp. has invested $137.5 million in DirecTv Inc., a leading provider of DBS service, and MCI Communications Corp. has announced that it has entered into a DBS joint venture arrangement with The News Corporation Limited, using a license that MCI won at a FCC auction for which it is paying a reported $682.5 million. DBS currently has approximately 2.3 million subscribers nationwide. PRIVATE CABLE. Private cable is a multi-channel subscription television service where the programming is received by satellite receiver and then transmitted via coaxial cable throughout private property, often MDUs, without crossing public rights of way. Private cable operates under an agreement with a private landowner to service a specific MDU, commercial establishment or hotel. The FCC amended its rules to provide point-to-point delivery of video programming by private cable operators and other video delivery systems in the 18 GHz band. Private cable operators compete with CAI for exclusive rights of entry into larger MDUs. TELEPHONE COMPANIES. The Communications Act prohibits local exchange carriers ("LECs"), including the RBOCs from providing video programming directly to subscribers in their respective telephone service areas. This restriction does not apply to wireless cable, however, certain federal courts have held that this cross-ownership ban abridges the First Amendment rights of LECs to free expression under the U.S. Constitution. Such rulings cover nearly all the approximately 1,300 LECs in the United States. The United States Supreme Court has decided to hear an appeal on this issue. A final determination of unconstitutionality of the cross-ownership ban would eliminate federal barriers to telephone company provision of video service. Both the United States Senate and House of Representatives have passed legislation that would, if enacted, lift barriers to the provision of video service by telephone companies. The FCC already permits LECs to provide "video dialtone" service, thereby allowing LECs to make available to multiple service providers, on a nondiscriminatory common carrier basis, a basic platform ITEM 1. BUSINESS (CONTINUED) COMPETITION (CONTINUED) that will permit end users to access video program services provided by others. Several large telephone companies have announced plans to either (i) enhance their existing distribution plant to offer video dialtone service, (ii) construct new plants in conjunction with a local cable operator to offer video dialtone service, or (iii) acquire or merge with existing hard-wire cable systems outside their telephone service areas. Some LECs have indicated that they intend to construct or acquire separate hard-wire cable systems within their telephone service areas if authorized. While the competitive effect of the entry of telephone companies into the video programming business is still uncertain, the Company believes that wireless cable systems will continue to maintain a cost advantage over video dialtone service and fiber optic distribution technologies. In July 1995, Pacific Telesis Group ("PacTel"), an LEC based in California, acquired Cross Country Wireless, Inc., a wireless cable system operator in southern California, for approximately $175 million. PacTel announced that its acquisition of Cross Country will allow PacTel to enter the market for consumer video services on an expedited basis. In November 1995, PacTel announced it would acquire Wireless Holdings, Inc. and Videotron Bay Area Inc., which operate wireless cable systems in San Francisco, California, Tampa, Florida and Spokane, Washington, and own channel rights in San Diego, California and Greenville, South Carolina, for approximately $170 million. The competitive effect of the entry of telephone companies into the subscription television business, including wireless cable, is still uncertain. LOCAL OFF-AIR VHF/UHF BROADCASTS. Local off-air VHF/UHF broadcast television stations (such as ABC, NBC, CBS and Fox) provide free programming to the public. Previously, subscription television operators could retransmit these broadcast signals without permission. However, effective October 6, 1993, pursuant to the 1992 Cable Act, local broadcasters may require that subscription television operators obtain their consent before retransmitting local television broadcasts. The Company has obtained such consents for its operating systems. See "Risk Factors--Restrictions Imposed by Government and Community Regulation." The Company will be required to obtain such consents in certain of its markets to re-broadcast any such channels. The Company believes that it will be able to obtain such consents, but no assurance can be given that it will be able to obtain all such consents. The FCC also has recently permitted broadcast networks to acquire, subject to certain restriction, ownership interests in hard-wire cable systems. In some areas, several low power television ("LPTV") stations authorized by the FCC are used to provide multi-channel subscription television service to the public. LPTV transmits on conventional VHF/UHF broadcast channels, but is restricted to very low power levels, which limits the area where a high-quality signal can be received. LOCAL MULTI-POINT DISTRIBUTION SERVICE ("LMDS"). In 1993, the FCC initially proposed to redesignate the 28 GHz band to create a new video programming delivery service referred to as LMDS. In July 1995, the FCC proposed to award licenses in each of 493 Auction Markets pursuant to auctions. Sufficient spectrum for up to 49 analog channels has been designated for the LMDS service. The FCC has not determined how many licenses it will award in each Auction Market. Final rules for LMDS have not been established. THE COMPANY'S MARKETPLACE BUSINESS AND OPERATING STRATEGIES CAI's objective is to become a leading regional provider of subscription television services by penetrating its markets and expanding into additional markets within its current regions. CAI believes that its relationship with Bell Atlantic and NYNEX will enhance its ability to achieve its objective. CAI believes that with respect to subscription television services, subscribers are generally indifferent to the delivery technology employed, but are concerned with such features as programming, price, service and reliability. CAI's operating strategy focuses on (i) competitive programming offerings, (ii) responsive customer service, (iii) value pricing, (iv) signal quality and reliability, (v) targeted marketing, (vi) commitment to technology, (vii) geographic concentration and (viii) exploitation of digital technology. This operating strategy is designed to attract and retain subscribers, enabling CAI to compete effectively with other video providers. ITEM 1. BUSINESS (CONTINUED) BUSINESS AND OPERATING STRATEGIES (CONTINUED) COMPETITIVE PROGRAMMING OFFERINGS. CAI provides its subscribers with a variety of programming choices, including local broadcast television stations; cable television networks such as CNN, ESPN, A&E, MTV, Nickelodeon, Discovery, HBO, Showtime and Disney; pay-per-view programming services; and various feature films and sporting events. CAI has assembled channel rights and programming agreements that it believes will allow it to provide programming packages competitive with those offered by other video providers. Additionally, CAI has the capacity to offer pay-per-view programming to all of its subscribers utilizing addressable converter technology. CAI believes that the expected introduction of digital video services in late 1996 will increase the variety of programming choices it may offer as well as increase the depth and breadth of additional services to subscribers. RESPONSIVE CUSTOMER SERVICE. CAI's objective is to provide its subscribers with a high level of efficient and responsive customer service. CAI believes that the quality of its customer service provides it with a competitive advantage. CAI seeks to achieve a high level of customer service through numerous initiatives, including maintaining extended hours of service, providing extensive training of its customer service representatives, implementing an automated response unit that provides after-hour assistance (e.g., billing inquiries, account balance information) and developing other computer-assisted customer service efficiency programs. VALUE PRICING. CAI believes that its lower capital requirements and low operating costs allow it to compete effectively with hard-wire cable operators based on price. CAI's experience indicates that its subscribers prefer premium service, but are reluctant to pay additional charges for premium services at prevailing prices. CAI's pricing strategy is to offer subscribers basic service plus a premium programming channel at the same general price level that its competitors charge for their basic services. In this way, CAI competes on value, while achieving an average revenue per subscriber comparable to that of other video service providers. SIGNAL QUALITY AND RELIABILITY. CAI strives to achieve the highest level of quality and reliability afforded by available technology. CAI believes its microwave transmission equipment delivers a signal to its subscribers that meets or exceeds the signal quality generally available from hard-wire cable service. CAI's wireless transmission system eliminates the need for cascading signal amplifiers that degrade television signal quality. Since there are fewer network components, CAI's wireless system achieves greater reliability and fewer outages as compared to most hard-wire cable systems. This reliability results in lower operating costs and fewer customer complaints from loss of service. TARGETED MARKETING. CAI targets its marketing efforts in specific neighborhoods identified as being particularly attractive and well-suited for its services. Once selected, the marketing campaign is effected by means of cost-effective local advertising (including billboards and local print-media), door-to-door campaigns, direct mail and customer-referral promotions. This targeted approach allows CAI to control its rollout and its marketing costs. In the future, CAI may include mass marketing strategies in conjunction with its targeted marketing strategy. COMMITMENT TO TECHNOLOGY. CAI is committed to deploying cost-effective state-of-the-art technology as it is developed in order to provide its customers with incremental video services, including interactive services. To that end, CAI has installed addressable converters in 100% of its subscriber- homes, allowing desirable and revenue enhancing pay-per-view services to be delivered. Nationally, only 40% of all hard-wire cable subscribers are addressable, according to the 1994 Cable TV Financial Databook published by Kagan. CAI will continue to evaluate new technologies and services, including anticipated developments in interactive services. GEOGRAPHIC CONCENTRATION. CAI will continue to develop and acquire markets in targeted regions. Through regional clustering, CAI expects to achieve additional revenue opportunities, such as regional advertising and operating efficiencies, including shared customer service, sales and administrative functions. ITEM 1. BUSINESS (continued) BUSINESS AND OPERATING STRATEGIES (CONTINUED) DIGITAL TECHNOLOGY. CAI intends to implement wireless digital video compression technology ("Digital") in Norfolk/Virginia Beach, Virginia, and Boston, Massachusetts and in more of its operating and targeted markets as circumstances permit. CAI estimates that Digital converter boxes could be commercially available by late 1996. Digital is expected to permit between four and 10 video channels to be transmitted over each analog wireless channel. Digital will allow a wireless cable operator to offer between 132 and 330 channels of video programming utilizing 33 analog wireless channels. Further, CAI believes Digital potentially may allow alternative uses of its wireless spectrum. Some alternative uses of CAI's wireless spectrum would be subject to certain regulatory approval. Finally, Digital may also allow CAI to utilize a cellular-type architecture by deploying additional transmit sites in a given market in order to increase the number of serviceable households. CAI'S MARKETS CAI operates six analog-based wireless cable systems in New York City, Rochester and Albany, NY, Philadelphia, PA, Washington, DC, and Norfolk/Virginia Beach, VA. In addition, CAI has a portfolio of wireless cable channel rights in eight additional markets, including Long Island, Buffalo and Syracuse, NY, Providence, RI, Hartford, CT, Boston, MA, Baltimore, MD, and Pittsburgh, PA. The Company's principal competitors in each of its markets are the hard-wire cable companies, and include Comcast Corp., Tele-Communications, Inc., Cox Cable Communications, Time Warner Cable and Cablevision Systems Corp. The table below outlines as of March 31, 1996, the characteristics in which CAI is currently operating or where CAI expects to launch systems.
Estimated Total New Monthly Service Estimated Number of Channels Approximate Revenue DMA Area LOS Channels APPLIED System Number of Per Premium MARKET RANK HOUSEHOLDS HOUSEHOLDS AVAILABLE FOR STATUS SUBSCRIBERS SUBSCRIBER PENETRATION (1) (2) (2) (3) (4) (4) Mid-Atlantic Markets/ Bell Atlantic Region Philadelphia 4 2,333,000 1,750,000 40 2 Operational 50,700 $38.83 147% Washington, DC 7 1,547,000 1,160,000 29 4 Operational 3,300 11.84 33% Pittsburgh 17 1,033,000 775,000 22 10 Planned --- --- --- Baltimore 23 988,000 741,000 31 2 Planned --- --- --- Norfolk/ Virgini Beach 40 574,000 431,000 27 6 Operational 3,000 29.87 124%
NORTHEAST MARKETS/NYNEX REGION New York City 1 5,563,000 4,173,000 36 0 Operational 16,300 46.27 199% Boston 6 1,710,000 1,283,000 30 3 Planned --- --- --- Long Island(6) N/A 619,000 464,000 20 13 Planned --- --- --- Buffalo 36 544,000 408,000 27 6 Planned --- --- --- Providence 46 671,000 503,000 23 10 Planned --- --- --- Albany 52 442,000 332,000 32 0 Operational 9,500 29.41 133% Syracuse 67 371,000 278,000 17 8 Planned --- --- --- OTHER MARKETS Hartford 26 1,012,000 525,000 19 4 Planned --- --- --- Rochester 71 388,000 323,000 27 6 Operational 2,300 27.27 87% 17,795,000 13,146,000 85,100
(1) DMA is the Designated Market Area as determined by A.C. Nielsen Company as of December 1994. (2) The Estimated Total Service Area Households for each market represents CAI's estimate of the number of households within the service area of the primary transmitter in each market based on 1990 Census Data. The Estimated LOS Households for each market represent the approximate number of Estimated Total Service Area Households within the service area that can receive an unobstructed signal, as estimated by CAI, based on engineering analyses of each individual market. Under the business relationship agreement, CAI has agreed to deliver at least 75% LOS households in each market covered by the BR Agreement. The service area for a
ITEM 1. BUSINESS (CONTINUED) CAI'S MARKETS (CONTINUED)
market varies from 25 to 40 miles based on transmitter height, transmitter power, and the proximity of adjacent wireless systems. The number of Estimated Total Service Area Households and Estimated LOS Households for Boston, Providence, Hartford, New York City, Long Island, Washington, D.C. and Baltimore have been adjusted to eliminate overlapping regions. (3) The Number of Channels Available comprises wireless cable channels and local broadcast channels that can be received by subscribers. Wireless cable channels are either licensed to CAI or leased to CAI from other license holders. The Number of Channels Available includes 10 off-air channels in Boston and 11 in New York. The Number of Channels Available is as of March 31, 1996 and includes certain channels that are subject to FCC approvals or third party interference agreements. CAI has pending FCC applications concerning co-location of transmission sites and/or an increase in broadcast power with respect to 4 channels in Philadelphia, 5 channels in Hartford, 4 channels in New York City, 16 channels in Washington, D.C., 4 channels in Pittsburgh, 24 channels in Rochester, 16 channels in Syracuse, 23 channels in Providence, 3 channels in Buffalo and substantially all channels in Boston and Long Island. The Number of Channels Available includes ITFS channels that may not be available for commercial programming by CAI. (4) Beginning in November 1995 and ending on March 28, 1996, the FCC held the FCC Auction. CAI was the successful bidder in 32 markets, seven of which will be transferred to CS Wireless at cost. As the successful bidder in such markets, CAI is applying to the FCC for 127 channel licenses. In addition, CAI has pending FCC applications concerning issuances of licenses for 2 channels in Boston, MA; 6 channels in Long Island, NY; 8 channels in Pittsburgh, PA; 8 channels in Providence, RI; 6 channels in Syracuse, NY and 4 channels in Washington, DC. Although there is no assurance that the FCC will grant these applications, many have been accepted for filing by the FCC and posted on Public Notice. CAI is also completing negotiations for the lease of 4 channels in Norfolk, VA. (5) Premium penetration is the ratio of the total number of premium channels received by subscribers in a market divided by the number of subscribers in that market. In most markets, the basic subscription service includes one premium channel. (6) The Long Island market includes Nassau and Suffolk counties in New York State.
The table below outlines certain characteristics of the Auction Markets for which CAI was the successful bidder during the recent FCC Auction (excluding Auction Markets transferred to CS Wireless and the Auction Markets included in the above table).
Estimated Channels Estimated Total Available from Service Area Estimated LOS FCC AUCTION HOUSEHOLDS HOUSEHOLDS Dover, DE 3 127,000 82,000 Glens Falls, NY 13 55,000 35,000 Hyannis, MA 8 101,000 65,000 Ithaca, NY 8 2,000 1,000 Manchester, VT 10 249,000 161,000 New Haven, CT 13 15,000 9,853 New London, CT 6 106,000 68,000 Pittsfield, MA 5 52,000 34,000 Poughkeepsie, NY 6 162,000 105,000 Springfield, MA 5 130,000 84,000 Utica, NY 6 120,000 77,000 Worcester, MA 5 50,000 2,000 Totals 1,169,000 724,000
ITEM 1. BUSINESS (CONTINUED) EMPLOYEES As of June 15, 1996, CAI had a total of 352 employees, of which none were subject to collective bargaining agreements. CAI has never experienced a work stoppage and believes that employee relations are good. ITEM 2. PROPERTIES CAI leases various office sites in Albany, New York; Arlington, Virginia; and in each region in which an operating system exists. CAI also leases transmission tower sites in the regions of its operating systems. CAI believes adequate office space and tower sites are readily available in all markets. CAI owns substantially all of the equipment which is necessary to conduct its operations, except certain vehicles, test equipment, and office equipment. A significant portion of CAI's investment in plant and equipment consists of subscriber equipment, which includes antennas, block downs, converters and remotes, and related installation costs, principally located at the subscribers' premises, and the reception and transmitter equipment located at the transmitter sites. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings with respect to CAI. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to stockholders during the last three months of the fiscal year ended March 31, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The principal market in which CAI Common Stock is traded is the NASDAQ National Market System under the ticker symbol "CAWS". The approximate number of stockholders of record on June 14, 1996 was 537. The high and low sales prices for the Common Stock on the NASDAQ are as follows:
HIGH LOW FISCAL YEAR ENDED MARCH 31, 1995 First Quarter $13.00 $10.00 Second Quarter 13.00 10.00 Third Quarter 12.00 7.00 Fourth Quarter 16.25 7.25 FISCAL YEAR ENDED MARCH 31, 1996 First Quarter 13.75 9.75 Second Quarter 13.00 8.38 Third Quarter 10.50 7.25 Fourth Quarter 10.38 7.25 FISCAL YEAR ENDING MARCH 31, 1997 First Quarter (through June 14, 1996) 17.50 6.25
DIVIDENDS The Company has never paid cash dividends on the CAI Common Stock and does not currently intend to pay cash dividends on the CAI Common Stock in the foreseeable future. Since the Company generally conducts, and in the future intends to conduct, operations through subsidiaries, the Company's ability to declare or pay cash dividends will depend in part on the ability of the Company's present and future subsidiaries to declare or pay cash dividends to the Company. Any future determination by the Company to pay cash dividends on the CAI Common Stock will be within the discretion of the Company's Board of Directors and will depend upon the earnings of the Company, the Company's financial condition and capital requirements and other financial factors which are considered relevant by the Company's Board of Directors. The Company has accrued dividends of $5,812,562 on all classes of its preferred stock as of March 31, 1996. The Company is not required to pay dividends on the Senior Preferred Stock until December 1, 1998. The Company began paying quarterly dividends on the 8% Redeemable Convertible Series A Preferred Stock, no par value (the "Series A Preferred Stock"), of CAI in March 1996. Pursuant to certain restrictive covenants contained in the Term Notes and the Senior Notes, the Company cannot declare or pay any dividends or make any distributions on shares of the Company except for dividends required to be paid on the Series A Preferred Stock and Senior Preferred Stock. Also, the Company may not purchase or redeem any of its shares, including warrants and options therefor. ITEM 6. SELECTED FINANCIAL DATA The following summary should be read in conjunction with the consolidated financial statements and related notes contained elsewhere herein. (in thousands, except share data)
Eight-month Seven-month Inception to Year ended Period ended Period Ended Year Ended Year Ended December 31, December 31, August 31, March 31, March 31, March 31, 1991 1992 1993 1994 1995(2) 1996(3) Summary of Operations: Revenue $ - $ - $ - $ 918 $ 5,148 $ 30,682 Net loss (74) (189) (1,378) (7,521) (14,107) (40,986) Preferred dividend requirement - - - - 328 5,879 Ratio of earnings to fixed charges(1) - - - - - - Per Share Data: Loss per common share (.01) (.02) (.12) (.61) (.93) (1.73) Weighted average number of shares outstanding 11,777,431 11,777,431 11,777,431 12,278,220 15,456,540 27,075,578
December 31, December 31, August 31, March 31, March 31, March 31, 1991 1992 1993 1994 1995 1996 Financial Condition: Wireless channel rights -net $ - $ - $ 1,350 $ 10,791 $ 46,192 $ 205,974 Investment in CS Wireless - - - - - 113,054 Property and equipment - net - - 763 2,434 21,840 52,569 Total assets 157 395 2,499 41,047 78,461 698,795 Notes payable 61 312 3,511 3,130 29,532 318,435 Redeemable preferred stock - - - - 18,378 92,882 Shareholders' equity 96 75 (1,597) 34,346 22,115 192,611
(1) In calculating the ratio of earnings to fixed charges, earnings consists of losses prior to income tax benefit, minority interest in loss, and fixed charges. Fixed charges consists of interest expense, amortization of debt issuance costs and one-third of rental payments on operating leases (such amount having been deemed by CAI to represent the interest portion of such payments). Earnings were inadequate to cover fixed charges by the amount of $74, $189, $1,378, $7,552, $15,004 and $53,307 for the periods ended in 1991, 1992, 1993, 1994, 1995, and 1996, respectively. (2) The Company acquired the New York System on January 9, 1995 (see Note 2 to the Financial Statements). (3) The Company acquired ACS and ECNW on September 29, 1995 (see Item 1). Also, the Company closed a series of transactions with Heartland wherein the Company's subsidiary, CS Wireless, received certain assets from Heartland in exchange for CS Wireless common stock and cash (see Item 1). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section should be read in conjunction with the Consolidated Financial Statements of the Company, the notes thereto and other information presented elsewhere herein. Except for the historical information contained herein, the matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are accompanied by cautionary factors which could cause CAI's actual results to differ materially from those in the forward-looking statement. The cautionary factors presented should not be construed as exhaustive. LIQUIDITY AND CAPITAL RESOURCES The wireless cable industry requires significant capital. CAI's plan for continued expansion requires substantial capital investment on a continuing basis and availability of sufficient financing is essential to that plan. Funds are required for the lease or acquisition of channel rights, the acquisition of wireless cable systems, the construction of system head-end and transmission equipment, start-up costs related to the commencement of operations and subscriber installation costs. CAI has financed its capital requirements since inception through a combination of the issuance of debt and equity securities, the incurrence of loans and the assumption of debt and other liabilities in connection with acquisitions. CAI has incurred operating losses since inception and its cash flow from operating activities has to date been insufficient to cover its operating expenses. CAI estimates that the launch of a new analog wireless cable system in a typical market (assuming 23 or more channels per market) requires the expenditure of approximately $2.2 million of start-up costs, consisting of approximately $1.2 million for system head-end and transmission equipment and approximately $1.0 million for the other pre-operational and start-up expenses, and incremental installation costs of approximately $450-500 per subscriber for equipment and labor at subscriber locations. The Company has made the decision to convert some of its analog systems to Digital, as it is doing with the Norfolk/Virginia Beach system, and to initially set up Digital systems as with the Boston, Massachusetts market. A Digital wireless cable system will cost much more than analog, including higher incremental installation costs per subscriber when subscriber equipment becomes available. The head-end and transmission expenditures must be made before programming can be delivered to subscribers. Labor installation costs for a subscriber are incurred only after that subscriber signs up for services. During the year ended March 31, 1995, CAI expended approximately $15.0 million to purchase equipment, $8.1 million to fund operating activities, $9.9 million to acquire the New York System, and $1.3 million to acquire wireless channel rights. During this period CAI funded its cash requirements out of existing cash balances, an issuance of equity securities generating net proceeds of approximately $7.1 million, debt proceeds of $9.8 million, and the disposition of equipment generating net proceeds of approximately $0.6 million. At March 31, 1995, CAI had unrestricted cash and cash equivalents of approximately $1.2 million. Since March 31, 1995, CAI has raised an additional $1.5 million of equity capital through the issuance of 179,765 shares of common stock. On May 9, 1995, at the Stage I Closing CAI received $30.0 million from Bell Atlantic and NYNEX, the proceeds of which were used to retire $21.3 million of short-term notes issued in connection with the purchase of the New York System, provide a required $4.0 million cash deposit under the ACS Merger Agreement, and to pay $3.0 million of cost associated with the short-term debt issued for the acquisition of the New York System and for transaction expenses and working capital. In June 1995, CAI received $12.0 million from an affiliate of Smith Barney pursuant to a term note, the proceeds of which were used for working capital. On September 29, 1995, the Company received $265.9 million from the Senior Notes Offering, net of $9.1 million in underwriting costs and interest, of which $90.6 million was placed in escrow to cover three years of interest, plus $70 million from the sale of 7,000 shares of Senior Preferred Stock and the Stage II Warrants to BANX. These funds were used in part to pay the cash portions of the following acquisitions: ACS ($41.1 million), ECNW ($8.9 million), the Baltimore Assets ($11.3 million) and the Pittsburgh Assets ($6.4 million). The non-cash portion of the purchase prices was satisfied with CAI Common Stock or debt, primarily notes. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (continued) Additionally, the Company loaned ACS $22.3 million to pay off ACS bank debt and another $11.3 million to pay other costs incurred by ACS relating to the ACS acquisition and for other corporate purposes. CAI also used $12.4 million to repay the interim financing it received from Smith Barney Holdings, Inc., including interest, and another $2.1 million to pay legal and other fees relating to the merger, Stage II Closing and the offering of the Senior Notes. During the year ended March 31, 1996, CAI expended approximately $14.5 million to purchase equipment, $34.6 million to fund operating activities and $24.5 million to acquire wireless channel rights in addition to the mergers and acquisitions mentioned previously. During fiscal 1996, CAI funded its cash requirements out of existing cash balances and the financings more fully described above. At March 31, 1996, CAI had cash and cash equivalents of approximately $103.3 million. Pursuant to the terms of the Participation Agreement, CAI and Heartland agreed to contribute to CS Wireless certain wireless cable assets, including related operating liabilities, or the stock of subsidiaries owning wireless cable assets for systems located principally in the Midwestern and Southwestern regions of the country. The transaction closed on February 23, 1996. CAI owns approximately 54% of CS Wireless, Heartland approximately 35%, and affiliates of Bell Atlantic and NYNEX own approximately 10%. The remaining 1% equity interest was sold to purchasers in the Unit Offering. The combination of these assets into CS Wireless resulted in a company with approximately 5.7 million LOS households and 56,500 subscribers, making it one of the largest wireless cable companies in the United States in terms of subscribers and LOS households. Through fiscal 1997 the Company plans to spend $60 million primarily for the purchase and installation of digital compatible head-end (transmission) equipment in connection with a BR Agreement with BANX (the BR Agreement). CAI is committed through open purchase orders to expend approximately $22.3 million primarily for capital expenditures associated with the development of the Boston and Norfolk/Virginia Beach Digital transmission facilities as of March 31, 1996. In addition, during that period, the Company is obligated to pay minimum license fees and lease payments of approximately, $6.5 million. Management believes that the Company's growth plan will require additional funds during the 1997 fiscal year, especially if CAI determines to effect additional acquisitions or to accelerate its anticipated growth rate or system launch rate, and/or if BANX fails to exercise its options with respect to markets as contemplated by the BR Agreement. Such additional funds may take the form of debt or equity securities issuances, borrowings under loan arrangements or sales of assets including channel rights or wireless cable systems. CAI's ability to engage in financings, asset sales or acquisition transactions is limited by the contractual arrangements entered into with BANX, and significant transactions likely will require its prior consent. In addition, the Senior Notes impose similar restrictions on the incurrence of additional debt and on the ability to effect asset sales. There is no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all. In the event that such additional financings are not available to the Company, management can and will defer capital expenditures and other costs currently contemplated, including the deployment of Digital head-end equipment which will affect the Company's ability to implement its obligations under the BR Agreement. The present revenue stream and cash resources available to the Company are adequate to sustain the Company's needs through mid 1997 if such actions were taken. However, expansion plans would be adversely impacted. There is no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all. COMPARISON OF OPERATING RESULTS SEVEN MONTHS ENDED MARCH 31, 1994 COMPARED TO EIGHT MONTHS ENDED AUGUST 31, 1993 The Company started operating the Albany System effective September 1, 1993 from which the Company generated all of its revenues, $0.9 million. The Company had a net loss of $7.5 million for the seven months ended ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS (continued) March 31, 1994. The loss resulted primarily from a $2.5 million non-cash compensation charge associated with stock sales to employees, approximately $1.5 million of corporate general and administrative expenses associated with developing a corporate administration and additional markets (Hartford, Rochester and Virginia Beach), and $3.4 million of interest expense. Costs and expenses for the seven-month period ended March 31, 1994 totaled $5.2 million versus $0.3 million in the prior eight-month period ended August 31, 1993. The 1994 costs and expenses included $0.4 million of programming and license fees, $36,000 of marketing, and $0.3 million of depreciation and amortization expense. Such costs had not been incurred prior to the commencement of operations as of September 1, 1993. General and administrative expenses for the seven-month period ended March 31, 1994 increased to $2.0 million from $247,000 during the eight-month period ended August 31, 1993. General and administrative expense consist primarily of salaries and related payroll costs. Such costs increased to $1.4 million during the seven-month period ended March 31, 1994 from $186,000 during the eight-month period ended August 31, 1993 due to increases associated with the development and management of a multisystem operation. Interest expense for the seven-month period ended March 31, 1994 was $3.4 million. Such expense was comprised of $2.7 million ($1.0 million imputed interest expense attributed to 1,840,000 shares of CAI Common Stock issued in conjunction with a $0.6 million short-term loan, $1.5 million of non-cash interest expense related to certain warrants issued in regard to bridge financing at exercise prices below market; and $0.2 million of loan discounting amortization), of non-cash interest expense, $0.7 million of bridge financing interest expense, and approximately $50,000 of other interest expense, primarily related party interest. In aggregate, the non-cash charges to interest expense and compensation totaled approximately $5.1 million in the seven-month period ended March 31, 1994 compared to the eight-month period ended August 31, 1993 total of $1.1 million. All such non-cash charges were reflected as additional paid-in capital. YEAR ENDED MARCH 31, 1995 COMPARED TO SEVEN MONTHS ENDED MARCH 31, 1994 Revenues were $5.1 million for the year ended March 31, 1995, compared to $0.9 million for the seven month period ended March 31, 1994. The revenues consisted of $4.8 million in television subscription revenue, $0.2 million in installation revenue and other revenue, and $0.1 million in pay-per- view revenues for the year ended March 31, 1995 and $850,000, $53,000 and $15,000, respectively, for the seven month period ended March 31, 1994. CAI's television subscription revenue of $4.8 million for the year ended March 31, 1995 resulted from the following systems: Albany ($1.9 million), New York City ($2.6 million), Hartford VDT ($0.1 million), Rochester ($0.1 million), Hampton Roads ($0.1 million) and Providence SMATV ($0.1 million). Such revenue of $0.9 million for the seven months ended March 31, 1994 was from the Albany System only. CAI had a net loss of $14.1 million for the year ended March 31, 1995 primarily due to operating costs and interest expense and expenses associated with the development of CAI's Hartford, Rochester, Hampton Roads, and Albany markets. Programming and license fees were $2.0 million for the year ended March 31, 1995 compared to $0.4 million for the seven month period ended March 31, 1994. These costs are primarily attributable to the Albany System acquired in August 1993 and have increased with the growth of subscribers and the acquisition of the New York System. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS (continued) CAI's general and administrative expenses increased to $11.1 million for the year ended March 31, 1995 from $2.0 million for the seven month period ended March 31, 1994. The increased general and administrative expenses are due primarily to costs associated with increased staffing levels, facility expenses, supplies, utilities, equipment, and other costs associated with four new systems being started and larger corporate headquarters. Depreciation and amortization increased to $3.6 million for the year ended March 31, 1995 from $0.3 million for the seven month period ended March 31, 1994. Depreciation and amortization expenses for the year ended March 31, 1995 are comprised of approximately $2.5 million of depreciation related to property and equipment, most of which was acquired in 1994, and approximately $1.1 million of amortization of primarily wireless channel rights compared to approximately $0.2 million and $0.1 million, respectively, for the seven month period ended March 31, 1994, during which time the Company only operated the Albany System. Interest income increased to $0.6 million for the year ended March 31, 1995 compared to $0.1 million for the seven month period ended March 31, 1994. The increase in interest income is attributable to the interest income earned on the proceeds received from CAI's initial public offering that occurred in February 1994. Other income increased to $0.3 million for the year ended March 31, 1995 compared to no other income for the seven month period ended March 31, 1994. The increase in other income is primarily attributable to a gain on the sale of transmission equipment, made available after the May 1994 Albany System equipment upgrade. Interest expense decreased to $1.7 million for the year ended March 31, 1995 from $2.2 million for the seven month period ended March 31, 1994. The 1995 interest expense is primarily associated with notes issued in the acquisition of the New York System in January 1995. The 1994 interest is primarily associated with bridge notes issued prior to CAI's initial public offering. Interest expense-related parties decreased to $18,000 for the year ended March 31, 1995 from $1.2 million for the seven month period ended March 31, 1994. The 1995 related party interest expense is associated with a $0.2 million outstanding note payable to a shareholder. The 1994 related party interest expense is primarily due to shares of CAI Common Stock issued in conjunction with a short-term borrowing originating in August 1993. YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995 CAI's total revenue was $30.7 million for the year ended March 31, 1996 as compared to $5.1 million for the year ended March 31, 1995 primarily due to the ACS acquisition on September 29, 1995 and a full year of operations for the New York System. ACS contributed $15.0 million to the overall increase of $25.6 million for its six months of operations included since the date of acquisition. The New York System contributed $7.5 million of the increased revenue. The remaining increase of $3.1 million is attributable to the growth of subscribers in the other systems. CAI's television subscription revenue was $28.1 million for the year ended March 31, 1996 as compared to $4.9 million for the year ended March 31, 1995 resulted from the following systems: Albany ($3.1 vs. $1.9 million), Rochester ($0.7 vs. $0.1 million), New York City ($9.2 vs. $2.6 million), Hampton Roads ($0.8 vs. $0.1 million), Philadelphia ($10.8 vs. 0 million) , Cleveland ($2.1 vs. 0 million), Bakersfield ($0.9 vs. 0 million), Washington ($0.2 vs. 0 million), Hartford VDT ($0.1 vs. $0.1 million), and Providence SMATV ($0.2 vs. $0.1 million). The systems with zero for the prior year were acquired in the current year. The increase in the New York City television subscription revenue is due to a full year of operations for the year ended March 31, 1996 as compared to only three months of operations included in the year ended March 31, 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS (continued) The television subscription revenue for Cleveland and Bakersfield totaling $3.0 million is for the period that these two systems were part of CAI. Cleveland and Bakersfield were acquired as part of the ACS acquisition and subsequently contributed to CS Wireless. CS Wireless was consolidated with CAI until the CS Closing (February 23, 1996). CS Wireless' revenue and expenses are not included in CAI's consolidated financial statements after that date. Through December 31, 1995, CAI will account for CS Wireless on a three-month lag that corresponds with CS Wireless' December 31 fiscal year end. CAI's net loss of $41.0 million for the year ended March 31, 1996 is higher than the net loss of $14.1 million for the year ended March 31, 1995 by $26.9 million due primarily to substantial increases in depreciation and amortization ($21.1 million) and interest expense ($22.9 million) offset by a deferred income tax benefit of $12.0 million and increased interest income of $5.4 million. The operating loss increased to $34.8 million for the year ended March 31, 1996 from $14.2 million for the year ended March 31, 1995, a change of $20.6 million, which approximated the depreciation and amortization increase of $21.1 million. The increase is primarily due to the depreciation and amortization associated with property and equipment, wireless channel rights, and goodwill acquired in connection with the ACS and ECNW acquisitions and to a lesser extent on additional investment in property and equipment. Programming and license fees were up six times from $2.0 million for the year ended March 31, 1995 to $12.6 million for the year ended March 31, 1996 in line with television subscription revenue also up almost six times. Marketing expenses were up slightly from $2.5 million for the year ended March 31, 1995 to $3.5 million for the year ended March 31, 1996 reflecting less emphasis on marketing and more on acquisitions during the year. General and administrative expenses went from $11.1 million for the year ended March 31, 1995 to $24.7 million for the year ended March 31, 1996, primarily due to the general and administrative expenses of then-newly acquired ACS and ECNW ($6.3 million) and a full year of the New York System (net increase of $5.2 million). General and administrative costs should stabilize due to the combination of ACS' and CAI's administrative operations. General and administrative expenses, other than those associated with new acquisitions and the New York System, increased $2.1 million over the prior year primarily due to increased salaries, personnel and professional fees incurred to develop, acquire, integrate and manage new systems. Interest expense increased to $24.6 million for the year ended March 31, 1996 from $1.7 million for the year ended March 31, 1995, a change of $22.9 million, primarily due to interest expense incurred on the Senior Notes issued on September 29, 1995 and the Term Notes issued on May 9, 1995. Interest expense will continue to increase next year by approximately $18.0 million to reflect the first full year of interest expense on the Senior Notes. Interest income was $6.0 million for the year ended March 31, 1996 as compared to $0.6 million for the year ended March 31, 1995. The increase is primarily due to income earned on the debt service escrow for the Senior Notes and on funds remaining from the issuance of the Senior Notes which are invested until used. The operating loss of $34.8 million for the year ended March 31, 1996 includes $1.8 million for the Cleveland and Bakersfield systems which are now part of CS Wireless. While CAI will no longer include those systems' revenue and expenses in its statements of operations, CAI will include its share of CS Wireless's net loss to the extent of its 54% ownership. Based on an unaudited pro forma condensed combined statement of operations for CS Wireless for the year ended December 31, 1995 (prepared as if the contributions contemplated by the Participation Agreement had occurred on January 1, 1995), CS Wireless' net loss would have been $35.0 million, of which CAI's share would approximate $18.9 million. CAI will record its share of CS Wireless' loss with a corresponding reduction in its investment in CS Wireless. CAI has not guaranteed any debt or commitments of CS Wireless. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INFLATION Management does not believe that inflation has had or will have a material impact on the Company's results of operations. Management believes it will be able to increase subscriber rates to keep pace with inflationary increases in costs without a significant decline in the number of subscribers. SEASONALITY OF INSTALLATION ACTIVITIES The rate at which new subscriber installations occur can be affected by severe winter or other weather conditions and limited daylight hours in the winter months in certain markets. Therefore, CAI may experience lower than average subscriber growth and capital expenditures primarily during the winter season. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 121 -- Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of is effective for fiscal years beginning after December 15, 1995. The Company will adopt this statement on April 1, 1996. CAI believes this statement will not have a material effect on CAI's financial position or results of operations. Statement of Financial Accounting Standards No. 123 -- Accounting for Stock-Based Compensation is effective for fiscal years beginning after December 15, 1995. CAI intends to continue using the intrinsic value based method of accounting for employee stock compensation and intends to implement the disclosure requirements required by FASB 123 as of April 1, 1996. CAI believes this statement will not have a material effect on CAI's financial position or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page No. IN FORM 10-K FINANCIAL STATEMENTS Report of Independent Accountants 29 Consolidated Balance Sheets - March 31, 1995 and 1996 30 Consolidated Statements of Operations - Seven-Month Period Ended March 31, 1994, and Years Ended March 31, 1995 and 1996 31 Consolidated Statements of Shareholders' Equity - Seven-Month Period Ended March 31, 1994 and Years Ended March 31, 1995 and 1996 32 Consolidated Statements of Cash Flows - Seven-Month Period Ended March 31, 1994 and Years Ended March 31, 1995 and 1996 33 Notes to Consolidated Financial Statements 36
REPORT OF INDEPENDENT ACCOUNTANTS REPORT OF INDEPENDENT ACCOUNTANTS Shareholders and Board of Directors CAI Wireless Systems, Inc. Albany, New York We have audited the accompanying consolidated balance sheets of CAI Wireless Systems, Inc. and Subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended March 31, 1996 and 1995 and for the seven-month period ended March 31, 1994. 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 consolidated financial position of CAI Wireless Systems, Inc. and Subsidiaries as of March 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years ended March 31, 1996 and 1995 and for the seven-month period ended March 31, 1994 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Albany, New York June 21, 1996 CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31, 1995 1996 ASSETS Cash and cash equivalents $ 1,201,932 $103,263,094 Subscriber accounts receivable, less allowance for bad debts of $135,383 for 1995 and $1,296,282 for 1996 63,248 1,432,674 Prepaid expenses 296,296 698,482 Property and equipment, net 21,840,328 52,568,619 Wireless channel rights, net 46,192,083 205,973,840 Investment in CS Wireless Systems, Inc. - 113,054,069 Debt service escrow - 77,621,088 Goodwill - 131,282,996 Loan acquisition costs, net 1,012,536 10,631,263 Other assets 7,854,452 2,268,847 Total Assets $78,460,875 $698,794,972 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable $ 4,513,908 $ 8,244,577 Accrued expenses 2,518,845 10,186,374 Senior debt 21,250,000 275,000,000 Notes payable 8,282,147 43,434,667 Wireless channel rights obligations 963,648 41,025,866 Deferred income taxes - 35,410,000 37,528,548 413,301,484 Commitments Minority interest 438,963 - Mandatorily redeemable preferred stock 14% Senior convertible preferred stock (liquidation value $70,000,000) - 69,020,002 Series A 8% redeemable convertible preferred stock (liquidation value $18,050,000) 18,050,000 18,050,000 Accrued preferred stock dividends 328,011 5,812,562 18,378,011 92,882,564 Shareholders' Equity Preferred stock Common stock, shares issued and outstanding March 31, 1995 - 15,754,018 March 31, 1996 - 37,829,482 40,341,043 257,701,130 Additional paid-in-capital 5,042,643 - Accumulated deficit (23,268,333) (65,090,206) 22,115,353 192,610,924 Total Liabilities and Shareholders' Equity $78,460,875 $698,794,972
See notes to consolidated financial statements. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
SEVEN-MONTH PERIOD ENDED Year ended Year ended MARCH 31, March 31, March 31, 1994 1995 1996 Revenues $ 917,762 $ 5,147,510 $30,682,486 Costs and expenses Programming and license fees 361,714 2,024,943 12,582,750 Marketing 36,252 2,529,623 3,525,396 General and administrative 4,475,422 11,139,693 24,689,572 Depreciation and amortization 294,945 3,639,643 24,718,341 5,168,333 19,333,902 65,516,059 Operating loss (4,250,571) (14,186,392) (34,833,573) Other income (expense) Interest income 70,749 641,021 6,047,081 Other income - 275,579 87,268 Interest expense (3,372,313) (1,733,745) (24,608,258) (3,301,564) (817,145) (18,473,909) Loss before provision for income tax benefit and minority interest (7,552,135) (15,003,537) (53,307,482) Provision for income tax benefit - - 12,000,000 Loss before minority interest (7,552,135) (15,003,537) (41,307,482) Minority interest in los 31,266 896,700 321,910 Net loss (7,520,869) (14,106,837) (40,985,572) Preferred stock dividend - (328,011) (5,878,960) Loss applicable to common stock shareholders $(7,520,869) $(14,434,848) $(46,864,532) Loss per common share $ (0.61) $ (0.93) $ (1.73) Average common and equivalent shares outstanding 12,278,220 15,456,540 27,075,578
See notes to consolidated financial statements. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY SEVEN-MONTH PERIOD ENDED MARCH 31, 1994 AND YEARS ENDED MARCH 31, 1995 AND 1996
ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL BALANCE AT SEPTEMBER 1, 1993 9,200,000 $ 20 $ 43,571 $ (1,640,627) $ (1,597,036) Sale of common stock 2,300,000 12,000 12,000 Additional value assigned to shares of common stock sold to employees at a price below fair market value 2,465,000 2,465,000 Value assigned to detachable warrants and bonus interest on issued debt 2,660,000 2,660,000 Sale of common stock - IPO 3,910,000 43,010,000 43,010,000 Less issuance costs (4,599,477) (4,599,477) Additional acquisition costs of Master Sublease adjusted to historical cost (83,855) (83,855) Net loss for the seven-month period _________ _________ _________ (7,520,869) (7,520,869) Balance at March 31, 1994 15,410,000 38,422,543 5,084,716 (9,161,496) 34,345,763 Value assigned to warrants exercised 72,279 18,500 (18,500) Preferred stock converted to common stock 271,739 1,900,000 1,900,000 Value assigned to detachable warrants 304,438 304,438 Preferred stock dividends accrued (328,011) (328,011) Net loss for the year _________ __________ _________ (14,106,837) (14,106,837) Balance at March 31, 1995 15,754,018 40,341,043 5,042,643 (23,268,333) 22,115,353 Net proceeds from sale of common stock 179,765 1,470,329 1,470,329 Value assigned to detachable warrants 1,350,000 1,350,000 Common stock issued to acquire 49% minority interest in Hampton Roads Wireless, Inc. 652,523 8,000,000 8,000,000 Less issuance costs (47,058) (47,058) Common stock issued in ACS Merger 19,362,611 190,600,700 190,600,700 Less registry costs (1,316,743) (1,316,743) Common stock issued in ECNW Merger 1,880,565 18,652,859 18,652,859 Senior preferred stock issuance costs (1,349,984) (1,349,984) Preferred stock dividends accrued (5,042,659) (836,301) (5,878,960) Net loss for the year _________ ___________ _________ (40,985,572) (40,985,572) Balance at March 31, 1996 37,829,482 $257,701,130 $ - $(65,090,206) $192,610,924
See notes to consolidated financial statements. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SEVEN-MONTH PERIOD ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 1994 1995 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (7,520,869) $ (14,106,837) $ (40,985,572) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and Amortization 294,945 3,639,643 24,718,341 Non-cash compensation related to employees stock purchases 2,465,000 - - Non-cash interest expense 2,450,000 - - Deferred income tax benefit - - (12,000,000) Loan costs and discounts amortization 400,000 415,460 1,778,893 Minority interest in loss (31,266) (896,700) (321,910) Other - (282,343) (193,890) Changes in assets and liabilities, net of effects from acquisitions: Subscriber accounts receivable (6,839) 185,689 (111,677) Other assets (50,149) (173,370) (128,117) Accounts payable and accrued expenses (100,871) 3,146,463 (7,404,356) Net cash used in operating activities (2,100,049) (8,071,995) (34,648,288) Cash flows from investing activities Cash paid for businesses acquired, net of cash (1,095,143) (9,916,889) (77,407,837) Purchase of wireless channel rights (1,009,640) (1,308,678) (24,489,840) Purchase of property and equipment (958,727) (14,961,633) (14,498,395) Proceeds from sale of property and equipment - 617,950 140,330 Purchase of investments - (6,004,297) (250,000) Proceeds from sale of investments - 6,000,000 13,461,558 Other - (1,792,324) (1,166,123) Net cash used in investing activities (3,063,510) (27,365,871) (104,210,307) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes, other debt and warrants 3,420,000 9,769,863 308,062,500 Payment of senior and other debt (5,163,178) (2,309,130) (42,369,042) Cash paid for debt service escrow - - (90,638,756) Proceeds from issuance of senior preferred stock and warrants - - 70,000,000 Debt financing costs paid - - (2,581,183) Proceeds from issuance of common stock 34,662,000 7,114,300 1,545,979 Registry and other stock issuance costs paid (3,852,427) (351,350) (2,775,336) Payment of related party debt (1,547,636) - - Other - - (324,405) Net cash provided by financing activities 27,518,759 14,223,683 240,919,757 Net increase (decrease) in cash and cash equivalents 22,355,200 (21,214,183) 102,061,162 Cash and cash equivalents, beginning 60,915 22,416,115 1,201,932 Cash and cash equivalents, ending $22,416,115 $ 1,201,932 $ 103,263,094
See notes to consolidated financial statements. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES 1. In the fiscal periods ended March 31, 1994 and 1995, the Company issued warrants to bridge lenders which were valued at $210,000 and $304,000, respectively. 2. During the seven-month period ended March 31, 1994 and the years ended March 31, 1995 and 1996, in connection with certain wireless channel rights acquisitions, the Company accrued obligations of $2,764,000 $2,942,258, and $47,256,113, respectively. 3. The Company issued 250,000 shares of common stock in settlement of $2,250,000 of wireless channel rights obligations and $500,000 of other debt on February 24, 1994. 4. The Company acquired three corporations with assets (principally wireless channel rights), approximating $3,910,000, for a cash payment of $1,000,000 and seller financed long-term debt obligations of $2,910,000 on March 31, 1994. 5. The Company accrued $5,214,300 of stock subscription receivable for 510,000 shares of common stock subscribed for on March 24, 1994 in accordance with the underwriter's agreement for the IPO of stock. The stock subscription receivable was collected on April 8, 1994. 6. During the years ended March 31, 1995 and 1996, in connection with property and equipment acquisitions, the Company accrued obligations of $394,275 and $3,673,925, respectively. 7. In January 1995, the Company acquired the New York System. In conjunction with the acquisition, the Company issued $18,050,000 of Series A preferred stock and $11,000,000 of short-term notes as follows:
Fair value of assets acquired, net of cash acquired $ 40,691,463 Liabilities assumed (1,724,574) Preferred stock issued (18,050,000) Short term notes issued (11,000,000) Cash paid $ 9,916,889
8. On March 29, 1995, the Company issued three notes payable aggregating $5,000,000 relating to acquisition deposits and accrued obligations of approximately $401,000 relating to acquisition costs. 9. On July 13, 1995, the Company purchased the 49% minority interest in Hampton Roads Wireless, Inc. for $8,000,000 in CAI common stock. 10. The underwriter's discount of $8,937,500 was subtracted from the senior notes offered on September 29, 1995. }3 CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES 11. On September 29, 1995, the Company issued CAI common stock in two merger acquisitions as follows:
TOTAL ACS ECNW Fair value of assets acquired $284,375,604 $255,674,388 $28,701,216 Less: Cash portion of purchase price 49,438,203 41,072,206 8,365,997 Liabilities assumed 22,672,180 22,367,053 305,127 Acquisition costs and fees 1,882,229 1,634,429 247,800 Note and interest receivable offset 1,129,433 - 1,129,433 Value of CAI common stock issued $209,253,559 $190,600,700 $18,652,859
In addition, as part of the ACS acquisition, the Company paid ACS bank debt of $22,334,298 and also advanced ACS $11,345,095 which is reflected in ACS's cash balance of $8,250,488 at the date of acquisition. In connection with the ECNW acquisition, the Company paid $500,000 for a non-compete agreement. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1994 1995 1996 Cash payments for interest $750,863 $271,427 $18,541,227
See notes to consolidated financial statements. }4 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS. CAI Wireless Systems, Inc. (the "Company" or "CAI") was incorporated in August 1991, to invest in, lease, and purchase wireless channel rights (including multi-channel, multi-point distribution services ("MMDS") licenses and instructional television fixed services ("ITFS") licenses) and develop wireless cable systems. The Company operates six analog- based wireless cable systems providing service to approximately 85,100 subscribers in New York City, Rochester, and Albany, NY, Philadelphia, PA, Washington, DC, and Norfolk/Virginia Beach, VA. In addition, CAI has a portfolio of wireless cable channel rights in eight additional markets, including Long Island, Buffalo and Syracuse, NY, Providence, RI, Hartford, CT, Boston, MA, Baltimore, MD, and Pittsburgh, PA. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries (HRW 51% owned prior to July 13, 1995) and CS Wireless Systems, Inc. ("CS Wireless") until February 23, 1996, when as a result of the CAI-Heartland closing, it became a 54% owned subsidiary. As of that closing date, CS Wireless is accounted for on the equity method of accounting. All material inter-company accounts and transactions have been eliminated in consolidation. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS. For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of money market type funds. The Company has a concentration of credit risk with regard to its cash in excess of the amount subject to federal insurance and money market type funds. The Company has mitigated its risk by depositing its cash in high credit quality financial institutions and by investing in low risk, high grade money market type funds which invest in U.S. government securities or high grade commercial paper. PROPERTY AND EQUIPMENT. Property and equipment are carried at cost. Depreciation and amortization is calculated by the straight-line method over the estimated useful lives of the related assets. The Company capitalizes subcontractor and direct employee labor costs incurred in connection with the installation of its television reception equipment on subscriber premises. Amortization of such costs is based on the estimated subscriber turnover rate for each system. These turnover rates range from 2 to 3 years. In addition, projects in process are carried at cost including capitalized interest amounting to $144,899 for the year ended March 31, 1996. ACQUISITIONS. All acquisitions of companies have been accounted for on the purchase method of accounting and the purchase prices have been "pushed down" to the acquired companies, primarily to wireless channel rights and goodwill, including provisions for deferred income taxes where applicable. Some acquisitions required issuance of CAI common stock which was recorded at the average market price per share as defined in the purchase agreements, usually over a ten day period. Also, direct acquisition costs were included as part of the purchase price. Costs to register CAI common stock in connection with an acquisition were treated as a reduction of the fair market value of shares issued for that acquisition in the common stock account. INVESTMENT IN CS WIRELESS SYSTEMS, INC. The investment in CS Wireless is recorded at cost and the difference between CAI's cost and the pro-rata ownership of the underlying equity is being amortized over 15 years, commensurate with goodwill and wireless channel rights amortization periods to which the investment primarily }5 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) relates. CAI will record its share of CS Wireless' net loss, adjusted for the amortization of its investment, in the statement of operations as a separate line item because the Company's majority stock ownership of CS Wireless is expected to be temporary and voting control is limited. CS Wireless was a wholly-owned subsidiary until February 23, 1996. The Company's share of unconsolidated operations from February 23, 1996 to March 31, 1996 is not material. CS Wireless has adopted a December 31 fiscal year and accordingly the Company records its proportionate share of the results of CS Wireless' operations based on a fiscal period ending three months earlier than that of the Company. INTANGIBLES. WIRELESS CHANNEL RIGHTS.Wireless channel rights are carried at cost and amortized over their estimated useful lives, generally 15 years. Wireless channel rights placed in service prior to April 1, 1995 were amortized over 10 years. Upon reevaluation, the Company changed its estimate of useful life to 15 years and accordingly will amortize the balance over the remaining life. The effect of this change was not material. The Company periodically reviews wireless channel rights and other long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When such circumstances occur, the Company will evaluate the possible effects on the carrying amount of such assets. GOODWILL. Goodwill, consisting of the acquisition costs in excess of the amounts allocated to assets and liabilities of the companies acquired, is amortized over 15 years. LOAN ACQUISITION COSTS. Costs incurred to obtain financing for the acquisitions and for general corporate purposes are amortized over the respective terms of the debt, primarily seven years. INVESTMENTS IN DEBT SERVICE ESCROW. Investments in the debt service escrow, consisting of debt instruments maturing over three years to coincide with the interest payment dates of the senior notes, are carried at cost since they will be held to maturity. Each investment is adjusted for accretion of discounts and amortization of premiums which are reflected in interest income. REVENUE RECOGNITION. Revenues from subscribers are recognized in the period that service is rendered. Installation fees are recognized as revenues upon subscriber hook-up to the extent of costs to obtain subscribers. INCOME TAXES. The Company files a consolidated federal income tax return with its subsidiaries in which it owns 80% or more of the outstanding common stock. Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable for future years to the difference between the financial statement and tax basis of existing assets and liabilities. The effect of tax rate changes on deferred taxes is recognized in the income tax provision in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that all, or some portion, of such deferred tax asset will not be realized. LOSS PER SHARE. Loss per share has been calculated on the basis of weighted average number of shares outstanding during each period presented. The weighted average number of shares outstanding were 12,278,220 shares, 15,456,540 shares and 27,075,578 shares for the periods ended March 31, 1994 , 1995 and 1996, respectively. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 83, common }6 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and common equivalent shares issued at prices below the anticipated public offering price during the twelve months immediately preceding the filing date of the initial public offering have been included in the calculation of common and common equivalent shares as if they were outstanding for all periods presented (using the treasury stock method and the public offering price). For the periods subsequent to the public offering, outstanding options and warrants are not considered for the purposes of calculating the weighted average shares of common stock outstanding, since these securities are anti-dilutive. RECLASSIFICATION. The Company has reclassified certain items in prior years' financial statements to make them comparative to the current year presentation. The reclassification had no effect on results from operations. CHANGE IN YEAR-END. The Company changed its fiscal year-end to March 31, as of March 1994. Previously, the Company had used August 31, 1993 as its fiscal period ending date. Accordingly, the period ended March 31, 1994 is for a seven month period. OTHER DEVELOPMENTS. Statement of Financial Accounting Standards No. 121 -- Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of is effective for fiscal years beginning after December 15, 1995. The Company will adopt this statement on April 1, 1996. CAI believes this statement will not have a material effect on CAI's financial position or results of operations. Statement of Financial Accounting Standards No. 123 -- Accounting for Stock-Based Compensation is effective for fiscal years beginning after December 15, 1995. CAI intends to continue using the intrinsic value based method of accounting for employee stock compensation and intends to implement the disclosure requirements required by FASB 123 as of April 1, 1996. CAI believes this statement will not have a material effect on CAI's financial position or results of operations. NOTE 2-ACQUISITIONS HAMPTON ROADS WIRELESS, INC. On July 13, 1995, the Company acquired the remaining 49% minority interest for $8,000,000 in CAI common stock.In accordance with the purchase method of accounting, the excess (approximately $7,890,000) over the book value of the minority interest acquired has been allocated to the wireless channel rights acquired. TWO BOTT CORPORATIONS. On January 12, 1996, the Company acquired two corporations (Chenango Associates, Inc. and Onondaga Wireless, Inc.) from George Bott and the a related Bott trust. The two corporations had no revenues or operations and hold wireless channel rights in Buffalo and Syracuse, NY, respectively. The purchase price for the two corporations was $2,480,000 of which $1,430,000 is payable without interest over six years with a balloon payment of $1,029,500 as the 72nd payment. This six year note has been recorded at a present value of $757,000 using a 12.25% imputed interest rate.In accordance with the purchase method of accounting, the excess (approximately $1,439,000) of the purchase price over the carrying value (approximately $368,000) of the net assets acquired (principally wireless channel rights) has been allocated to the wireless channel rights acquired. }7 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - ACQUISITIONS (CONTINUED) NEW YORK SYSTEM. As of January 9, 1995, the Company, through its wholly-owned subsidiary, New York Choice Television, Inc., acquired assets and assumed certain liabilities, of the New York City wireless cable system of The Microband Companies, Inc. ("Microband") an unaffiliated entity under protection of Chapter 11 of the Bankruptcy Code at that date. The New York System has been included in the Company's operations since January 10, 1995. The Company funded the acquisition price of $39,050,000 with $18,050,000 of Series A preferred stock, $11,000,000 of short-term notes, and $10,000,000 in cash.In accordance with the purchase method of accounting, the excess (approximately $31,700,000) of the acquisition cost over the fair value of the tangible assets and liabilities has been allocated to wireless channel rights. ACS ENTERPRISES, INC. On September 29, 1995 , the Company acquired ACS Enterprises, Inc. and Subsidiaries ("ACS"), a public company with operating wireless cable systems in Philadelphia, PA, Cleveland, OH and Bakersfield, CA and has wireless channel rights in Stockton/Modesto, CA, for $3.50 per ACS common share and 1.65 CAI common shares for each ACS common share. This acquisition required $41,072,206 in cash and 19,362,611,shares of CAI common stock valued at $190,600,700. The purchase price including direct acquisition costs in excess of ACS's book value were allocated to wireless channel rights and the remainder to goodwill. (See also Note 5). ACS has been included in the Company's operations since September 29, 1995. EASTERN CABLE NETWORKS OF WASHINGTON, INC. On September 29, 1995, the Company acquired Eastern Cable Networks of Washington, Inc. ("ECNW") which operates a wireless cable system in the Washington, DC area for approximately $8,366,000 in cash and 1,880,565 shares of CAI common stock valued at approximately $18,653,000. ECNW was merged into a subsidiary of CAI which was renamed Washington Choice Television, Inc. The purchase price including direct acquisition costs in excess of book value was allocated to wireless channel rights. ECNW has been included in the Company's operations since September 29, 1995. OTHER ACQUISITIONS. On September 29, 1995, concurrent with the ACS and ECNW acquisitions mentioned above, the Company purchased the non-operating assets, primarily wireless channel rights, of the Baltimore and Pittsburgh wireless systems for approximately $16,381,000 and $12,272,000, respectively, including direct acquisition costs. The Company incurred debt of $8,350,000 with the balance paid in cash. }8 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - ACQUISITIONS (continued) PRO FORMA SUMMARY RELATING TO THE ACS AND ECNW ACQUISITIONS. The following unaudited pro forma summary presents the condensed consolidated statement of operations information of the Company, the ACS and ECNW acquisitions as if the operations had been combined as of the beginning of year ended March 31, 1995:
YEAR ENDED MARCH 31, 1995 1996 Revenues $ 27,484,403 $ 48,343,807 Costs and expenses, excluding depreciation and amortization 39,465,821 71,619,582 Depreciation and amortization 34,015,656 42,920,977 Operating loss (45,997,074) (66,196,752) Other income ( expense ) Interest expense (11,533,745) (29,491,980) Other income 883,827 6,071,408
Loss before income tax benefit and minority interest (56,646,992) (89,617,324) Income tax benefit 14,336,600 22,238,000 Minority interest in loss 896,700 321,910 Net loss $(41,413,692) $(67,057,414) Net loss per common share $ (1.13) $ (1.78) Average common and equivalent shares outstanding 36,699,716 37,639,125 Pro forma assumptions :
(a) The one-time merger fees and debt extinguishment costs totaling approximately $ 3.1 million incurred by ACS have been eliminated from other income (expense) for the year ended March 31, 1996. (b) Interest expense on the applicable portion of senior notes used to complete both acquisitions including paying the ACS bank debt has been recorded in place of existing ACS and ECNW interest expense for the years ended March 31, 1995 and 1996. (c) Deferred tax benefit is recorded at a composite rate of 40 % of the loss adjusted for goodwill amortization. (d) Preferred stock dividend requirements are not included in this presentation.
The unaudited pro forma information does not reflect the elimination of the Cleveland and Bakersfield divisions of CS Wireless which with CAI's reduction in ownership constitute a disposition. Cleveland and Bakersfield revenue approximated $12.0 million with net loss approximating $6.4 million for the year ended December 31, 1995. The unaudited pro forma information shown above does not purport to be indicative of the results of operations that actually would have been obtained if the companies were combined during the periods presented, or results of operations which may occur in the future. }9 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
Useful LIFE 1995 1996 Transmission equipment 3-7 years $ 7,116,364 $ 9,542,449 Subscriber equipment 3-5 years 14,446,640 41,950,370 Leasehold improvements 5-20 years 1,023,217 939,090 Office furniture and equipment 5-7 years 1,617,226 3,056,631 Vehicles 3 years 239,754 584,761 24,443,201 56,073,301 Less accumulated depreciation and amortization 2,602,873 14,063,102 21,840,328 42,010,199 Projects in process - 10,558,420 $21,840,328 $52,568,619
Depreciation and amortization for the seven-month period ended March 31, 1994 and for the years ended March 31, 1995 and 1996 was $222,922, $2,518,239 and $12,922,021, respectively. The projects in process primarily represent costs incurred to date relative to establishing digital systems in Norfolk/Virginia Beach, VA and Boston, MA. NOTE 4 - WIRELESS CHANNEL RIGHTS The company has acquired wireless channel rights through direct negotiation with license holders and with sub-lessors of certain licenses and through business acquisitions. The company's wireless channel rights are predominately lease arrangements, however, the company is the direct licensee to certain licenses and has purchase options on others. The Company's wireless channel rights are principally located in the New York City, Albany, Long Island, and Rochester, New York; Hartford, Connecticut; Norfolk/Virginia Beach, Virginia; Boston, Massachusetts; Philadelphia and Pittsburgh, Pennsylvania; Washington, D.C., and Baltimore, Maryland markets. The lease and sub-lease agreements frequently require initial fees followed by certain monthly fees based on subscriber volume, subject to certain minimum fees. Certain agreements require profit sharing with the license holders. The lease and sub-lease periods generally follow the periods corresponding to the actual FCC license dates with provisions for extensions upon license renewal from the FCC. The FCC licenses are typically granted for a ten-year period. The Company is obligated to pay, as of March 31, 1996, minimum fees to license holders or sub-lessors in future years as follows:
Years ending MARCH, 31 1997 $ 3,809,000 1998 4,622,000 1999 4,834,000 2000 5,012,000 2001 5,151,000 Thereafter 15,564,000 Total $38,992,000
}10 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - WIRELESS CHANNEL RIGHTS (CONTINUED) Lease expense for the year ended March 31, 1996 was approximately $1,700,000. The Company capitalizes the wireless channel rights acquisition costs and initial fees and amortizes such costs when operations commence in the market to which they relate. The non-operating wireless channel rights, totaling approximately $9,500,000 as of March 31, 1995 and $89,000,000 as of March 31, 1996, will be amortized when placed in service. The following is a summary of wireless channel rights:
1995 1996 Cost of wireless channel rights $47,373,711 $212,691,464 Less accumulated amortization 1,181,628 6,717,624 $46,192,083 $205,973,840
Amortization for the seven-month period ended March 31, 1994 and for the years ended March 31, 1995 and 1996 was $70,000, $1,111,628 and $6,467,996, respectively. Wireless channel rights obligations are due within one year without interest. The amount due as of March 31, 1996 includes $35,101,033 due on the successful bids at FCC Auction and is net of $12.6 million due from CS Wireless for rights acquired by CAI (for which CAI is obligated) on behalf of CS Wireless. NOTE 5 - INVESTMENT IN CS WIRELESS SYSTEMS, INC. CAI closed a series of transactions on February 23, 1996 with Heartland Wireless Communications, Inc. ("Heartland") and CS Wireless pursuant to a participation agreement between CAI and Heartland dated December 12, 1995. CAI, after the transactions, owns approximately 54% of CS Wireless, Heartland approximately 35%, the BANX Partnership approximately 10% and the unit holders approximately 1%. The cable systems, wireless channel rights and other assets of CS Wireless with the exception of Charlotte, NC were acquired by CAI through the ACS acquisition. CS Wireless, which had been a wholly owned subsidiary of CAI (see Note 2) and the operator of a wireless cable system in Cleveland, OH, acquired or had contributed to it, under the participation agreement, operating wireless cable systems or wireless channel rights held by CAI in Bakersfield, CA, Charlotte, NC, and Stockton/Modesto, CA and held by Heartland in Dallas, Fort Worth, and San Antonio, TX, Dayton, OH, Maysville and Sweet Springs, MO, Minneapolis, MN, Grand Rapids, MI and Salt Lake City, UT. The Heartland contribution was valued at approximately $138,663,000, the estimated fair value. Heartland received 3,578,834 shares of CS Wireless common stock, approximately $28,300,000 of cash, and $40,000,000 of notes from CS Wireless. CS Wireless also closed an offering of $400,000,000 face amount of units with gross proceeds approximating $230,000,000 which were used in part to make the cash payment to Heartland on February 23, 1996. Each unit consisted of four $1,000 face amount 11.375% senior discount notes, due March 1, 2006 and 1.1 shares of CS Wireless common stock. CAI has not guaranteed this or any other CS Wireless debt. }11 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - INVESTMENT IN CS WIRELESS SYSTEMS, INC. (CONTINUED) The following is an Unaudited Pro Forma Condensed Combined Balance Sheet of CS Wireless as of December 31, 1995 as if all above described transactions had occurred on that date.
ASSETS Cash and cash equivalents $168,302,000 Other current assets 1,136,000 Systems and equipment, net 30,511,000 Wireless channel rights, net 135,659,000 Excess of cost over fair value of net assets acquired 51,335,000 Net assets held for sale 27,609,000 Other assets, net 9,242,000 $423,794,000 LIABILITIES AND EQUITY Accounts payable and accrued expenses $ 5,626,000 Long-term debt 397,000 Heartland long-term note 15,000,000 Senior discount notes 228,684,000 Deferred income taxes 14,556,000 Equity 159,531,000 $423,794,000
The following is an Unaudited Pro Forma Condensed Combined Statement of Operations for CS Wireless for the year ended December 31, 1995 utilizing historical operating statements of the constituent systems adjusted for the above transactions as if they had occurred on January 1, 1995.
Total revenues $ 16,618,000 Operating expenses: Systems operations 8,233,000 Selling, general and administrative 10,829,000 Depreciation and amortization 18,526,000 Total operating expenses 37,588,000 Operating loss (20,970,000) Interest expense (29,319,000) Interest income and other 765,000 Loss before income tax benefit (49,524,000) Income tax benefit 14,556,000 Net loss $(34,968,000)
}12 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - DEBT SERVICE ESCROW The debt service escrow relating to the senior notes is being used to pay the first three years of interest on the senior notes. The escrow is held in trust by Chemical Bank and consists of marketable government debt instruments that mature as follows:
GROSS UNREALIZED AMORTIZED COST GAINS LOSSES MARKET VALUE Maturing in fiscal year ending: March 31, 1997 $28,591.935 $27,206 $ - $28,619,141 March 31, 1998 31,989,268 43,335 - 32,032,603 March 31, 1999 16,382,674 - 36,833 16,345,841 Total invested 76,963,877 $70,541 $36,833 76,997,585 Cash balance 2,554 2,554 Accrued interest 654,657 654,657 Total escrow balance $77,621,088 $77,654,796
The Company received $13,275,000 upon maturity of a security in the escrow account with no gain or loss. Also the Company has a concentration of credit risk with respect to the investments in the escrow account which is mitigated by investing in marketable U.S. government debt instruments. NOTE 7 - OTHER ASSETS Other assets at March 31, consist of :
1995 1996 Acquisition deposits $6,000,000 $ - Other assets 1,854,452 2,268,847 $7,854,452 $ 2,268,847
NOTE 8 - DEBT Debt consisted of the following:
SENIOR DEBT 1995 1996 12.25% senior notes due 2002 (a) $ - $275,000,000 12% notes payable - New York System acquisition debt (b) 21,250,000 - NOTES PAYABLE Term notes due May 9, 2005 (c) - 29,753,550 Acquisitions (d) 3,062,337 12,138,186 Acquisition deposits 5,000,000 - Employee notes - 1,063,156 Vehicles, equipment and other 219,810 479,775 $ 29,532,147 $318,434,667
}13 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - DEBT (CONTINUED) Scheduled maturities of debt at March 31, 1996, are as follows:
YEARS ENDING MARCH 31 1997 $ 5,251,356 1998 451,225 1999 257,878 2000 232,560 2001 7,048,579 Thereafter 305,193,069 $318,434,667
(a) CAI's offering of $275,000,000 of 12 1/4% Senior Notes due 2002 closed on September 29, 1995. The proceeds were used in part to pay the cash portions of certain acquisitions and to fund a debt service escrow account (Escrow) with approximately three years of interest pursuant to the indenture. The indenture calls for semi- annual interest payments (March and September) from Escrow with the principal due in full on September 15, 2002. The Senior Notes are general unsecured obligations of CAI except for a first priority security interest in the Escrow and its equal rank with the other senior debt and senior rank to the other debt with respect to right of payment. The Senior Notes are effectively subordinated to all collateralized debt to the extent of the value of assets collateralizing such debt. The indenture also imposes certain limitations and restrictions on CAI including the ability of CAI to incur additional indebtedness, pay dividends, make investments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, engage in unrelated businesses, and enter into mergers and/or consolidations without express consent. (b) On January 9, 1995, the Company issued various short-term notes to finance the acquisition of the New York System. These notes, including accrued interest and a five percent success fee, were repaid on May 9, 1995 from proceeds of the Term Notes mentioned in (c) below. The success fee of $1,062,500 was charged to interest expense over the period January 9, 1995 to May 9, 1995. (c) Two $15,000,000 term notes issued to affiliates of NYNEX and Bell Atlantic are due on May 9, 2005 with interest at 16%, accruing semi-annually on both principal and unpaid accrued interest. Interest will be paid semi-annually on March 1 and September 1 of each year, commencing on March 1, 1999. The term notes contain maintenance and compliance covenants including compliance with the Business Relationship Agreement and the covenants mentioned in (a) above. The original discount of $300,000 represents the value of the Warrants issued with the term notes and is amortized over the term note period as interest expense. In addition, the term notes interest rate increased to 16% from 14% per annum pursuant to an adjunct agreement with BANX regarding licensing issues, which amounted to an additional interest expense of $354,000 for the applicable period of September 29, 1995 to March 31, 1996. For the year ended March 31, 1996, interest expense on the term notes approximated $4,000,000, which is included in accrued expenses. The term notes are convertible into 14% Senior Preferred Stock at the initial Conversion Price of $10,000 per Senior Preferred Share until September 29, 2000. The 14% Senior Preferred Shares are convertible into Voting Preferred Stock based on a formula prescribed in the terms of the Senior Preferred Stock. The Stage I Warrants entitle the holder to purchase Voting Preferred Shares from the Company from time to time based on formulas prescribed in the terms of the Stage I Warrant until September 29, 2000. The Voting Preferred Stock is convertible into common stock. Together, the terms and intent of the Term Notes, 14% Senior Preferred Stock, and the Stage I and Stage II Warrants allow NYNEX and Bell Atlantic through their affiliates to maintain a constant 45% common stock position in CAI, assuming exercising the Warrants and full conversion of all shares to common shares. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - DEBT (CONTINUED) (d) The notes payable for acquisitions consist of (1) a note in the amount of $3,525,000 relating to the Pittsburgh Asset purchase, due on September 30, 1996 with interest payable semi-annually at 8% per annum; (2) a note in the amount of $4,725,000 relating to the Baltimore Asset purchase due on September 29, 2000 with interest payable quarterly at 8% per annum for the first three years and 12% per annum thereafter to maturity. Both notes are subordinated to all other CAI obligations for borrowed money unless by its terms such obligations are not Senior Indebtedness and all other obligations collateralized by liens or a security interest on CAI property and (3) acquisition notes payable reflecting the notes issued to Bott and the Bott Family Trust in connection with the purchase of five corporations with wireless channel rights. Three Bott corporations were acquired on March 31, 1994 resulting in notes with a face value of $3,750,000 discounted to $2,910,000 based on an imputed interest rate of 8.5%. Another two Bott corporations were acquired in January 1996 resulting in a note with a face value of $1,430,000 discounted to $757,000 based on an imputed interest rate of 12.25%. Each of the notes is collateralized by the common stock of the company acquired. NOTE 9 - INCOME TAXES The components of the consolidated income tax benefit for the period ended March 31, 1994 and the years ended March 31, 1995 and 1996 are as follows:
1994 1995 1996 Current $ - $ - $ - Deferred - - 12,000,000 Total $ - $ - $12,000,000
The primary items giving rise to the difference between the federal statutory tax rate and the Company's effective tax rate is the recognition of certain tax benefits associated with acquisitions as a reduction to goodwill under the purchase accounting rules for the year ended March 31, 1996, the establishment of a valuation allowance against deferred tax assets for the year ended March 31, 1995 and certain nondeductible stock transactions for the period ended March 31, 1994. The significant components of deferred tax assets and liabilities are as follows:
1995 1996 Net operating loss carryovers $ 7,630,000 $ 24,915,000 Intangibles (1,580,000) (34,841,000) Investment in CS Wireless - (24,000,000) Property and equipment (462,000) (1,434,000) Other, net 402,000 (50,000) Total net deferred tax asset (liability) 5,990,000 (35,410,000) Less: Valuation allowance (5,990,000) - Net deferred tax asset (liability) $ - $(35,410,000)
}14 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - INCOME TAXES (CONTINUED) Approximately $47,410,000 of the change in deferred taxes from March 31, 1995 to March 31, 1996 was recorded as a net increase in goodwill incident to the purchase accounting of certain acquisitions. A valuation allowance is provided to reduce deferred tax assets to a level which, more likely than not, will be realized. The deferred tax assets recorded reflects management's estimate of the amount which will be realized based upon current operating results and contingencies. During the year ended March 31, 1996 the valuation allowance of $5,990,000 was eliminated. The Company has available as of March 31, 1996 approximately $62 million of net operating loss carryforwards which begin to expire in 2009. The use of these carryforwards may be limited on an annual basis pursuant to the Internal Revenue Code due to certain changes in ownership and equity transactions. NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS. The carrying amount approximates fair value because of the short maturity of those instruments. DEBT SERVICE ESCROW. The fair values of the investments in the debt service escrow are estimated based on market values or comparable interest rates, creditworthiness, and maturities of other debt instruments. DEBT. The fair value of the Company's debt is primarily based on quoted market prices for its publicly traded senior notes and for the remaining debt, estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of debt maturing within twelve months is estimated to be its carrying value.
Carrying Fair AMOUNT VALUE Cash and cash equivalents $103,263,094 $103,263,094 Debt service escrow 77,621,088 77,654,796 Debt Senior notes 275,000,000 292,187,500 Term notes and other 43,434,667 45,556,117
NOTE 11 - COMMITMENTS CONSULTING AGREEMENTS. As of March 31, 1996, the Company is obligated under five consulting agreements, expiring in September 1996 through April 2000, for certain business, system design and other consulting services to be provided. These agreements provide that the consultants shall be paid fees aggregating $607,000. }15 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - COMMITMENTS (continued) PURCHASE COMMITMENTS. As of March 31, 1996, the Company had approximately $22.3 million of outstanding purchase orders, primarily relating to equipment and technical work for the Boston and Norfolk/Virginia Beach Projects. PROGRAMMING CONTRACTS. In connection with its distribution of television programming, the Company has fixed-term contracts with various program suppliers, such as HBO, Showtime, CNN, MTV, USA, and A&E. Contract terms range in length from one year to ten years and expire at various dates through 2003. Most contracts are subject to automatic renewal upon expiration unless notice is given, by either party, of intent not to renew. These contracts require the Company to pay fees to programmers based on the number of subscribers. Expansion. Management believes that the foregoing commitments and its expansion plans will require the Company to raise additional funds during the year ending March 31, 1997. Such additional funds my take the form of debt or equity securities issuances, borrowings under loan arrangements or sales of assets including channel rights or wireless cable systems. Any such financings must conform to the requirements contained in the agreements with BANX and the restrictions imposed by the Senior Notes. In the event that such additional financings are not available to the Company, management can and will defer the acquisition of capital expenditures and other costs. The present revenue stream and cash resources available to the Company are adequate to sustain the Company's needs through mid-1997 if such actions were taken. However, expansion plans would be adversely impacted. Due to the regulated nature of the subscription television industry, the Company's growth and operations may be adversely impacted by the adoption of new, or changes to existing, laws or regulations or the interpretations thereof. NOTE 12 - REDEEMABLE PREFERRED STOCKS As part of the BANX Transactions (see Note 17) the BANX Partnership purchased 7,000 shares of Senior Convertible Preferred Stock (Senior Preferred) and Stage II Warrants to purchase Voting Preferred Stock, without par value, of CAI. The Senior Preferred has a 14% cumulative dividend, payable quarterly (optionally before December 1, 1998 and Mandatorily after December 1, 1998). Additionally, the dividend is increased by an amount calculated at a rate of 14% per annum, compounded semi-annually, on any accrued dividends remaining unpaid. In addition, the Company is subject to an additional dividend at the rate of 0.5% per quarter on the par value plus unpaid accrued dividends pursuant to an adjunct agreement with BANX regarding licensing issues. As of March 31, 1996, dividends accrued to BANX approximated $5,800,000. The Senior Preferred is convertible into Voting Preferred Stock, based on a formula prescribed in the terms of the Senior Preferred for a period of five years commencing on September 29, 1995, the date of issue. In turn, the Voting Preferred Stock is convertible into common stock, initially at the rate of 100 shares of common stock for one share of Voting Preferred Stock. The terms and intent of the Senior Preferred and the Term Notes together with the Stage I and Stage II Warrants held by affiliates of NYNEX and Bell Atlantic are to allow them the ability to maintain a 45% common stock ownership position at all times, assuming exercise and conversion of all warrants and preferred shares. The Senior Preferred Stock also provides for mandatory redemption at par plus any accrued dividends on the tenth anniversary date of the Original Issue Date which was September 29, 1995, absent any conversion. }16 { CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - REDEEMABLE PREFERRED STOCKS (CONTINUED) In conjunction with the January 9, 1995 acquisition of the New York System, the Company issued 180,500 shares of Series A preferred stock. The Series A preferred stock has an 8% cumulative dividend which restricts other dividend payments, and the shares are convertible through January 9, 1998, into common stock based on the Series A preferred stock having a $100 redemption and liquidation value and a conversion price of the lesser of $11 or the average of the ten day market price prior to conversion. The shares have certain registration rights. The Company must redeem all Series A shares by January 9, 2000, or earlier. The Company has authorized 350,000 shares of Series A preferred stock, of which 180,500 shares were issued and outstanding at March 31, 1995 and 1996. Through the month of May 1996, a total of 174,725 shares of the Series A 8% Redeemable Convertible Preferred Stock was converted into 2,481,991 shares of CAI common stock. NOTE 13 - SHAREHOLDERS' EQUITY In September 1993, the Company sold 703,900 shares to certain officers and employees at less than fair market value. The Company recorded $2,465,000 as additional compensation expense and additional paid-in-capital. In addition, as part of a restructuring of ownership, the Company issued 1,596,100 shares to certain owners of the Company. In September 1994, 74,000 warrants were exercised on a non-cash basis at $.25 by an officer for 72,279 shares of common stock. The value of the aggregate exercise price was $18,500. On March 8, 1995, the Company authorized and issued 20,000 shares of Series B preferred stock for $2,000,000 gross proceeds before a $100,000 placement fee. The Series B preferred stock has a 6% cumulative dividend provision, are redeemable and are also convertible to common stock based on the Series B preferred stock having a $100 liquidation value and a conversion price of $7.36 unless the market price is less than $9.20 on the conversion date, at which point there is an adjustment based on 80% of the market price. All 20,000 shares of Series B preferred stock were converted into 271,739 shares of common stock in April 1995, which pursuant to conversion are considered cancelled as of March 31, 1995. These shares of Series B preferred stock cannot be reissued. The 271,739 shares of common stock issued in April 1995 pursuant to the conversion feature on the 20,000 shares of Series B preferred stock were considered outstanding as of March 31, 1995. On September 29, 1995, the Company amended and restated its Certificate of Incorporation with shareholder approval to increase the authorized number of CAI no par Common Shares available for issuance from 45,000,000 to 100,000,000, and to authorize 15,000 shares of a new class of 14% Senior Preferred Stock, par value $10,000 per share and 2,000,000 shares of a new class of Voting Preferred Stock, no par value. The Senior Preferred Stock is convertible into Voting Preferred Stock and the Voting Preferred Stock is convertible into common stock. (see Note 12). }17 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - SHAREHOLDERS' EQUITY (CONTINUED) The stock capitalization is as follows:
Shares Authorized Shares Issued and Outstanding CLASS OF STOCK AS OF MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 Preferred stock 14% Senior convertible preferred stock, par value $10,000 per share 15,000 - 7,000 Series preferred stock Series A 8% redeemable convertible 350,000 180,500 180,500 preferred stock, no par value Undesignated 4,650,000 - - Total series preferred stock 5,000,000 180,500 180,500 Voting preferred stock, no par value 2,000,000 - - Total preferred stock 7,015,000 180,500 187,500 Common stock, no par value 100,000,000 15,754,018 37,829,482
NOTE 14 - OPTIONS AND WARRANTS STOCK OPTION PLANS INCENTIVE AND NONQUALIFIED STOCK OPTION PLANS. The Company's 1995 Incentive Stock Plan (the "1995 Plan") provides for the grant of incentive stock options (qualifying under Section 422 of the Internal Revenue Code), non-qualified stock options, stock appreciation rights, performance shares and restricted stock or any combination of the foregoing, as the Committee may determine. The 1995 Plan will expire on March 27, 2005. The number of shares available for grants is 1,200,000 shares and the 1995 Plan is administered by the Board of Director's Compensation Committee. Vesting and the per share exercise price for stock options granted under the 1995 Plan, which will not be less than 100% of the fair market value per share of common stock on the date the option is granted, is determined by the Compensation Committee at the time of grant. In November 1993, the Company adopted its 1993 Stock Option and Incentive Plan (the "1993 Plan"). Under the 1993 Plan, options to purchase an aggregate of not more than 1,000,000 shares of common stock may be granted, from time to time, to key employees (including officers), advisors and independent consultants to the Company or to any of its subsidiaries. Options granted to officers and employees may be designated as incentive stock options ("ISOs") or nonqualified stock options ("NQSOs"). Options granted to independent consultants and other nonemployees may only be designated NQSOs. The 1993 Plan is administered by a committee established by the Board of Directors. Vesting and the per share exercise price for stock options granted under this Plan, which will not be less than 100% of the fair market value per share of common stock on the date the option is granted, is determined by the Compensation Committee at the time of grant. OUTSIDE DIRECTORS' OPTION PLAN. In October 1993, the Company adopted the Outside Directors' Option Plan (the "Directors' Plan"). Under the Directors' Plan, options to purchase an aggregate of not more than 30,000 shares of common stock may be granted from time to time to nonemployee directors. These options will vest at the rate of 20% a year over five years, beginning one year after date of grant and are exercisable for a period of seven years. The exercise price for stock options granted under the Directors' Plan will not be less than 100% of the fair market value of the common stock on the grant date. As of March 31, 1996, the Company has granted options under this plan to purchase 8,334 shares of common stock at $11 per share. }18 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - OPTIONS AND WARRANTS (CONTINUED) OPTION ACTIVITY. Information on options for the above described plans is summarized as follows:
Exercise NUMBER OF OPTIONS PRICE RANGE TOTAL Exercisable Outstanding, September 1, 1993 - - Granted $11.00 452,667 Outstanding, March 31, 1994 $11.00 452,667 205,000 Granted $11.00-15.00 743,834 Canceled $11.00-15.00 (254,667) Outstanding, March 31, 1995 $11.00-15.00 941,834 454,500 Granted(1) $7.50-11.00 997,300 Canceled(1) $11.00-15.00 (665,000) Outstanding, March 31, 1996 $7.50-11.00 1,274,134 550,501
(1) Employees submitted and the Company reissued repriced options for 959,500 shares. The average purchase price of outstanding stock options at March 31, 1994, 1995 and 1996 was $11.80 per share, $12.27 per share and $7.75 per share, based on an aggregate purchase price of $5,321,000, $11,733,500 and $9,850,000, respectively. Outstanding stock options will expire over a period ending no later than March 2002. WARRANTS THE BANX WARRANTS. The BANX Partnership holds warrants to the Stage I and Stage II financings which are exercisable for an aggregate of $201,000,000 and which entitle BANX to common stock aggregating 45% of the then total outstanding shares of the Company if exercised along with the conversion provisions of the term notes and senior preferred stock for which CAI has already received $100,000,000. COMMON STOCK WARRANTS. Outstanding warrants, except for those issued to the BANX Partnership, are as follows:
Exercising Number of PRICE RANGE Warrants Outstanding, April 1, 1994 $0.25-14.85 1,214,000 Issued(1) $7.50-10.00 880,578 Exercised $0.25 (74,000) Outstanding, March 31, 1995 $0.25-14.85 2,020,578 Issued(2) $5.56-11.00 289,963 Outstanding, March 31, 1996 $0.25-11.00 2,310,541
(1) The warrants were issued to bridge lenders in connection with the acquisition of the New York System. (2) The warrants issued and certain warrant exercise prices revised during the year ended March 31, 1996 were pursuant to anti-dilutive clauses in agreements relating to the warrants. }19 { CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - OPTIONS AND WARRANTS (CONTINUED) The average purchase price of outstanding warrants at March 31, 1995 and 1996 was $9.51 and $7.72 per share, based on an aggregate purchase price of $20,639,050 and $17,829,083, respectively. Outstanding warrants will expire over a period ending no later than January 2000. NOTE 15 - OPERATING LEASES The Company leases office space in each market it currently operates in under non-cancelable agreements which expire through November 30, 2000, and requires various minimum monthly payments and payment of property taxes, certain maintenance, and insurance. The Company leases towers, land and/or building space in each of its operating markets and certain other markets for broadcasting purposes. The leases are non-cancelable agreements expiring through December 2012. Most of the leases have provisions for renewal periods. The leases require various minimum monthly payments and are subject to periodic fixed and inflationary increases. The Company leases vehicles for customer service and other corporate use. The agreements are non-cancelable, expire through April 1997 and require various monthly payments. The company is responsible for normal maintenance and insurance. Additionally, the Company leases certain office and broadcast test equipment under various lease agreements for periods up to thirty-six months. The company pays various monthly payments and is required to maintain and insure such equipment. The approximate minimum rental commitments for operating leases as of March 31, 1996 due in future years is as follows:
YEARS ENDING MARCH 31, 1997 $ 2,655,000 1998 2,528,000 1999 1,739,000 2000 1,301,000 2001 1,009,000 Thereafter 2,681,000 Total $11,913,000
Total rent expense for the seven-month period ended March 31, 1994 and years ended March 31, 1995 and 1996 was approximately $122,000, $1,080,000 and $2,511,000, respectively. NOTE 16 - RELATED PARTY TRANSACTIONS The Company has entered into various transactions with the BANX Partnership. (See Note 17). On May 8, 1995 CAI sold, subject to an option to repurchase exercisable at any time prior to January 1, 1996, all of the issued and outstanding stock of TelQuest, Inc. ("TelQuest") (with a negative net book value of approximately }20 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - RELATED PARTY TRANSACTIONS (CONTINUED) $70,000) to Wave Holdings, L.L.C., a Delaware limited liability company controlled by Jared E. Abbruzzese, CAI's Chairman and Chief Executive Officer, for $25,000.The gain on this sale of approximately $23,000 was deferred and was not included in income. TelQuest has entered into a Joint Venture and Capital Commitment Agreement with Corotoman pursuant to which Corotoman will fund TelQuest's developmental wireless transmission projects. Those projects could result in TelQuest's involvement in interLATA operations that could violate the MJF, if engaged in by an RBOC or an affiliated enterprise. In May 1996, CAI relinquished its option to repurchase TelQuest for a 2% equity interest in TelQuest Systems, Inc., the operating successor of TelQuest's business. In consideration of Mr. Abbruzzese's guaranteeing the obligation of CAI to MMDS Holdings, which permitted CAI to complete the Microband acquisition in January 1995, the CAI Board of Directors awarded options to acquire 150,000 CAI Common Shares at $11.00 per share to Mr. Abbruzzese. As of March 31, 1996, the Company has a note payable outstanding of $119,810 owed to Hope Carter. CAI must make a $100,000 principal payment on January 31, 1997, and pay the remaining principal and interest on July 31, 1997. The loan carries a simple annual interest rate of 8%. Additionally, CAI periodically chartered an airplane owned by Wave Air, Inc., which is primarily owned by Mr. Abbruzzese, in order to carry out business when airline schedules were not compatible. Transactions with Wave Air, Inc. amounted to approximately $103,000 for the year ended March 31, 1996 (none for prior periods). NOTE 17 - TRANSACTIONS AND AGREEMENTS WITH BELL ATLANTIC AND NYNEX CAI financed the cash consideration of various acquisitions through the issuance of $30,000,000 of Term Notes and Warrants ("Stage I") and $70,000,000 (7,000 shares) of Senior Preferred Stock and Warrants ("Stage II") to BANX Partnership ("BANX") which consists of Bell Atlantic Corporation ("Bell Atlantic") and NYNEX Corporation ("NYNEX"). The Term Notes are convertible into 3,000 shares of Senior Preferred Stock effective with the Stage II closing. The Senior Preferred Stock is convertible into Convertible Voting Preferred Stock, no par value ("Voting Preferred Stock"). The Stage I and Stage II Warrants also relate to the purchase of Voting Preferred Stock which is convertible into common shares on the ratio of 100 common shares to one share of Voting Preferred Stock. The formula to convert Senior Preferred Stock and the Stage I and II Warrants into Voting Preferred Stock is intended to maintain a 45% common stock position for BANX, assuming conversion of all common stock equivalents, including the Voting Preferred Stock. CAI also entered into a Business Relationship Agreement (the "BR Agreement") and a Securities Purchase Agreement (the "Purchase Agreement") with BANX dated March 28, 1995. The BR Agreement is structured as an election by Bell Atlantic and NYNEX to utilize CAI's transmission systems in specified service areas in their respective operating territories in which CAI currently has an operating wireless system or wireless spectrum rights. The BR Agreement identifies several phases in the relationship between the parties: (I) a study phase during which a technology and operating plan is developed, (ii) after Bell Atlantic or NYNEX, as the case may be, gives notice of its election to implement the BR Agreement in a particular market, a preparatory phase for such market, and (iii) an implementation phase for each market in which a BANX affiliate has elected to implement the BR Agreement, during which CAI commences transmission services. }21 {CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - TRANSACTIONS AND AGREEMENTS WITH BELL ATLANTIC AND NYNEX (CONTINUED) CAI will receive contractual monthly revenues for use, by the BANX Affiliates, of its transmission system service. Revenues are based on the number of serviceable homes and subscribers in each area, subject to certain minimums which range from $28,000,000 to $34,000,000 (assuming implementation of the BR Agreement in all markets within one year of the Stage II Closing) during the initial five-year term. If the election has been made with respect to less than all of the service areas in both the Bell Atlantic or NYNEX territories, the minimum service revenues are adjusted on the basis of the ratio of the number of serviceable homes in the service areas where the election has been made as compared with the total number of serviceable homes in all of the service areas identified in the agreement. The BR Agreement is renewable by the BANX affiliates on a market-by-market basis for successive five-year terms on one year's prior notice if (i) service revenues paid to CAI have exceeded certain specified minimums in the applicable market and (ii) the BANX Affiliates have converted Senior Preferred Stock to Voting Preferred Stock or exercised Warrants for Voting Preferred Stock in an aggregate amount of at least 25% of the aggregate number of shares of Voting Preferred Stock issued upon such conversion or exercise. A price adjuster based on the GDP Implicit Price Deflater applies to increase the minimum service revenue schedule in the renewal period. }22 {PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CAI WIRELESS SYSTEMS, INC. The following table sets forth certain information concerning each of the Company's directors and executive officers:
NAME Age Position with Company Jared E. Abbruzzese 41 Chairman, Chief Executive Officer and Director (1) John J. Prisco 40 President, Chief Operating Officer and Director (1) George M. Williams 55 Chief Administrative Officer, Secretary, Treasurer and Director(1) Timothy J. Santora 41 Executive Vice President (1) James P. Ashman 42 Executive Vice President, Chief Financial Officer and Director Craig J. Kessler 39 Vice President and Controller Arthur C. Belanger 70 Director(2) Harold A. Bouton 52 Director(3) David M. Tallcott 50 Director(3) Alan Sonnenberg 44 Director Robert D. Happ 54 Director(2)(3)
(1) Member of Executive Committee. The Executive Committee conducts the affairs and business of the Company between meetings of the Board of Directors. (2) Member of Audit Committee. The Audit Committee assists the Board of Directors in fulfilling its responsibilities with respect to the Company's accounting and financial reporting activities. (3) Member of Compensation Committee. The Compensation Committee determines the compensation to be paid by the Company to its officers and administers the 1995 and 1993 Stock Option Plans and Outside Directors' Option Plan. The Certificate of Incorporation and the Bylaws of the Company provide for a minimum of three and a maximum of eleven members of the Company's Board of Directors (the "Board") and permit the Board to specify the number of directors within that range by resolution. The Board has currently established the size of the Board at nine members. All directors hold office until their successors have been elected and qualified. The Company has agreed with Gerard Klauer Mattison & Co., LLC, the representative of the Underwriters of the Company's initial public offering of Common Stock (the "Representative"), that for the five-year period ending February 1999, the Company will use its best efforts to cause, if requested by the Representative, an individual selected by the Representative and reasonably acceptable to the Company to be elected to the Board who may be an officer, director or affiliate of the Representative. To date, the Representative has made no such request. JARED E. ABBRUZZESE has been the Chairman, Chief Executive Officer and a director of the Company since its formation in August 1991. On August 28, 1992 Tri-Mark Communications, Ltd. ("Tri-Mark") named Mr. Abbruzzese as acting President of Tri-Mark and its subsidiary, Capital Wireless, in order to guide Capital Wireless through its Chapter 11 bankruptcy proceeding. He served as acting President through September 1993. Prior to that, Mr. Abbruzzese served as President of The Diabetes Institute Foundation in Virginia Beach, Virginia from October 1988 until August 1991. JOHN J. PRISCO has been President, Chief Operating Officer and a director of CAI as of March 1, 1996. Mr. Prisco came to CAI from Bell Atlantic Network Services, Inc., where he spent the last three years as a corporate officer, most recently as President of CellularVision of New York, the only LMDS (28 GHz) wireless cable operator in the U.S. In 1986, Mr. Prisco founded Penn Access Corporation , which operated a fiber optic network in the greater Pittsburgh, PA area. Mr. Prisco served as President and Chief Executive Officer of Penn Access until its sale in 1993 to TCI. Penn Access currently operates as part of the Teleport Communications Group. }23 {ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CAI WIRELESS SYSTEMS, INC. (CONTINUED) GEORGE M. WILLIAMS has been Chief Administrative Officer and Corporate Analyst, Treasurer and Secretary of the Company since December 1995. Previously, he was Executive Vice President of Finance and Chief Financial Officer since August 1993. Mr. Williams has been a director of the Company since August 1993 and was Treasurer from March 1994 through September 1994. Mr. Williams was a financial consultant to the Company from September 1992 until his current appointment. From 1986 until August 1993 he was a partner in Cable Management Services providing management consultation to the hard-wire and wireless cable industries in both the domestic and international markets. He was involved in the start-up of Schomann Entertainment, Inc., a small hard-wire cable multiple systems operator, as a partner and controller with operational responsibilities from 1987 until August 1993. He also has been a consultant in the cable television industry since 1986. Mr. Williams is currently a 20% shareholder and officer of Hamilton County Cable TV, Inc., a hard-wire cable system operator. TIMOTHY J. SANTORA has been Executive Vice President of the Company since November 21, 1995. Previously, Mr. Santora was Senior Vice President, Secretary and director of the Company since May 1993 and Treasurer from May 1993 until February 1994. Since September 1992 to the present, Mr. Santora has been Vice President and a director of Tri-Mark. From August 1991 to September 1992, Mr. Santora consulted with the Company. From 1985 to August 1991, he was Corporate Officer of Manufacturer's Hanover Trust Company. JAMES P. ASHMAN has been Executive Vice President and Chief Financial Officer of CAI since December 1995. Previously, he was Senior Vice President and Treasurer of the Company since September 1994. He has been a director since March 1994. From November 1992 to September 1994, he was a senior advisor of, and independent consultant affiliated with, Carolina Barnes Capital, Inc. ("CBC"), a registered broker dealer. CBC served as a financial advisor to the Company and Tri-Mark from January 1993 until September 1994. Mr. Ashman was Vice President of Richter & Co., Inc. from June 1990 to November 1992. CRAIG J. KESSLER has been Vice President and Controller of CAI since March 1994. From June 1989 until joining CAI, he was a manager and assistant director of quality control at Urbach, Kahn, and Werlin, PC, a public accounting firm, responsible for the firm's continuing professional education, client service, and compliance with professional standards. Mr. Kessler is a certified public accountant and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants, and the Missouri Society of Certified Public Accountants. ARTHUR C. BELANGER has been a director of the Company since March 1994. From December 1979 to 1984, Mr. Belanger served as Vice President and General Manager of GE Cablevision. GE Cablevision merged with United Artists Communications, Inc. ("UA") in 1979. In 1984, Mr. Belanger became UA's Executive Vice President and Chief Operating Officer and held that position until his retirement in January 1992. At that time, UA served approximately 3 million subscribers. HAROLD A. BOUTON has been a director of the Company since September 1994. Mr. Bouton is the President and General Manager of WTVI, Channel 42, the Public Broadcast Service (PBS) affiliate in Charlotte, North Carolina, positions he has held since 1983. DAVID M. TALLCOTT has been a director of the Company since March 1995. Since 1990, Mr. Tallcott has been President of Lortech Corporation, a full service large mainframe commercial data center serving the insurance industry, labor unions and direct mailers. ALAN SONNENBERG has been a director of the Company since September 29, 1995. Mr. Sonnenberg served as President of CAI from September 29, 1995, when ACS was acquired by the Company, until February 23, 1996, when he became President of CS Wireless. Currently, Mr. Sonnenberg serves as Vice Chairman of CS Wireless. Previously, Mr. Sonnenberg served as Chairman of the Board of Directors of ACS and its Chief Executive Officer since 1988, and as its President since 1987. Since 1989, Mr. Sonnenberg has been a director of the Wireless Cable Association International, Inc. }24 {ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CAI WIRELESS SYSTEMS, INC. (CONTINUED) ROBERT D. HAPP has been a director of CAI since September 1995. Mr. Happ served as Managing Partner of the Boston, Massachusetts office of KPMG Peat Marwick ("KPMG"), an accounting firm, from 1985 until his retirement in 1994. Prior to that, he served in various capacities with KPMG. Mr. Happ is also a member of the Board of Directors of Galileo Electro-Optics Corporation. SECTION 16 REPORTS.Under the securities laws of the United States, the Company's directors, its executive officers and any persons holding ten percent or more of the common stock are required to report their ownership of the Common Stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for the reports have been established. Jared E. Abbruzzese failed to timely file one report relating to one transaction in Common Stock beneficially owned by him and two grants of options to purchase Common Stock of the Company pursuant to a Rule 16b-3 stock plan. Messrs. Happ, Bouton and Tallcott each failed to timely file a report upon being elected a director of the Company, and Mr. Tallcott failed to timely file a report relating to one transaction in the Common Stock of the Company. Finally, Hope Carter, Joseph Abbruzzese and The Corotoman Company, LLC each failed to timely file one report relating to one transaction in Common Stock of the Company beneficially owned by Mrs. Carter and Mr. Joseph Abbruzzese and directly owned by The Corotoman Company LLC. In making these statements, the Company has relied on the written representations of its incumbent directors and officers and its ten percent holders and copies of the reports that they have filed with the Securities and Exchange Commission. }25 { ITEM 11. EXECUTIVE COMPENSATION Executive Compensation The following table discloses three fiscal periods of compensation received by the Company's Executive Officers receiving compensation in excess of $100,000 for the year ended March 31, 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION Securities NAME AND PRINCIPAL POSITION Fiscal Other Annual Underlying All Other PERIOD SALARY BONUS COMPENSATION OPTIONS COMPENSATION Jared E. Abbruzzese 1996 $277,300 $155,000 0(1) 0 $ 0 Chief Executive Officer 1995 206,000 0 0(1) 525,000 0 1994 97,500 10,000 0(1) 0 0 George M. Williams 1996 147,000 0 0(1) 40,000 0 Chief Administrative Officer 1995 124,900 0 0(1) 28,000 0 1994 53,750 0 0(1) 48,000 402,500(2) Timothy J. Santora 1996 144,500 0 0(1) 40,000 Executive Vice President 1995 112,600 0 0(1) 28,000 0 1994 41,667 0 0(1) 36,000 161,000(2) James P. Ashman 1996 140,100 0 0(1) 40,000 0 Chief Financial Officer 1995 54,400 0 0(1) 37,000 0 Alan Sonnenberg 1996 117,400 500,000 0(1) 300,000 13,750(3) President(3)
_____________________________ (1) Other annual compensation, including Company provided vehicle or allowances, life insurance, or membership dues, less than the lesser of 10% of total annual salary and bonus or $50,000 is not presented. (2) The Company recorded additional compensation expense in the seven-month period ended March 31, 1994 related to shares of CAI common stock sold to employees. Such compensation for Messrs. Williams and Santora amounted to $402,500 and $161,000, respectively, using an estimated value of $3.50 per share. (3) Mr. Sonnenberg was President of CAI from September 29, 1995, upon the acquisition of ACS until February 23, 1996 (upon the consummation of the CS Wireless transaction), under which Mr. Sonnenberg entered a consulting arrangement with CAI whereby CAI will pay $75,000 per year through August 1998. COMPENSATION OF DIRECTORS Directors who are not officers, excluding Mr. Sonnenberg, are paid an annual fee of $6,000 and a fee of $750 per Board meeting attended and $250 per committee meeting attended, plus out-of-pocket expenses, effective November 21, 1995. Prior to that date, the annual fee was $5,000 and a fee of $750 per Board meeting attended plus out-of-pocket expenses. Officers who also serve as directors do not receive fees for serving as directors. }26 {ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS (CONTINUED) Under the Company's Outside Directors' Option Plan (the "Directors' Plan") each new director who is not otherwise an employee will receive options to purchase 1,667 shares on the first anniversary of their election to the Board. Any director having received options will automatically receive an additional 1,667 options on the following two anniversaries of their initial receipt of options, provided there are sufficient shares remaining in the Directors' Plan and that they continue to be an eligible director. Options are exercisable for a period of seven years following the date of grant. The exercise price of options granted under the Directors' Plan may not be less than the greater of the fair market value on the grant date or the Company's initial public offering price of $11. During the year ended March 31, 1995, Mr. Belanger received options to purchase 1,667 shares of CAI Common Stock at an exercise price of $11 per share. During the year ended March 31, 1996, Messrs. Belanger, Bouton and Tallcott were each granted options to purchase 1,667 shares of CAI Common Stock at an exercise price of $11 per share under the Directors' Plan. Options granted under the Directors' Plan are not transferable other than by will or the laws of descent and distribution. In the event the grantee ceases to be a director for any reason, each unexpired option may be exercised to the extent exercisable on the date of such cessation at any time prior to the date specified in such option. Notwithstanding the foregoing, in the event of cessation by reason of death, each unexpired option shall become exercisable in full and may be exercised at any time during the following 12 months. If the director is terminated for cause, outstanding options shall be terminated. Options granted under the Directors' Plan become immediately exercisable upon the occurrence of certain events, including the death or disability of a director or certain business combinations. OPTION GRANTS IN LATEST FISCAL YEAR The following table provides information on options to purchase shares of CAI Common Stock granted during the fiscal year ended March 31, 1996 to the persons named in the Compensation Table above.
Potential realizable value Number of % of Total at assumed annual rates of Securities Options Granted Exercise stock price appreciation Underlying to Employees Price Expiration FOR OPTION TERM ($) NAME OPTIONS IN FISCAL YEAR ($/SH) DATE 5% 10% Jared E. Abbruzzese --- --- --- --- --- --- Alan Sonnenberg 300,000 30.2 11.00 9/29/02 1,132,400 2,838,500 James P. Ashman 40,000 4.0 9.13 12/31/03 148,600 346,400 George M. Williams 40,000 4.0 9.13 12/31/03 148,600 346,400 Timothy J. Santora 40,000 4.0 9.13 12/31/03 148,600 346,400
In addition, John J. Prisco was awarded options to purchase 200,000 shares of CAI Common Stock at an exercise price of $7.75 per share. The options were awarded under the Company's 1995 Stock Incentive Plan and expire on March 7, 2006. }27 {ITEM 11. EXECUTIVE COMPENSATION AGGREGATE OPTION EXERCISES IN LATEST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information with regard to the outstanding options to purchase shares of CAI Common Stock as of the end of the fiscal year ended March 31, 1996 for the persons named in the Compensation Table above and John J. Prisco.
Number of Securities VALUE OF UNEXERCISED IN-THE-MONEY SHARES ACQUIRED ON Underlying Unexercised OPTIONS AT EXERCISE (#) VALUE REALIZED Options at March 31, 1996 MARCH 31, 1996 (1) NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE Jared E. Abbruzzese --- --- 225,000 --- $ --- $ --- John J. Prisco --- --- --- 200,000 --- --- Alan Sonnenberg --- --- --- --- --- --- George M. Williams --- --- 60,000 56,000 --- --- Timothy J. Santora --- --- 52,000 52,000 --- --- James P. Ashman --- --- 37,000 40,000 --- ---
(1) The value of unexercised in-the-money options at March 31, 1996 is based on the difference between the March 31, 1996 closing price per share of CAI Common Stock on NASDAQ NM of $7.56 and the exercise prices of the in-the-money options. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Messrs. Abbruzzese, Prisco, Williams and Santora. Such agreements continue in effect until October 1, 1996, in the case of Messrs. Santora and Williams; until March 21, 1998, in the case of Mr. Abbruzzese; and until January 3, 1998 in the case of Mr. Prisco. The employment agreements are automatically renewed for successive one year terms, unless otherwise terminated. Pursuant to his employment agreement, Mr. Abbruzzese serves as Chairman and Chief Executive Officer of the Company and is entitled to an annual base salary of $350,000. Pursuant to his employment agreement, Mr. Prisco serves as President and Chief Operating Officer of the Company and is entitled to a base salary of $200,000. Mr. Santora serves as Executive Vice President and is entitled to an annual base salary of $170,000. Mr. Williams serves as Chief Administrative Officer and Corporate Analyst, Secretary and Treasurer and is entitled to an annual base salary of $160,000. Each of the foregoing executive officers will be entitled to an annual bonus to be determined by the Compensation Committee. Pursuant to their respective employment agreements, Mr. Abbruzzese, Mr. Prisco, Mr. Santora and Mr. Williams agree to devote substantially all of their working time to the business of the Company. Mr. Abbruzzese has agreed to devote not less than 75% of his working time to the Company. Mr. Williams, however, may continue to perform his duties as Treasurer of Hamilton County Cable TV, as long as such activities can be accomplished outside of his normal working time for the Company and do not otherwise interfere with his duties under his employment agreement. If their employment is terminated without cause, Mr. Williams and Mr. Santora will be entitled to their base salary and certain benefits for 12 months following termination of employment. Mr. Abbruzzese and Mr. Prisco would be entitled to a severance amount equal to the greater of such executive's then-current base salary or the total base salary that would have been payable for the balance of the term of his employment in the event such executive's employment is terminated without cause. }28 { ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) EMPLOYMENT AGREEMENTS (CONTINUED) Mr. Abbruzzese has been granted options to purchase 525,000 shares of CAI Common Stock, of which options to purchase 225,000 shares of Common Stock of CAI were granted to Mr. Abbruzzese during the fiscal year ended March 31, 1995. Mr. Abbruzzese surrendered options to purchase 300,000 shares of CAI Common Stock. Mr. Abbruzzese currently holds options to purchase 225,000 shares of CAI Common Stock at an exercise price of $7.75 per share, all of which are fully vested. Mr. Williams has been granted options to purchase a total of 116,000 shares of CAI Common Stock at an exercise price of $7.75 per share, of which options to purchase 40,000 shares were granted to Mr. Williams during the fiscal year ended March 31, 1996. Of the 116,000 option shares, 60,000 are fully vested, 20,000 vest in January 1997, 16,000 vest in February 1997, and 20,000 vest in January 1998. Mr. Santora has been granted options to purchase a total of 104,000 shares of CAI Common Stock at an exercise price of $7.75 per share, of which options to purchase 40,000 shares were granted to Mr. Santora during the fiscal year ended March 31, 1996. Of the 104,000 option shares, 52,000 are fully vested, 20,000 vest in each of January 1997 and 1998, and 12,000 vest in February 1997. Mr. Ashman has been granted options to purchase a total of 77,000 shares of Common Stock of CAI at an exercise price of $7.75 per share, of which options to purchase 40,000 shares of Common Stock of CAI were granted to Mr. Ashman during the fiscal year ended March 31, 1996. Of the 77,000 option shares, 37,000 are fully vested, and 20,000 vest in each of January 1997 and 1998. Mr. Prisco has been granted options to purchase a total of 200,000 shares of Common Stock of CAI, all of which were granted during the fiscal year ended March 31, 1996. The options are exercisable in varying amounts commencing on December 31, 1996, and annually thereafter on each January 1 through January 1, 2001. The exercise price for the options granted to Mr. Prisco is $7.75 per share. Mr. Abbruzzese, Mr. Prisco and Mr. Williams are subject to nondisclosure agreements with respect to the confidential information of CAI and are subject to a noncompetition provision in each of their employment agreements. In the case of Mr. Abbruzzese, the noncompetition provisions provide that, if he is terminated for cause of voluntarily terminates his employment or does not renew his employment with the Company, for a period of 12 months following such termination, or if Mr. Abbruzzese's empIoyment is terminated and he is receiving the severance amount as provided in his employment agreement, for a period not to exceed 12 months during such severance period, he will not engage in any business directly competitive with CAI in any market serviced by CAI or any "Service Area," as defined in the BR Agreement, or engage in any MMDS license-based subscription television business or wireline franchise cable business in any market in which the Company has licenses or leases at the time of termination. In the case of Mr. Prisco, the noncompetition provisions provide that, if he is terminated for cause or voluntarily terminates his employment or does not renew his employment with the Company, for a period of 12 months following such termination, or if employment is terminated and he is receiving the severance amount as provided in the employment agreement, for a period not to exceed 12 months during such severance period, he will not engage in any business directly competitive with CAI in any market serviced by CAI or any "Service Area," as defined in the BR Agreement, or be employed by or provide consulting services to any person in the wireless cable or pay television industry within 25 miles of any city in which CAI does business, has rights or licenses related to the broadcast or transmission of television programming or in which CAI is providing transport services to affiliates of Bell Atlantic or NYNEX. In the case of Mr. Williams, the noncompetition provisions provide that, if he is terminated for cause, for a period of 18 months following termination he will not engage in any business directly competitive with CAI in any market serviced by CAI or be employed or provide consulting services to any person in the wireless cable or pay television industry within 25 miles of Albany, Buffalo, Rochester, Boston, Hartford or Norfolk/Virginia Beach or of any other city or community in which CAI operates or has rights or licenses related to the broadcast or transmission of television programming or in which CAI has had, within the preceding 12-month period, active negotiations regarding the acquisition of such rights or licenses. }29 {ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) EMPLOYMENT AGREEMENTS (CONTINUED) Mr. Sonnenberg, President of CAI from September 29, 1995 until February 23, 1996, entered into a three-year Employment Agreement with CAI pursuant to which he became President of CAI and Chief Executive Officer of the Wireless Operating Group of CAI effective September 29, 1995. Mr. Sonnenberg also serves as a director of CAI. He served as Vice Chairman of the CAI Board of Directors from September 29, 1995 until February 23, 1996. Under Mr. Sonnenberg's employment agreement, Mr. Sonnenberg was entitled to receive a base salary of $275,000 per year, received options to purchase 300,000 shares of CAI Common Stock at an exercise price of $11.00 per share and received a signing bonus of $500,000 upon execution of such agreement. Upon the closing of the transactions contemplated by the Participation Agreement, Mr. Sonnenberg entered into a Termination Agreement with the Company pursuant to which his employment agreement was terminated, he surrendered options to purchase 300,000 shares of CAI Common Stock, and agreed to certain noncompetition provisions similar to those imposed upon Mr. Prisco. The Company also entered into a Consulting Agreement with Mr. Sonnenberg pursuant to which he agreed to provide CAI with certain consulting services for a thirty-month period beginning on February 23, 1996 for an annual fee of $75,000. }30 { ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of May 24, 1996 (i) each stockholder who based on public filings, is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of CAI Common Stock, (ii) each Director and Executive Officer and (iii) all Directors and Officers of CAI as a group:
BENEFICIAL OWNERSHIP Percentage of Outstanding NUMBER OF SHARES SHARES The Corotoman Company, LLC ("Corotoman") 6,141,000(1) 15.3% c/o Jared E. Abbruzzese 18 Corporate Woods Blvd., Third Floor Albany, NY 12211 Jared E. Abbruzzese 7,212,700(2)(3)(5) 17.9% 18 Corporate Woods Blvd., Third Floor Albany, NY 12211 Hope Carter 6,577,600(2)(5) 16.4% 18 Corporate Woods Blvd., Third Floor Albany, NY 12211 Joseph E. Abbruzzese 6,186,300(2) 15.4% 18 Corporate Woods Blvd., Third Floor Albany, NY 12211 Edward P. Swyer dba SPI Comtech 2,139,000(4) 5.3% c/o The Swyer Companies Executive Park Albany, NY 12203 BANX Partnership 36,751,083(6) 47.9% 3900 Washington Street Wilmington, DE 19802 John J. Prisco 5,000 * Timothy J. Santora 276,500(7) * George M. Williams 175,000(8) * James P. Ashman 184,279(9) * Craig J. Kessler 33,000(10) * Arthur C. Belanger 3,334(11) * Harold A. Bouton 1,914(12) * Robert D. Happ 1,000 * Alan Sonnenberg 759,227(13) 1.9% David M. Tallcott 2,000(14) * All directors and officers as a group (11 persons) 8,653,954 21.3%
_______________________________ * less than 1% }31 { ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONTINUED) (1) Jared E. Abbruzzese and Hope Carter and Joseph Abbruzzese, the aunt and brother of Jared E. Abbruzzese, respectively, own 46.5%, 46.5% and 4%, respectively, of the membership interests in Corotoman. Those individuals are the sole directors of Corotoman. (2) Includes 6,141,000 shares held by Corotoman. (3) Includes 263,000 shares held by relatives over which shares Jared E. Abbruzzese retains voting control and 225,000 shares issuable upon exercise of options granted under the 1995 Incentive Stock Plan. (4) Includes 200,000 shares held by a family trust over which shares Mr. Swyer retains voting control. (5) Includes 20,000 shares held by The Corotoman Foundation, Inc., of which Jared E. Abbruzzese and HopeCarter are directors and over which shares they retain voting control. (6) Consists of 36,751,083 shares issuable upon the exercise of warrants to purchase Common Stock, the conversion of the Company's senior preferred stock, the exercise of warrants to purchase voting preferred stock and upon conversion of such voting preferred stock to Common Stock. The general partners of BANX Partnership are MMDS Holdings (as defined herein) and NYNEX MMDS Holding (as defined herein), which are subsidiaries of Bell Atlantic Corporation and NYNEX Corporation, respectively. The address of MMDS Holdings and Bell Atlantic Corporation is 1717 Arch Street, Philadelphia, PA 19103, and the address of NYNEX MMDS Holding and NYNEX Corporation is 1113 Westchester Avenue, White Plains, NY 10604. (7) Includes 52,000 shares issuable upon the exercise of options exercisable currently or within 60 days of May 24, 1996, and 6,000 shares given to relatives over which shares Mr. Santora retains voting control. (8) Includes 60,000 shares issuable upon the exercise of options exercisable currently or within 60 days of May 24, 1996. (9) Includes 37,000 shares issuable upon the exercise of options exercisable currently or within 60 days of May 24, 1996, and 75,000 shares issuable upon the exercise of warrants exercisable currently or within 60 days of March 31, 1996. (10) Includes 33,000 shares issuable upon the exercise of options exercisable currently or within 60 days of May 24, 1996. (11) Consists of 3,334 shares issuable upon the exercise of options exercisable currently or within 60 days of May 24, 1996. (12) Includes 127 shares held by an immediate family member and 1,667 shares issuable upon the exercise of options exercisable currently or within 60 days of May 24, 1996. (13) Includes 33,000 shares held by the Sonnenberg Foundation over which Alan Sonnenberg retains voting control and 98 shares held by an immediate family member. (14) Includes 1,000 shares held by Lortech Corp. over which Mr. Tallcott retains voting control. }32 { ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS THE BANX TRANSACTIONS. Reference is made to the description of The BANX Transactions contained in Item 1 - Business - The BANX Transactions appearing in Part I of this Annual Report on Form 10-K. DIVESTITURE. In connection with the investment by the BANX Affiliates in CAI, CAI has agreed to comply with the restrictions placed on Regional Bell Operating Companies, such as Bell Atlantic and NYNEX ("RBOCs"), and their affiliated enterprises by the Modification of Final Judgment entered by the United States District Court for the District of Columbia on August 24, 1982 (the "MFJ"). Among its restrictions, the MFJ prohibits RBOCs and affiliated enterprises from providing telecommunications services between Local Access and Transport Areas ("LATAs"). Because certain transmission and reception facilities used by CAI transmit or receive signals to or from other LATAs, as a condition to the Stage I Closing, CAI divested itself of those facilities and ceased providing transmission and reception services between LATAs. Upon the restrictions being lifted, CAI exercised its option to reacquire all assets sold. OTHER. On May 8, 1995 CAI sold, subject to an option to repurchase exercisable at any time prior to January 1, 1996, all of the issued and outstanding stock of TelQuest, Inc. ("TelQuest") (with a negative net book value of approximately $40,000) to Wave Holdings, L.L.C., a Delaware limited liability company controlled by Jared E. Abbruzzese, CAI's Chairman and Chief Executive Officer, for $25,000. The gain on this sale of approximately $23,000 was deferred and was not included in income. TelQuest has entered into a Joint Venture and Capital Commitment Agreement with Corotoman pursuant to which Corotoman will fund TelQuest's developmental wireless transmission projects. Those projects could result in TelQuest's involvement in interLATA operations that could violate the MJF, if engaged in by an RBOC or an affiliated enterprise. In May 1996, CAI relinquished its option to repurchase TelQuest for a 2% equity interest in Telquest Systems, Inc., the operating successor of Telquest's business. In consideration of Mr. Abbruzzese guaranteeing the obligation of CAI to MMDS Holdings, which permitted CAI to complete the Microband acquisition in January 1995, the CAI Board of Directors awarded options to acquire 150,000 shares of CAI Common Stock at $11.00 per share to Mr. Abbruzzese. As of March 31, 1996, the Company has a note payable outstanding of $119,810 owed to Hope Carter. CAI must make a $100,000 principal payment on January 31, 1997, and pay the remaining principal and interest on July 31, 1997. The loan carries a simple annual interest rate of 8%. Additionally, CAI periodically chartered an airplane owned by Wave Air, Inc., which is primarily owned by Mr. Abbruzzese, in order to carry out business when airline schedules were not compatible. Transactions with Wave Air, Inc. amounted to approximately $103,000 for the year ended March 31, 1996 (none for prior periods). }33 { ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules The financial statements and schedules listed in the accompanying index to financial statements and Schedules are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated March 8, 1996, that reported under Item 2 the closing of the CS Wireless transactions on February 23, 1996, as contemplated by the previously reported Participation Agreement dated December 12, 1995 among the Company, Heartland and CS Wireless. In connection with the transactions reported on the Company's Current Report on Form 8-K dated March 8, 1996 described above, the Company filed a Current Report on Form 8-K/A dated March 29, 1996, to submit under Item 7 the financial statements and pro forma information required for the reported transactions. The Company filed a Current Report on Form 8-K/A dated February 23, 1996 (filed April 1, 1996), to amend an exhibit previously filed with the Company's March 29, 1996 Current Report on Form 8-K. (c) Exhibits See index to exhibits filed as part of this annual report on Form 10-K. (d) Schedules Schedules, specified under Regulation S-X, are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements submitted. In accordance with Rule 3-09(a), separate financial statements of CS Wireless Systems, Inc. are not required to be filed. }34 {INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page No. IN FORM 10-K FINANCIAL STATEMENTS Report of Independent Accountants 29 Consolidated Balance Sheets - March 31, 1995 and 1996 30 Consolidated Statements of Operations - Seven- Month Period Ended March 31, 1994,and Years Ended March 31, 1995 and 1996 31 Consolidated Statements of Shareholders' Equity - - Seven-Month Period Ended March 31, 1994, and Years Ended March 31, 1995 and 1996 32 Consolidated Statements of Cash Flows - Seven- Month Period Ended March 31, 1994 and Years Ended March 31, 1995 and 1996 33 Notes to Consolidated Financial Statements 36
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CAI Wireless Systems, Inc. has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized. CAI WIRELESS SYSTEMS, INC. (Registrant) BY: /S/ JARED E. ABBRUZZESE Jared E. Abbruzzese, Chairman, Date: JUNE 28, 1996 Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of CAI Wireless Systems, Inc. and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /S/ JARED E. ABBRUZZESE Chairman, Chief Executive Officer June 28, 1996 Jared E. Abbruzzese and Director (Principal Executive Officer) /S/ JOHN J. PRISCO President, Chief Operating Officer June 28, 1996 John J. Prisco and Director /S/ JAMES P. ASHMAN Executive Vice President, Chief June 28, 1996 James P. Ashman Financial Officer and Director (Principal Financial Officer) /S/ GEORGE M. WILLIAMS Chief Administrative Officer, June 28, 1996 George M. Williams Secretary,Treasurer and Director /S/ CRAIG J. KESSLER Vice President and Controller June 28, 1996 Craig J. Kessler (Principal Accounting Officer) /S/ ARTHUR C. BELANGER Director June 28, 1996 Arthur C. Belanger
{SIGNATURES (continued)
SIGNATURE TITLE DATE \s\ HAROLD A. BOUTON Director June 28, 1996 Harold A. Bouton /S/ DAVID M. TALLCOTT Director June 28, 1996 David M. Tallcott /S/ ROBERT D. HAPP Director June 28, 1996 Robert D. Happ /S/ ALAN SONNENBERG Director June 28, 1996 Alan Sonnenberg
{INDEX TO EXHIBITS
Incorporation Exhibit no. Description By Reference PAGE NO (see legend) No. 2.1 Asset Purchase Agreement-New York System 5-Exhibit 2 2.2 Bott Acquisition Agreement 2-Exhibit 2 2.3 Agreement and Plan of Merger, as amended, by and among CAI CAI Merger SUB and ACS 7-Exhibit 2.1 2.4 Agreement and Plan of Merger by and among CAI, ECN and ECNW dated as of March 28,1995 7-Exhibit 2.2 2.5 Asset Purchase Agreement by and among CAI, ECN and ECNMII dated as of March 28, 1995 7-Exhibit 2.3 2.6 Option Agreement dated March 28, 1996 7-Exhibit 2.4 2.7 Purchase Agreement by and between CAI and WCTV dated as of March 28, 1995 7-Exhibit 2.5 2.8 Purchase Agreement by and between CAI and AWS dated as of March 28,1995 7-Exhibit 2.6 2.9 Agreement and Plan of Merger by and among CAI, HRW and 7-Exhibit 2.7 the Minority Shareholders named therein, dated as of March 28, 1995 2.10 Participation Agreement among Heartland Wireless 9-Exhibit 2.1 Communications, Inc., CAI Wireless Systems, Inc. and CS Wireless Systems, Inc. dated as of December 12, 1995. 2.11 Amendment No. 1 to Participation Agreement among 12-Exhibit 2.2 Heartland Wireless Communications, Inc., CAI Wireless Systems, Inc., and CS Wireless Systems, Inc. dated as of December 12, 1995. 3.1 Amended and Restated Certificate of Incorporation of 9-Exhibit 3.1 CAI 3.2 Amended and Restated Bylaws of CAI 9-Exhibit 3.2 4.1 Form of Indenture for Senior Notes 6-Exhibit 4.1 4.2 First Supplemental Indenture 11-Exhibit 4.1 4.3 Form of Escrow Agreement among CAI and Chemical Bank 6-Exhibit 4.30 4.4 Subordinated Unsecured Promissory Note dated August 31, 1-Exhibit 4.7 1993 by and between CAI and Hope E. Carter 4.5 Promissory Note-Bott Family Trust 2-Exhibit 4.1 4.6 Guaranty and Security Agreement-Bott Family Trust 2-Exhibit 4.2 4.7 Promissory Note-Bott 2-Exhibit 4.3 4.8 Guaranty and Security Agreement-Bott 2-Exhibit 4.4 4.9 Term Note due May 9, 2005 in the principal amount of 73 $15.0 million issued to MMDS Holdings II, Inc. 4.10 Term Note due May 9, 2005 in the principal amount of 92 $15.0 million issued to NYNEX Holding Company 10.1 1993 Stock Option and Incentive Plan 1-Exhibit 10.1,3 10.2 Form 1993 Incentive Stock Option Agreement 1-Exhibit 10.2,3 10.3 Form of 1993 Non-Qualified Stock Option Agreement 1-Exhibit 10.3,3 10.4 Outside Director's Stock Option Plan 1-Exhibit 10.4,3 10.5 Form of Outside Director's Stock Option Agreement 1-Exhibit 10.5,3 10.6 Employment Agreement dated March 21, 1996 by and 111 between Jared E. Abbruzzese and CAI 10.7 Letter Agreement dated October 13, 1993 by and between 1-Exhibit 10.10 Hampton Roads Wireless, Inc. and CAI 10.8 Employment Agreement dated October 1, 1993 by and 1-Exhibit 10.9,3 between George M. Williams and CAI and Amendment to Employment Agreement dated December 15, 1993 10.9 Master Sublease dated June 19, 1993 by and between Tri- 1-Exhibit 10.11 Mark Communications, Ltd. and George Bott 10.10 Agreement between CAI and SNET 1-Exhibit 10.14 10.11 Consulting Agreement dated May 15, 1993 between Jared 1-Exhibit 10.7 E. Abbruzzese and CAI
}4{
INDEX TO EXHIBITS (CONTINUED) Incorporated Exhibit NO. Description by Reference Page (see legend) No. 10.12 Business Relationship Agreement among CAI, its Subsidiaries 7-Exhibit 10.13 and BANX Affiliate dated as of March 28, 1995, as amended by Amendment Agreement No. 1 10.13 Securities Purchase Agreement dated as of March 28, 1995 4-Exhibit 2 among CAI, its Subsidiaries and BANX Partnership, including forms of Stage I and Stage II Warrants 10.14 Stage I Warrant 8-Exhibit 4.19 10.15 Stage II Warrant 117 10.16 1995 Incentive Stock Plan 140 10.17 Consulting and Employment Agreement dated as of January 1, 147 1996 between the Company and John Prisco 10.18 Termination Agreement dated February 23, 1996 between CAI 156 and Alan Sonnenberg 10.19 Consulting Agreement dated February 23, 1996 between the 159 Company and Alan Sonnenberg 10.20 Form of Lenders Warrant Agreement for James P. Ashman with 1-Exhibit 4.2 Form of Warrant Certificate attached thereto 10.21 Form of Representative's Warrant Agreement with Form of 1-Exhibit 4.3 Warrant Certificate attached thereto 10.22 Warrant Agreement dated August 30, 193 between CAI and 1-Exhibit 4.13 Richard McKenzie 10.23 Warrant Agreement dated August 30, 1993 between CAI and Phil 1-Exhibit 4.14 Hempleman 10.24 Warrant Agreement dated September 10, 1993 between CAI and 1-Exhibit 4.15 John Oppenheimer 10.25 Warrant Agreement dated August 30, 1993 between CAI and Marc 1-Exhibit 4.16 Howard 10.26 Warrant Agreement dated September 10, 1993 between CAI and 1-Exhibit 4.17 Les Alexander 10.27 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.26 Phil Hempleman 10.28 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.27 Marc Howard 10.29 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.28 Richard McKenzie 10.30 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.29 John Oppenheimer 10.31 Warrant Agreement dated November 9, 1993 between CAI and Les 1-Exhibit 4.30 Alexander 11.1 Schedule Regarding Computation of Loss Per Share 160 11.2 Schedule Regarding Computation of Fully Diluted Loss Per 162 Common Share 12. Statements re Computation of Ratios 13 21. Subsidiaries of the Registrant 163 23.2 Consent of Coopers & Lybrand L.L.P. 164
}5 {INDEX TO EXHIBITS (CONTINUED)
LEGEND 1 Incorporated by reference to the exhibits to the Registration Statement on Form S-1 (No. 33-71662). 2 Incorporated by reference to exhibits to the Current Report on Form 8-K dated March 23, 1994 (0-22888). 3 Management contract or compensation plan or arrangement. 4 Incorporated by reference to the exhibits to the Schedule 13D of BANX Partnership dated March 29, 1995, filed with the Commission on April 10, 1995. 5 Incorporated by reference to the exhibit to the Current Report on Form 8-K dated January 9,1995 (0-22888). 6 Incorporated by reference to the exhibits to the Registration Statement on Form S-1 (No. 33-93062). 7 Incorporated by reference to the exhibits to the Registration Statement on Form S-4 (No. 33-94222). 8 Incorporated by reference to the exhibits to the Annual Report on Form 10-K for March 31,1995 9 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for September 30, 1995. 10 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated December 12, 1995. 11 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for December 31, 1995. 12 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated February 23, 1996. 13 The information is not included because the ratio is less than 1 and the earnings deficiency is included in the Selected Financial Data of CAI. Filed herewith.
EX-4 2 }6{ Exhibit 4.9 THIS NOTE AND THE SECURITIES TO BE ISSUED UPON CONVERSION HEREOF (I) HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR RESALE IN CONNECTION WITH THE DISTRIBUTION HEREOF, AND (II) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (B) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE SECURITIES ACT (OR ANY SIMILAR RULE UNDER THE SECURITIES ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (C) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT REGISTRATION UNDER THE SECURITIES ACT IS NOT REQUIRED. No. SB-3 TERM NOTE DUE MAY 9, 2005 $15,000,000.00 May 9, 1995 FOR VALUE RECEIVED, CAI WIRELESS SYSTEMS, INC., a Connecticut corporation (hereinafter referred to as the "COMPANY"), hereby promises to pay to MMDS HOLDINGS II, INC., a Delaware corporation, having an address at 1717 Arch Street, Philadelphia, PA 19103 (the "PAYEE"), or registered assigns, on or before May 9, 2005, the principal sum of Fifteen Million Dollars ($15,000,000.00), together with interest thereon at the rate provided herein, and payable on the terms set forth below. This Note is one of an issue of Term Notes due May 9, 2005 of the Company in an aggregate principal amount of $30,000,000 (collectively, the "NOTES") issued pursuant to a certain Securities Purchase Agreement, dated as of March 28, 1995 between the Company and the Payee (the "SECURITIES PURCHASE AGREEMENT"). Through the Change Date (as defined in SECTION 7 hereof), but not after such date, this Note is secured by, and the performance by the Company of its obligations hereunder is guaranteed by, a Security Agreement and Pledge Agreement, of even date herewith, between the Company and the Payee, and those certain Guarantee Agreements and Security Agreements, of even date herewith, between the Payee and certain subsidiaries of the Company. Each registered holder ("HOLDER") of this Note will be deemed, by its acceptance hereof, (I) to have agreed to the confidentiality provisions set forth in SECTION 12 of the Securities Purchase Agreement and (II) to have made the representation set forth in SECTION 5.2 of the Securities Purchase Agreement. Certain capitalized terms used in this Note are defined in SECTION 7 hereof. Other capitalized terms, used in this Note but not defined herein, shall have the meanings ascribed to them in the Securities Purchase Agreement. Without limiting the generality of the foregoing, for purposes of this Note, the term "SUBSIDIARY" shall include, without limitation, any Acquired Company effective, except as provided in Section 3.2(ad) hereof, as of the time such Acquired Company was acquired by the Company. SECTION . PAYMENT OF PRINCIPAL AND INTEREST. . PRINCIPAL. The outstanding principal balance of this Note shall be paid in full on the tenth anniversary hereof. . INTEREST. () Interest shall accrue semi-annually at the Applicable Rate on the unpaid principal sum due hereunder and previous unpaid accruals of interest. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. Interest shall be paid semi-annually on March 1 and September 1 of each year, commencing on the First Payment Date. () This Note shall bear interest following the occurrence and during the continuance of any Event of Default on the unpaid principal amount, including any overdue payment or prepayment of principal and premium, if any, and on any overdue installment of interest at the Overdue Rate. If the Company shall have paid or agreed to pay any interest or premium on this Note pursuant to the terms hereof in excess of that permitted by law, then it is the express intent of the Company and the Holder that all excess amounts previously paid or to be paid by the Company be applied to reduce the principal balance of this Note, and the provisions hereof immediately be deemed reformed and the amounts thereafter collectible hereunder reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder. . PREPAYMENTS. () The Company shall, without notice, prepay, without premium, on the 180th day after the payment in full of all outstanding obligations under the Senior Notes, this Note with all interest accrued on the principal amount of this Note, including the amount to be prepaid. Notwithstanding anything contained in this SECTION 1.3, on the maturity date of this Note, the aggregate outstanding principal amount of this Note, together with all interest accrued thereon, shall be due and payable. () If there is more than one Note outstanding, the aggregate principal amount of the prepayment of Notes shall be allocated among the Holders of the Notes then outstanding and being so prepaid in proportion, as nearly as practicable, to the respective unpaid principal amounts of such Notes, with adjustments, to the extent practicable, to compensate for any prior prepayments not made in exactly such proportion. () Except as otherwise provided in SECTION 1.3(A), there shall be no prepayment, in whole or in part, of the principal amount of all or any of the Notes. . MANNER OF PAYMENT. All payments of principal and interest shall be made in lawful money of the United States of America at the time of any such payment, at the election of the Holder from time to time, either by wire transfer of immediately available funds to the account designated by the Holder for such purpose from time to time, or by check mailed to the Holder at the address designated by the Holder for such purpose from time to time. . PAYMENT ON NON- BUSINESS DAYS. Whenever any payment to be made on the Notes shall be due on a Saturday, Sunday or a public holiday under the laws of the State of New York, such payment may be made, together with interest thereon at the interest rate provided for in SECTION 1.2(A) hereof, on the next succeeding day on which banks in New York City are open for business with the same effect as if made on the nominal date for payment. . MANDATORY REDEMPTION ON CHANGE OF CONTROL. Upon the occurrence of a Change of Control, the Holder will have the right to require the Company to repurchase all or any portion of this Note at a purchase price equal to 101% (or such higher percentage as shall then be applicable to any right of the holders of the Senior Notes or the holders of any other Indebtedness to put such Notes or Indebtedness or any part thereof to the Company upon a Change in Control as defined in the Senior Notes or the Senior Notes Indenture or upon the occurrence of any similar event pursuant to the terms of such other Indebtedness) of the unpaid principal amount of this Note plus accrued interest hereon. Notwithstanding the foregoing, for so long as the Senior Notes are outstanding, in no event shall the Company's obligation to make such redemption arise earlier than the date which is 15 days after the date the Company is obligated to purchase Senior Notes pursuant to the Senior Notes Indenture following a Change of Control (as defined therein). () "CHANGE OF CONTROL" during the period that any Senior Notes are outstanding shall have the meaning ascribed to such term in the Senior Notes Indenture, and during any period that no Senior Notes are outstanding shall mean the occurrence of one or more of the following events: () any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of assets of the Company or any Subsidiary to any person, other than to the Purchaser or any Affiliate thereof, which assets are either material to the ownership and operation of a Wireless Cable Television System which is subject to the Business Relationship Agreement or which have a fair market value at the time of sale in excess of 30% of the fair market value of the Company and the Subsidiaries; or () during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election to such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office, excluding for all purposes of this subsection (ii) any directors elected by the Senior Preferred Shares or the Voting Preferred Shares; or () any person or group of related persons for purposes of Section 13(d) of the Exchange Act or any Subsidiary (a "GROUP"), excluding the Purchaser, The Corotoman Company L.L.C. and their respective Affiliates (each a "PERMITTED PURCHASER"), either (1) is or becomes, by purchase, tender offer, exchange offer, open market purchases, privately negotiated purchases or otherwise, the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not applicable, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or after the passage of time only), directly or indirectly, of more than 50% of the total then outstanding Voting Stock of the Company (for the purpose of this clause (iii), such person or Group will be deemed to "beneficially own" (determined as aforesaid) any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") if such person or Group "beneficially owns," directly or indirectly, a majority of the voting power of the Voting Stock of such parent corporation), or (2) otherwise has the ability to elect, directly or indirectly, a majority of the members of the Board of the Company; or () the Company consolidates with or merges into another person (other than the Purchaser or an Affiliate thereof) and the stockholders immediately prior to such merger or consolidation, or a Permitted Purchaser and the stockholders immediately prior to such merger or consolidation, hold less than a majority of the Voting Stock of the resulting entity; or () any person or Group, excluding the Purchaser and its Affiliates, either (x) is or becomes, by purchase, tender offer, exchange offer, open market purchases, privately negotiated purchases or otherwise, the "beneficial owner" of more of the outstanding Voting Stock than The Corotoman Company L.L.C. and its Affiliates or (y) commences, within the meaning of Rule 14d-1 under the Exchange Act, a tender offer with respect to more than 30% of the total then outstanding Voting Stock of the Company. () "VOTING STOCK" means, with respect to any person, securities of any class or classes of capital stock in such person entitling the holders thereof (whether at all times or only so long as no senior class of stock has voting power by reason of any contingency) to vote in the election of members of the Board of such person. SECTION . REGISTRATION, TRANSFER AND REPLACEMENT. . REGISTRATION. The Company shall maintain at its principal office a register of the Notes and shall record therein the names and addresses of the Holders of the Notes, the address to which notices are to be sent and the address to which payments are to be made as designated by the Holder if other than the address of the Holder, and the particulars of all transfers, exchanges and replacements of Notes. No transfer of a Note shall be valid unless the Holder or his or its duly appointed attorney requests such transfer to be made on such register, upon surrender thereof for exchange as hereinafter provided, accompanied by an instrument in writing, in form and execution reasonably satisfactory to the Company. Each Note issued hereunder, whether originally or upon transfer, exchange or replacement of a Note, shall be registered on the date of execution thereof by the Company. The Holder of a Note shall be that person or entity in whose name the Note has been so registered by the Company. A Holder shall be deemed the owner of a Note for all purposes, and the Company shall not be affected by any notice to the contrary. . TRANSFER AND EXCHANGE. The Holder of any Note or Notes may, prior to maturity or redemption thereof, surrender such Note or Notes at the principal office of the Company for transfer or exchange. Within a reasonable time after notice to the Company from a Holder of its intention to make such exchange and without expense (other than applicable transfer taxes, if any) to such Holder, the Company shall issue in exchange therefor another Note or Notes dated the date to which interest has been paid on, and for the unpaid principal amount of, the Note or Notes so surrendered, containing the same provisions and subject to the same terms and conditions as the Note or Notes so surrendered; provided, however, that unless the transferee is an Affiliate of the Purchaser, the new Note or Notes shall omit SECTION 3.2 hereof. Subject to the restrictions on transfer set forth in Section 2.1 hereof, each new Note shall be made payable to such person or entity, as the Holder of such surrendered Note or Notes may designate. Notes issued upon any transfer or exchange shall be only in authorized denominations, which shall be $1,000,000 and integral multiples of $500,000 in excess thereof or, in the event of partial redemption by the Company of any Notes or partial conversion of such Notes pursuant to SECTION 5 hereof or the surrender of such Notes in connection with the exercise of the Warrants, such lesser amount as shall constitute the entire remaining principal amount of such Note. . REPLACEMENT. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Note and, if requested by the Company in the case of any such loss, theft or destruction, upon delivery of an indemnity bond or other agreement or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Note, the Company will issue a new Note, of like tenor, in the amount of the unpaid principal of such Note, and dated the date to which interest has been paid, in lieu of such lost, stolen, destroyed or mutilated Note. SECTION . COVENANTS. . COVENANT EFFECTIVE DATES. Through the period ending on and including the earlier of (i) the Change Date or (ii) the date on which the Holder receives final payment of all amounts payable under this Note, the Company and its Subsidiaries shall comply with all of the covenants and agreements set forth in SECTION 3.2. If the Change Date occurs, then the Company and its Subsidiaries shall no longer be bound, with respect to the period following the Change Date, by their covenants and agreements set forth in SECTION 3.2. Immediately after the Change Date, the Company and its Subsidiaries shall become bound to perform, on behalf of the Holders, all of their covenants and agreements (the "COVENANTS") contained in the Senior Notes Indenture governing, and the Senior Notes evidencing, the Anticipated Financing, and shall comply therewith as they may be amended, modified, supplemented or replaced after the Change Date with the prior written approval of the Required Holders. If the Change Date has occurred and thereafter the Senior Notes are repaid in full at any time while any Note remains outstanding, the Covenants as in effect immediately prior to such termination shall be deemed to be incorporated herein by reference and shall continue in effect for all purposes hereof. . INITIAL COVENANTS. Subject to SECTION 3.1, so long as any Notes are held by the Purchaser or an Affiliate thereof or a successor to any of the foregoing (the "PURCHASER GROUP"), the Company shall comply with the following covenants unless its first obtains the approval (by vote or written consent) of the Holders of a majority of the then outstanding Stage I Warrants, Stage II Warrants, Senior Preferred Stock and Voting Preferred Stock (voting together as one class on the basis of the number of Voting Preferred Shares for or into which each such security is then exercisable or convertible) held by the Purchaser Group (a "Purchaser Group Approval"). Notwithstanding the foregoing, the parties intend that no provision of this Section 3.2 shall operate to limit or impair the Company's full responsibility for and control of the FCC Licenses and its operations conducted pursuant to those Licenses, if such provision, as so applied, shall violate applicable law. () MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS. The Company shall, and shall cause each of its Subsidiaries to, (i) at all times preserve and keep in full force and effect such entity's corporate or partnership existence, as the case may be, and rights and franchises material to such entity's business and (ii) comply at all times with the provisions of all franchises, permits, licenses or other similar authorizations relating to such entity's business, including, without limitation, the FCC Licenses, Channel Leases and any obligations or agreements with respect to signal interference, certifications and permits, and all other material agreements, licenses and sublicenses, leases and subleases to which it is a party, and will suffer no loss or forfeiture thereof or thereunder except for losses or forfeitures which in the aggregate would not have a Material Adverse Effect. () MAINTENANCE OF BUSINESS RELATIONSHIPS. The Company shall, and shall cause each of its Subsidiaries to, maintain and preserve its relationships with equipment vendors, programmers, lessors (including without limitation MMDS, MDS, POFS and ITFS lessors and lessors of headend and antennae sites), licensors and others having business relationships with it except for losses or replacements of relationships which individually or in the aggregate would not have a Material Adverse Effect. () MAINTENANCE OF PROPERTIES. The Company shall, and shall cause each of its Subsidiaries to, maintain and keep, or cause to be maintained and kept, their respective properties (including without limitation, intellectual property and properties acquired in accordance with the terms of the Business Plan or in accordance with the Loan Documents) in good repair, working order and condition (other than ordinary wear and tear), and from time to time shall make or cause to be made all appropriate repairs, renewals and replacements thereof, so that the business carried on in connection therewith may be properly conducted at all times, except where the failure to do so would not have a Material Adverse Effect. () MAINTENANCE OF LICENSES AND OTHER MATERIAL AGREEMENTS. The Company shall, and shall cause each of its Subsidiaries to, use its best efforts to keep in full force and effect all of the FCC Licenses, Channel Leases, any obligations or agreements with respect to signal interference, certifications and permits, and all other material agreements, licenses and sublicenses, leases and subleases to which it or any of the Subsidiaries is a party or to which it or any of the Subsidiaries shall become a party hereafter except for losses thereof which individually or in the aggregate would not have a Material Adverse Effect. The foregoing notwithstanding, the Company shall, and shall cause each of its Subsidiaries to, keep in full force and effect sufficient FCC Licenses and Channel Leases in each Wireless Distribution System covered by the Business Relationship Agreement to comply with the obligations of the Company under the Business Relationship Agreement. () USE OF PROCEEDS. Proceeds advanced pursuant to the Purchase Agreement and pursuant to the Anticipated Financing shall be used only as expressly provided by Section 1.5(a) and 1.5(b) of the Purchase Agreement or, in respect of the Anticipated Financing, as provided in the Business Plan. () PERFORMANCE OF LOAN DOCUMENTS AND ANTICIPATED FINANCING DOCUMENTS. The Company shall, and shall cause each of its Subsidiaries to, duly and punctually perform, pay and discharge or cause to be performed, paid or discharged, all of their respective obligations, as defined herein, of every nature arising or owed under the Loan Documents and under the documents related to the Anticipated Financing, whether absolute or contingent. The Company shall comply with each of the covenants set forth in the documents related to the Anticipated Financing (without regard to any waivers or consents obtained in respect thereof from the holders of the notes issued in the Anticipated Financing). () COMPLIANCE WITH LAW. The Company shall, and shall cause each of its Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations, orders or ordinances to which each of them is or will be subject, including, without limitation, the Communications Act, the Copyright Act and all Environmental Laws, and shall obtain and maintain in effect at all times all licenses, certificates, permits, franchises and other governmental or other authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, including, without limitation, all FCC Licenses, Channel Leases and obligations or agreements with respect to signal interference, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. () COMPLIANCE WITH BUSINESS PLAN AND BUSINESS RELATIONSHIP AGREEMENT. The Company shall, and shall cause each of the Subsidiaries to, use its best efforts to achieve the build-out of the Wireless Distribution Systems contemplated by the Business Plan, in each case subject to the availability of financing and the anticipated development of certain technology, and, except as expressly permitted hereunder, shall not enter into any material transaction which is not contemplated by the Business Plan or the Loan Documents. The Company shall, and shall cause each of its Subsidiaries to, comply in all respects with the Business Relationship Agreement. () INSURANCE. The Company shall, and shall cause each of its Subsidiaries to, maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co- insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities engaged in the same or a similar business and similarly situated. The Company shall maintain key- person insurance on the life of Jared E. Abbruzzese in the amount of $2,000,000, which policy names the Company as the owner and sole beneficiary thereof. () PAYMENT OF TAXES AND CLAIMS; CONSOLIDATION. () The Company shall, and shall cause each of the Subsidiaries to, timely file all Tax Returns required to be filed in any jurisdiction and to pay and discharge all Taxes shown to be due and payable on such returns and all other Taxes imposed on them or any of their properties, assets (wherever used herein, the term "ASSETS" includes without limitation the properties, licenses, permits, franchises, stock of Subsidiaries and contract rights of the Company and its Subsidiaries), income or franchises, to the extent such Taxes have become due and payable and before they have become delinquent; and to pay and discharge all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any of their respective Subsidiaries, PROVIDED that the Company or any of the Subsidiaries need not pay any such Tax or claim if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or such Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such Taxes and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect. () The Company shall not, and shall not permit any of the Subsidiaries to, file or consent to the filing of any consolidated or combined income tax return with any Person (other than the Company or any of the Subsidiaries). () EMPLOYEE BENEFIT PLANS. () The Company shall, and shall cause each ERISA Affiliate to, () comply in all material respects with the provisions of ERISA to the extent applicable to any Benefit Plan maintained by it and cause all Benefit Plans maintained by it to satisfy the conditions under the Code for tax qualification of all such plans intended to be tax qualified; and () avoid () any material accumulated funding deficiency (within the meaning of ERISA '302 and Code '412(a)) (whether or not waived); (B) any act or omission on the basis of which it or an ERISA Affiliate might incur a material liability to the PBGC (other than for the payment of required premiums) or to a trust established under former ERISA '4049; (C) any transaction with a principal purpose described in ERISA '4069; and (D) any act or omission that might result in the assessment by any Multiemployer Plan of withdrawal liability against the Company or any ERISA Affiliate, but only to the extent that the liability arising from a failure to comply with any covenant set forth in (i) or (ii) could reasonably be expected to result in a liability to it or a Subsidiary or an ERISA Affiliate for any one such event in excess of $100,000; provided however that this covenant will not apply to the employee benefit plans assumed by the Company or a Subsidiary pursuant to any acquisition contemplated by the Loan Documents until the 120th day after such acquisition is completed. () The Company shall not, directly or indirectly, and shall not permit its Subsidiaries or any ERISA Affiliate to directly or indirectly by reason of an amendment or amendments to, or the adoption of, one or more Benefit Plans subject to Title IV or ERISA, permit the present value of all benefit liabilities, as defined in Title IV of ERISA (using the actuarial assumptions utilized by the PBGC upon termination of a plan), to increase by more than $100,000; PROVIDED that this limitation shall not be applicable to the extent that the fair market value of assets allocable to such benefits, all determined as of the most recent valuation date for each such Benefit Plan, is in excess of the benefit liabilities, or to increase to the extent security must be provided to any Benefit Plan under Section 401(a)(29) of the Code. Neither the Company nor any of its Subsidiaries shall establish or become obligated to any new Retiree Welfare Plan, or modify any existing Retiree Welfare Plan, which could result in an increase in annual cost, or could result in an annual increase in liability to the Company, in either case by more than $50,000. Neither the Company nor any of its Subsidiaries shall establish or become obligated to any new unfunded Benefit Plan, or modify any existing unfunded Benefit Plan, without the prior written approval by the Holder. The Company shall not, directly or indirectly, and shall not permit its Subsidiaries or any ERISA Affiliate to (i) satisfy any liability under any Benefit Plan by purchasing annuities from an insurance company or (ii) invest the assets of any Benefit Plan with an insurance company, unless, in each case, such insurance company is rated AA by Standard & Poor's Corporation and the equivalent by each other nationally recognized rating agency at the time of the investment. () With respect to other than a Multiemployer Plan, for each Benefit Plan hereafter adopted or maintained by the Company, any of its Subsidiaries or any other ERISA Affiliate and which is intended to be qualified under Section 401(a) of the Code, the Company shall (i) seek, or cause its Subsidiaries or other ERISA Affiliates to seek, and receive determination letters from the IRS to the effect that such Benefit Plan is qualified within the meaning of Section 401(a) of the Code; and (ii) from and after the adoption of any such Benefit Plan, cause such plan to be qualified within the meaning of Section 401(a) of the Code and to be administered in all material respects in accordance with the requirements of ERISA and Section 401(a) of the Code. () With respect to each Benefit Plan hereafter adopted or maintained by the Company, any of its Subsidiaries or any other ERISA Affiliate and which is a welfare plan within the meaning of Section 3(1) of ERISA, the Company shall comply, or cause its Subsidiaries or other ERISA Affiliates to comply, with the notice and continuation coverage requirements of Section 4980B of the Code and the regulations thereunder to the extent noncompliance could result in a material liability. () The foregoing notwithstanding, the provisions of this SECTION 3.2(K) shall not apply to an Acquired Company for a period of six months from the time of its acquisition by the Company or a Subsidiary, if information disclosed by such Acquired Company to the Company or a Subsidiary on a schedule to its Acquisition Documents indicates that such Acquired Company would, at the time of its acquisition by the Company or a Subsidiary, be in violation of this SECTION 3.2(K), and such violation would not have a Material Adverse Effect. () ENVIRONMENTAL LAWS. The Company shall, and shall cause each of its Subsidiaries to, conduct its business so as to, and maintain a system to assure that it will, comply with all applicable Environmental Laws and shall promptly take corrective action to remedy any non-compliance with any Environmental Law, except for non- compliances which individually or in the aggregate would not have a Material Adverse Effect. () FURTHER ASSURANCES. From time to time, upon the request of the Holder, the Company shall, and shall cause each of the Subsidiaries to, make such filings and seek such consents, approvals, permits and waivers as may be necessary or desirable in the reasonable judgment of the Holder to permit the Holder to exercise all of its rights under each of the Loan Documents, including without limitation the right to exercise the Stage I Warrants and the Stage II Warrants, to convert the Notes, the Senior Preferred Shares and the Voting Preferred Shares and to enforce all the covenants thereunder and under the Business Relationship Agreement and the terms of the Voting Preferred Shares. () OTHER AFFIRMATIVE COVENANTS. The Company shall cause each of its Subsidiaries to comply with Section 2 of the Purchase Agreement and this SECTION 3.2. () SOLVENCY. The Company and the Subsidiaries shall, on a consolidated basis, and Atlantic on a standalone basis shall, be and remain Solvent. "SOLVENT" means that the aggregate present fair saleable value of such Person's assets is in excess of the total cost of its probable liability on its existing debts to third parties as they become absolute and matured, such Person has not incurred debts beyond its foreseeable ability to pay such debts as they mature, and such Person has capital adequate to conduct the business in which it is presently employed. () INDEBTEDNESS. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, remain liable, create, incur, assume, guaranty, or otherwise become or remain directly or indirectly liable with respect to any Indebtedness except: () the Company and the Subsidiaries may become and remain liable with respect to the Obligations; () the Company and the Subsidiaries may become and remain liable with respect to the Anticipated Financing created and incurred pursuant to Section 2.4 of the Purchase Agreement; () the Subsidiaries of the Company may become and remain liable with respect to intercompany indebtedness to the Company; PROVIDED that all such intercompany indebtedness is subordinated to the Obligations and evidenced by an intercompany note executed by such Subsidiary, all in form and substance satisfactory to the Holder; () the Company and the Subsidiaries may become and remain liable with respect to unsecured debt incurred in connection with the acquisition by the Company or a Subsidiary of any of the Acquired Companies in accordance with the terms of the Acquisition Agreements including, without limitation, debt that is assumed in such acquisition provided that such debt is prepayable at the option of the Company; () the Company and the Subsidiaries may become and remain liable with respect to contingent or deferred payment obligations incurred by the Company or any of its Subsidiaries in connection with the acquisition of assets by the Company or any of its Subsidiaries in the ordinary course of business, which payment obligation is secured solely by the acquired assets; () prior to January 1, 1997, the Company may incur the debt permitted pursuant to Section 2.7(c)(ii) of the Purchase Agreement; () if the Stage II Closing has been consummated, from January 1, 1997 until the earlier of July 1, 1997 or the first date that the quotient, expressed as a percentage, of the number of LOS Households in service areas with respect to which Purchaser's Affiliates have then exercised their options under Article 3 of the Business Relationship Agreement divided by the number of LOS Households in all service areas subject to the Business Relationship Agreement (the "BR PERCENTAGE") first exceeds 30%, the Company may incur Indebtedness in the aggregate principal amount of $25,000,000 to the extent necessary to fund operations or repay existing debt or used to effect acquisitions or capital expenditures (including acquisitions or capital expenditures in the form of Capital Leases) permitted under SECTION 3.2(AB) hereof; and () after July 1, 1997, the Company may incur Indebtedness in an aggregate amount equal to the product of (x) $250,000,000 (reduced by the principal amount of the Indebtedness incurred under subsection (h) hereof and then outstanding) at the time such Indebtedness is contemplated to be incurred by the Business Plan multiplied by (y) the difference between (i) 100% and (ii) the BR Percentage at the time the Indebtedness is incurred; PROVIDED that after the first date that the BR Percentage is equal to or greater than 75%, no Indebtedness may thereafter be incurred hereunder. The provisions of this SECTION 3.2(P) notwithstanding, the Company shall not permit Atlantic to directly or indirectly remain liable, create, incur, assume, guaranty or otherwise become or remain directly or indirectly liable with respect to any Indebtedness. () LIENS. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, maintain, create, incur, assume or permit to exist any lien on or with respect to any property or asset (including any document or instrument in respect of goods or accounts receivable) of the Company or any Subsidiary, whether now owned or hereafter acquired, or any income or profits therefrom, except: () liens granted pursuant to the Loan Documents or disclosed in Schedule 4.8 of the Purchase Agreement (as amended with respect to Acquired Companies pursuant to Section 2.10 of the Purchase Agreement) and not discharged as contemplated by Section 3.2(a) of the Purchase Agreement; () liens securing Indebtedness permitted under SECTIONS 3.2(P)(VII) AND (VIII) above; and () liens securing Indebtedness of acquired entities in acquisitions or for capital expenditures, in either case which are permitted under SECTION 3.2(AA) hereof. The provisions of this SECTION 3.2(Q) notwithstanding, the Company shall not permit, nor shall it permit any of the Subsidiaries, to directly or indirectly, maintain, create, incur, assume or permit to exist any lien on or with respect to (i) any property or assets of Atlantic or (ii) any assets which are used in connection with Wireless Distribution Systems subject to the Business Relationship Agreement; PROVIDED HOWEVER, that this clause (ii) shall not apply to liens securing Indebtedness issued pursuant to SECTION 3.2(P)(VIII) hereof. () RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES. The Company shall not, nor shall it permit any of the Subsidiaries to, alter its corporate, capital or legal structure or to enter into any merger, or consolidate, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, sub-lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired (other than in the ordinary course of business), or acquire by purchase, lease or otherwise, in one transaction or a series of transactions, all or any part of the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person (other than purchases or other acquisitions of inventory, leases, materials, property and equipment in the ordinary course of business) or agree to do any of the foregoing at any future time, except: () the Company and the Subsidiaries may make acquisitions and capital expenditures in the manner expressly provided in SECTION 3.2(AA) hereof; () the Company and the Subsidiaries may from time to time make sales or other dispositions of assets having a cumulative fair market value in any twelve-month period not in excess of the greater of $1,000,000 in the aggregate or 5% in the aggregate of Consolidated Operating Cash Flow (hereinafter defined) for the fiscal year preceding any such sale; PROVIDED that () the consideration received shall be an amount at least equal to the fair market value thereof and () at least 85% of the consideration received shall be cash; PROVIDED, HOWEVER, that in no event shall the Company sell assets (other than assets of DE MINIMIS value) which are used or useful in providing the services required to be provided by the Company or its Subsidiaries under the Business Relationship Agreement; and () the Company and its Subsidiaries may from time to time dispose of FCC Licenses and Channel Leases for equivalent rights in replacement FCC Licenses and Channel Leases in the same operating market and the swapping of assets for equivalent or better replacement assets shall be permitted if at least 20 days prior notice is given to the Holder (other than in the case of swaps involving assets of DE MINIMIS value). "CONSOLIDATED OPERATING CASH FLOW" shall mean, for any period, the sum (without duplication) of the amounts for such period of (i) net income, (ii) depreciation expense, (iii) amortization expense, (iv) taxes paid, and (v) service fees under the Loan Documents LESS (x) capital expenditures and (y) increases in net current assets (increases in inventory and accounts receivable LESS increases in accounts payable), determined on a consolidated basis for the Company and the Subsidiaries in accordance with GAAP. () RESTRICTED PAYMENTS. The Company shall not, nor shall it permit any Subsidiary to: () declare or pay any dividend or make any distribution (other than dividends required to be paid by the Series A Convertible Preferred Stock and 6% Series B Convertible Preferred Stock or on any shares the issuance of which has received a Purchaser Group Approval) on shares of the Company or any Subsidiary; () purchase, redeem or otherwise acquire or retire for value any stock of the Company or of any Subsidiary or any warrants, rights or options to acquire shares of any class of such stock; () make any principal payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment, scheduled sinking fund payment, or scheduled redemption payment, any Indebtedness that is subordinate or junior in right of payment to the Notes (other than any such Indebtedness owing to the Company or any wholly-owned Subsidiary of the Company); or () make any Investment (other than Investments permitted by SECTION 3.2(AA) or 3.2(AC) hereof). () ISSUANCE OF STOCK. The Company shall not, and shall not permit any Subsidiary to, authorize or issue any capital stock except for (i) shares issuable upon exercise of the Warrants and the Stage II Warrants or conversion of the Notes, the Senior Preferred Shares or the Voting Preferred Shares, (ii) shares issued in connection with the acquisition of the Acquired Companies as described in the Acquisition Agreements, (iii) Common Shares issued upon conversion of shares of Series A Convertible Preferred Stock and 6% Series B Convertible Preferred Stock or the exercise of options, warrants and other purchase rights disclosed on Schedule 4.3 to the Purchase Agreement, (iv) options and warrants with respect to Common Shares set forth on Schedule I hereto, (v) Common Shares issued in payment of the purchase price under acquisitions or to fund capital expenditures, in each case permitted pursuant to SECTION 3.2(AA) hereof, (vi) Common Shares issued pursuant to Section 2.7(c)(ii) of the Purchase Agreement, and (vii) Common Shares assumed to be issued when calculating Fully-Diluted Common Shares immediately after consummation of the Stage II Closing. () TRANSACTIONS WITH AFFILIATES. The Company shall not, nor shall it permit any of the Subsidiaries to, enter into, directly or indirectly, any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except (i) for transactions required by the ServiceCo Documents, and (ii) in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person that is not an Affiliate. () CERTAIN OTHER RESTRICTIONS. The Company shall not, nor shall it permit any of the Subsidiaries to, engage in any business or undertake any activities or otherwise do any act, that would subject the Holders, in the reasonable opinion of the Holders, to a risk of violation of the MFJ. In addition: () the Company will ensure that its directors and senior management, and the directors and senior management of the Subsidiaries, are aware of the terms of the MFJ and of what types or categories of businesses or activities might constitute a breach thereof. The Company shall procure all managers having significant responsibility for matters addressed in the MFJ to sign a certificate as described in Section V of the MFJ, or such other form as the Holders may reasonably require from time to time. The Company shall ensure that the Subsidiaries and any other company or other entity in which it or any Subsidiary holds an interest shall comply with the terms of this provision; and () the Company shall, and shall cause the Subsidiaries to, provide all necessary and reasonable assistance to the Holders in any MFJ proceeding or investigation, at the request of the Holders. It is the intention of the Company and the Holders that, in addition to any damages to which the Holders may be entitled for violation of this provision, this provision may be enforced by grant of injunctive relief to restrain any such breach by the Company or a Subsidiary. () CONTINGENT OBLIGATIONS. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, create or become or be liable with respect to any Contingent Obligation except: () Contingent Obligations of the Company and the Subsidiaries incurred pursuant to the Loan Documents; () Contingent Obligations resulting from endorsement of negotiable instruments for collection in the ordinary course of business; () Contingent Obligations in respect of operating leases; () intercompany Contingent Obligations with respect to the Company or any other Subsidiary; PROVIDED that all such intercompany Contingent Obligations are subordinated to the Obligations; () Contingent Obligations which the Company elects to treat as Indebtedness and which could then be incurred as Indebtedness under SECTION 3.2(P) hereof; () Contingent Obligations of the Company in respect of assisting the Subsidiaries in providing goods and services in the ordinary course of their respective businesses. For purposes of this SECTION 3.2(W), the term "CONTINGENT OBLIGATIONS" shall mean any direct or indirect liability, contingent or otherwise (1) with respect to any indebtedness, lease, dividend or other obligation of another if the primary purpose or intent thereof is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligations will be protected (in whole or in part) against loss in respect thereof and (2) with respect to any letter of credit. Contingent Obligations shall include with respect to the Company or any of the Subsidiaries, without limitation, () the direct or indirect guaranty, endorsement (otherwise than for the collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by the Company or any of the Subsidiaries, () the obligation to make take-or-pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, and () any liability of the Company or any of the Subsidiaries for the obligations of another through any agreement (contingent or otherwise) (x) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), and (y) to maintain the solvency or any balance sheet item, level of income or financial condition of another (except as expressly provided in this Note), if in the case of any agreement described under subclause (x) or (y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. () CONDUCT OF BUSINESS. Except as expressly provided in the Loan Documents, the Company shall not, nor shall it permit any of the Subsidiaries to, engage in any line of business except those described in the Company's Transition Report on Form 10-K for the period ended March 31, 1994 and the activities described in Note 2 to the Company's financial statements contained in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 which, in the sole judgment of the Purchaser Group, do not violate the MFJ; provided, however, that prior to the time that the BR Percentage first exceeds 30%, the Company and its Subsidiaries may engage in other business activities related to the use of the MMDS Spectrum if (i) they are in compliance with all of their obligations hereunder, under the other Loan Documents and the documents related to the Anticipated Financing, (ii) such activities will not have a material adverse effect on the ability of the Company and the Subsidiaries to perform their obligations under the Business Relationship Agreement, and (iii) the Company does not enter into any joint ventures, partnerships or other arrangement with a third Person to share the profits, losses and control of such activities with any person unless the Company has offered the Purchaser the right to enter into such arrangement on terms no less favorable to the Purchaser than those agreed to by the third person and in any event, the Company shall not enter into such an arrangement with any Person if such Person or any Affiliate of such Person is engaged in operating, providing or marketing wireline cable or local wireline telephone systems or services within the United States. () CREATION OF SUBSIDIARIES; DISPOSAL OF SUBSIDIARY STOCK. () The Company shall not, nor shall it permit any of the Subsidiaries to, create or acquire any interest in any Subsidiaries, unless such Subsidiary is wholly-owned by the Company or a wholly- owned Subsidiary or unless expressly permitted by clause (iii) of SECTION 3.2(X) hereof. () The Company shall not, and shall not permit any of the Subsidiaries to, directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock, partnership interests, or other equity securities (or warrants, rights or options to acquire shares or other equity securities) of any of the Subsidiaries, except (i) to the Company, another Subsidiary of the Company, (ii) to qualify directors if required by applicable law, (iii) as permitted by SECTION 3.2(S) hereof, (iv) as reflected on Schedule 4.2 to the Purchase Agreement, or (v) as collateral for these Notes. () AMENDMENTS TO CHARTER DOCUMENTS. Except as expressly provided in the Loan Documents, the Company shall not, nor shall it permit any of the Subsidiaries to, make any amendment to, or waive any of its material rights under, its articles or certificate of incorporation, as the case may be, its by-laws or other documents relating to its capital stock, or other equity interests of the Company or any of the Subsidiaries (other than non-material amendments which, in the aggregate, would not have a Material Adverse Effect and which would not adversely affect the rights of the holders of the Notes) without, in each case, obtaining the written consent of all Holders to such amendment or waiver. () ACQUISITIONS AND CAPITAL EXPENDITURES. The Company shall not, nor shall it permit any of its Subsidiaries to, incur any capital expenditures or acquire the capital stock or assets of any Person, except for capital expenditures reflected in the Business Plan; PROVIDED, HOWEVER, that, so long as no Default shall have occurred and be continuing under the Notes or Senior Preferred Shares, until the BR Percentage is at least 30%: () prior to July 1, 1997, the Company may make, in addition to those reflected in the Business Plan, capital expenditures for which the aggregate consideration to be paid does not exceed $20 million and acquisitions of businesses for which the aggregate value of the consideration paid and the liabilities assumed, in the aggregate, does not exceed $15 million, () after July 1, 1997, the Company may incur additional capital expenditures so long as the aggregate consideration to be paid therefor, including for capital expenditures made prior to July 1, 1997, does not exceed $35 million, and may make additional acquisitions so long as the aggregate value of the consideration paid for and the liabilities assumed in such acquisitions, in the aggregate and including acquisitions made prior to July 1, 1997, does not exceed $25 million. () SALE OR DISCOUNT OF RECEIVABLES. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, sell any of their notes or accounts receivable except solely in the ordinary course of business for the collection of delinquent accounts. () INVESTMENTS. The Company shall not, nor shall it permit any of the Subsidiaries to, make or permit to exist, any Investments, directly or indirectly, other than (a) marketable direct obligations of the United States of America which mature within 5 years from the date of issue or participations in marketable direct obligations of the United States of America acquired from domestic banks having total assets in excess of $500,000,000, (b) certificates of deposit and bankers' acceptances of domestic banks having total assets in excess of $500,000,000 and demand and time deposits in any bank, whether domestic or foreign, (c) securities commonly known as "commercial paper" issued by any company organized and existing under the laws of the United States of America or any state thereof which at the time of purchase have been rated and the ratings for which are not less than "P-1" if rated by Moody's, and not less than "A-1" if rated by Standard and Poor's, (d) written agreements under which domestic banks having total assets in excess of $500,000,000 sell and agree to repurchase marketable direct obligations of the United States of America, (e) money market funds backed by U.S. Obligations, (f) acquisitions of companies if such acquisition is permitted pursuant to SECTION 3.2(AA) hereof and such acquisition is of the entire interest in the equity of the acquired company, and (g) the Company's investment in ACTV, Inc. described in Schedule 4.13(6) to the Purchase Agreement. () ACQUIRED COMPANIES. The term "Subsidiaries" as used in the covenants contained in this SECTION 3.2 shall be deemed to include each Acquired Company from and after the date that the acquisition of such Acquired Company is consummated, except for the grace periods applicable thereto contained in this SECTION 3.2(AD). The following provisions of this SECTION 3.2 shall not apply to any Acquired Company until the end of the grace period after the date of such Acquired Company's acquisition by the Company set forth opposite the reference to such provision below; PROVIDED, HOWEVER, that (i) the failure of the Acquired Company to comply with such provisions immediately is due to circumstances existing at the time of consummation of the acquisition, (ii) the Company is using all reasonable and diligent efforts to bring such Acquired Company into compliance with such provisions, and (iii) such failure of such Acquired Company to comply with such provisions does not have a material adverse effect on the Company's ability to comply with its obligations under the Business Relationship Agreement: SECTION REFERENCE GRACE PERIOD 3.2(A)(II) 60 days 3.2(B) 60 days 3.2(C) 180 days 3.2(F) 60 days 3.2(G) 60 days 3.2(H)(last sentence only) 60 days 3.2(J) 60 days 3.2(X) 30 days () AMENDMENT OF SENIOR NOTE OR SENIOR NOTES INDENTURE. The Company shall not amend the Senior Notes or the Senior Notes Indenture without a prior Purchaser Group Approval of such amendment. SECTION . EVENTS OF DEFAULT. For purposes of this SECTION 4, the term "SUBSIDIARY" shall include Acquired Companies as of the time such Acquired Companies were acquired by the Company. . An "EVENT OF DEFAULT" shall exist if any of the following conditions or events shall occur and be continuing: () on or prior to the Change Date: () the Company defaults in the payment of any principal on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or () the Company defaults in the payment of any interest on any Note for more than ten calendar days after the same becomes due and payable; or () the Company defaults in the performance of or compliance with any covenant or agreement contained in SECTION 3.2 hereof except SUBSECTIONS 3.2(C), (F), (G), (M) AND (N) hereof or SECTION 6.2(B) OR (D) of the Securities Purchase Agreement, and such default remains unremedied for a period of 30 days; or () the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in subparagraphs (i), (ii) and (iii) of this SECTION 4.1(A)) or in the Securities Purchase Agreement and such default is not remedied within 30 days after the earlier of (X) a Responsible Officer obtaining actual knowledge of such default and (Y) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this subparagraph (a)(iv) of SECTION 4.1); or () any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in the Securities Purchase Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or () (X) the Company or any Subsidiary is, or would be with notice or the passage of time, in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $500,000 beyond any period of grace provided with respect thereto, or (Y) the Company or any Subsidiary is, or would be with notice or the passage of time, in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $500,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (Z) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (1) the Company or any Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $500,000 or (2) one or more Persons have the right to require the Company or any Subsidiary so to purchase or repay such Indebtedness; or () the Company or any Subsidiary (U) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (V) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (W) makes an assignment for the benefit of its creditors, (X) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (Y) is adjudicated as insolvent or to be liquidated, or (Z) takes corporate action for the purpose of any of the foregoing; or () a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Subsidiaries, or any such petition shall be filed against the Company or any of its Subsidiaries and such petition shall not be dismissed within 90 days; or () a final judgment or judgments for the payment of money aggregating in excess of $500,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 90 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or () if (U) any Benefit Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (V) a notice of intent to terminate any Benefit Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Benefit Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Benefit Plan may become a subject of any such proceedings, (W) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Benefit Plans, determined in accordance with Title IV of ERISA, shall exceed $500,000, (X) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (Y) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (Z) the Company or any Subsidiary establishes or amends any Benefit Plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (U) through (Z) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or () either the Anticipated Financing or the Stage II Closing shall not have been consummated before February 28, 1996; or () after the Change Date, if (i) any Default or Event of Default, as defined in the Senior Notes Indenture or the Senior Notes as in effect on the original issuance date thereof and without giving effect to any amendment, supplement or other modification thereof or waiver or consent thereunder, shall occur and be continuing (other than any Default or Event of Default occasioned solely due to the failure to pay interest on the Senior Notes unless such failure results in the acceleration of the Senior Notes), regardless of whether or not any Senior Notes are then outstanding, or (ii) the Company shall have failed to pay when due any principal of any Note when such principal becomes due and payable, at maturity, upon acceleration, redemption pursuant to a required offer to purchase or otherwise, or (iii) the Company shall have failed to pay interest on any Note when the same becomes due and payable and such failure continues for a period of 30 days. . ACCELERATION OF NOTES. () If, on or before the Change Date, an Event of Default with respect to the Company described in subparagraph (a)(vii) or (a)(viii) of SECTION 4.1 (other than an Event of Default described in clause (U) of subparagraph (a)(vii) or described in clause (Z) of subparagraph (a)(vii) by virtue of the fact that such clause encompasses clause (U) of subparagraph (a)(vii)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. () If, after the Change Date, an Event of Default with respect to the Company described in provisions of the Senior Notes or the Senior Notes Indenture which are comparable to subparagraph (a)(vii) or (a)(viii) of SECTION 4.1 (other than an Event of Default which is comparable to an event described in clause (U) of subparagraph (a)(vii) or described in clause (Z) of subparagraph (a)(vii) by virtue of the fact that such clause encompasses clause (U) of subparagraph (a)(vii)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. () If any other Event of Default has occurred and is continuing, the Required Holders may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. Upon any Notes becoming due and payable under this SECTION 4.2, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus all accrued and unpaid interest thereon, shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each Holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for). . OTHER REMEDIES. If any Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under SECTION 4.2, the Holder of any Note at the time outstanding may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. . RESCISSION. At any time after any Notes have been declared due and payable pursuant to paragraph (c) or (d) of SECTION 4.2, the Required Holders, by written notice to the Company, may rescind and annul any such declaration and its consequences if (A) the Company has paid all overdue interest on the Notes and all principal of any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and (to the extent permitted by applicable law) any overdue interest in respect of the Notes at the Default Rate, (B) all Events of Default other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to SECTION 9 of the Securities Purchase Agreement, and (C) no judgment or decree has been entered for the payment of any monies due pursuant to the Notes. No rescission and annulment under this SECTION 4.4 will extend to or affect any subsequent Event of Default or impair any right consequent thereon. . NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC. No course of dealing and no delay on the part of any Holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such Holder's rights, powers or remedies. No right, power or remedy conferred by this Note or by the Securities Purchase Agreement upon any Holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under SECTION 7 of the Securities Purchase Agreement, the Company will pay to the Holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this SECTION 4.5, including, without limitation, reasonable attorneys' fees, expenses and disbursements. SECTION . CONVERSION. This SECTION 5 shall become effective upon consummation of the Stage II Closing and shall remain effective thereafter, but only with respect to the period commencing at such time. . CONVERSION PRIVILEGE. Subject to and upon compliance with the provisions of this SECTION 5, at the option of the Holder during the period beginning upon consummation of the Stage II Closing and ending at 5:00 P.M. local time in New York, NY on the fifth anniversary of the Stage II Closing (the "CONVERSION PERIOD"), this Note or any portion of the principal amount due hereunder may, at any time and from time to time, be converted into fully paid and nonassessable shares of 14% Senior Preferred Stock of the Company ("SENIOR PREFERRED STOCK"), at the Conversion Price in effect at the date of conversion. The shares of Senior Preferred Stock issued or issuable upon conversion of the Notes are referred to herein as the "SENIOR PREFERRED SHARES." . MANNER OF EXERCISE OF CONVERSION PRIVILEGE. () In the sole discretion of the Holder, this Note may be converted in whole or in part, at any time and from time to time during the Conversion Period. To exercise the conversion privilege with respect to this Note in whole or in part, the Holder shall deliver to the Company at its principal office, during the Conversion Period, (i) this Note, and (ii) a written notice of such Holder's election to convert all or any part of this Note, which notice shall specify the amount of this Note to be so converted, the denominations of the share certificate or certificates desired and the name or names in which such certificates are to be registered. This Note or the portion thereof specified in such notice shall be deemed to have been converted immediately prior to the close of business on the date of receipt of such notice and such Note by the Company, even if the Company's stock transfer books are on that date closed. () Promptly after the conversion of all or any portion of this Note, the Company shall issue and deliver, at its expense, to the Holder, or to the nominee or nominees of such Holder, a certificate or certificates for the number of Senior Preferred Shares due on such conversion. Interest shall accrue on the unpaid principal amount of this Note converted to the date of conversion. In the case of a conversion of all or only a portion of the outstanding principal amount of this Note, the Company shall execute and deliver to the Holder (or its nominee or nominees), at the expense of the Company, a replacement note in a principal amount equal to the sum of the unconverted principal portion of such Note plus all accrued unpaid interest on such Note and dated and bearing interest from the date to which interest has been paid on such Note or dated the date of such Note if no interest has been paid thereon. . REGULATORY APPROVALS. The Company acknowledges that prior to exercising its rights to acquire Voting Preferred Shares hereunder and to acquiring the shareholder rights provided to holders of such Voting Preferred Shares, the Holder shall secure any regulatory approvals it deems necessary to effect such exercise and acquire and to assert such rights, including but not limited to the approval of the FCC. The Company shall cooperate (and shall cause its Affiliates and Subsidiaries to cooperate) with the Holder in applying for any necessary requests or applications for such approval, and shall immediately execute, on request of the Holder, all application forms and other documents requiring execution by the Company in connection therewith. . FRACTIONAL SHARES. The Company shall not be required to issue fractions of Senior Preferred Shares upon conversion of this Note. If any fraction of a share would, but for this Section, be issuable upon any conversion of this Note, in lieu of such fractional share the Company shall pay to the Holder or Holders, as the case may be, in cash, an amount equal to the fair market value of such fractional share. . CONVERSION PRICE. The Conversion Price at which Senior Preferred Shares shall be issuable upon the conversion of this Note shall initially be $10,000 for each Senior Preferred Share (subject to appropriate adjustment for stock splits, subdivisions, combinations, dividends or other similar transactions with respect to Senior Preferred Shares). SECTION . SUBORDINATION. This SECTION 6 shall become effective immediately after the Change Date and shall remain effective thereafter, but only with respect to the period commencing at such time. . DEFINITIONS. () "FEDERAL BANKRUPTCY CODE" means the Bankruptcy Act of Title 11 of the United States Code, as amended from time to time. () "NON-PAYMENT DEFAULT" means any event (other than a Payment Default) the occurrence of which entitles one or more persons to accelerate the maturity of, or would result in the acceleration of, any Senior Indebtedness. () "PAYMENT DEFAULT" means any default in the payment of principal of (or premium, if any, on) or interest on Senior Indebtedness when due. () "SENIOR INDEBTEDNESS" means (i) the principal of, premium, if any, and interest on the Senior Notes, and (II) all other Indebtedness of the Company for money borrowed the incurrence of which does not violate the Loan Documents and which is not expressly subordinated (as set forth in the terms of such Indebtedness) to the right of payment to any other Indebtedness of the Company, in each case including without limitation, all obligations of the Company, whether outstanding on the date hereof or hereafter created, incurred or assumed, under or in respect of the Senior Notes or such other Indebtedness, whether for principal, interest (including, without limitation, interest accruing after the filing of a petition initiating any proceeding under any state or federal bankruptcy law whether or not such interest is an allowable claim), reimbursement of amounts drawn under letters of credit issued or arranged for pursuant thereto, guarantees in respect thereof, and all charges, fees, expenses (including reasonable fees and expenses of counsel) and other amounts in respect of the Senior Notes or such other Indebtedness incurred by or owing to the holders of the Senior Notes or such other Indebtedness or their respective representative, agent or trustee. () "SUBORDINATED INDEBTEDNESS" means, with respect to the Company, Indebtedness of the Company which is expressly subordinated in right of payment to the Notes. . GENERAL. The Company covenants and agrees, and each Holder of this Note, by its acceptance hereof, likewise covenants and agrees, for the benefit of the holders, from time to time, of Senior Indebtedness that, to the extent and in the manner hereinafter set forth in this SECTION 6, the Notes, the indebtedness represented thereby and the payment of the principal of (and premium, if any, on) and interest on each Note are hereby expressly made subordinate and subject in right of payment as provided in this SECTION 6 to the prior payment in full in cash or cash equivalents of all Senior Indebtedness; PROVIDED, HOWEVER, that the Notes, the indebtedness represented thereby and the payment of the principal of (and premium, if any, on) and interest on the Notes in all respects shall rank prior to all future Subordinated Indebtedness and PARI PASSU with all Indebtedness of the Company other than Senior Indebtedness and Subordinated Indebtedness. . PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or its assets, or (b) any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshalling of assets or liabilities of the Company, then and in any such event (1) the holders of Senior Indebtedness shall be entitled to receive payment in full in cash or cash equivalents of all amounts due on or in respect of all Senior Indebtedness, or provision shall be made for such payment, before the Holders of the Notes are entitled to receive any payment or distribution of any kind or character on account of the Notes; and (2) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, by set-off or otherwise, to which the Holders of the Notes would be entitled but for the provisions of this SECTION 6 shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness held or represented by each, to the extent necessary to make payment in full in cash or cash equivalents of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and (3) in the event that, notwithstanding the foregoing provisions of this SECTION 6, the Holder of any Notes shall have received any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, in respect of the Notes before all Senior Indebtedness is paid in full or payment thereof provided for in cash or cash equivalents, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full in cash or cash equivalents, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. For purposes of this SECTION 6, the words "payment or distribution" shall not be deemed to include (X) any payment or distribution of securities of the Company or any other corporation authorized by an order or decree giving effect, and stating in such order or decree that effect is given, to the subordination of the Notes to the Senior Indebtedness and made by a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy, insolvency or other similar law, or (Y) securities of the Company or any other corporation provided for by a plan of reorganization or readjustment which are subordinated, to at least the same extent as the Notes, to the payment of all Senior Indebtedness then outstanding or to the payment of all securities issued in exchange therefor to the holders of Senior Indebtedness at the time outstanding. The consolidation of the Company with, or the merger of the Company into, another person, or the liquidation or dissolution of the Company following the conveyance, transfer or lease of its properties and assets substantially as an entirety to another person shall not be deemed a dissolution, winding up, liquidation, reorganization, assignment for the benefit of creditors or marshalling of assets and liabilities of the Company for the purposes of this SECTION 6 if the person formed by such consolidation or into which the Company is merged or the person which acquires by conveyance, transfer or lease such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance, transfer or lease, comply with the conditions set forth in the Senior Notes Indenture. . SUSPENSION OF PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT. (a) Unless SECTION 6.3 shall be applicable, upon the occurrence of a Payment Default, then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of the Notes or on account of the purchase or redemption or other acquisition of Notes unless and until such Payment Default shall have been cured or waived in writing or shall have ceased to exist or such Senior Indebtedness shall have been discharged or paid in full in cash or cash equivalents, after which the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. (b) Unless SECTION 6.3 shall be applicable, upon (1) the occurrence of a Non-payment Default and (2) receipt by the Company or the Holders of the Notes from the representative of holders of such any Senior Indebtedness of written notice of such occurrence, then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of the Notes or on account of the purchase or redemption or other acquisition of the Notes for a period ("PAYMENT BLOCKAGE PERIOD") commencing on the earlier of the date of receipt by the Company or the date of receipt by the Holders of the Notes of such notice from such representative unless and until (subject to any blockage of payments that may then be in effect under paragraph (a) of this Section) (X) more than 179 days shall have elapsed since receipt of such written notice by the Company or the Holders of the Notes, whichever was earlier, (Y) such Non-payment Default shall have been cured or waived in writing or shall have ceased to exist or such Designated Senior Indebtedness shall have been discharged or (Z) such Payment Blockage Period shall have been terminated by written notice to the Company or the Holders of the Notes from such representative initiating such Payment Blockage Period, after which, in the case of clause (x), (y) or (z), the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. Notwithstanding any other provision of this SECTION 6, only one Payment Blockage Period may be commenced within any consecutive 366-day period, and no Non-payment Default with respect to Senior Indebtedness which existed or was continuing on the date of the commencement of any Payment Blockage Period initiated by or behalf of such Senior Indebtedness shall be, or be made, the basis for the commencement of a second Payment Blockage Period whether or not within a period of 366 consecutive days unless such event of default shall have been cured or waived for a period of not less than 60 consecutive days subsequent to the commencement of such initial Payment Blockage Period (it being acknowledged that any subsequent action, or any breach of any financial covenant for a period commencing after the date of commencement of such Payment Blockage Period, that, in either case, would give rise to a Non-payment Default pursuant to any provision under which a Non-payment Default previously existed or was continuing shall constitute a new Non-payment Default for this purpose). In no event will a Payment Blockage Period extend beyond 183 days from the date of the receipt by the Holders of the Notes of the notice and there must be a 183-consecutive-day period in any 366-day period during which no Payment Blockage Period is in effect. (c) In the event that, notwithstanding the foregoing, the Company shall make any payment to the Holder of any Note prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to the Company. . PAYMENT PERMITTED IF NO DEFAULT. Nothing contained in this SECTION 6 or elsewhere in any of the Notes shall prevent the Company, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshalling of assets and liabilities of the Company referred to in SECTION 6.3 or under the conditions described in SECTION 6.4, from making payments at any time of principal of (and premium, if any, on) or interest on the Notes. . SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject to the payment in full in cash or cash equivalents of all Senior Indebtedness, the Holders of the Notes shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of (and premium, if any, on) and interest on the Notes shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holders of the Notes would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders of the Notes, shall, as among the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Notes, deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. . PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Notes on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Section or elsewhere in the Securities Purchase Agreement or the Notes is intended to or shall (a) impair, as between the Company and the Holders of the Notes, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Notes the principal of (and premium, if any, on) and interest on the Notes as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Notes and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Holder of any Note from exercising all remedies otherwise permitted by applicable law upon Default under this Note, subject to the rights, if any, under this SECTION 6 of the holders of Senior Indebtedness. . NO WAIVER OF SUBORDINATION PROVISIONS. (a) No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non- compliance by the Company with the terms, provisions and covenants of this Note, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without in any way limiting the generality of paragraph (a) of this SECTION 6.8, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holders of the Notes, without incurring responsibility to the Holders of the Notes and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Notes to the holders of Senior Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (2) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (3) release any person liable in any manner for the collection of Senior Indebtedness; and (4) exercise or refrain from exercising any rights against the Company and any other person. . NOTICE TO NOTE HOLDERS. The Company shall give prompt written notice to the Holders of the Notes of any fact known to the Company which would prohibit the making of any payment to the Holders of the Notes in respect of the Notes. Notwithstanding the provisions of this Section or any other provision of this Note, the Holders shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to the Holders in respect of the Notes, unless and until the Holders of the Notes shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Holders shall be entitled in all respects to assume that no such facts exist; PROVIDED, HOWEVER, that, if the Holders shall not have received the notice provided for in this SECTION 6.9 prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any, on) or interest on any Note), then, anything herein contained to the contrary notwithstanding, the Holders shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by them on such date. . RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT. Upon any payment or distribution of assets of the Company referred to in this SECTION 6, the Holders of the Notes shall be entitled to rely conclusively upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Holders of Notes, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section. . NO SUSPENSION OF REMEDIES. Nothing contained in this SECTION 6 shall limit the right of the Holders of Notes to take any action to accelerate the maturity of the Notes pursuant to SECTION 4.2 or to pursue any rights or remedies hereunder or under applicable law. SECTION . DEFINITIONS. As used herein, the following terms have the respective meanings set forth below: "Applicable Rate" means, through the Change Date, 12.5% per annum and, after the Change Date, 14.0% per annum. "Change Date" means the date immediately preceding the closing date at which the Anticipated Financing is consummated, if and only if the Stage II Closing is consummated on or before such closing date of the Anticipated Financing. "Common Shares" means the shares of Common Stock, no par value, of the Company. "First Payment Date" means (i) if the Change Date occurs, then March 1, 1999, or at the Payee's option such later date as Payee may elect, or (ii) otherwise March 1, 1996. "Overdue Rate" means, with respect to any interest accrual period or portion thereof, the Applicable Rate then in effect with respect to such period or portion, plus 2.0% per annum. "Senior Notes" means the notes of the Company evidencing the Anticipated Financing issued pursuant to the Senior Notes Indenture. "Senior Notes Indenture" means the indenture between the Company and trustee named therein, governing the Anticipated Financing. SECTION . MISCELLANEOUS. . NOTICES. All notices, advices and communications to be given or otherwise made to the Company or any Holder shall be deemed given upon receipt thereof if contained in a written instrument and delivered in person, sent by overnight courier, sent by first class registered or certified mail, postage prepaid and return receipt requested, or sent by facsimile telecopier, confirmed by mail, addressed to such party at the address or telecopier number set forth below or at such other address or telecopier number as may hereafter be designated in writing by the addressee to the addressor listing all parties: (a) if to BANX Partnership (so long as BANX Partnership is the Holder of this Note): to Alexander Good, Bell Atlantic Corporation, 1310 North Court House Road, Arlington, VA 22201; Thomas R. McKeough, Bell Atlantic Corporation, 1717 Arch Street, Philadelphia, PA 19103; and Philip R. Marx, Bell Atlantic Corporation, 1717 Arch Street, Philadelphia, PA 19103, and NYNEX Corporation, 1113 Westchester Avenue, White Plains, NY 10604- 3510, Attention: Chief Financial Officer and to such address Attention: General Counsel, (b) if to any other Holder of this Note: to it at its address listed on the books for the registration and registration of transfer of the Notes to be maintained by the Company pursuant to SECTION 2.1 hereof, and (c) if to the Company: CAI Wireless Systems, Inc., 12 Corporate Woods Boulevard, Suite 102, Albany, NY 12211, Attention: President, with a required copy to Day, Berry & Howard, One Canterbury Green, Stamford, Connecticut 06901- 2047, Attention Sabino Rodriguez, III, Esq. Whenever pursuant to this Note, notice is required to be given to any or all of the Holders of the Notes, such requirement shall be satisfied if such notice is given in the manner prescribed to the persons last known by the Company to be a Holder of the Note, entitled to such notice, at the addresses of such persons last known to the Company. . SEVERABILITY. If any term, provision, covenant or restriction of this Note is held by a court or a governmental agency of competent jurisdiction to be invalid, void or unenforceable, or to cause any party to be in violation of any applicable provision of law, the remainder of the terms, provisions, covenants and restrictions of this Note shall remain in full force and effect and in no way shall be affected, impaired or invalidated. . CAPTIONS. The descriptive headings of the various paragraphs or parts of this Note are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. . AMENDMENT AND WAIVER. This Note may only be amended or supplemented, and the observance of any term hereof may only be waived, in accordance with SECTION 9 of the Securities Purchase Agreement. . WAIVER OF PRESENTMENT, ETC. The Company hereby waives presentment, demand for payment, notice of dishonor or acceleration, protest and notice of protest, and any and all other notices or demand in connection with the delivery, acceptance, performance, default or enforcement of this Note, excepting any notice requirement set forth in the Securities Purchase Agreement. No failure on the part of the Holder of this Note in exercising any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or remedy preclude any other or future exercise thereof or the exercise of any other right or remedy hereunder. No modification or waiver of any provision of this Note, nor any departure by the Company therefrom, shall in any event be effective unless the same shall be in writing, in accordance with the Securities Purchase Agreement, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose given. . CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE COMPANY ARISING OUT OF OR RELATING TO THIS NOTE, ANY NOTE, WARRANT OR OTHER LOAN DOCUMENT OR ANY OBLIGATION MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK AND BY EXECUTION AND DELIVERY OF THIS NOTE, THE COMPANY ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS NOTE, THE SECURITIES PURCHASE AGREEMENT, SUCH OTHER LOAN DOCUMENT OR SUCH OBLIGATION. IF ANY AGENT APPOINTED BY THE COMPANY REFUSES TO ACCEPT SERVICE, THE COMPANY HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF ANY PURCHASER TO BRING PROCEEDINGS AGAINST THE COMPANY IN THE COURTS OF ANY OTHER JURISDICTION. . WAIVER OF JURY TRIAL. THE COMPANY AND EACH HOLDER OF THIS NOTE HEREBY AGREES TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE, ANY OF THE LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION AND THE PURCHASER/COMPANY RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Note, and that each will continue to rely on the waiver in their related future dealings. Each party hereto further warrants and represents that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, REPLACEMENTS, SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOAN. In the event of litigation, a copy of this Note may be filed as a written consent to a trial by the court. IN WITNESS WHEREOF, the undersigned, by its duly authorized officer, has executed this Term Note as of the date first above written. CAI WIRELESS SYSTEMS, INC. By: /S/ JARED ABBRUZZESE As its: Chairman and Chief Executive Officer EX-4 3 }7 {EXHIBIT 4.10 THIS NOTE AND THE SECURITIES TO BE ISSUED UPON CONVERSION HEREOF (I) HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR RESALE IN CONNECTION WITH THE DISTRIBUTION HEREOF, AND (II) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (B) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE SECURITIES ACT (OR ANY SIMILAR RULE UNDER THE SECURITIES ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (C) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT REGISTRATION UNDER THE SECURITIES ACT IS NOT REQUIRED. No. SB-4 TERM NOTE DUE MAY 9, 2005 $15,000,000.00 May 9, 1995 FOR VALUE RECEIVED, CAI WIRELESS SYSTEMS, INC., a Connecticut corporation (hereinafter referred to as the "COMPANY"), hereby promises to pay to NYNEX MMDS HOLDING COMPANY, a Delaware corporation, having an address at 1113 Westchester Ave., White Plains, NY 10605 (the "PAYEE"), or registered assigns, on or before May 9, 2005, the principal sum of Fifteen Million Dollars ($15,000,000.00), together with interest thereon at the rate provided herein, and payable on the terms set forth below. This Note is one of an issue of Term Notes due May 9, 2005 of the Company in an aggregate principal amount of $30,000,000 (collectively, the "NOTES") issued pursuant to a certain Securities Purchase Agreement, dated as of March 28, 1995 between the Company and the Payee (the "SECURITIES PURCHASE AGREEMENT"). Through the Change Date (as defined in SECTION 7 hereof), but not after such date, this Note is secured by, and the performance by the Company of its obligations hereunder is guaranteed by, a Security Agreement and Pledge Agreement, of even date herewith, between the Company and the Payee, and those certain Guarantee Agreements and Security Agreements, of even date herewith, between the Payee and certain subsidiaries of the Company. Each registered holder ("HOLDER") of this Note will be deemed, by its acceptance hereof, (I) to have agreed to the confidentiality provisions set forth in SECTION 12 of the Securities Purchase Agreement and (II) to have made the representation set forth in SECTION 5.2 of the Securities Purchase Agreement. Certain capitalized terms used in this Note are defined in SECTION 7 hereof. Other capitalized terms, used in this Note but not defined herein, shall have the meanings ascribed to them in the Securities Purchase Agreement. Without limiting the generality of the foregoing, for purposes of this Note, the term "SUBSIDIARY" shall include, without limitation, any Acquired Company effective, except as provided in Section 3.2(ad) hereof, as of the time such Acquired Company was acquired by the Company. SECTION . PAYMENT OF PRINCIPAL AND INTEREST. . PRINCIPAL. The outstanding principal balance of this Note shall be paid in full on the tenth anniversary hereof. . INTEREST. () Interest shall accrue semi-annually at the Applicable Rate on the unpaid principal sum due hereunder and previous unpaid accruals of interest. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. Interest shall be paid semi-annually on March 1 and September 1 of each year, commencing on the First Payment Date. () This Note shall bear interest following the occurrence and during the continuance of any Event of Default on the unpaid principal amount, including any overdue payment or prepayment of principal and premium, if any, and on any overdue installment of interest at the Overdue Rate. If the Company shall have paid or agreed to pay any interest or premium on this Note pursuant to the terms hereof in excess of that permitted by law, then it is the express intent of the Company and the Holder that all excess amounts previously paid or to be paid by the Company be applied to reduce the principal balance of this Note, and the provisions hereof immediately be deemed reformed and the amounts thereafter collectible hereunder reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder. . PREPAYMENTS. () The Company shall, without notice, prepay, without premium, on the 180th day after the payment in full of all outstanding obligations under the Senior Notes, this Note with all interest accrued on the principal amount of this Note, including the amount to be prepaid. Notwithstanding anything contained in this SECTION 1.3, on the maturity date of this Note, the aggregate outstanding principal amount of this Note, together with all interest accrued thereon, shall be due and payable. () If there is more than one Note outstanding, the aggregate principal amount of the prepayment of Notes shall be allocated among the Holders of the Notes then outstanding and being so prepaid in proportion, as nearly as practicable, to the respective unpaid principal amounts of such Notes, with adjustments, to the extent practicable, to compensate for any prior prepayments not made in exactly such proportion. () Except as otherwise provided in SECTION 1.3(A), there shall be no prepayment, in whole or in part, of the principal amount of all or any of the Notes. . MANNER OF PAYMENT. All payments of principal and interest shall be made in lawful money of the United States of America at the time of any such payment, at the election of the Holder from time to time, either by wire transfer of immediately available funds to the account designated by the Holder for such purpose from time to time, or by check mailed to the Holder at the address designated by the Holder for such purpose from time to time. . PAYMENT ON NON- BUSINESS DAYS. Whenever any payment to be made on the Notes shall be due on a Saturday, Sunday or a public holiday under the laws of the State of New York, such payment may be made, together with interest thereon at the interest rate provided for in SECTION 1.2(A) hereof, on the next succeeding day on which banks in New York City are open for business with the same effect as if made on the nominal date for payment. . MANDATORY REDEMPTION ON CHANGE OF CONTROL. Upon the occurrence of a Change of Control, the Holder will have the right to require the Company to repurchase all or any portion of this Note at a purchase price equal to 101% (or such higher percentage as shall then be applicable to any right of the holders of the Senior Notes or the holders of any other Indebtedness to put such Notes or Indebtedness or any part thereof to the Company upon a Change in Control as defined in the Senior Notes or the Senior Notes Indenture or upon the occurrence of any similar event pursuant to the terms of such other Indebtedness) of the unpaid principal amount of this Note plus accrued interest hereon. Notwithstanding the foregoing, for so long as the Senior Notes are outstanding, in no event shall the Company's obligation to make such redemption arise earlier than the date which is 15 days after the date the Company is obligated to purchase Senior Notes pursuant to the Senior Notes Indenture following a Change of Control (as defined therein). () "CHANGE OF CONTROL" during the period that any Senior Notes are outstanding shall have the meaning ascribed to such term in the Senior Notes Indenture, and during any period that no Senior Notes are outstanding shall mean the occurrence of one or more of the following events: () any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of assets of the Company or any Subsidiary to any person, other than to the Purchaser or any Affiliate thereof, which assets are either material to the ownership and operation of a Wireless Cable Television System which is subject to the Business Relationship Agreement or which have a fair market value at the time of sale in excess of 30% of the fair market value of the Company and the Subsidiaries; or () during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election to such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office, excluding for all purposes of this subsection (ii) any directors elected by the Senior Preferred Shares or the Voting Preferred Shares; or () any person or group of related persons for purposes of Section 13(d) of the Exchange Act or any Subsidiary (a "GROUP"), excluding the Purchaser, The Corotoman Company L.L.C. and their respective Affiliates (each a "PERMITTED PURCHASER"), either (1) is or becomes, by purchase, tender offer, exchange offer, open market purchases, privately negotiated purchases or otherwise, the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not applicable, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or after the passage of time only), directly or indirectly, of more than 50% of the total then outstanding Voting Stock of the Company (for the purpose of this clause (iii), such person or Group will be deemed to "beneficially own" (determined as aforesaid) any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") if such person or Group "beneficially owns," directly or indirectly, a majority of the voting power of the Voting Stock of such parent corporation), or (2) otherwise has the ability to elect, directly or indirectly, a majority of the members of the Board of the Company; or () the Company consolidates with or merges into another person (other than the Purchaser or an Affiliate thereof) and the stockholders immediately prior to such merger or consolidation, or a Permitted Purchaser and the stockholders immediately prior to such merger or consolidation, hold less than a majority of the Voting Stock of the resulting entity; or () any person or Group, excluding the Purchaser and its Affiliates, either (x) is or becomes, by purchase, tender offer, exchange offer, open market purchases, privately negotiated purchases or otherwise, the "beneficial owner" of more of the outstanding Voting Stock than The Corotoman Company L.L.C. and its Affiliates or (y) commences, within the meaning of Rule 14d-1 under the Exchange Act, a tender offer with respect to more than 30% of the total then outstanding Voting Stock of the Company. () "VOTING STOCK" means, with respect to any person, securities of any class or classes of capital stock in such person entitling the holders thereof (whether at all times or only so long as no senior class of stock has voting power by reason of any contingency) to vote in the election of members of the Board of such person. SECTION . REGISTRATION, TRANSFER AND REPLACEMENT. . REGISTRATION. The Company shall maintain at its principal office a register of the Notes and shall record therein the names and addresses of the Holders of the Notes, the address to which notices are to be sent and the address to which payments are to be made as designated by the Holder if other than the address of the Holder, and the particulars of all transfers, exchanges and replacements of Notes. No transfer of a Note shall be valid unless the Holder or his or its duly appointed attorney requests such transfer to be made on such register, upon surrender thereof for exchange as hereinafter provided, accompanied by an instrument in writing, in form and execution reasonably satisfactory to the Company. Each Note issued hereunder, whether originally or upon transfer, exchange or replacement of a Note, shall be registered on the date of execution thereof by the Company. The Holder of a Note shall be that person or entity in whose name the Note has been so registered by the Company. A Holder shall be deemed the owner of a Note for all purposes, and the Company shall not be affected by any notice to the contrary. . TRANSFER AND EXCHANGE. The Holder of any Note or Notes may, prior to maturity or redemption thereof, surrender such Note or Notes at the principal office of the Company for transfer or exchange. Within a reasonable time after notice to the Company from a Holder of its intention to make such exchange and without expense (other than applicable transfer taxes, if any) to such Holder, the Company shall issue in exchange therefor another Note or Notes dated the date to which interest has been paid on, and for the unpaid principal amount of, the Note or Notes so surrendered, containing the same provisions and subject to the same terms and conditions as the Note or Notes so surrendered; provided, however, that unless the transferee is an Affiliate of the Purchaser, the new Note or Notes shall omit SECTION 3.2 hereof. Subject to the restrictions on transfer set forth in Section 2.1 hereof, each new Note shall be made payable to such person or entity, as the Holder of such surrendered Note or Notes may designate. Notes issued upon any transfer or exchange shall be only in authorized denominations, which shall be $1,000,000 and integral multiples of $500,000 in excess thereof or, in the event of partial redemption by the Company of any Notes or partial conversion of such Notes pursuant to SECTION 5 hereof or the surrender of such Notes in connection with the exercise of the Warrants, such lesser amount as shall constitute the entire remaining principal amount of such Note. . REPLACEMENT. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Note and, if requested by the Company in the case of any such loss, theft or destruction, upon delivery of an indemnity bond or other agreement or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Note, the Company will issue a new Note, of like tenor, in the amount of the unpaid principal of such Note, and dated the date to which interest has been paid, in lieu of such lost, stolen, destroyed or mutilated Note. SECTION . COVENANTS. . COVENANT EFFECTIVE DATES. Through the period ending on and including the earlier of (i) the Change Date or (ii) the date on which the Holder receives final payment of all amounts payable under this Note, the Company and its Subsidiaries shall comply with all of the covenants and agreements set forth in SECTION 3.2. If the Change Date occurs, then the Company and its Subsidiaries shall no longer be bound, with respect to the period following the Change Date, by their covenants and agreements set forth in SECTION 3.2. Immediately after the Change Date, the Company and its Subsidiaries shall become bound to perform, on behalf of the Holders, all of their covenants and agreements (the "COVENANTS") contained in the Senior Notes Indenture governing, and the Senior Notes evidencing, the Anticipated Financing, and shall comply therewith as they may be amended, modified, supplemented or replaced after the Change Date with the prior written approval of the Required Holders. If the Change Date has occurred and thereafter the Senior Notes are repaid in full at any time while any Note remains outstanding, the Covenants as in effect immediately prior to such termination shall be deemed to be incorporated herein by reference and shall continue in effect for all purposes hereof. . INITIAL COVENANTS. Subject to SECTION 3.1, so long as any Notes are held by the Purchaser or an Affiliate thereof or a successor to any of the foregoing (the "PURCHASER GROUP"), the Company shall comply with the following covenants unless its first obtains the approval (by vote or written consent) of the Holders of a majority of the then outstanding Stage I Warrants, Stage II Warrants, Senior Preferred Stock and Voting Preferred Stock (voting together as one class on the basis of the number of Voting Preferred Shares for or into which each such security is then exercisable or convertible) held by the Purchaser Group (a "Purchaser Group Approval"). Notwithstanding the foregoing, the parties intend that no provision of this Section 3.2 shall operate to limit or impair the Company's full responsibility for and control of the FCC Licenses and its operations conducted pursuant to those Licenses, if such provision, as so applied, shall violate applicable law. () MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS. The Company shall, and shall cause each of its Subsidiaries to, (i) at all times preserve and keep in full force and effect such entity's corporate or partnership existence, as the case may be, and rights and franchises material to such entity's business and (ii) comply at all times with the provisions of all franchises, permits, licenses or other similar authorizations relating to such entity's business, including, without limitation, the FCC Licenses, Channel Leases and any obligations or agreements with respect to signal interference, certifications and permits, and all other material agreements, licenses and sublicenses, leases and subleases to which it is a party, and will suffer no loss or forfeiture thereof or thereunder except for losses or forfeitures which in the aggregate would not have a Material Adverse Effect. () MAINTENANCE OF BUSINESS RELATIONSHIPS. The Company shall, and shall cause each of its Subsidiaries to, maintain and preserve its relationships with equipment vendors, programmers, lessors (including without limitation MMDS, MDS, POFS and ITFS lessors and lessors of headend and antennae sites), licensors and others having business relationships with it except for losses or replacements of relationships which individually or in the aggregate would not have a Material Adverse Effect. () MAINTENANCE OF PROPERTIES. The Company shall, and shall cause each of its Subsidiaries to, maintain and keep, or cause to be maintained and kept, their respective properties (including without limitation, intellectual property and properties acquired in accordance with the terms of the Business Plan or in accordance with the Loan Documents) in good repair, working order and condition (other than ordinary wear and tear), and from time to time shall make or cause to be made all appropriate repairs, renewals and replacements thereof, so that the business carried on in connection therewith may be properly conducted at all times, except where the failure to do so would not have a Material Adverse Effect. () MAINTENANCE OF LICENSES AND OTHER MATERIAL AGREEMENTS. The Company shall, and shall cause each of its Subsidiaries to, use its best efforts to keep in full force and effect all of the FCC Licenses, Channel Leases, any obligations or agreements with respect to signal interference, certifications and permits, and all other material agreements, licenses and sublicenses, leases and subleases to which it or any of the Subsidiaries is a party or to which it or any of the Subsidiaries shall become a party hereafter except for losses thereof which individually or in the aggregate would not have a Material Adverse Effect. The foregoing notwithstanding, the Company shall, and shall cause each of its Subsidiaries to, keep in full force and effect sufficient FCC Licenses and Channel Leases in each Wireless Distribution System covered by the Business Relationship Agreement to comply with the obligations of the Company under the Business Relationship Agreement. () USE OF PROCEEDS. Proceeds advanced pursuant to the Purchase Agreement and pursuant to the Anticipated Financing shall be used only as expressly provided by Section 1.5(a) and 1.5(b) of the Purchase Agreement or, in respect of the Anticipated Financing, as provided in the Business Plan. () PERFORMANCE OF LOAN DOCUMENTS AND ANTICIPATED FINANCING DOCUMENTS. The Company shall, and shall cause each of its Subsidiaries to, duly and punctually perform, pay and discharge or cause to be performed, paid or discharged, all of their respective obligations, as defined herein, of every nature arising or owed under the Loan Documents and under the documents related to the Anticipated Financing, whether absolute or contingent. The Company shall comply with each of the covenants set forth in the documents related to the Anticipated Financing (without regard to any waivers or consents obtained in respect thereof from the holders of the notes issued in the Anticipated Financing). () COMPLIANCE WITH LAW. The Company shall, and shall cause each of its Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations, orders or ordinances to which each of them is or will be subject, including, without limitation, the Communications Act, the Copyright Act and all Environmental Laws, and shall obtain and maintain in effect at all times all licenses, certificates, permits, franchises and other governmental or other authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, including, without limitation, all FCC Licenses, Channel Leases and obligations or agreements with respect to signal interference, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. () COMPLIANCE WITH BUSINESS PLAN AND BUSINESS RELATIONSHIP AGREEMENT. The Company shall, and shall cause each of the Subsidiaries to, use its best efforts to achieve the build-out of the Wireless Distribution Systems contemplated by the Business Plan, in each case subject to the availability of financing and the anticipated development of certain technology, and, except as expressly permitted hereunder, shall not enter into any material transaction which is not contemplated by the Business Plan or the Loan Documents. The Company shall, and shall cause each of its Subsidiaries to, comply in all respects with the Business Relationship Agreement. () INSURANCE. The Company shall, and shall cause each of its Subsidiaries to, maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co- insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities engaged in the same or a similar business and similarly situated. The Company shall maintain key- person insurance on the life of Jared E. Abbruzzese in the amount of $2,000,000, which policy names the Company as the owner and sole beneficiary thereof. () PAYMENT OF TAXES AND CLAIMS; CONSOLIDATION. () The Company shall, and shall cause each of the Subsidiaries to, timely file all Tax Returns required to be filed in any jurisdiction and to pay and discharge all Taxes shown to be due and payable on such returns and all other Taxes imposed on them or any of their properties, assets (wherever used herein, the term "ASSETS" includes without limitation the properties, licenses, permits, franchises, stock of Subsidiaries and contract rights of the Company and its Subsidiaries), income or franchises, to the extent such Taxes have become due and payable and before they have become delinquent; and to pay and discharge all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any of their respective Subsidiaries, PROVIDED that the Company or any of the Subsidiaries need not pay any such Tax or claim if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or such Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such Taxes and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect. () The Company shall not, and shall not permit any of the Subsidiaries to, file or consent to the filing of any consolidated or combined income tax return with any Person (other than the Company or any of the Subsidiaries). () EMPLOYEE BENEFIT PLANS. () The Company shall, and shall cause each ERISA Affiliate to, () comply in all material respects with the provisions of ERISA to the extent applicable to any Benefit Plan maintained by it and cause all Benefit Plans maintained by it to satisfy the conditions under the Code for tax qualification of all such plans intended to be tax qualified; and () avoid () any material accumulated funding deficiency (within the meaning of ERISA '302 and Code '412(a)) (whether or not waived); (B) any act or omission on the basis of which it or an ERISA Affiliate might incur a material liability to the PBGC (other than for the payment of required premiums) or to a trust established under former ERISA '4049; (C) any transaction with a principal purpose described in ERISA '4069; and (D) any act or omission that might result in the assessment by any Multiemployer Plan of withdrawal liability against the Company or any ERISA Affiliate, but only to the extent that the liability arising from a failure to comply with any covenant set forth in (i) or (ii) could reasonably be expected to result in a liability to it or a Subsidiary or an ERISA Affiliate for any one such event in excess of $100,000; provided however that this covenant will not apply to the employee benefit plans assumed by the Company or a Subsidiary pursuant to any acquisition contemplated by the Loan Documents until the 120th day after such acquisition is completed. () The Company shall not, directly or indirectly, and shall not permit its Subsidiaries or any ERISA Affiliate to directly or indirectly by reason of an amendment or amendments to, or the adoption of, one or more Benefit Plans subject to Title IV or ERISA, permit the present value of all benefit liabilities, as defined in Title IV of ERISA (using the actuarial assumptions utilized by the PBGC upon termination of a plan), to increase by more than $100,000; PROVIDED that this limitation shall not be applicable to the extent that the fair market value of assets allocable to such benefits, all determined as of the most recent valuation date for each such Benefit Plan, is in excess of the benefit liabilities, or to increase to the extent security must be provided to any Benefit Plan under Section 401(a)(29) of the Code. Neither the Company nor any of its Subsidiaries shall establish or become obligated to any new Retiree Welfare Plan, or modify any existing Retiree Welfare Plan, which could result in an increase in annual cost, or could result in an annual increase in liability to the Company, in either case by more than $50,000. Neither the Company nor any of its Subsidiaries shall establish or become obligated to any new unfunded Benefit Plan, or modify any existing unfunded Benefit Plan, without the prior written approval by the Holder. The Company shall not, directly or indirectly, and shall not permit its Subsidiaries or any ERISA Affiliate to (i) satisfy any liability under any Benefit Plan by purchasing annuities from an insurance company or (ii) invest the assets of any Benefit Plan with an insurance company, unless, in each case, such insurance company is rated AA by Standard & Poor's Corporation and the equivalent by each other nationally recognized rating agency at the time of the investment. () With respect to other than a Multiemployer Plan, for each Benefit Plan hereafter adopted or maintained by the Company, any of its Subsidiaries or any other ERISA Affiliate and which is intended to be qualified under Section 401(a) of the Code, the Company shall (i) seek, or cause its Subsidiaries or other ERISA Affiliates to seek, and receive determination letters from the IRS to the effect that such Benefit Plan is qualified within the meaning of Section 401(a) of the Code; and (ii) from and after the adoption of any such Benefit Plan, cause such plan to be qualified within the meaning of Section 401(a) of the Code and to be administered in all material respects in accordance with the requirements of ERISA and Section 401(a) of the Code. () With respect to each Benefit Plan hereafter adopted or maintained by the Company, any of its Subsidiaries or any other ERISA Affiliate and which is a welfare plan within the meaning of Section 3(1) of ERISA, the Company shall comply, or cause its Subsidiaries or other ERISA Affiliates to comply, with the notice and continuation coverage requirements of Section 4980B of the Code and the regulations thereunder to the extent noncompliance could result in a material liability. () The foregoing notwithstanding, the provisions of this SECTION 3.2(K) shall not apply to an Acquired Company for a period of six months from the time of its acquisition by the Company or a Subsidiary, if information disclosed by such Acquired Company to the Company or a Subsidiary on a schedule to its Acquisition Documents indicates that such Acquired Company would, at the time of its acquisition by the Company or a Subsidiary, be in violation of this SECTION 3.2(K), and such violation would not have a Material Adverse Effect. () ENVIRONMENTAL LAWS. The Company shall, and shall cause each of its Subsidiaries to, conduct its business so as to, and maintain a system to assure that it will, comply with all applicable Environmental Laws and shall promptly take corrective action to remedy any non-compliance with any Environmental Law, except for non- compliances which individually or in the aggregate would not have a Material Adverse Effect. () FURTHER ASSURANCES. From time to time, upon the request of the Holder, the Company shall, and shall cause each of the Subsidiaries to, make such filings and seek such consents, approvals, permits and waivers as may be necessary or desirable in the reasonable judgment of the Holder to permit the Holder to exercise all of its rights under each of the Loan Documents, including without limitation the right to exercise the Stage I Warrants and the Stage II Warrants, to convert the Notes, the Senior Preferred Shares and the Voting Preferred Shares and to enforce all the covenants thereunder and under the Business Relationship Agreement and the terms of the Voting Preferred Shares. () OTHER AFFIRMATIVE COVENANTS. The Company shall cause each of its Subsidiaries to comply with Section 2 of the Purchase Agreement and this SECTION 3.2. () SOLVENCY. The Company and the Subsidiaries shall, on a consolidated basis, and Atlantic on a standalone basis shall, be and remain Solvent. "SOLVENT" means that the aggregate present fair saleable value of such Person's assets is in excess of the total cost of its probable liability on its existing debts to third parties as they become absolute and matured, such Person has not incurred debts beyond its foreseeable ability to pay such debts as they mature, and such Person has capital adequate to conduct the business in which it is presently employed. () INDEBTEDNESS. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, remain liable, create, incur, assume, guaranty, or otherwise become or remain directly or indirectly liable with respect to any Indebtedness except: () the Company and the Subsidiaries may become and remain liable with respect to the Obligations; () the Company and the Subsidiaries may become and remain liable with respect to the Anticipated Financing created and incurred pursuant to Section 2.4 of the Purchase Agreement; () the Subsidiaries of the Company may become and remain liable with respect to intercompany indebtedness to the Company; PROVIDED that all such intercompany indebtedness is subordinated to the Obligations and evidenced by an intercompany note executed by such Subsidiary, all in form and substance satisfactory to the Holder; () the Company and the Subsidiaries may become and remain liable with respect to unsecured debt incurred in connection with the acquisition by the Company or a Subsidiary of any of the Acquired Companies in accordance with the terms of the Acquisition Agreements including, without limitation, debt that is assumed in such acquisition provided that such debt is prepayable at the option of the Company; () the Company and the Subsidiaries may become and remain liable with respect to contingent or deferred payment obligations incurred by the Company or any of its Subsidiaries in connection with the acquisition of assets by the Company or any of its Subsidiaries in the ordinary course of business, which payment obligation is secured solely by the acquired assets; () prior to January 1, 1997, the Company may incur the debt permitted pursuant to Section 2.7(c)(ii) of the Purchase Agreement; () if the Stage II Closing has been consummated, from January 1, 1997 until the earlier of July 1, 1997 or the first date that the quotient, expressed as a percentage, of the number of LOS Households in service areas with respect to which Purchaser's Affiliates have then exercised their options under Article 3 of the Business Relationship Agreement divided by the number of LOS Households in all service areas subject to the Business Relationship Agreement (the "BR PERCENTAGE") first exceeds 30%, the Company may incur Indebtedness in the aggregate principal amount of $25,000,000 to the extent necessary to fund operations or repay existing debt or used to effect acquisitions or capital expenditures (including acquisitions or capital expenditures in the form of Capital Leases) permitted under SECTION 3.2(AB) hereof; and () after July 1, 1997, the Company may incur Indebtedness in an aggregate amount equal to the product of (x) $250,000,000 (reduced by the principal amount of the Indebtedness incurred under subsection (h) hereof and then outstanding) at the time such Indebtedness is contemplated to be incurred by the Business Plan multiplied by (y) the difference between (i) 100% and (ii) the BR Percentage at the time the Indebtedness is incurred; PROVIDED that after the first date that the BR Percentage is equal to or greater than 75%, no Indebtedness may thereafter be incurred hereunder. The provisions of this SECTION 3.2(P) notwithstanding, the Company shall not permit Atlantic to directly or indirectly remain liable, create, incur, assume, guaranty or otherwise become or remain directly or indirectly liable with respect to any Indebtedness. () LIENS. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, maintain, create, incur, assume or permit to exist any lien on or with respect to any property or asset (including any document or instrument in respect of goods or accounts receivable) of the Company or any Subsidiary, whether now owned or hereafter acquired, or any income or profits therefrom, except: () liens granted pursuant to the Loan Documents or disclosed in Schedule 4.8 of the Purchase Agreement (as amended with respect to Acquired Companies pursuant to Section 2.10 of the Purchase Agreement) and not discharged as contemplated by Section 3.2(a) of the Purchase Agreement; () liens securing Indebtedness permitted under SECTIONS 3.2(P)(VII) AND (VIII) above; and () liens securing Indebtedness of acquired entities in acquisitions or for capital expenditures, in either case which are permitted under SECTION 3.2(AA) hereof. The provisions of this SECTION 3.2(Q) notwithstanding, the Company shall not permit, nor shall it permit any of the Subsidiaries, to directly or indirectly, maintain, create, incur, assume or permit to exist any lien on or with respect to (i) any property or assets of Atlantic or (ii) any assets which are used in connection with Wireless Distribution Systems subject to the Business Relationship Agreement; PROVIDED HOWEVER, that this clause (ii) shall not apply to liens securing Indebtedness issued pursuant to SECTION 3.2(P)(VIII) hereof. () RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES. The Company shall not, nor shall it permit any of the Subsidiaries to, alter its corporate, capital or legal structure or to enter into any merger, or consolidate, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, sub-lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired (other than in the ordinary course of business), or acquire by purchase, lease or otherwise, in one transaction or a series of transactions, all or any part of the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person (other than purchases or other acquisitions of inventory, leases, materials, property and equipment in the ordinary course of business) or agree to do any of the foregoing at any future time, except: () the Company and the Subsidiaries may make acquisitions and capital expenditures in the manner expressly provided in SECTION 3.2(AA) hereof; () the Company and the Subsidiaries may from time to time make sales or other dispositions of assets having a cumulative fair market value in any twelve-month period not in excess of the greater of $1,000,000 in the aggregate or 5% in the aggregate of Consolidated Operating Cash Flow (hereinafter defined) for the fiscal year preceding any such sale; PROVIDED that () the consideration received shall be an amount at least equal to the fair market value thereof and () at least 85% of the consideration received shall be cash; PROVIDED, HOWEVER, that in no event shall the Company sell assets (other than assets of DE MINIMIS value) which are used or useful in providing the services required to be provided by the Company or its Subsidiaries under the Business Relationship Agreement; and () the Company and its Subsidiaries may from time to time dispose of FCC Licenses and Channel Leases for equivalent rights in replacement FCC Licenses and Channel Leases in the same operating market and the swapping of assets for equivalent or better replacement assets shall be permitted if at least 20 days prior notice is given to the Holder (other than in the case of swaps involving assets of DE MINIMIS value). "CONSOLIDATED OPERATING CASH FLOW" shall mean, for any period, the sum (without duplication) of the amounts for such period of (i) net income, (ii) depreciation expense, (iii) amortization expense, (iv) taxes paid, and (v) service fees under the Loan Documents LESS (x) capital expenditures and (y) increases in net current assets (increases in inventory and accounts receivable LESS increases in accounts payable), determined on a consolidated basis for the Company and the Subsidiaries in accordance with GAAP. () RESTRICTED PAYMENTS. The Company shall not, nor shall it permit any Subsidiary to: () declare or pay any dividend or make any distribution (other than dividends required to be paid by the Series A Convertible Preferred Stock and 6% Series B Convertible Preferred Stock or on any shares the issuance of which has received a Purchaser Group Approval) on shares of the Company or any Subsidiary; () purchase, redeem or otherwise acquire or retire for value any stock of the Company or of any Subsidiary or any warrants, rights or options to acquire shares of any class of such stock; () make any principal payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment, scheduled sinking fund payment, or scheduled redemption payment, any Indebtedness that is subordinate or junior in right of payment to the Notes (other than any such Indebtedness owing to the Company or any wholly-owned Subsidiary of the Company); or () make any Investment (other than Investments permitted by SECTION 3.2(AA) or 3.2(AC) hereof). () ISSUANCE OF STOCK. The Company shall not, and shall not permit any Subsidiary to, authorize or issue any capital stock except for (i) shares issuable upon exercise of the Warrants and the Stage II Warrants or conversion of the Notes, the Senior Preferred Shares or the Voting Preferred Shares, (ii) shares issued in connection with the acquisition of the Acquired Companies as described in the Acquisition Agreements, (iii) Common Shares issued upon conversion of shares of Series A Convertible Preferred Stock and 6% Series B Convertible Preferred Stock or the exercise of options, warrants and other purchase rights disclosed on Schedule 4.3 to the Purchase Agreement, (iv) options and warrants with respect to Common Shares set forth on Schedule I hereto, (v) Common Shares issued in payment of the purchase price under acquisitions or to fund capital expenditures, in each case permitted pursuant to SECTION 3.2(AA) hereof, (vi) Common Shares issued pursuant to Section 2.7(c)(ii) of the Purchase Agreement, and (vii) Common Shares assumed to be issued when calculating Fully-Diluted Common Shares immediately after consummation of the Stage II Closing. () TRANSACTIONS WITH AFFILIATES. The Company shall not, nor shall it permit any of the Subsidiaries to, enter into, directly or indirectly, any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except (i) for transactions required by the ServiceCo Documents, and (ii) in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person that is not an Affiliate. () CERTAIN OTHER RESTRICTIONS. The Company shall not, nor shall it permit any of the Subsidiaries to, engage in any business or undertake any activities or otherwise do any act, that would subject the Holders, in the reasonable opinion of the Holders, to a risk of violation of the MFJ. In addition: () the Company will ensure that its directors and senior management, and the directors and senior management of the Subsidiaries, are aware of the terms of the MFJ and of what types or categories of businesses or activities might constitute a breach thereof. The Company shall procure all managers having significant responsibility for matters addressed in the MFJ to sign a certificate as described in Section V of the MFJ, or such other form as the Holders may reasonably require from time to time. The Company shall ensure that the Subsidiaries and any other company or other entity in which it or any Subsidiary holds an interest shall comply with the terms of this provision; and () the Company shall, and shall cause the Subsidiaries to, provide all necessary and reasonable assistance to the Holders in any MFJ proceeding or investigation, at the request of the Holders. It is the intention of the Company and the Holders that, in addition to any damages to which the Holders may be entitled for violation of this provision, this provision may be enforced by grant of injunctive relief to restrain any such breach by the Company or a Subsidiary. () CONTINGENT OBLIGATIONS. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, create or become or be liable with respect to any Contingent Obligation except: () Contingent Obligations of the Company and the Subsidiaries incurred pursuant to the Loan Documents; () Contingent Obligations resulting from endorsement of negotiable instruments for collection in the ordinary course of business; () Contingent Obligations in respect of operating leases; () intercompany Contingent Obligations with respect to the Company or any other Subsidiary; PROVIDED that all such intercompany Contingent Obligations are subordinated to the Obligations; () Contingent Obligations which the Company elects to treat as Indebtedness and which could then be incurred as Indebtedness under SECTION 3.2(P) hereof; () Contingent Obligations of the Company in respect of assisting the Subsidiaries in providing goods and services in the ordinary course of their respective businesses. For purposes of this SECTION 3.2(W), the term "CONTINGENT OBLIGATIONS" shall mean any direct or indirect liability, contingent or otherwise (1) with respect to any indebtedness, lease, dividend or other obligation of another if the primary purpose or intent thereof is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligations will be protected (in whole or in part) against loss in respect thereof and (2) with respect to any letter of credit. Contingent Obligations shall include with respect to the Company or any of the Subsidiaries, without limitation, () the direct or indirect guaranty, endorsement (otherwise than for the collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by the Company or any of the Subsidiaries, () the obligation to make take-or-pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, and () any liability of the Company or any of the Subsidiaries for the obligations of another through any agreement (contingent or otherwise) (x) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), and (y) to maintain the solvency or any balance sheet item, level of income or financial condition of another (except as expressly provided in this Note), if in the case of any agreement described under subclause (x) or (y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. () CONDUCT OF BUSINESS. Except as expressly provided in the Loan Documents, the Company shall not, nor shall it permit any of the Subsidiaries to, engage in any line of business except those described in the Company's Transition Report on Form 10-K for the period ended March 31, 1994 and the activities described in Note 2 to the Company's financial statements contained in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 which, in the sole judgment of the Purchaser Group, do not violate the MFJ; provided, however, that prior to the time that the BR Percentage first exceeds 30%, the Company and its Subsidiaries may engage in other business activities related to the use of the MMDS Spectrum if (i) they are in compliance with all of their obligations hereunder, under the other Loan Documents and the documents related to the Anticipated Financing, (ii) such activities will not have a material adverse effect on the ability of the Company and the Subsidiaries to perform their obligations under the Business Relationship Agreement, and (iii) the Company does not enter into any joint ventures, partnerships or other arrangement with a third Person to share the profits, losses and control of such activities with any person unless the Company has offered the Purchaser the right to enter into such arrangement on terms no less favorable to the Purchaser than those agreed to by the third person and in any event, the Company shall not enter into such an arrangement with any Person if such Person or any Affiliate of such Person is engaged in operating, providing or marketing wireline cable or local wireline telephone systems or services within the United States. () CREATION OF SUBSIDIARIES; DISPOSAL OF SUBSIDIARY STOCK. () The Company shall not, nor shall it permit any of the Subsidiaries to, create or acquire any interest in any Subsidiaries, unless such Subsidiary is wholly-owned by the Company or a wholly- owned Subsidiary or unless expressly permitted by clause (iii) of SECTION 3.2(X) hereof. () The Company shall not, and shall not permit any of the Subsidiaries to, directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock, partnership interests, or other equity securities (or warrants, rights or options to acquire shares or other equity securities) of any of the Subsidiaries, except (i) to the Company, another Subsidiary of the Company, (ii) to qualify directors if required by applicable law, (iii) as permitted by SECTION 3.2(S) hereof, (iv) as reflected on Schedule 4.2 to the Purchase Agreement, or (v) as collateral for these Notes. () AMENDMENTS TO CHARTER DOCUMENTS. Except as expressly provided in the Loan Documents, the Company shall not, nor shall it permit any of the Subsidiaries to, make any amendment to, or waive any of its material rights under, its articles or certificate of incorporation, as the case may be, its by-laws or other documents relating to its capital stock, or other equity interests of the Company or any of the Subsidiaries (other than non-material amendments which, in the aggregate, would not have a Material Adverse Effect and which would not adversely affect the rights of the holders of the Notes) without, in each case, obtaining the written consent of all Holders to such amendment or waiver. () ACQUISITIONS AND CAPITAL EXPENDITURES. The Company shall not, nor shall it permit any of its Subsidiaries to, incur any capital expenditures or acquire the capital stock or assets of any Person, except for capital expenditures reflected in the Business Plan; PROVIDED, HOWEVER, that, so long as no Default shall have occurred and be continuing under the Notes or Senior Preferred Shares, until the BR Percentage is at least 30%: () prior to July 1, 1997, the Company may make, in addition to those reflected in the Business Plan, capital expenditures for which the aggregate consideration to be paid does not exceed $20 million and acquisitions of businesses for which the aggregate value of the consideration paid and the liabilities assumed, in the aggregate, does not exceed $15 million, () after July 1, 1997, the Company may incur additional capital expenditures so long as the aggregate consideration to be paid therefor, including for capital expenditures made prior to July 1, 1997, does not exceed $35 million, and may make additional acquisitions so long as the aggregate value of the consideration paid for and the liabilities assumed in such acquisitions, in the aggregate and including acquisitions made prior to July 1, 1997, does not exceed $25 million. () SALE OR DISCOUNT OF RECEIVABLES. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, sell any of their notes or accounts receivable except solely in the ordinary course of business for the collection of delinquent accounts. () INVESTMENTS. The Company shall not, nor shall it permit any of the Subsidiaries to, make or permit to exist, any Investments, directly or indirectly, other than (a) marketable direct obligations of the United States of America which mature within 5 years from the date of issue or participations in marketable direct obligations of the United States of America acquired from domestic banks having total assets in excess of $500,000,000, (b) certificates of deposit and bankers' acceptances of domestic banks having total assets in excess of $500,000,000 and demand and time deposits in any bank, whether domestic or foreign, (c) securities commonly known as "commercial paper" issued by any company organized and existing under the laws of the United States of America or any state thereof which at the time of purchase have been rated and the ratings for which are not less than "P-1" if rated by Moody's, and not less than "A-1" if rated by Standard and Poor's, (d) written agreements under which domestic banks having total assets in excess of $500,000,000 sell and agree to repurchase marketable direct obligations of the United States of America, (e) money market funds backed by U.S. Obligations, (f) acquisitions of companies if such acquisition is permitted pursuant to SECTION 3.2(AA) hereof and such acquisition is of the entire interest in the equity of the acquired company, and (g) the Company's investment in ACTV, Inc. described in Schedule 4.13(6) to the Purchase Agreement. () ACQUIRED COMPANIES. The term "Subsidiaries" as used in the covenants contained in this SECTION 3.2 shall be deemed to include each Acquired Company from and after the date that the acquisition of such Acquired Company is consummated, except for the grace periods applicable thereto contained in this SECTION 3.2(AD). The following provisions of this SECTION 3.2 shall not apply to any Acquired Company until the end of the grace period after the date of such Acquired Company's acquisition by the Company set forth opposite the reference to such provision below; PROVIDED, HOWEVER, that (i) the failure of the Acquired Company to comply with such provisions immediately is due to circumstances existing at the time of consummation of the acquisition, (ii) the Company is using all reasonable and diligent efforts to bring such Acquired Company into compliance with such provisions, and (iii) such failure of such Acquired Company to comply with such provisions does not have a material adverse effect on the Company's ability to comply with its obligations under the Business Relationship Agreement: SECTION REFERENCE GRACE PERIOD 3.2(A)(II) 60 days 3.2(B) 60 days 3.2(C) 180 days 3.2(F) 60 days 3.2(G) 60 days 3.2(H)(last sentence only) 60 days 3.2(J) 60 days 3.2(X) 30 days () AMENDMENT OF SENIOR NOTE OR SENIOR NOTES INDENTURE. The Company shall not amend the Senior Notes or the Senior Notes Indenture without a prior Purchaser Group Approval of such amendment. SECTION . EVENTS OF DEFAULT. For purposes of this SECTION 4, the term "SUBSIDIARY" shall include Acquired Companies as of the time such Acquired Companies were acquired by the Company. . An "EVENT OF DEFAULT" shall exist if any of the following conditions or events shall occur and be continuing: () on or prior to the Change Date: () the Company defaults in the payment of any principal on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or () the Company defaults in the payment of any interest on any Note for more than ten calendar days after the same becomes due and payable; or () the Company defaults in the performance of or compliance with any covenant or agreement contained in SECTION 3.2 hereof except SUBSECTIONS 3.2(C), (F), (G), (M) AND (N) hereof or SECTION 6.2(B) OR (D) of the Securities Purchase Agreement, and such default remains unremedied for a period of 30 days; or () the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in subparagraphs (i), (ii) and (iii) of this SECTION 4.1(A)) or in the Securities Purchase Agreement and such default is not remedied within 30 days after the earlier of (X) a Responsible Officer obtaining actual knowledge of such default and (Y) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this subparagraph (a)(iv) of SECTION 4.1); or () any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in the Securities Purchase Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or () (X) the Company or any Subsidiary is, or would be with notice or the passage of time, in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $500,000 beyond any period of grace provided with respect thereto, or (Y) the Company or any Subsidiary is, or would be with notice or the passage of time, in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $500,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (Z) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (1) the Company or any Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $500,000 or (2) one or more Persons have the right to require the Company or any Subsidiary so to purchase or repay such Indebtedness; or () the Company or any Subsidiary (U) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (V) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (W) makes an assignment for the benefit of its creditors, (X) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (Y) is adjudicated as insolvent or to be liquidated, or (Z) takes corporate action for the purpose of any of the foregoing; or () a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Subsidiaries, or any such petition shall be filed against the Company or any of its Subsidiaries and such petition shall not be dismissed within 90 days; or () a final judgment or judgments for the payment of money aggregating in excess of $500,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 90 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or () if (U) any Benefit Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (V) a notice of intent to terminate any Benefit Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Benefit Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Benefit Plan may become a subject of any such proceedings, (W) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Benefit Plans, determined in accordance with Title IV of ERISA, shall exceed $500,000, (X) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (Y) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (Z) the Company or any Subsidiary establishes or amends any Benefit Plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (U) through (Z) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or () either the Anticipated Financing or the Stage II Closing shall not have been consummated before February 28, 1996; or () after the Change Date, if (i) any Default or Event of Default, as defined in the Senior Notes Indenture or the Senior Notes as in effect on the original issuance date thereof and without giving effect to any amendment, supplement or other modification thereof or waiver or consent thereunder, shall occur and be continuing (other than any Default or Event of Default occasioned solely due to the failure to pay interest on the Senior Notes unless such failure results in the acceleration of the Senior Notes), regardless of whether or not any Senior Notes are then outstanding, or (ii) the Company shall have failed to pay when due any principal of any Note when such principal becomes due and payable, at maturity, upon acceleration, redemption pursuant to a required offer to purchase or otherwise, or (iii) the Company shall have failed to pay interest on any Note when the same becomes due and payable and such failure continues for a period of 30 days. . ACCELERATION OF NOTES. () If, on or before the Change Date, an Event of Default with respect to the Company described in subparagraph (a)(vii) or (a)(viii) of SECTION 4.1 (other than an Event of Default described in clause (U) of subparagraph (a)(vii) or described in clause (Z) of subparagraph (a)(vii) by virtue of the fact that such clause encompasses clause (U) of subparagraph (a)(vii)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. () If, after the Change Date, an Event of Default with respect to the Company described in provisions of the Senior Notes or the Senior Notes Indenture which are comparable to subparagraph (a)(vii) or (a)(viii) of SECTION 4.1 (other than an Event of Default which is comparable to an event described in clause (U) of subparagraph (a)(vii) or described in clause (Z) of subparagraph (a)(vii) by virtue of the fact that such clause encompasses clause (U) of subparagraph (a)(vii)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. () If any other Event of Default has occurred and is continuing, the Required Holders may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. Upon any Notes becoming due and payable under this SECTION 4.2, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus all accrued and unpaid interest thereon, shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each Holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for). . OTHER REMEDIES. If any Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under SECTION 4.2, the Holder of any Note at the time outstanding may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. . RESCISSION. At any time after any Notes have been declared due and payable pursuant to paragraph (c) or (d) of SECTION 4.2, the Required Holders, by written notice to the Company, may rescind and annul any such declaration and its consequences if (A) the Company has paid all overdue interest on the Notes and all principal of any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and (to the extent permitted by applicable law) any overdue interest in respect of the Notes at the Default Rate, (B) all Events of Default other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to SECTION 9 of the Securities Purchase Agreement, and (C) no judgment or decree has been entered for the payment of any monies due pursuant to the Notes. No rescission and annulment under this SECTION 4.4 will extend to or affect any subsequent Event of Default or impair any right consequent thereon. . NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC. No course of dealing and no delay on the part of any Holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such Holder's rights, powers or remedies. No right, power or remedy conferred by this Note or by the Securities Purchase Agreement upon any Holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under SECTION 7 of the Securities Purchase Agreement, the Company will pay to the Holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this SECTION 4.5, including, without limitation, reasonable attorneys' fees, expenses and disbursements. SECTION . CONVERSION. This SECTION 5 shall become effective upon consummation of the Stage II Closing and shall remain effective thereafter, but only with respect to the period commencing at such time. . CONVERSION PRIVILEGE. Subject to and upon compliance with the provisions of this SECTION 5, at the option of the Holder during the period beginning upon consummation of the Stage II Closing and ending at 5:00 P.M. local time in New York, NY on the fifth anniversary of the Stage II Closing (the "CONVERSION PERIOD"), this Note or any portion of the principal amount due hereunder may, at any time and from time to time, be converted into fully paid and nonassessable shares of 14% Senior Preferred Stock of the Company ("SENIOR PREFERRED STOCK"), at the Conversion Price in effect at the date of conversion. The shares of Senior Preferred Stock issued or issuable upon conversion of the Notes are referred to herein as the "SENIOR PREFERRED SHARES." . MANNER OF EXERCISE OF CONVERSION PRIVILEGE. () In the sole discretion of the Holder, this Note may be converted in whole or in part, at any time and from time to time during the Conversion Period. To exercise the conversion privilege with respect to this Note in whole or in part, the Holder shall deliver to the Company at its principal office, during the Conversion Period, (i) this Note, and (ii) a written notice of such Holder's election to convert all or any part of this Note, which notice shall specify the amount of this Note to be so converted, the denominations of the share certificate or certificates desired and the name or names in which such certificates are to be registered. This Note or the portion thereof specified in such notice shall be deemed to have been converted immediately prior to the close of business on the date of receipt of such notice and such Note by the Company, even if the Company's stock transfer books are on that date closed. () Promptly after the conversion of all or any portion of this Note, the Company shall issue and deliver, at its expense, to the Holder, or to the nominee or nominees of such Holder, a certificate or certificates for the number of Senior Preferred Shares due on such conversion. Interest shall accrue on the unpaid principal amount of this Note converted to the date of conversion. In the case of a conversion of all or only a portion of the outstanding principal amount of this Note, the Company shall execute and deliver to the Holder (or its nominee or nominees), at the expense of the Company, a replacement note in a principal amount equal to the sum of the unconverted principal portion of such Note plus all accrued unpaid interest on such Note and dated and bearing interest from the date to which interest has been paid on such Note or dated the date of such Note if no interest has been paid thereon. . REGULATORY APPROVALS. The Company acknowledges that prior to exercising its rights to acquire Voting Preferred Shares hereunder and to acquiring the shareholder rights provided to holders of such Voting Preferred Shares, the Holder shall secure any regulatory approvals it deems necessary to effect such exercise and acquire and to assert such rights, including but not limited to the approval of the FCC. The Company shall cooperate (and shall cause its Affiliates and Subsidiaries to cooperate) with the Holder in applying for any necessary requests or applications for such approval, and shall immediately execute, on request of the Holder, all application forms and other documents requiring execution by the Company in connection therewith. . FRACTIONAL SHARES. The Company shall not be required to issue fractions of Senior Preferred Shares upon conversion of this Note. If any fraction of a share would, but for this Section, be issuable upon any conversion of this Note, in lieu of such fractional share the Company shall pay to the Holder or Holders, as the case may be, in cash, an amount equal to the fair market value of such fractional share. . CONVERSION PRICE. The Conversion Price at which Senior Preferred Shares shall be issuable upon the conversion of this Note shall initially be $10,000 for each Senior Preferred Share (subject to appropriate adjustment for stock splits, subdivisions, combinations, dividends or other similar transactions with respect to Senior Preferred Shares). SECTION . SUBORDINATION. This SECTION 6 shall become effective immediately after the Change Date and shall remain effective thereafter, but only with respect to the period commencing at such time. . DEFINITIONS. () "FEDERAL BANKRUPTCY CODE" means the Bankruptcy Act of Title 11 of the United States Code, as amended from time to time. () "NON-PAYMENT DEFAULT" means any event (other than a Payment Default) the occurrence of which entitles one or more persons to accelerate the maturity of, or would result in the acceleration of, any Senior Indebtedness. () "PAYMENT DEFAULT" means any default in the payment of principal of (or premium, if any, on) or interest on Senior Indebtedness when due. () "SENIOR INDEBTEDNESS" means (i) the principal of, premium, if any, and interest on the Senior Notes, and (II) all other Indebtedness of the Company for money borrowed the incurrence of which does not violate the Loan Documents and which is not expressly subordinated (as set forth in the terms of such Indebtedness) to the right of payment to any other Indebtedness of the Company, in each case including without limitation, all obligations of the Company, whether outstanding on the date hereof or hereafter created, incurred or assumed, under or in respect of the Senior Notes or such other Indebtedness, whether for principal, interest (including, without limitation, interest accruing after the filing of a petition initiating any proceeding under any state or federal bankruptcy law whether or not such interest is an allowable claim), reimbursement of amounts drawn under letters of credit issued or arranged for pursuant thereto, guarantees in respect thereof, and all charges, fees, expenses (including reasonable fees and expenses of counsel) and other amounts in respect of the Senior Notes or such other Indebtedness incurred by or owing to the holders of the Senior Notes or such other Indebtedness or their respective representative, agent or trustee. () "SUBORDINATED INDEBTEDNESS" means, with respect to the Company, Indebtedness of the Company which is expressly subordinated in right of payment to the Notes. . GENERAL. The Company covenants and agrees, and each Holder of this Note, by its acceptance hereof, likewise covenants and agrees, for the benefit of the holders, from time to time, of Senior Indebtedness that, to the extent and in the manner hereinafter set forth in this SECTION 6, the Notes, the indebtedness represented thereby and the payment of the principal of (and premium, if any, on) and interest on each Note are hereby expressly made subordinate and subject in right of payment as provided in this SECTION 6 to the prior payment in full in cash or cash equivalents of all Senior Indebtedness; PROVIDED, HOWEVER, that the Notes, the indebtedness represented thereby and the payment of the principal of (and premium, if any, on) and interest on the Notes in all respects shall rank prior to all future Subordinated Indebtedness and PARI PASSU with all Indebtedness of the Company other than Senior Indebtedness and Subordinated Indebtedness. . PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or its assets, or (b) any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshalling of assets or liabilities of the Company, then and in any such event (1) the holders of Senior Indebtedness shall be entitled to receive payment in full in cash or cash equivalents of all amounts due on or in respect of all Senior Indebtedness, or provision shall be made for such payment, before the Holders of the Notes are entitled to receive any payment or distribution of any kind or character on account of the Notes; and (2) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, by set-off or otherwise, to which the Holders of the Notes would be entitled but for the provisions of this SECTION 6 shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness held or represented by each, to the extent necessary to make payment in full in cash or cash equivalents of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and (3) in the event that, notwithstanding the foregoing provisions of this SECTION 6, the Holder of any Notes shall have received any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, in respect of the Notes before all Senior Indebtedness is paid in full or payment thereof provided for in cash or cash equivalents, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full in cash or cash equivalents, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. For purposes of this SECTION 6, the words "payment or distribution" shall not be deemed to include (X) any payment or distribution of securities of the Company or any other corporation authorized by an order or decree giving effect, and stating in such order or decree that effect is given, to the subordination of the Notes to the Senior Indebtedness and made by a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy, insolvency or other similar law, or (Y) securities of the Company or any other corporation provided for by a plan of reorganization or readjustment which are subordinated, to at least the same extent as the Notes, to the payment of all Senior Indebtedness then outstanding or to the payment of all securities issued in exchange therefor to the holders of Senior Indebtedness at the time outstanding. The consolidation of the Company with, or the merger of the Company into, another person, or the liquidation or dissolution of the Company following the conveyance, transfer or lease of its properties and assets substantially as an entirety to another person shall not be deemed a dissolution, winding up, liquidation, reorganization, assignment for the benefit of creditors or marshalling of assets and liabilities of the Company for the purposes of this SECTION 6 if the person formed by such consolidation or into which the Company is merged or the person which acquires by conveyance, transfer or lease such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance, transfer or lease, comply with the conditions set forth in the Senior Notes Indenture. . SUSPENSION OF PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT. (a) Unless SECTION 6.3 shall be applicable, upon the occurrence of a Payment Default, then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of the Notes or on account of the purchase or redemption or other acquisition of Notes unless and until such Payment Default shall have been cured or waived in writing or shall have ceased to exist or such Senior Indebtedness shall have been discharged or paid in full in cash or cash equivalents, after which the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. (b) Unless SECTION 6.3 shall be applicable, upon (1) the occurrence of a Non-payment Default and (2) receipt by the Company or the Holders of the Notes from the representative of holders of such any Senior Indebtedness of written notice of such occurrence, then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of the Notes or on account of the purchase or redemption or other acquisition of the Notes for a period ("PAYMENT BLOCKAGE PERIOD") commencing on the earlier of the date of receipt by the Company or the date of receipt by the Holders of the Notes of such notice from such representative unless and until (subject to any blockage of payments that may then be in effect under paragraph (a) of this Section) (X) more than 179 days shall have elapsed since receipt of such written notice by the Company or the Holders of the Notes, whichever was earlier, (Y) such Non-payment Default shall have been cured or waived in writing or shall have ceased to exist or such Designated Senior Indebtedness shall have been discharged or (Z) such Payment Blockage Period shall have been terminated by written notice to the Company or the Holders of the Notes from such representative initiating such Payment Blockage Period, after which, in the case of clause (x), (y) or (z), the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. Notwithstanding any other provision of this SECTION 6, only one Payment Blockage Period may be commenced within any consecutive 366-day period, and no Non-payment Default with respect to Senior Indebtedness which existed or was continuing on the date of the commencement of any Payment Blockage Period initiated by or behalf of such Senior Indebtedness shall be, or be made, the basis for the commencement of a second Payment Blockage Period whether or not within a period of 366 consecutive days unless such event of default shall have been cured or waived for a period of not less than 60 consecutive days subsequent to the commencement of such initial Payment Blockage Period (it being acknowledged that any subsequent action, or any breach of any financial covenant for a period commencing after the date of commencement of such Payment Blockage Period, that, in either case, would give rise to a Non-payment Default pursuant to any provision under which a Non-payment Default previously existed or was continuing shall constitute a new Non-payment Default for this purpose). In no event will a Payment Blockage Period extend beyond 183 days from the date of the receipt by the Holders of the Notes of the notice and there must be a 183-consecutive-day period in any 366-day period during which no Payment Blockage Period is in effect. (c) In the event that, notwithstanding the foregoing, the Company shall make any payment to the Holder of any Note prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to the Company. . PAYMENT PERMITTED IF NO DEFAULT. Nothing contained in this SECTION 6 or elsewhere in any of the Notes shall prevent the Company, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshalling of assets and liabilities of the Company referred to in SECTION 6.3 or under the conditions described in SECTION 6.4, from making payments at any time of principal of (and premium, if any, on) or interest on the Notes. . SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject to the payment in full in cash or cash equivalents of all Senior Indebtedness, the Holders of the Notes shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of (and premium, if any, on) and interest on the Notes shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holders of the Notes would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders of the Notes, shall, as among the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Notes, deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. . PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Notes on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Section or elsewhere in the Securities Purchase Agreement or the Notes is intended to or shall (a) impair, as between the Company and the Holders of the Notes, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Notes the principal of (and premium, if any, on) and interest on the Notes as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Notes and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Holder of any Note from exercising all remedies otherwise permitted by applicable law upon Default under this Note, subject to the rights, if any, under this SECTION 6 of the holders of Senior Indebtedness. . NO WAIVER OF SUBORDINATION PROVISIONS. (a) No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non- compliance by the Company with the terms, provisions and covenants of this Note, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without in any way limiting the generality of paragraph (a) of this SECTION 6.8, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holders of the Notes, without incurring responsibility to the Holders of the Notes and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Notes to the holders of Senior Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (2) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (3) release any person liable in any manner for the collection of Senior Indebtedness; and (4) exercise or refrain from exercising any rights against the Company and any other person. . NOTICE TO NOTE HOLDERS. The Company shall give prompt written notice to the Holders of the Notes of any fact known to the Company which would prohibit the making of any payment to the Holders of the Notes in respect of the Notes. Notwithstanding the provisions of this Section or any other provision of this Note, the Holders shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to the Holders in respect of the Notes, unless and until the Holders of the Notes shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Holders shall be entitled in all respects to assume that no such facts exist; PROVIDED, HOWEVER, that, if the Holders shall not have received the notice provided for in this SECTION 6.9 prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any, on) or interest on any Note), then, anything herein contained to the contrary notwithstanding, the Holders shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by them on such date. . RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT. Upon any payment or distribution of assets of the Company referred to in this SECTION 6, the Holders of the Notes shall be entitled to rely conclusively upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Holders of Notes, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section. . NO SUSPENSION OF REMEDIES. Nothing contained in this SECTION 6 shall limit the right of the Holders of Notes to take any action to accelerate the maturity of the Notes pursuant to SECTION 4.2 or to pursue any rights or remedies hereunder or under applicable law. SECTION . DEFINITIONS. As used herein, the following terms have the respective meanings set forth below: "Applicable Rate" means, through the Change Date, 12.5% per annum and, after the Change Date, 14.0% per annum. "Change Date" means the date immediately preceding the closing date at which the Anticipated Financing is consummated, if and only if the Stage II Closing is consummated on or before such closing date of the Anticipated Financing. "Common Shares" means the shares of Common Stock, no par value, of the Company. "First Payment Date" means (i) if the Change Date occurs, then March 1, 1999, or at the Payee's option such later date as Payee may elect, or (ii) otherwise March 1, 1996. "Overdue Rate" means, with respect to any interest accrual period or portion thereof, the Applicable Rate then in effect with respect to such period or portion, plus 2.0% per annum. "Senior Notes" means the notes of the Company evidencing the Anticipated Financing issued pursuant to the Senior Notes Indenture. "Senior Notes Indenture" means the indenture between the Company and trustee named therein, governing the Anticipated Financing. SECTION . MISCELLANEOUS. . NOTICES. All notices, advices and communications to be given or otherwise made to the Company or any Holder shall be deemed given upon receipt thereof if contained in a written instrument and delivered in person, sent by overnight courier, sent by first class registered or certified mail, postage prepaid and return receipt requested, or sent by facsimile telecopier, confirmed by mail, addressed to such party at the address or telecopier number set forth below or at such other address or telecopier number as may hereafter be designated in writing by the addressee to the addressor listing all parties: (a) if to BANX Partnership (so long as BANX Partnership is the Holder of this Note): to Alexander Good, Bell Atlantic Corporation, 1310 North Court House Road, Arlington, VA 22201; Thomas R. McKeough, Bell Atlantic Corporation, 1717 Arch Street, Philadelphia, PA 19103; and Philip R. Marx, Bell Atlantic Corporation, 1717 Arch Street, Philadelphia, PA 19103, and NYNEX Corporation, 1113 Westchester Avenue, White Plains, NY 10604- 3510, Attention: Chief Financial Officer and to such address Attention: General Counsel, (b) if to any other Holder of this Note: to it at its address listed on the books for the registration and registration of transfer of the Notes to be maintained by the Company pursuant to SECTION 2.1 hereof, and (c) if to the Company: CAI Wireless Systems, Inc., 12 Corporate Woods Boulevard, Suite 102, Albany, NY 12211, Attention: President, with a required copy to Day, Berry & Howard, One Canterbury Green, Stamford, Connecticut 06901- 2047, Attention Sabino Rodriguez, III, Esq. Whenever pursuant to this Note, notice is required to be given to any or all of the Holders of the Notes, such requirement shall be satisfied if such notice is given in the manner prescribed to the persons last known by the Company to be a Holder of the Note, entitled to such notice, at the addresses of such persons last known to the Company. . SEVERABILITY. If any term, provision, covenant or restriction of this Note is held by a court or a governmental agency of competent jurisdiction to be invalid, void or unenforceable, or to cause any party to be in violation of any applicable provision of law, the remainder of the terms, provisions, covenants and restrictions of this Note shall remain in full force and effect and in no way shall be affected, impaired or invalidated. . CAPTIONS. The descriptive headings of the various paragraphs or parts of this Note are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. . AMENDMENT AND WAIVER. This Note may only be amended or supplemented, and the observance of any term hereof may only be waived, in accordance with SECTION 9 of the Securities Purchase Agreement. . WAIVER OF PRESENTMENT, ETC. The Company hereby waives presentment, demand for payment, notice of dishonor or acceleration, protest and notice of protest, and any and all other notices or demand in connection with the delivery, acceptance, performance, default or enforcement of this Note, excepting any notice requirement set forth in the Securities Purchase Agreement. No failure on the part of the Holder of this Note in exercising any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or remedy preclude any other or future exercise thereof or the exercise of any other right or remedy hereunder. No modification or waiver of any provision of this Note, nor any departure by the Company therefrom, shall in any event be effective unless the same shall be in writing, in accordance with the Securities Purchase Agreement, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose given. . CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE COMPANY ARISING OUT OF OR RELATING TO THIS NOTE, ANY NOTE, WARRANT OR OTHER LOAN DOCUMENT OR ANY OBLIGATION MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK AND BY EXECUTION AND DELIVERY OF THIS NOTE, THE COMPANY ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS NOTE, THE SECURITIES PURCHASE AGREEMENT, SUCH OTHER LOAN DOCUMENT OR SUCH OBLIGATION. IF ANY AGENT APPOINTED BY THE COMPANY REFUSES TO ACCEPT SERVICE, THE COMPANY HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF ANY PURCHASER TO BRING PROCEEDINGS AGAINST THE COMPANY IN THE COURTS OF ANY OTHER JURISDICTION. . WAIVER OF JURY TRIAL. THE COMPANY AND EACH HOLDER OF THIS NOTE HEREBY AGREES TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE, ANY OF THE LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION AND THE PURCHASER/COMPANY RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Note, and that each will continue to rely on the waiver in their related future dealings. Each party hereto further warrants and represents that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, REPLACEMENTS, SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOAN. In the event of litigation, a copy of this Note may be filed as a written consent to a trial by the court. IN WITNESS WHEREOF, the undersigned, by its duly authorized officer, has executed this Term Note as of the date first above written. CAI WIRELESS SYSTEMS, INC. By: /S/ JARED ABBRUZZESE As its: Chairman and Chief Executive Officer EX-10 4 }8 {EXHIBIT 10.6 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement") made as of the 21st day of March, 1996 by and between JARED E. ABBRUZZESE, residing at the address indicated following his signature below (hereinafter referred to as "Employee") and CAI WIRELESS SYSTEMS, INC., a Connecticut corporation having its principal place of business at 18 Corporate Woods Boulevard, Third Floor, Albany, New York 12211 (hereinafter referred to as the "Company"). RECITALS . The Company and Employee are parties to that certain Amended and Restated Employment Agreement dated as of October 31, 1993 whereby Employee has been employed by the Company as its Chairman and Chief Executive Officer. . The Company and Employee desire to enter into a new employment agreement in order to set forth the terms of Employee's continued employment by the Company and hereby enter into this Agreement for that purpose. . Employee acknowledges the additional consideration for the covenants contained herein. . EMPLOYMENT. The Company hereby agrees to continue to employ Employee and Employee agrees to continue to work for the Company as Chairman and Chief Employee Officer during the Term (as defined below) and upon the terms and conditions set forth in this Agreement. . COMPENSATION/BENEFITS. () BASE SALARY. During the term of this Agreement, the Company agrees to pay Employee a base annual salary of $350,000 ("Base Salary"). Such Base Salary shall be reviewed no less frequently than annually during the term of this Agreement and may be increased but not decreased by the Board of Directors. Such Base Salary shall be payable in accordance with the Company's normal business practices or in such other amounts and at such other times as the parties may mutually agree. () STOCK OPTIONS. Employee shall be eligible for stock options as approved by the Compensation Committee of the Board of Directors. } {() BONUSES. During the term of this Agreement, the Company shall pay to the Employee an annual bonus of up to 35% of Base Salary, based upon the Company's achievement of performance targets established by the Company's Board of Directors, in consultation with Employee. These targets will be revised annually within ninety days of the beginning of each fiscal year in consultation with the Employee or at such other times as may be mutually agreed by the parties. The bonus may be structured as a part of a deferred compensation arrangement. () BENEFITS/VACATION. During the Term, the Company shall provide Employee with such other benefits, including medical plans, as are made generally available to employees of the Company from time to time and with such additional benefits as are made available to executive officers of the Company at any time during the Term. Employee shall be entitled to up to six weeks vacation during each year of the Term, provided that the time and duration of vacation periods shall not interfere with the operations of the Company. Accrued vacation may be carried over or "sold back" to the Company to the extent permitted by, and in accordance with, the policy set forth in the Employee Manual of the Company. () LIFE INSURANCE. Subject to the Employee's submitting to any required physical examinations and provided such policy can be obtained at customary premiums, the Company shall purchase a term insurance policy with the face amount of $1,000,000 on the life of Employee and shall permit Employee to designate the beneficiary thereof. () MEDICAL INSURANCE/PHYSICAL. During the Term, the Company shall provide to Employee and Employee's immediate family a comprehensive policy of health insurance. During the Term, Employee shall be entitled to a comprehensive annual physical performed, at the expense of the Company, by the physician or medical group of Employee's choosing. () OFFICE/SECRETARY, ETC. During the Term, Employee shall be entitled to secretarial services and a private office commensurate with his title and duties. () CLUB MEMBERSHIP. The Company will pay, or at Employee's election reimburse, all of the costs of a country club membership at the club of Employee's choice in the greater Albany, New York area. } {. SERVICES. Subject to subparagraph 9(B) below, Employee agrees to devote not less than 75% of his working time, attention and energies to the business of the Company and its Affiliates under the general direction of the Board of Directors and shall not be required to take direction from or report to any other person. Employee agrees to serve at the pleasure of the Board of Directors as an officer or director of any direct or indirect wholly-owned subsidiary of the Company and as a CAI Director for CS Wireless Systems, Inc., a Delaware corporation ("CS"), (as defined in that certain CS Stockholders' Agreement dated as of February 23, 1996 by and among the Company, Heartland Wireless Communications, Inc. and CS); provided, that Employee is entitled to indemnification by the Company, to the full extent permitted by law, with respect to Employee's services in such capacities. Except to the extent provided in subparagraph 9(B) below, Employee shall not, without the prior written consent of the Company, directly or indirectly, during the term of this Agreement, render services, for compensation or otherwise, to or for any other person or firm engaged in any Related Business (as defined in subparagraph 9(A) below) in any market served by the Company or its Affiliates. In performing his duties hereunder, Employee shall be available for reasonable travel as the needs of the Company's business require. Employee shall be based in the greater Albany, New York metropolitan area. . TERM. The term of this Agreement (the "Term") shall be for a period beginning on the date hereof and continuing until the second anniversary of this Agreement, and shall be automatically renewed annually thereafter for successive one year periods on terms no less favorable than are contained herein unless either party gives notice to the other of its intention not to renew this Agreement within sixty days of the expiration of the Term of this Agreement. . EARLY TERMINATION. () GENERAL. Employee's employment hereunder shall be terminated and the Company's obligation to employ Employee hereunder shall cease, including the obligation to pay compensation for any period after the date of termination (except as provided in subparagraph 5(D)): (i) immediately upon notice, in the sole discretion of the Company, other than for Cause, (ii) without the necessity of notice, upon the death of Employee, or (iii) upon written notice of a finding that Employee has (a) acted with gross negligence or willful misconduct in connection with the performance of his material duties under Paragraphs 1, 3, 6 and 9, with respect to acts or omissions prior to termination, and has not corrected such action within 15 days of receipt of written notice thereof, (b) defaulted in the performance of his material duties under Paragraphs 1, 3, 6 and 9, with respect to acts or omissions prior to termination, and has not corrected such action within 15 days of receipt of written notice thereof, (c) committed a material act of common law fraud against the Company, or (d) knowingly and in bad faith acted against the best interests of the Company in a manner that has a material adverse affect on the financial condition of the Company (any such finding is referred to herein as "Cause"), provided, however, that from and after the occurrence of an event described in Annex A attached hereto only events under (iii)(a) above shall constitute "Cause." Upon any termination of Employee's employment, the Term shall expire. () DISABILITY. If Employee shall become unable to efficiently perform the essential functions of his job, even with reasonable accommodation, as a result of a disability or illness, as such terms are defined by the Americans with Disabilities Act, he shall be entitled to his regular compensation until the period of disability or illness (whether or not the same disability or illness) shall exceed 180 consecutive days during the Term hereunder, provided, that Employee is eligible for and is receiving payments under any disability insurance plan of the Company. This Agreement may thereafter be terminated by the Company and the Company's obligations hereunder shall cease, including the obligation to pay compensation for any period after the date of termination. Any amounts payable as compensation during the period of disability or illness shall be reduced by any amounts paid during such period under any disability insurance plan or similar insurance wholly paid for by the Company. () EMPLOYEE'S RIGHT TO TERMINATE. Employee may, at any time during the Term, resign. () AMOUNTS PAYABLE TO EMPLOYEE UPON TERMINATION. Upon any termination of Employee's employment hereunder for any reason, the Company shall pay to Employee or his executor or legal representative, as the case may be, any unpaid portion of his Base Salary up to the date of termination, any unpaid bonus for any fiscal year completed prior to date of termination of Employee's employment, the bonus for the fiscal year in which Employee's employment is terminated to the extent earned (as defined below), any expenses incurred in accordance with Paragraph 7 and not reimbursed prior to the date of termination, and benefits up to the date of Employee's termination of employment. In addition, in the event of Employee's termination under subparagraph 5(A) other than for Cause (as defined therein) or the death of Employee, the Company shall (i) pay to Employee severance in an amount (the "Severance Amount") equal to the greater of (x) his then Base Salary under Paragraph 2, payable in twelve equal monthly installments or (y) the total Base Salary that would have been payable for the balance of the Term (without giving effect to any early termination), payable in equal such monthly installments, and (ii) continue the benefits provided in Paragraph 8 and maintain, or obtain replacement coverage for, all disability insurance, life insurance (including any insurance provided under subparagraph 2(F)), group insurance, medical and dental plans to which Employee, his spouse and family were receiving as of the date of the termination of his employment under subparagraph 2(D) and containing comparable coverages and benefits, for the period during which Employee is entitled to receive the Severance Amount ("Severance Period") as described above; provided, however, the Company shall not be obligated to provide such benefits under clause (ii) above to the extent Employee is receiving the same, or an equivalent value therefor, from a subsequent employer. With respect to the fiscal year in which the Term expires or Employee's employment is terminated, and provided that the performance targets for such fiscal year established pursuant to subparagraph 2(C) are met as determined with respect to the executive officers of the Company by the Compensation Committee of the Board of Directors of the Company, the portion of such bonus which is deemed "earned" for such fiscal year, shall be calculated as follows: (i) determine the bonus which would have been paid to Employee for the full fiscal year if the financial results for the portion of the fiscal year prior to termination were pro rated to the entire fiscal year; and (ii) multiply the amounts of such bonus as calculated under clause (I) by the fraction of the full fiscal year prior to such termination (determined by dividing the number of days during such fiscal year prior to termination by 365 days). This subparagraph 5(D) shall survive the termination of this Agreement. () NO MITIGATION; LEGAL FEES. In the event of the termination of Employee's employment for any reason, Employee shall have no duty to mitigate damages, and any earnings of Employee shall not reduce the payments otherwise due to Employee hereunder or otherwise, except with respect to benefits as provided for in subparagraph 5(D)(II). Employee shall be entitled to legal fees and costs if Employee institutes any legal action to enforce the Company's obligations hereunder provided that he is the prevailing party. This subparagraph 5(E) shall survive the termination of this Agreement. . EMPLOYER'S AUTHORITY. Employee agrees to observe and comply with the rules and regulations of the Company as adopted by the Company's Board of Directors respecting the performance of his duties and to carry out and perform orders, directions and policies communicated to him from time to time by the Company's Board of Directors provided such rules, regulations, orders, directions and policies do not violate any applicable law, rule or regulation or require the commission of a tort or crime. . EXPENSES. During the term of this Agreement, the Company shall reimburse Employee for the reasonable business expenses approved in advance incurred by Employee in the course of performing his duties for the Company hereunder in accordance with the procedures then in place for such reimbursement. . AUTOMOBILE ALLOWANCE. During the term of this Agreement, Employee shall be entitled to an automobile allowance of $750.00 per month, payable monthly in arrears. . NON-COMPETITION. () RESTRICTIONS. Except to the extent provided in subparagraph 9(B) below, if (i)(x) Employee's employment is terminated for Cause or (y) Employee voluntarily terminates his employment relationship hereunder with the Company, for a period of twelve (12) months following the termination of this Agreement, or (ii) Employee's employment is terminated and Employee is receiving the Severance Amount, for a period not to exceed twelve (12) months during the Severance Period, whichever is applicable, he will not, (i) engage in any business or undertaking directly competitive with the wireless cable television transport business of the Company contemplated by the Business Relationship Agreement (the "BRA") between the Company and Bell Atlantic Corporation ("BAC") and NYNEX Corporation ("NYNEX") amended and in effect on the date of termination in any "Service Area" (as defined in the BRA) in which the Company or any Affiliate thereof could be required to provide transport services; or (ii) engage in any MMDS license-based television subscription business or wireline franchise cable business in any market in which the Company or any Affiliate has MMDS licenses or leases on the date of termination (any such business or activity under (i) or (ii) herein referred to as a "Related Business"), in either case without the prior written consent of a majority of the independent members of the Board of Directors. The parties agree that the time period and geographical area of noncompetition specified above are reasonable and necessary in light of the transactions entered into this Agreement. If, however, it shall be determined at any time by a court of competent jurisdiction that either the time period restriction or the geographical area restriction, or both, are invalid or unenforceable, the parties agree that any such restriction determined to be invalid or unenforceable shall be deemed so amended as to make such restriction valid and enforceable in the determination of said court, and such restriction, as so amended, shall be enforceable between the parties to the same extent as if such amendment had been made as of the date of this Agreement. This subparagraph 9(A) shall survive the termination of this Agreement. () PERMITTED ACTIVITIES. Notwithstanding anything contained herein to the contrary, Employee may during and after the Term engage in the following permitted activities: (i) participate as an officer or director of, or advisor to, any charitable or other tax exempt organization; and (ii) to the extent not in a Related Business, devote up to 25% of his working time to providing services to or investing in entities, businesses or persons other than the Company, including but not limited to (A) purchasing securities in private placements by any corporation or other business entity, PROVIDED that, if such investments would otherwise be prohibited by the terms of this Paragraph 9, such investments shall not result in his collectively owning beneficially at any time ten percent or more of the equity securities of any corporation or other business entity, (B) engaging in any telecommunications businesses or ventures, and (C) providing services as an officer, director, employee or consultant to TelQuest, Inc., TelQuest Ventures, L.L.C., Haig Capital L.L.C., The Corotoman Company, L.L.C., Crest International Holdings LLC and any Affiliates or successors thereof, so long as those efforts by Employee individually or collectively do not adversely impact on the business of the Company. . EXECUTION, DELIVERY AND PERFORMANCE. The execution, delivery and performance by Employee of this Agreement or any other agreement, instrument or document contemplated herein or hereby will not result in a breach of or conflict with any terms of any other agreement, instrument or document to which Employee is a party or by which Employee or his property is bound. No consent or approval of any person or entity, other than those that have been obtained by Employee, is required for Employee to execute, deliver and perform its obligations under this Agreement or any agreement, instrument or document contemplated herein or hereby. . NOTICES. Any notice permitted or required hereunder shall be deemed sufficient when hand-delivered or mailed by certified mail, postage prepaid, and addressed if to the Company at the address indicated above and if to the Employee at the address indicated below (or to such other address as may be provided by written notice. . MISCELLANEOUS. () This Agreement (i) together with that certain Non-Disclosure Agreement dated as of October 1, 1993 by and between the Company and Employee, constitutes the entire agreement between the parties concerning the subjects hereof and supersedes any and all prior agreements or understandings, including but not limited to that certain Amended and Restated Employment Agreement dated as of October 1, 1993 by and between the Company and Employee and such Employment Agreement shall be of no further force and effect, (ii) may not be assigned by Employee without the prior written consent of the Company, and (iii) may not be assigned by the Company except in the event of a sale of substantially all of the assets of the Company to a third party who assumes in writing the Company's obligations (naming Employee as a third party beneficiary of the assumption) and furnishes a copy of such assumption of the Employee hereunder (and provided such assignment shall not release the Company of its financial obligations hereunder in case of a default by the assignee) and (iv), subject to clauses (ii) and (iii) hereof, shall be binding upon, and inure to the benefit of, the Employee, his heirs and personal representatives, and the Company and its successors and assigns. () Headings herein are for convenience of reference only and shall not define, limit or interpret the contents hereof. . AFFILIATES. As used herein, the term "Affiliate" shall mean any individual or entity directly or indirectly controlled by such person, now or in the future, including without limitation, partnerships in which such person or any Affiliate may invest as a limited or general partner and limited liability companies in which such person or any Affiliate may become a member. . AMENDMENt. This Agreement may be amended, modified or supplemented by the mutual consent of the parties in writing, but no oral amendment, modification or supplement shall be effective. . SPECIFIC ENFORCEMENT. The parties acknowledge that the Company would be irreparably damaged and there would be no adequate remedy at law for the Employee's breach of Paragraph 9 of this Agreement, and accordingly, the terms thereof shall be specifically enforced. Employee hereby consents to the entry of any temporary restraining order or preliminary injunction, in addition to any other remedies available at law or in equity, to enforce the provisions hereof provided sufficient facts are shown to warrant such relief. . SEVERABILITY. The provisions of this Agreement are severable. The invalidity of any provision shall not affect the validity of any other provision. . GOVERNING LAW. This Agreement shall be construed and regulated in all respects under the laws of the State of New York. IN WITNESS WHEREOF, this Agreement is entered into as of the date and year first above written. CAI WIRELESS SYSTEMS, INC. By /S/ JOHN PRISCO Name: John Prisco Title: President EMPLOYEE: /S/ JARED E. ABBRUZZESE Name: Jared E. Abbruzzese Address: 59 Old Niskayuna Road Loudonville, NY 12211 EX-10 5 {EXHIBIT 10.15 THIS WARRANT AND THE SECURITIES TO BE ISSUED UPON EXERCISE HEREOF (I) HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR RESALE IN CONNECTION WITH THE DISTRIBUTION HEREOF, AND (II) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (B) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE SECURITIES ACT (OR ANY SIMILAR RULE UNDER THE SECURITIES ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (C) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT REGISTRATION UNDER THE SECURITIES ACT IS NOT REQUIRED. No. 1 Dated: September 29, 1995 STAGE II WARRANT To Purchase Shares of Voting Preferred Stock, No Par Value, of CAI WIRELESS SYSTEMS, INC. THIS IS TO CERTIFY THAT, for value received, BANX Partnership or its registered assign (the "HOLDER") is entitled to purchase from CAI Wireless Systems, Inc., a Connecticut corporation (the "COMPANY"), at any time and from time to time before the Expiration Time (hereinafter defined), at the place where the Warrant Agency (hereinafter defined) is located, at each of the Tier Prices (hereinafter defined), the number of shares of the Company's Voting Preferred Stock ("VOTING PREFERRED SHARES") described herein, and is also entitled to exert the other appurtenant rights, powers and privileges hereinafter described. This Warrant is one of the Stage II Warrants (the "WARRANTS") which is issued in connection with that certain Securities Purchase Agreement dated as of March 28, 1995 (the "PURCHASE AGREEMENT"). } { ARTICLE . CERTAIN DEFINITIONS Terms used herein and not defined herein, shall have the meaning ascribed thereto in the Purchase Agreement. The following terms have the respective meanings set forth below: . "BLENDED PRICE" means at any time the quotient of (a) the sum of (i) the product of the sum of the number of Voting Preferred Shares then issuable at the Tier 1 Exercise Price under the Warrants and the Stage I Warrants and at the Tier 1 Conversion Price under and as defined in the Senior Preferred Shares, multiplied by the Tier 1 Exercise Price, plus (ii) the product of the number of Voting Preferred Shares then issuable at the Tier 2 Exercise Price under the Warrants multiplied by the Tier 2 Exercise Price, plus (iii) the product of the number of Voting Preferred Shares then issuable at the Tier 3 Exercise Price under the Warrants multiplied by the Tier 3 Exercise Price, plus (iv) the product of the number of Voting Preferred Shares then issuable at the Tier 4 Exercise Price under the Warrants multiplied by the Tier 4 Exercise Price, divided by (b) the number of Voting Preferred Shares then issuable under the Warrants, the Stage I Warrants, and the Senior Preferred Shares. . "BUSINESS DAY" means each day on which banking institutions in New York City are not required or authorized by law or executive order to close. . "COMMON SHARES" means shares of Common Stock, no par value, of the Company. . "CONVERSION SHARES" means the Common Shares issued or issuable from time to time upon the conversion of Warrant Shares. . "DILUTION FACTOR" shall be determined from time to time for each Tier Price and shall be equal to the quotient, expressed as a percentage (calculated to the nearest one-hundredth of a percent), of such Tier Price immediately before an adjustment under SECTION 5.3 hereof divided by the Blended Price immediately before such adjustment under SECTION 5.3 hereof. . "FAIR MARKET VALUE" means the fair market value of the business, property or assets in question, as a going concern, or if greater, in an orderly liquidation. If the Company is being valued such valuation shall not reflect any decrease in value for any obligations of the Company in connection with the Purchase Agreement other than the Company's obligations to make payments of principal, interest, redemption proceeds and dividends on the Notes and the Senior Preferred Stock. In calculating the Fair Market Value, no discount shall be made for lack of control, lack of an active trading market, or any restrictions on transferability of any equity interest. Notwithstanding the foregoing, so long as the Common Shares are traded on Nasdaq or a national securities exchange, the Fair Market Value of each Voting Preferred Share shall mean the product of (x) the Preferred Conversion Ratio in effect at the time of such determination, multiplied by (y) the average of the daily closing prices for a Common Share on the thirty (30) consecutive trading days before the day in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way, in either case on Nasdaq, or if the Common Shares are not listed or admitted to trading on Nasdaq, on the principal national securities exchange on which the Common Shares are listed or admitted to trading. Fair Market Value initially shall be determined in good faith by the Board of Directors of the Company, provided however, that if the Required Holders object to any determination of Fair Market Value made by such Board, the Fair Market Value shall be determined by a Qualified Investment Banking Firm selected by the Required Holders from a list of three Qualified Investment Banking Firms which shall be submitted to the Required Holders by the Company within five Business Days after the Company has received notice that Fair Market Value shall be so determined. . "FULLY-DILUTED COMMON SHARES" at any time shall mean the sum of (A) the number of Common Shares then outstanding, plus (B) in the case of options to purchase or rights to subscribe for Common Shares, the aggregate maximum number of Common Shares which are deliverable upon exercise of such options to purchase or rights to subscribe for Common Shares, plus (C) in the case of securities by their terms convertible into or exchangeable for Common Shares or options to purchase or rights to subscribe for such convertible or exchangeable securities, the aggregate maximum number of Common Shares deliverable upon conversion of or in exchange for any such convertible or exchangeable securities, whether or not then exercisable, or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof, including without limitation Options and Convertible Securities as defined in SECTION 5.3(B) hereof, and further including without limitation all Common Shares issuable, directly or indirectly, under anti-dilution or similar provisions of Options or Convertible Securities as a result of any past, present or future issuance of Common Shares, Options or Convertible Securities, plus (D) 2,072,166 Common Shares which may be issued upon the exercise of options, having an exercise price of not less than $11.00 per share in the case of 1,200,000 of such shares and, in the case of the remaining shares, of not less than the Fair Market Value of the Common Shares subject thereto at the time of grant, which may be granted from time to time to directors, officers and employees of the Company. . "INITIAL TIER 1 EXERCISE PRICE" means the product of the Preferred Conversion Ratio immediately after the consummation of the Stage II Closing, multiplied by the quotient, rounded to the nearest $.01, of (a) $131,704,000, divided by (b) 60% of the Initial Target Share Number. . "INITIAL TIER 2 EXERCISE PRICE" means the product of the Preferred Conversion Ratio immediately after consummation of the Stage II Closing, multiplied by the quotient, rounded to the nearest $.01, of (a) $60,368,000, divided by (b) 20% of the Initial Target Share Number. . "INITIAL TIER 3 EXERCISE PRICE" means the product of the Preferred Conversion Ratio immediately after consummation of the Stage II Closing, multiplied by the quotient, rounded to the nearest $.01, of (a) $46,648,000, divided by (b) 10% of the Initial Target Share Number. . "INITIAL TIER 4 EXERCISE PRICE" means the product of the Preferred Conversion Ratio immediately after consummation of the Stage II Closing, multiplied by the quotient, rounded to the nearest $.01, of (a) $63,112,000, divided by (b) 10% of the Initial Target Share Number. . "NASDAQ" means the National Market System of The Nasdaq Stock Market. . "NOTES" means the Company's Term Notes due 2005 issued under the Purchase Agreement. . "PREFERRED CONVERSION RATIO" at any time means the number of Common Shares then issuable upon the conversion of one Voting Preferred Share. . "QUALIFIED INVESTMENT BANKING FIRM" means any firm engaged in providing merger and acquisition advisory services having announced transactions of not less than $100 billion during the five most recent years for which such data shall be publicly available from Securities Data Corp. or another recognized industry source but excluding, however, any firms which received more than $100,000 in fees during the preceding 24 calendar months from the Company. . "REQUIRED HOLDERS" means, at any time, the holders of Warrants evidencing the right to purchase a majority of the Warrant Shares then issuable upon the exercise of all then outstanding Warrants (exclusive of Warrants then owned by the Company or any of its Affiliates). . "SECURITIES ACT" means the Securities Act of 1933, as amended. . "SENIOR PREFERRED STOCK" means the 14% Senior Preferred Stock, par value $10,000 per share, of the Company. . "SENIOR PREFERRED SHARES" means the shares of Senior Preferred Stock issued under the Purchase Agreement or issued or issuable upon conversion of the Notes. . "STAGE I WARRANTS" means the Stage I Warrants as described in the Purchase Agreement. . "TARGET SHARE NUMBER" at any time means the product of 45% multiplied by the number of Fully-Diluted Common Shares of the Company at that time (including without limitation the number of Fully-Diluted Common Shares issuable upon conversion of the Voting Preferred Shares issued or issuable upon exercise or conversion of the Warrants, the Stage I Warrants, and the Senior Preferred Shares and including the number of Common Shares set forth on Schedule I hereto). "INITIAL TARGET SHARE NUMBER" means the product of 45% multiplied by the number of Fully-Diluted Common Shares of the Company (including without limitation the number of Fully-Diluted Common Shares issuable upon conversion of the Voting Preferred Shares issued or issuable upon exercise or conversion of the Warrants, the Stage I Warrants and the Senior Preferred Shares and including the number of Common Shares set forth on Schedule I hereto) determined immediately after consummation of the Stage II Closing. . "TARGET TIER 1 SHARES" means at the time of each exercise of this Warrant the number of Voting Preferred Shares which is equal to the amount by which (i) the quotient of (A) 60% of the Target Share Number at that time, divided by (B) the Preferred Conversion Ratio in effect at that time, exceeds (ii) the number of Voting Preferred Shares which theretofore have been issued or are then issuable under the Stage I Warrant and the Senior Preferred Shares or which theretofore have been issued under this Warrant, in each case at the Tier 1 Exercise Price. . "TARGET TIER 2 SHARES" means at the time of each exercise of this Warrant the number of Voting Preferred Shares which is equal to the amount by which (i) the quotient of (A) 20% of the Target Share Number at that time, divided by (B) the Preferred Conversion Ratio in effect at that time, exceeds (ii) the number of Voting Preferred Shares which theretofore have been issued under this Warrant at the Tier 2 Exercise Price. . "TARGET TIER 3 SHARES" means at the time of each exercise of this Warrant the number of Voting Preferred Shares which is equal to the amount by which (i) the quotient of (A) 10% of the Target Share Number at that time, divided by (B) the Preferred Conversion Ratio in effect at that time, exceeds (ii) the number of Voting Preferred Shares which theretofore have been issued under this Warrant at the Tier 3 Exercise Price. . "TARGET TIER 4 SHARES" means at the time of each exercise of this Warrant the number of Voting Preferred Shares which is equal to the amount by which (i) the quotient of (A) 10% of the Target Share Number at that time, divided by (B) the Preferred Conversion Ratio in effect at that time, exceeds (ii) the number of Voting Preferred Shares which theretofore have been issued under this Warrant at the Tier 4 Exercise Price. . "WARRANT SHARES" means the Voting Preferred Shares issued or issuable from time to time under the Warrants. ARTICLE . NUMBER OF WARRANT SHARES, EXERCISE PRICE . WARRANT SHARES. This Warrant entitles the Holder to purchase from the Company from time to time (a) the number of Voting Preferred Shares which is equal to the number of Target Tier 1 Shares at a price per Voting Preferred Share equal to the Tier 1 Exercise Price; (b) the number of Voting Preferred Shares which is equal to the number of Target Tier 2 Shares at a price per share equal to the Tier 2 Exercise Price; (c) the number of Voting Preferred Shares which is equal to the number of Target Tier 3 Shares at a price per share equal to the Tier 3 Exercise Price; and (d) the number of Voting Preferred Shares which is equal to the number of Target Tier 4 Shares, at a price per share equal to the Tier 4 Exercise Price. . ADJUSTMENT OF EXERCISE PRICE. The "TIER 1 EXERCISE PRICE", "TIER 2 EXERCISE PRICE", "TIER 3 EXERCISE PRICE" and "TIER 4 EXERCISE PRICE" hereunder (together, the "TIER PRICES") shall initially be the Initial Tier 1 Exercise Price, the Initial Tier 2 Exercise Price, the Initial Tier 3 Exercise Price and the Initial Tier 4 Exercise Price, respectively, but each such exercise price shall be adjusted from time to time in accordance with the provisions of Article 5 hereof. ARTICLE . EXERCISE OF WARRANTS . EXPIRATION TIME. This Warrant, to the extent not exercised, shall expire and become null and void at 5:00 P.M. local time in New York, NY on September 29, 2001 (the "EXPIRATION TIME"). . METHOD OF EXERCISE. In the sole discretion of the Holder, this Warrant may be exercised in whole or in part, at any time and from time to time prior to the Expiration Time; provided, however, that if this Warrant is exercised only in part and the Holder is the Purchaser or an Affiliate of the Purchaser, the minimum exercise of this Warrant shall involve an aggregate Exercise Price (hereinafter defined) of at least $500,000. To exercise this Warrant in whole or in part, the Holder shall either: (a) deliver to the Company, on or before the Expiration Time, at the Warrant Agency (i) this Warrant, (ii) a written notice, in substantially the form of the Subscription Notice attached hereto, of such Holder's election to exercise this Warrant, which notice shall specify the number of Voting Preferred Shares to be purchased, the denominations of the share certificate or certificates desired and the name or names in which such certificates are to be registered and (iii) payment of the appropriate exercise price ("EXERCISE PRICE") with respect to such shares, made, at the option of the Holder, by (x) cash, money order, certified or bank cashier's check or wire transfer, or (y) if the Holder of this Warrant is a holder of a Note, by set-off of any unpaid principal of, or accrued interest on, whether or not then payable, such Note, or (z) if the holder of this Warrant is the holder of Senior Preferred Shares, only if the entire amount of redemption proceeds of such Shares has already been, or is simultaneously being, converted into Voting Preferred Shares, by set-off of all but not less than all accumulated and unpaid dividends on such Senior Preferred Shares, provided, however, that (I) if the amount of such accumulated and unpaid dividends exceeds the aggregate Tier 1 Exercise Price (or, if the number of Target Tier 1 Shares is zero, the aggregate Tier 2 Exercise Price (or, if the number of Target Tier 2 Shares is zero, the aggregate Tier 3 Exercise Price)), then an amount of such dividends equal to such aggregate Exercise Price may be used to satisfy such price, and (II) if the amount of such accumulated and unpaid dividends exceeds the aggregate Exercise Price which is required to exercise this Warrant in full, then an amount of such dividends equal to such aggregate Exercise Price may be used to satisfy such price; or (b) deliver to the Company, on or before the Expiration Time, at the Warrant Agency, (i) this Warrant and (ii) a written notice, in substantially the form of the Conditional Notice attached hereto, of such Holder's election to exercise this Warrant on a conditional basis, which notice shall specify the conditions precedent to such exercise, the number of Voting Preferred Shares to be purchased, the denominations of the share certificate or certificates desired and the name or names in which such certificates are to be registered. In the case of a Conditional Notice, no payment of the Exercise Price shall be made until all the conditions to exercise have been either waived by the Holder or satisfied, at which time payment shall be made, at the option of the Holder, by (x) cash, money order, certified or bank cashier's check or wire transfer, or, (y) if the Holder of this Warrant is a holder of a Note, by set-off of any unpaid principal of, or accrued interest on, whether or not then payable, such Note, or (z) if the holder of this Warrant is the holder of Senior Preferred Shares, only if the entire amount of redemption proceeds of such Shares has already been, or is simultaneously being, converted into Voting Preferred Shares, by set-off of all but not less than all accumulated and unpaid dividends on such Senior Preferred Shares, provided, however, that (I) if the amount of such accumulated and unpaid dividends exceeds the aggregate Tier 1 Exercise Price (or, if the number of Target Tier 1 Shares is zero, the aggregate Tier 2 Exercise Price (or, if the number of Target Tier 2 Shares is zero, the aggregate Tier 3 Exercise Price)), then an amount of such dividends equal to such aggregate Exercise Price may be used to satisfy such price, and (II) if the amount of such accumulated and unpaid dividends exceeds the aggregate Exercise Price which is required to exercise this Warrant in full, then an amount of such dividends equal to such aggregate Exercise Price may be used to satisfy such price. If payment of the Exercise Price under this SECTION 3.2(B) is made by set-off of any unpaid principal of, or accrued interest on, a Note, the Exercise Price shall be increased by an amount equal to the stated interest rate (determined without regard to any default rate) on such Note computed on the unpaid Exercise Price from the Expiration Time until the date the purchase described in the Conditional Notice is consummated, and if payment of the Exercise Price under this SECTION 3.2(B) is made by set-off of any accumulated dividends on Senior Preferred Shares, the Exercise Price shall be increased by an amount equal to the stated dividend rate (determined without regard to any higher default rate) of such Senior Preferred Shares computed on the unpaid Exercise Price from the Expiration Time until the date the purchase described in the Conditional Notice is consummated. If payment of the Exercise Price under this SECTION 3.2(B) is made other than by set-off of any unpaid principal of, or accrued interest on, a Note, or accumulated dividends on Senior Preferred Shares, the Exercise Price shall be increased by an amount equal to interest on the unpaid Exercise Price at 8% per annum simple interest computed on the unpaid Exercise Price from the Expiration Time until the date the purchase described in the Conditional Notice is consummated. Payment of the Exercise Price by Holder as contemplated by SECTION 3.2(B) shall be Holder's confirmation that all conditions described in the Conditional Notice have been satisfied or waived by the Holder. If the purchase described in the Conditional Notice has not been consummated prior to 5:00 PM local time in New York, NY on the last day of the 18th full calendar month following the Expiration Time, the Conditional Notice shall expire. . DELIVERY OF CERTIFICATES. () The Company shall, in the case of a Subscription Notice, as promptly as practicable and in any event within five days thereafter, and in the case of a Conditional Notice, immediately upon receipt from the Holder of payment representing the Exercise Price, execute and deliver or cause to be executed and delivered, in accordance with such notice, a certificate or certificates representing the number of Warrant Shares specified in said notice. The share certificate or certificates so delivered shall be in such denominations as may be specified in such notice or, if such notice shall not specify denominations, in denominations of 100 shares each, and shall be issued in the name of the Holder or such other name or names as shall be designated in such notice. In the case of a Subscription Notice, such certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated therein shall be deemed for all purposes to have become holders of record of such shares, as of the date the Subscription Notice is received by the Company. In the case of a Conditional Notice, the certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated therein shall be deemed for all purposes to have become holders of record of such shares, as of the date that payment in respect of the Exercise Price is received by the Company; provided, however, that the Holder of the Warrant shall be entitled to all dividends, distributions, and other economic rights and benefits which would accrue to the holder of the number and type of Warrant Shares with respect to which the Warrant is being exercised pursuant to the Conditional Notice after the date the Conditional Notice is given until the date that the certificates evidencing the Warrant are issued. The proceeds of such rights and benefits shall be paid to a national bank or other party acceptable to the Company and the Holder to be held in an interest-bearing escrow account pending consummation of the transactions contemplated by the Conditional Notice at which time the funds in such escrow account shall be paid over to the Holder. After delivery of a Conditional Notice, the Company shall cooperate with the Holder to satisfy such conditions as may be obtained in the Conditional Notice and shall take such actions as may be reasonably requested by the Holder in connection therewith. () If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of the certificate or certificates, deliver to the Holder a new Warrant evidencing the rights to purchase the remaining Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of the Holder, appropriate notation may be made on this Warrant which shall then be returned to the Holder. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, issuance and delivery of share certificates and new Warrants contemplated by SECTION 4.6 below, except that, if share certificates or new Warrants shall be registered in a name or names other than the name of the Holder, funds sufficient to pay all transfer taxes payable as a result of such transfer shall be paid by the Holder at the time of delivering the aforementioned notice of exercise or promptly upon receipt of a written request of the Company for payment. . SHARES TO BE FULLY PAID AND NONASSESSABLE; RESERVATION AND LISTING. All Warrant Shares and Conversion Shares shall be validly issued, fully paid and nonassessable and the Company shall at all times reserve and keep available out of its authorized shares of capital stock (a) solely for the purpose of issuance upon the exercise of this Warrant, such number of Voting Preferred Shares as shall be issuable from time to time upon the exercise of all rights hereunder, and (b) solely for the purpose of issuance upon the conversion of the Warrant Shares, such number of Common Shares as shall be issuable from time to time upon the conversion of all Warrant Shares issuable from time to time upon the exercise of all rights hereunder. If the Voting Preferred Shares or Common Shares are then listed on any national securities exchange (as such term is used in the Securities Exchange Act of 1934, as amended) or quoted on Nasdaq, the Company shall cause the Warrant Shares and the Conversion Shares, respectively, to be duly listed or quoted thereon, as the case may be. . NO FRACTIONAL SHARES TO BE ISSUED. The Company shall not be required to issue fractions of Voting Preferred Shares upon exercise of this Warrant. If any fraction of a share would, but for this Section, be issuable upon any exercise of this Warrant, in lieu of such fractional share the Company shall pay to the Holder or Holders, as the case may be, in cash, an amount equal to the product of such fraction multiplied by the Fair Market Value of a Warrant Share upon such exercise. . SHARE LEGEND. Each certificate for Warrant Shares issued upon exercise of this Warrant, unless at the time of exercise such shares are registered under the Securities Act, shall bear the following legend: THESE SECURITIES (I) HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR RESALE IN CONNECTION WITH THE DISTRIBUTION HEREOF, AND (II) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (B) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE SECURITIES ACT (OR ANY SIMILAR RULE UNDER THE SECURITIES ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (C) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT REGISTRATION UNDER THE SECURITIES ACT IS NOT REQUIRED. Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Securities Act) shall also bear such legend unless, in the opinion of counsel selected by the holder of such certificate and reasonably acceptable to the Company, the securities represented thereby need no longer be subject to restrictions on resale under the Securities Act. . REGULATORY APPROVALS. The Company acknowledges that prior to exercising its rights to acquire Voting Preferred Shares hereunder and to acquiring the shareholder rights provided to holders of such Voting Preferred Shares, the Holder shall secure any regulatory approvals it deems necessary to effect such exercise and acquisition and to assert such rights, including but not limited to the approval of the FCC. The Company shall cooperate (and shall cause its Affiliates and Subsidiaries to cooperate) with the Holder in applying for any necessary requests or applications for such approval, and shall immediately execute, on request of the Holder, all application forms and other documents requiring execution by the Company in connection therewith. ARTICLE . WARRANT AGENCY; TRANSFER, EXCHANGE AND REPLACEMENT OF WARRANTS . WARRANT AGENCY. Until such time, if any, as an independent agency shall be appointed by the Company to perform services with respect to the Warrants described herein (the "WARRANT AGENCY"), the Company shall perform the obligations of the Warrant Agency provided herein at its principal office address or such other address as the Company shall specify by prior written notice to all Holders. . OWNERSHIP OF WARRANT. The Company may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by any person other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer as provided in this ARTICLE 4. . TRANSFER OF WARRANT. The Company agrees to maintain at the Warrant Agency books for the registration of transfers of Warrants, and transfer of this Warrant and all rights hereunder shall be registered, in whole or in part, on such books, upon surrender of this Warrant at the Warrant Agency, together with a written assignment of this Warrant duly executed by the Holder wishing to transfer this Warrant or his duly authorized agent or attorney, and funds sufficient to pay any transfer taxes payable upon such transfer. Upon surrender the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in the instrument of assignment, and this Warrant shall promptly be canceled. Notwithstanding the foregoing, a Warrant may be exercised by a new holder without having a new Warrant issued. Without limiting the generality of the ability of the Holder of this Warrant to transfer this Warrant in whole or in part, the Holder of the Warrant shall have the right to direct the Company to transfer interests in a fixed number of Warrant Shares or in a percentage of the Warrant Shares, in each case with respect to one or more Tier Prices, which may be issuable from time to time hereunder and the new Warrants resulting shall bear such modifications related thereto as the transferor may direct; provided, however, that in no event shall the new Warrants issued to the transferor and the transferee in the aggregate contain rights which are greater than the rights under the Warrant being transferred in whole or in part; and provided further that any Warrant transferred to any person who is not an Affiliate (as defined in the Purchase Agreement) of the Purchaser under the Purchase Agreement shall not be entitled to enforce the covenants contained in ARTICLE 7 hereof. . DIVISION OR COMBINATION OF WARRANTS. This Warrant may be divided or combined with other Warrants upon surrender hereof and of any Warrant or Warrants with which this Warrant is to be combined at the Warrant Agency, together with a written notice specifying the names and denominations in which the new Warrant or Warrants are to be issued, signed by the holders hereof and thereof or their respective duly authorized agents or attorneys. Subject to compliance with SECTION 4.3 as to any transfer which may be involved in the division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. . LOSS, THEFT, DESTRUCTION OF WARRANT CERTIFICATES. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnification agreement reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of Warrant Shares. . EXPENSES OF DELIVERY OF WARRANTS. The Company shall pay all expenses, taxes (other than transfer taxes in connection with any transfer by the Holder) and other charges payable in connection with the preparation, issuance and delivery of Warrants and Warrant Shares hereunder. ARTICLE . ANTIDILUTION PROVISIONS . ADJUSTMENTS GENERALLY. The Tier Prices and the type of securities or property issuable upon exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events, as provided in this Article 5. . STOCK REORGANIZATION. In case the Company shall subdivide its outstanding Common Shares into a greater number of shares or consolidate its outstanding Common Shares into a smaller number of shares (any such event being called a "STOCK REORGANIZATION"), then each of the Tier Prices shall be adjusted, effective immediately after the record date at which the holders of Common Shares are determined for purposes of such Stock Reorganization, to a price determined by multiplying each of the Tier Prices in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Common Shares outstanding on such record date before giving effect to such Stock Reorganization and the denominator of which shall be the number of Common Shares outstanding after giving effect to such Stock Reorganization. . STOCK DISTRIBUTION. () If the Company shall issue or otherwise sell or distribute any Common Shares, other than pursuant to a Stock Reorganization (any such event, including any event described in paragraphs (b) and (c) below, being herein called a "STOCK DISTRIBUTION") without consideration or for a consideration per share (the "ISSUE PRICE") less than the quotient of the Blended Price on the date of such issue, sale or distribution (before giving effect to such issue, sale or distribution) divided by the Preferred Conversion Ratio then in effect, then, effective upon such issue, sale or distribution, each Tier Price shall be reduced to the product of the Dilution Factor for such Tier Price multiplied by the Issue Price multiplied by the Preferred Conversion Ratio then in effect. No adjustment of a Tier Price shall be made in an amount less than 1% of such Tier Price, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to 1% of such Tier Price or more. In no event shall the application of this SECTION 5.3 result in an increase in a Tier Price. () If the Company shall issue, sell, distribute or otherwise grant in any manner (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any warrants or options for the purchase of, Common Shares or any stock or securities convertible into or exchangeable for Common Shares (such rights, warrants or options being herein called "OPTIONS" and such convertible or exchangeable stock or securities being herein called "CONVERTIBLE SECURITIES"), whether or not such Options or the rights to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Shares are issuable upon exercise of such Options or upon conversion or exchange of such Convertible Securities (determined by dividing (i) the aggregate amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus, in the case of Options to acquire Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of Common Shares issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the quotient of the Blended Price divided by the Preferred Conversion Ratio, in each case on the date of granting such Options (before giving effect to such grant), then, for purposes of paragraph (a) above, the total maximum number of Common Shares issuable upon the exercise of such Options or upon conversion or exchange of the Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued as of the date of granting of such Options and thereafter shall be deemed to be outstanding and the Company shall be deemed to have received as consideration such price per share, determined as provided above, therefor. Except as otherwise provided in paragraph (d) below, no additional adjustment of a Tier Price shall be made upon the actual exercise of such Options or upon conversion or exchange of such Convertible Securities. () If the Company shall issue, sell or otherwise distribute (whether directly or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Shares are issuable upon such conversion or exchange (determined by dividing (i) the aggregate amount received or receivable by the Company as consideration for the issue, sale or distribution of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the total maximum number of Common Shares issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the quotient of the Blended Price divided by the Preferred Conversion Ratio, in each case on the date of such issue, sale or distribution (before giving effect to such issue, sale or distribution), then, for purposes of paragraph (a) above, the total maximum number of Common Shares issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued as of the date of the issue, sale or distribution of such Convertible Securities and thereafter shall be deemed to be outstanding and the Company shall be deemed to have received as consideration such price per share, determined as provided above, therefor. Except as otherwise provided in paragraph (d) below, no additional adjustment of a Tier Price shall be made upon the actual conversion or exchange of such Convertible Securities. () If the purchase price provided for in any Option referred to in paragraph (b) above, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph (b) or (c) above, or the rate at which any Convertible Securities referred to in paragraph (b) or (c) above are convertible into or exchangeable for Common Shares shall change at any time (other than under or by reason of provisions designed to protect against dilution upon an event which results in a related adjustment pursuant to this ARTICLE 5), each Tier Price then in effect shall forthwith be readjusted (effective only with respect to any exercise of this Warrant after such readjustment) to the Tier Price which would then be in effect had the adjustment made upon the issue, sale, distribution or grant of such Options or Convertible Securities been made based upon such changed purchase price, additional consideration or conversion rate, as the case may be; PROVIDED, HOWEVER, that such readjustment shall give effect to such change only with respect to such Options and Convertible Securities as then remain outstanding. () If the Company shall pay a dividend or make any other distribution upon any capital stock of the Company payable in Common Shares, Options or Convertible Securities, then, for purposes of paragraph (a) above, such Options or Convertible Securities, as the case may be, shall be deemed to have been issued or sold without consideration. () If any Common Shares, Options or Convertible Securities shall be issued, sold or distributed for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, before deduction therefrom of any reasonable expenses incurred and any underwriting commission or concessions paid or allowed by the Company in connection therewith. If any Common Shares, Options or Convertible Securities shall be issued, sold or distributed for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the Fair Market Value of such consideration, before deduction of any reasonable expenses incurred and any underwriting commissions or concessions paid or allowed by the Company in connection therewith. If any Common Shares, Options or Convertible Securities shall be issued in connection with any merger in which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the Fair Market Value of such portion of the assets and business of the nonsurviving corporation as shall be attributable to such Common Shares, Options or Convertible Securities, as the case may be. If any Options shall be issued in connection with the issue and sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. () Notwithstanding any other provision of this SECTION 5.3, no adjustment under this SECTION 5.3 shall be made with respect to the issuance of any securities which were included in the calculation of Fully-Diluted Common Shares immediately after consummation of the Stage II Closing. . SPECIAL DIVIDENDS. If the Company shall issue or distribute to any holders of Common Shares, evidences of indebtedness, any other securities of the Company or any cash, property or other assets, and if such issuance or distribution does not constitute (y) a Stock Reorganization or (z) a Stock Distribution (any such nonexcluded event being herein called a "SPECIAL DIVIDEND"), then each Tier Price shall be decreased, effective immediately after the record date at which the holders of Common Shares are determined for purposes of such Special Dividend, by an amount equal to the product of (a) the Fair Market Value of the evidences of indebtedness, securities or property or other assets issued or distributed in such Special Dividend with respect to one Common Share, multiplied by (b) the Preferred Conversion Ratio. . CAPITAL REORGANIZATION. If there shall be: (i) any consolidation or merger to which the Company is a party (other than a consolidation or a merger in which the Company is a continuing corporation and which does not result in any reclassification of, or change (other than a Stock Reorganization or a change in par value) in, outstanding Common Shares) or (ii) any sale or conveyance of the property of the Company as an entirety or substantially as an entirety (any such event being called a "CAPITAL REORGANIZATION"), then, effective upon the effective date of such Capital Reorganization, the Holder shall have the right to purchase, upon exercise of this Warrant, the kind and amount of shares of stock and other securities and property (including cash) which the Holder would have owned or have been entitled to receive after such Capital Reorganization if this Warrant had been exercised immediately prior to such Capital Reorganization. In such event, the provisions set forth herein with respect to the rights and interest of the Holder shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or property thereafter receivable upon the exercise of this Warrant. The above provisions of this SECTION 5.5 shall apply to successive consolidations, mergers, sales and conveyances. . CERTAIN OTHER EVENTS. If any event occurs as to which the foregoing provisions of this Article 5 are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the Board of Directors of the Company, fairly protect the purchase rights of the Warrants in accordance with the essential intent and principles of such provisions or would violate applicable law, then such Board shall make such adjustments in the application of such provisions in accordance with such essential intent and principles, as shall be reasonably necessary, in the good faith opinion of such Board, to protect such purchase rights as aforesaid. . ADJUSTMENT RULES. () Any adjustments pursuant to this ARTICLE 5 shall be made successively whenever an event referred to herein shall occur. () No adjustment shall be made pursuant to this ARTICLE 5 in respect of the issuance from time to time of Senior Preferred Shares upon conversion of the Notes, Voting Preferred Shares upon the exercise of Warrants, the Stage I Warrants or the Senior Preferred Stock or upon the issuance from time to time of Common Shares upon the conversion of the Voting Preferred Shares. () If the Company shall set a record date to determine the holders of Common Shares for purposes of a Stock Reorganization, Stock Distribution, Special Dividend or Capital Reorganization and shall legally abandon such action prior to effecting such action, then no adjustment shall be made pursuant to this ARTICLE 5 in respect of such action. . PROCEEDING PRIOR TO ANY ACTION REQUIRING ADJUSTMENT. As a condition precedent to the taking of any action which would require an adjustment pursuant to this Article 5, the Company shall take any action which may be necessary, including obtaining regulatory approvals or exemptions, in order that the Company may thereafter validly and legally issue as fully paid and nonassessable (i) all Voting Preferred Shares which the holders of Warrants are entitled to receive upon exercise thereof, and (ii) all Common Shares which the holders of Voting Preferred Shares issuable under this Warrant will be entitled to receive upon conversion thereof. . NOTICE OF ADJUSTMENT. Not less than 15 days prior to the earlier of the record date for, or the taking of, any action which requires or might require an adjustment or readjustment pursuant to this Article 5, the Company shall give notice to each holder of Warrants of such event, describing such event in reasonable detail and specifying the record date or effective date, as the case may be, and, if determinable, the required adjustment and the computation thereof. If the required adjustment is not determinable at the time of such notice, the Company shall give notice to each holder of a Warrant of such adjustment and computation promptly after such adjustment becomes determinable. ARTICLE . BASIC COVENANTS . NOTICE OF CERTAIN EVENTS. In addition to the provisions of SECTION 5.9, in case at any time the Company shall (a) declare any dividend on any class or series of its capital stock, whether payable in cash, stock or other property, (b) offer to all the holders of any class of its capital stock any additional shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) declare a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or propose a sale of all or substantially all of its property, assets and business as an entirety, then the Company shall give written notice to each Holder of the date on which the books of the Company shall close or a record shall be taken for such action. Such notice shall also specify the date as of which the holders of record of the class or series of capital stock affected shall participate in such action. Such written notice shall be given at least 15 days prior to the relevant record date or the date fixed for determining stockholders entitled to participate therein, as the case may be. . INFORMATIONAL REQUIREMENTS. The Company will transmit to the Holder such information, documents and reports concerning the Company as are required to be distributed by the Purchase Agreement to the Purchaser (as defined in the Purchase Agreement). . AMENDMENT TO CHARTER. The Company shall not make any amendment to its Certificate of Incorporation or By-laws which limits its legal capacity or ability to perform its obligations under this Warrant or the Voting Preferred Shares or which may materially adversely affect the rights of the Holders of these Warrants. ARTICLE . SPECIAL COVENANTS So long as this Warrant is held by the Purchaser or an Affiliate thereof or a successor to any of the foregoing (the "PURCHASER GROUP"), the Company shall comply with the following covenants unless its first obtains the approval (by vote or written consent) of the holders of a majority of the then outstanding Warrants, Stage I Warrants, Senior Preferred Stock and Voting Preferred Stock (voting together as one class on the basis of the number of Voting Preferred Shares for or into which each such security is then exercisable or convertible) held by the Purchaser Group (a "PURCHASER GROUP APPROVAL"). Notwithstanding the foregoing, the parties intend that no provision of this ARTICLE 7 shall operate to limit or impair the Company's full responsibility for and control of the FCC Licenses and its operations conducted pursuant to those Licenses, if such provision, as so applied, shall violate applicable law. . MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS. The Company shall, and shall cause each of its Subsidiaries to, (a) at all times preserve and keep in full force and effect such entity's corporate or partnership existence, as the case may be, and rights and franchises material to such entity's business and (b) comply at all times with the provisions of all franchises, permits, licenses or other similar authorizations relating to such entity's business, including, without limitation, the FCC Licenses, Channel Leases and any obligations or agreements with respect to signal interference, certifications and permits, and all other material agreements, licenses and sublicenses, leases and subleases to which it is a party, and will suffer no loss or forfeiture thereof or thereunder except for losses or forfeitures which in the aggregate would not have a Material Adverse Effect. . MAINTENANCE OF BUSINESS RELATIONSHIPS. The Company shall, and shall cause each of its Subsidiaries to, maintain and preserve its relationships with equipment vendors, programmers, lessors (including without limitation MMDS, MDS, POFS and ITFS lessors and lessors of headend and antennae sites), licensors and others having business relationships with it except for losses or replacements of relationships which individually or in the aggregate would not have a Material Adverse Effect. . MAINTENANCE OF PROPERTIES. The Company shall, and shall cause each of its Subsidiaries to, maintain and keep, or cause to be maintained and kept, their respective properties (including without limitation, intellectual property and properties acquired in accordance with the terms of the Business Plan or in accordance with the Loan Documents) in good repair, working order and condition (other than ordinary wear and tear), and from time to time shall make or cause to be made all appropriate repairs, renewals and replacements thereof, so that the business carried on in connection therewith may be properly conducted at all times, except where the failure to do so would not have a Material Adverse Effect. . MAINTENANCE OF LICENSES AND OTHER MATERIAL AGREEMENTS. The Company shall, and shall cause each of its Subsidiaries to, use its best efforts to keep in full force and effect all of the FCC Licenses, Channel Leases, any obligations or agreements with respect to signal interference, certifications and permits, and all other material agreements, licenses and sublicenses, leases and subleases to which it or any of the Subsidiaries is a party or to which it or any of the Subsidiaries shall become a party hereafter except for losses thereof which individually or in the aggregate would not have a Material Adverse Effect. The foregoing notwithstanding, the Company shall, and shall cause each of its Subsidiaries to, keep in full force and effect sufficient FCC Licenses and Channel Leases in each Wireless Distribution System covered by the Business Relationship Agreement to comply with the obligations of the Company under the Business Relationship Agreement. . USE OF PROCEEDS. Proceeds advanced pursuant to the Purchase Agreement and pursuant to the Anticipated Financing shall be used only as expressly provided by Section 1.5(a) and 1.5(b) of the Purchase Agreement or, in respect of the Anticipated Financing, as provided in the Business Plan. . PERFORMANCE OF LOAN DOCUMENTS AND ANTICIPATED FINANCING DOCUMENTS. The Company shall, and shall cause each of its Subsidiaries to, duly and punctually perform, pay and discharge or cause to be performed, paid or discharged, all of their respective obligations, as defined herein, of every nature arising or owed under the Loan Documents and under the documents related to the Anticipated Financing, whether absolute or contingent. The Company shall comply with each of the covenants set forth in the documents related to the Anticipated Financing (without regard to any waivers or consents obtained in respect thereof from the holders of the notes issued in the Anticipated Financing). . COMPLIANCE WITH LAW. The Company shall, and shall cause each of its Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations, orders or ordinances to which each of them is or will be subject, including, without limitation, the Communications Act, the Copyright Act and all Environmental Laws, and shall obtain and maintain in effect at all times all licenses, certificates, permits, franchises and other governmental or other authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, including, without limitation, all FCC Licenses, Channel Leases and obligations or agreements with respect to signal interference, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. . COMPLIANCE WITH BUSINESS PLAN AND BUSINESS RELATIONSHIP AGREEMENT. The Company shall, and shall cause each of the Subsidiaries to, use its best efforts to achieve the build-out of the Wireless Distribution Systems contemplated by the Business Plan, in each case subject to the availability of financing and the anticipated development of certain technology, and, except as expressly permitted hereunder, shall not enter into any material transaction which is not contemplated by the Business Plan or the Loan Documents. The Company shall, and shall cause each of its Subsidiaries to, comply in all respects with the Business Relationship Agreement. . INSURANCE. The Company shall, and shall cause each of its Subsidiaries to, maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities engaged in the same or a similar business and similarly situated. The Company shall maintain key-person insurance on the life of Jared E. Abbruzzese in the amount of $2,000,000, which policy names the Company as the owner and sole beneficiary thereof. . PAYMENT OF TAXES AND CLAIMS; CONSOLIDATION. () The Company shall, and shall cause each of the Subsidiaries to, timely file all Tax Returns required to be filed in any jurisdiction and to pay and discharge all Taxes shown to be due and payable on such returns and all other Taxes imposed on them or any of their properties, assets (wherever used herein, the term "ASSETS" includes without limitation the properties, licenses, permits, franchises, stock of Subsidiaries and contract rights of the Company and its Subsidiaries), income or franchises, to the extent such Taxes have become due and payable and before they have become delinquent; and to pay and discharge all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any of their respective Subsidiaries, PROVIDED that the Company or any of the Subsidiaries need not pay any such Tax or claim if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or such Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such Taxes and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect. () The Company shall not, and shall not permit any of the Subsidiaries to, file or consent to the filing of any consolidated or combined income tax return with any Person (other than the Company or any of the Subsidiaries). . EMPLOYEE BENEFIT PLANS. () The Company shall, and shall cause each ERISA Affiliate to, () comply in all material respects with the provisions of ERISA to the extent applicable to any Benefit Plan maintained by it and cause all Benefit Plans maintained by it to satisfy the conditions under the Code for tax qualification of all such plans intended to be tax qualified; and () avoid (A) any material accumulated funding deficiency (within the meaning of ERISA '302 and Code '412(a)) (whether or not waived); (B) any act or omission on the basis of which it or an ERISA Affiliate might incur a material liability to the PBGC (other than for the payment of required premiums) or to a trust established under former ERISA '4049; (C) any transaction with a principal purpose described in ERISA '4069; and (D) any act or omission that might result in the assessment by any Multiemployer Plan of withdrawal liability against the Company or any ERISA Affiliate, but only to the extent that the liability arising from a failure to comply with any covenant set forth in (i) or (ii) could reasonably be expected to result in a liability to it or a Subsidiary or an ERISA Affiliate for any one such event in excess of $100,000; provided however that this covenant will not apply to the employee benefit plans assumed by the Company or a Subsidiary pursuant to any acquisition contemplated by the Loan Documents until the 120th day after such acquisition is completed. () The Company shall not, directly or indirectly, and shall not permit its Subsidiaries or any ERISA Affiliate to directly or indirectly by reason of an amendment or amendments to, or the adoption of, one or more Benefit Plans subject to Title IV or ERISA, permit the present value of all benefit liabilities, as defined in Title IV of ERISA (using the actuarial assumptions utilized by the PBGC upon termination of a plan), to increase by more than $100,000; PROVIDED that this limitation shall not be applicable to the extent that the fair market value of assets allocable to such benefits, all determined as of the most recent valuation date for each such Benefit Plan, is in excess of the benefit liabilities, or to increase to the extent security must be provided to any Benefit Plan under Section 401(a)(29) of the Code. Neither the Company nor any of its Subsidiaries shall establish or become obligated to any new Retiree Welfare Plan, or modify any existing Retiree Welfare Plan, which could result in an increase in annual cost, or could result in an annual increase in liability to the Company, in either case by more than $50,000. Neither the Company nor any of its Subsidiaries shall establish or become obligated to any new unfunded Benefit Plan, or modify any existing unfunded Benefit Plan, without the prior written approval by the Holder. The Company shall not, directly or indirectly, and shall not permit its Subsidiaries or any ERISA Affiliate to (i) satisfy any liability under any Benefit Plan by purchasing annuities from an insurance company or (ii) invest the assets of any Benefit Plan with an insurance company, unless, in each case, such insurance company is rated AA by Standard & Poor's Corporation and the equivalent by each other nationally recognized rating agency at the time of the investment. () With respect to other than a Multiemployer Plan, for each Benefit Plan hereafter adopted or maintained by the Company, any of its Subsidiaries or any other ERISA Affiliate and which is intended to be qualified under Section 401(a) of the Code, the Company shall (i) seek, or cause its Subsidiaries or other ERISA Affiliates to seek, and receive determination letters from the IRS to the effect that such Benefit Plan is qualified within the meaning of Section 401(a) of the Code; and (ii) from and after the adoption of any such Benefit Plan, cause such plan to be qualified within the meaning of Section 401(a) of the Code and to be administered in all material respects in accordance with the requirements of ERISA and Section 401(a) of the Code. () With respect to each Benefit Plan hereafter adopted or maintained by the Company, any of its Subsidiaries or any other ERISA Affiliate and which is a welfare plan within the meaning of Section 3(1) of ERISA, the Company shall comply, or cause its Subsidiaries or other ERISA Affiliates to comply, with the notice and continuation coverage requirements of Section 4980B of the Code and the regulations thereunder to the extent noncompliance could result in a material liability. () The foregoing notwithstanding, the provisions of this SECTION 7.11 shall not apply to an Acquired Company for a period of six months from the time of its acquisition by the Company or a Subsidiary, if information disclosed by such Acquired Company to the Company or a Subsidiary on a schedule to its Acquisition Documents indicates that such Acquired Company would, at the time of its acquisition by the Company or a Subsidiary, be in violation of this SECTION 7.11, and such violation would not have a Material Adverse Effect. . ENVIRONMENTAL LAWS. The Company shall, and shall cause each of its Subsidiaries to, conduct its business so as to, and maintain a system to assure that it will, comply with all applicable Environmental Laws and shall promptly take corrective action to remedy any non-compliance with any Environmental Law, except for non-compliances which individually or in the aggregate would not have a Material Adverse Effect. . FURTHER ASSURANCES. From time to time, upon the request of the Holder, the Company shall, and shall cause each of the Subsidiaries to, make such filings and seek such consents, approvals, permits and waivers as may be necessary or desirable in the reasonable judgment of the Holder to permit the Holder to exercise all of its rights under each of the Loan Documents, including without limitation the right to exercise the Warrants and the Stage I Warrants, to convert the Notes, the Senior Preferred Shares and the Voting Preferred Shares and to enforce all the covenants thereunder and under the Business Relationship Agreement and the terms of the Voting Preferred Shares. . OTHER AFFIRMATIVE COVENANTS. The Company shall cause each of its Subsidiaries to comply with Section 2 of the Purchase Agreement and this ARTICLE 7. . SOLVENCY. The Company and the Subsidiaries shall, on a consolidated basis, and Atlantic on a standalone basis shall, be and remain Solvent. "SOLVENT" means that the aggregate present fair saleable value of such Person's assets is in excess of the total cost of its probable liability on its existing debts to third parties as they become absolute and matured, such Person has not incurred debts beyond its foreseeable ability to pay such debts as they mature, and such Person has capital adequate to conduct the business in which it is presently employed. . INDEBTEDNESS. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, remain liable, create, incur, assume, guaranty, or otherwise become or remain directly or indirectly liable with respect to any Indebtedness except: () the Company and the Subsidiaries may become and remain liable with respect to the Obligations; () the Company and the Subsidiaries may become and remain liable with respect to the Anticipated Financing created and incurred pursuant to Section 2.4 of the Purchase Agreement; () the Subsidiaries of the Company may become and remain liable with respect to intercompany indebtedness to the Company; PROVIDED that all such intercompany indebtedness is subordinated to the Obligations and evidenced by an intercompany note executed by such Subsidiary, all in form and substance satisfactory to the Holder; () the Company and the Subsidiaries may become and remain liable with respect to unsecured debt incurred in connection with the acquisition by the Company or a Subsidiary of any of the Acquired Companies in accordance with the terms of the Acquisition Agreements including, without limitation, debt that is assumed in such acquisition provided that such debt is prepayable at the option of the Company; () the Company and the Subsidiaries may become and remain liable with respect to contingent or deferred payment obligations incurred by the Company or any of its Subsidiaries in connection with the acquisition of assets by the Company or any of its Subsidiaries in the ordinary course of business, which payment obligation is secured solely by the acquired assets; () prior to January 1, 1997, the Company may incur the debt permitted pursuant to Section 2.7(c)(ii) of the Purchase Agreement; () if the Stage II Closing has been consummated, from January 1, 1997 until the earlier of July 1, 1997 or the first date that the quotient, expressed as a percentage, of the number of LOS Households in service areas with respect to which Purchaser's Affiliates have then exercised their options under Article 3 of the Business Relationship Agreement divided by the number of LOS Households in all service areas subject to the Business Relationship Agreement (the "BR PERCENTAGE") first exceeds 30%, the Company may incur Indebtedness in the aggregate principal amount of $25,000,000 to the extent necessary to fund operations or repay existing debt or used to effect acquisitions or capital expenditures (including acquisitions or capital expenditures in the form of Capital Leases) permitted under Section 7.27 hereof; and () after July 1, 1997, the Company may incur Indebtedness in an aggregate amount equal to the product of (x) $250,000,000 (reduced by the principal amount of the Indebtedness incurred under subsection (h) hereof and then outstanding) at the time such Indebtedness is contemplated to be incurred by the Business Plan multiplied by (y) the difference between (i) 100% and (ii) the BR Percentage at the time the Indebtedness is incurred; PROVIDED that after the first date that the BR Percentage is equal to or greater than 75%, no debt may thereafter be incurred hereunder. The provisions of this SECTION 7.16 notwithstanding, the Company shall not permit Atlantic to directly or indirectly remain liable, create, incur, assume, guaranty or otherwise become or remain directly or indirectly liable with respect to any Indebtedness. . LIENS. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, maintain, create, incur, assume or permit to exist any lien on or with respect to any property or asset (including any document or instrument in respect of goods or accounts receivable) of the Company or any Subsidiary, whether now owned or hereafter acquired, or any income or profits therefrom, except: () liens granted pursuant to the Loan Documents or disclosed in Schedule 4.8 of the Purchase Agreement (as amended with respect to Acquired Companies pursuant to Section 2.10 of the Purchase Agreement) and not discharged as contemplated by Section 3.2(a) of the Purchase Agreement; () liens securing Indebtedness permitted under SECTIONS 7.16(G) and (H) above; and () liens securing Indebtedness of acquired entities in acquisitions or for capital expenditures, in either case which are permitted under SECTION 7.27. The provisions of this SECTION 7.17 notwithstanding, the Company shall not permit, nor shall it permit any of the Subsidiaries, to directly or indirectly, maintain, create, incur, assume or permit to exist any lien on or with respect to (i) any property or assets of Atlantic or (ii) any assets which are used in connection with Wireless Cable Television Systems subject to the Business Relationship Agreement; PROVIDED HOWEVER, that this clause (ii) shall not apply to liens securing Indebtedness issued pursuant to SECTION 7.16(H) hereof. . RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES. The Company shall not, nor shall it permit any of the Subsidiaries to, alter its corporate, capital or legal structure or to enter into any merger, or consolidate, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, sub-lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired (other than in the ordinary course of business), or acquire by purchase, lease or otherwise, in one transaction or a series of transactions, all or any part of the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person (other than purchases or other acquisitions of inventory, leases, materials, property and equipment in the ordinary course of business) or agree to do any of the foregoing at any future time, except: () the Company and the Subsidiaries may make acquisitions and capital expenditures in the manner expressly provided in SECTION 7.27 hereof; () the Company and the Subsidiaries may from time to time make sales or other dispositions of assets not subject to the Business Relationship Agreement having a cumulative fair market value in any twelve month period not in excess of the greater of $1,000,000 in the aggregate or 5% in the aggregate of Consolidated Operating Cash Flow (hereinafter defined) for the fiscal year preceding any such sale; PROVIDED that () the consideration received shall be an amount at least equal to the fair market value thereof and () at least 85% of the consideration received shall be cash; PROVIDED, HOWEVER, that in no event shall the Company sell assets (other than assets of DE MINIMIS value) which are used or useful in providing the services required to be provided by the Company or its Subsidiaries under the Business Relationship Agreement; and () the Company and its Subsidiaries may from time to time dispose of FCC Licenses and Channel Leases for equivalent rights in replacement FCC Licenses and Channel Leases in the same operating market and the swapping of assets for equivalent or better replacement assets shall be permitted if at least 20 days prior notice is given to the Holder (other than in the case of swaps involving assets of DE MINIMIS value). "CONSOLIDATED OPERATING CASH FLOW" shall mean, for any period, the sum (without duplication) of the amounts for such period of (i) net income, (ii) depreciation expense, (iii) amortization expense, (iv) taxes paid, and (v) service fees under the Loan Documents LESS (x) capital expenditures and (y) increases in net current assets (increases in inventory and accounts receivable LESS increases in accounts payable), determined on a consolidated basis for the Company and the Subsidiaries in accordance with GAAP. . RESTRICTED PAYMENTS. The Company shall not, nor shall it permit any Subsidiary to: () declare or pay any dividend or make any distribution (other than dividends required to be paid by the Series A Convertible Preferred Stock and 6% Series B Convertible Preferred Stock or on any shares the issuance of which has received a Purchaser Group Approval) on shares of the Company or any Subsidiary; () purchase, redeem or otherwise acquire or retire for value any stock of the Company or of any Subsidiary or any warrants, rights or options to acquire shares of any class of such stock; () make any principal payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment, scheduled sinking fund payment, or scheduled redemption payment, any Indebtedness that is subordinate or junior in right of payment to the Notes (other than any such Indebtedness owing to the Company or any wholly-owned Subsidiary of the Company); or () make any Investment (other than Investments permitted by SECTION 7.27 or 7.29 hereof). . ISSUANCE OF STOCK. The Company shall not, and shall not permit any Subsidiary to, authorize or issue any capital stock except for (i) shares issuable upon exercise of the Warrants and the Stage I Warrants or conversion of the Notes, the Senior Preferred Shares or the Voting Preferred Shares, (ii) shares issued in connection with the acquisition of the Acquired Companies as described in the Acquisition Agreements, (iii) Common Shares issued upon conversion of shares of Series A Convertible Preferred Stock and 6% Series B Convertible Preferred Stock or the exercise of options, warrants and other purchase rights disclosed on Schedule 4.3 to the Purchase Agreement, (iv) options and warrants with respect to Common Shares set forth on Schedule I hereto, (v) Common Shares issued in payment of the purchase price under acquisitions or to fund capital expenditures, in each case permitted pursuant to SECTION 7.27 hereof, (vi) Common Shares issued pursuant to Section 2.7(c)(ii) of the Purchase Agreement, and (vii) Common Shares assumed to be issued when calculating Fully-Diluted Common Shares immediately after consummation of the Stage II Closing. . TRANSACTIONS WITH AFFILIATES. The Company shall not, nor shall it permit any of the Subsidiaries to, enter into, directly or indirectly, any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except (i) for transactions required by the ServiceCo Documents, and (ii) in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person that is not an Affiliate. . CERTAIN OTHER RESTRICTIONS. The Company shall not, nor shall it permit any of the Subsidiaries to, engage in any business or undertake any activities or otherwise do any act, that would subject the Holders, in the reasonable opinion of the Holders, to a risk of violation of the MFJ. In addition: () the Company will ensure that its directors and senior management, and the directors and senior management of the Subsidiaries, are aware of the terms of the MFJ and of what types or categories of businesses or activities might constitute a breach thereof. The Company shall procure all managers having significant responsibility for matters addressed in the MFJ to sign a certificate as described in Section V of the MFJ, or such other form as the Holders may reasonably require from time to time. The Company shall ensure that the Subsidiaries and any other company or other entity in which it or any Subsidiary holds an interest shall comply with the terms of this provision; and () the Company shall, and shall cause the Subsidiaries to, provide all necessary and reasonable assistance to the Holders in any MFJ proceeding or investigation, at the request of the Holders. It is the intention of the Company and the Holders that, in addition to any damages to which the Holders may be entitled for violation of this provision, this provision may be enforced by grant of injunctive relief to restrain any such breach by the Company or a Subsidiary. . CONTINGENT OBLIGATIONS. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, create or become or be liable with respect to any Contingent Obligation except: () Contingent Obligations of the Company and the Subsidiaries incurred pursuant to the Loan Documents; () Contingent Obligations resulting from endorsement of negotiable instruments for collection in the ordinary course of business; () Contingent Obligations in respect of operating leases; () intercompany Contingent Obligations with respect to the Company or any other Subsidiary; PROVIDED that all such intercompany Contingent Obligations are subordinated to the Obligations; () Contingent Obligations which the Company elects to treat as Indebtedness and which could then be incurred as Indebtedness under SECTION 7.16 hereof; () Contingent Obligations of the Company in respect of assisting the Subsidiaries in providing goods and services in the ordinary course of their respective businesses. For purposes of this SECTION 7.23, the term "CONTINGENT OBLIGATIONS" shall mean any direct or indirect liability, contingent or otherwise () with respect to any indebtedness, lease, dividend or other obligation of another if the primary purpose or intent thereof is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligations will be protected (in whole or in part) against loss in respect thereof and () with respect to any letter of credit. Contingent Obligations shall include with respect to the Company or any of the Subsidiaries, without limitation, (A) the direct or indirect guaranty, endorsement (otherwise than for the collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by the Company or any of the Subsidiaries, (B) the obligation to make take-or- pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, and (C) any liability of the Company or any of the Subsidiaries for the obligations of another through any agreement (contingent or otherwise) (x) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), and (y) to maintain the solvency or any balance sheet item, level of income or financial condition of another (except as expressly provided in this Warrant), if in the case of any agreement described under subclause (x) or (y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. . CONDUCT OF BUSINESS. Except as expressly provided in the Loan Documents, the Company shall not, nor shall it permit any of the Subsidiaries to, engage in any line of business except those described in the Company's Transition Report on Form 10-K for the period ended March 31, 1994 and the activities described in Note 2 to the Company's financial statements contained in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 which, in the sole judgment of the Purchaser Group, do not violate the MFJ; provided, however, that prior to the time that the BR Percentage first exceeds 30%, the Company and its Subsidiaries may engage in other business activities related to the use of the MMDS Spectrum if (i) they are in compliance with all of their obligations hereunder, under the other Loan Documents and the documents related to the Anticipated Financing, (ii) such activities will not have a material adverse effect on the ability of the Company and the Subsidiaries to perform their obligations under the Business Relationship Agreement, and (iii) the Company does not enter into any joint ventures, partnerships or other arrangement with a third Person to share the profits, losses and control of such activities with any person unless the Company has offered the Purchaser the right to enter into such arrangement on terms no less favorable to the Purchaser than those agreed to by the third person and in any event, the Company shall not enter into such an arrangement with any Person if such Person or any Affiliate of such Person is engaged in operating, providing or marketing wireline cable or local wireline telephone systems or services within the United States. . CREATION OF SUBSIDIARIES; DISPOSAL OF SUBSIDIARY STOCK. () The Company shall not, nor shall it permit any of the Subsidiaries to, create or acquire any interest in any Subsidiaries, unless such Subsidiary is wholly-owned by the Company or a wholly-owned Subsidiary or unless expressly permitted by clause (iii) of SECTION 7.24 hereof. () The Company shall not, and shall not permit any of the Subsidiaries to, directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock, partnership interests, or other equity securities (or warrants, rights or options to acquire shares or other equity securities) of any of the Subsidiaries, except (i) to the Company or another Subsidiary of the Company, (ii) to qualify directors if required by applicable law, (iii) as permitted by Section 7.18 hereof, (iv) as reflected on Schedule 4.2 to the Purchase Agreement or (v) as collateral for the Notes. . AMENDMENTS TO CHARTER DOCUMENTS. Except as expressly provided in the Loan Documents, the Company shall not, nor shall it permit any of the Subsidiaries to, make any amendment to, or waive any of its material rights under, its articles or certificate of incorporation, as the case may be, its by-laws or other documents relating to its capital stock, or other equity interests of the Company or any of the Subsidiaries (other than non-material amendments which, in the aggregate, would not have a Material Adverse Effect and which would not adversely affect the rights of the Warrants or the Warrant Shares) without, in each case, obtaining the written consent of all Holders to such amendment or waiver. . ACQUISITIONS AND CAPITAL EXPENDITURES. The Company shall not, nor shall it permit any of its Subsidiaries to, incur any capital expenditures or acquire the capital stock or assets of any Person, except for capital expenditures reflected in the Business Plan; PROVIDED, HOWEVER, that, so long as no Default shall have occurred and be continuing under the Notes or Senior Preferred Shares, until the BR Percentage is at least 30%: () prior to July 1, 1997, the Company may make, in addition to those reflected in the Business Plan, capital expenditures for which the aggregate consideration to be paid does not exceed $20 million and acquisitions of businesses for which the aggregate value of the consideration paid and the liabilities assumed, in the aggregate, does not exceed $15 million, () after July 1, 1997, the Company may incur additional capital expenditures so long as the aggregate consideration to be paid therefor, including for capital expenditures made prior to July 1, 1997, does not exceed $35 million, and may make additional acquisitions so long as the aggregate value of the consideration paid for and the liabilities assumed in such acquisitions, in the aggregate and including acquisitions made prior to July 1, 1997, does not exceed $25 million. . SALE OR DISCOUNT OF RECEIVABLES. The Company shall not, nor shall it permit any of the Subsidiaries to, directly or indirectly, sell any of their notes or accounts receivable except solely in the ordinary course of business for the collection of delinquent accounts. . INVESTMENTS. The Company shall not, nor shall it permit any of the Subsidiaries to, make or permit to exist, any Investments, directly or indirectly, other than (a) marketable direct obligations of the United States of America which mature within 5 years from the date of issue or participations in marketable direct obligations of the United States of America acquired from domestic banks having total assets in excess of $500,000,000, (b) certificates of deposit and bankers' acceptances of domestic banks having total assets in excess of $500,000,000 and demand and time deposits in any bank, whether domestic or foreign, (c) securities commonly known as "commercial paper" issued by any company organized and existing under the laws of the United States of America or any state thereof which at the time of purchase have been rated and the ratings for which are not less than "P-1" if rated by Moody's, and not less than "A-1" if rated by Standard and Poor's, (d) written agreements under which domestic banks having total assets in excess of $500,000,000 sell and agree to repurchase marketable direct obligations of the United States of America, (e) money market funds backed by U.S. Obligations, (f) acquisitions of companies if such acquisition is permitted pursuant to SECTION 7.27 hereof and such acquisition is of the entire interest in the equity of the acquired company, and (g) the Company's investment in ACTV, Inc. described in Schedule 4.13(6) to the Purchase Agreement. . ACQUIRED COMPANIES. The term "Subsidiaries" as used in the covenants contained in this ARTICLE 7 shall be deemed to include each Acquired Company from and after the date that the acquisition of such Acquired Company is consummated, except for the grace periods applicable thereto contained in this SECTION 7.30. The following provisions of this ARTICLE 7 shall not apply to any Acquired Company until the end of the grace period after the date of such Acquired Company's acquisition by the Company set forth opposite the reference to such provision below; PROVIDED, HOWEVER, that (i) the failure of the Acquired Company to comply with such provisions immediately is due to circumstances existing at the time of consummation of the acquisition, (ii) the Company is using all reasonable and diligent efforts to bring such Acquired Company into compliance with such provisions, and (iii) such failure of such Acquired Company to comply with such provisions does not have a material adverse affect on the Company's ability to comply with its obligations under the Business Relationship Agreement: SECTION REFERENCE GRACE PERIOD 7.1(b) 60 days 7.2 60 days 7.3 180 days 7.6 60 days 7.7 60 days 7.8 (last sentence only) 60 days 7.10 60 days 7.24 30 days . OBSERVER RIGHTS. The Company shall give the Holders written notice of each meeting of the boards of directors of the Company and each Subsidiary and any committees or other groups exercising responsibilities comparable to such boards of directors at the same time as such notice is given to the directors or committee members, as the case may be, but in no event less than two days prior to any meeting, such written notice specifying the time and place of such meeting. Upon receipt of such written notice, the Purchasers by Purchaser Group Approval may designate one representative of the Holders to attend any such meeting in a nonvoting observer capacity and the Company shall invite such representative to each meeting of such boards and committees; PROVIDED, HOWEVER, that in no event shall there be more than two such representatives for all holders of the Notes, the Warrants, the Stage I Warrants and the Senior Preferred Stock. The Company shall provide such representative copies of all notices, minutes, consents and other material which have been provided to the Company's or a Subsidiary's directors or any committee member, as the case may be, no later than at the time of any such meeting. ARTICLE . HOLDER'S REMEDIES . EQUITABLE RELIEF; OTHER REMEDIES. The Company acknowledges that the covenants contained in ARTICLES 6 and 7 are reasonable and necessary to protect the legitimate interests of the Holder, that the Holder would not have entered into the Purchase Agreement and the various Loan Documents in the absence of such restrictions, and that any violation of any provision of those Sections will result in irreparable injury to the Holder and its affiliates. The Company agrees that the Holder shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as an equitable accounting of all earnings, profits and other benefits arising from any violation of ARTICLES 6 and 7, which rights shall be cumulative and in addition to any other rights or remedies to which the Holder may be entitled. . REPRICING OF WARRANTS. () Upon the occurrence from time to time of any of the following conditions or events (each a "REPRICING EVENT") then the Tier 1 Exercise Price of the Warrants shall be adjusted as set forth herein: (i) the Company defaults in the performance of or compliance with any covenant or agreement contained in SECTIONS 7.1, 7.4, 7.5, 7.8, and 7.15 through 7.27 of this Warrant; or (ii) any representation or warranty contained in Sections 4.1 through 4.3, 4.9, 4.12, 4.14, 4.15, 4.18, 4.24, 4.29 and 4.32 through 4.38 (excluding 4.36) of the Purchase Agreement (without regard to any materiality limitation therein except that (i) the materiality provisions of Section 4.24 shall remain in effect and (ii) the materiality provisions of Section 4.15 shall remain in effect until the Threshold Amount (as defined therein) equals zero) proves to have been false or incorrect in any respect on the Stage I Closing Date or Stage II Closing Date; or (iii) any representation or warranty contained in the revised representations and warranties provided by the Company in Sections 4.1 through 4.3, 4.9, 4.12, 4.14, 4.15, 4.18, 4.24, 4.29 and 4.32 through 4.38 (excluding 4.36) of the Purchase Agreement pursuant to Section 2.10 of the Purchase Agreement (treating such representations and warranties as being made with respect to each of the Acquired Companies, and without regard to any materiality limitation therein except that (i) the materiality provisions of Section 4.24 shall remain in effect and (ii) the materiality provisions of Section 4.15 shall remain in effect until the Threshold Amount (as defined therein) equals zero) proves to have been false or incorrect in any respect on the Stage II Closing Date. () After the occurrence of a Repricing Event, the Required Holders may send to the Company a notice specifying the nature of such Repricing Event and an estimate, to the extent feasible, of the amount of the damages, losses, deficiencies, liabilities, costs or expenses to the Company and the Subsidiaries (including without limitation for purposes of SECTION 8.2(A)(I) Acquired Companies from and after the time such requirements are deemed to be applicable to such Acquired Companies pursuant to SECTION 7.30 hereof) on a consolidated basis which arise from defaults referred to in SECTION 8.2(A)(I) or the inaccuracy of the representations and warranties referred to in SECTION 8.2(A)(II) or 8.2(A)(III) (without regard to any materiality limitation therein except as provided in SECTION 8.2(A)(II) or 8.2(A)(III)) ("REPRICING DAMAGES") to the extent then feasible (which estimate shall not be conclusive of the final amount of damages) (the "CLAIM NOTICE"). () At such time as the aggregate Repricing Damages for all Repricing Events exceed $20,000,000, the Tier 1 Exercise Price per share then in effect shall be reduced by an amount equal to the product of (i) the then applicable Preferred Conversion Ratio multiplied by (ii) the quotient of (A) the aggregate Repricing Damages through the date such calculation is made, divided by (B) (1) in the case of a Repricing Event described in SECTION 8.2(A)(II) or (III), the Fully-Diluted Common Shares of the Company determined immediately after consummation of the Stage II Closing and (2) in the case of a Repricing Event described in SECTION 8.2(A)(I), the Fully-Diluted Common Shares of the Company at the date of the Claim Notice with respect thereto. () The Required Holders and the Company shall negotiate in good faith to arrive at the amount of Repricing Damages, but in the event that the parties are unable to reach agreement as to such amount within 30 days of the date of the latest Claim Notice, the Company shall deliver to the Required Holders a list of three Qualified Investment Banking Firms. Within 10 days of the delivery of such list, the Required Holders shall select one of the investment banking firms on such list. Such investment banking firm shall render its opinion of the amount of the aggregate Repricing Damages within 30 days of such selection and such opinion shall be conclusive and binding upon the Company and the Holder as to the amount of such Repricing Damages. All fees and costs of the selected investment banking firm shall be borne by the Company. () Notwithstanding the foregoing, however, Repricing Damages shall not include damages (i) resulting from a Repricing Event described in SECTION 8.2(A)(II) OR (III) unless the Claim Notice with respect thereto is delivered not later than the last day of the 18th full calendar month following (1) the Stage II Closing Date, (2) if the Stage II Closing has not occurred, the Stage I Closing Date or (3) to the extent that such Repricing Damages relate to Section 4.15 of the Purchase Agreement, the date on which the Holders receive actual notice of the final amount of such damages; (ii) to the extent that the Holder has actually received indemnification therefor pursuant to Section 7.2 of the Purchase Agreement; (iii) resulting from a breach of any of the covenants referred to in SECTION 8.2(A)(I) to the extent that such breach is caused principally by an action which the holders of Voting Preferred Shares approved or disapproved in accordance with Section 6(e) of the Designation of Terms of the Voting Preferred Shares; PROVIDED, HOWEVER, that the limitations contained in this clause (iii) shall not apply if the Required Holders of Voting Preferred Shares (as defined therein) have notified the Company in writing, within 30 days of the receipt of a written request for such consent, that they have waived their right to consent to the specific action with respect to which Repricing Damages are claimed; or (iv) which have previously been reflected in an adjustment pursuant to clause (c) above and in any comparable adjustment under the Senior Preferred Shares or the Stage I Warrants. ARTICLE . MISCELLANEOUS . NOTICES. Any notice or other communication to be given hereunder shall be in writing and shall be delivered by recognized courier, telecopy or certified mail, return receipt requested, and shall be conclusively deemed to have been received by a party hereto and to be effective on the day on which delivered or telecopied to such party at its address set forth below (or at such other address as such party shall specify to the other parties hereto in writing), or, if sent by certified mail, on the third business day after the day on which mailed, addressed to such party at such addresses. In the case of a Holder, such notices and communications shall be addressed to (a) if to BANX Partnership (so long as BANX Partnership is the Holder of this Note), to Alexander Good, Bell Atlantic Corporation, 1310 North Court House Road, Arlington, VA 22201; Thomas R. McKeough, Bell Atlantic Corporation, 1717 Arch Street, Philadelphia, PA 19103; and Philip R. Marx, Bell Atlantic Corporation, 1717 Arch Street, Philadelphia, PA 19103, and NYNEX Corporation, 1113 Westchester Avenue, White Plains, NY 10604-3510), Attention: Chief Financial Officer and to such address Attention: General Counsel, (b) if to any other Holder his or her address as shown on the books maintained by the Warrant Agency; unless the Holder shall notify the Company and the Warrant Agency that notices and communications should be sent to a different address, in which case such notices and communications shall be sent to the address specified by the Holder. In the case of the Company, such notices and communications shall be addressed as follows (until notice of a change is given as provided herein): CAI Wireless Systems, Inc., 12 Corporate Woods Blvd., Albany, New York 12211, Attention: Jared E. Abbruzzese, Chairman and Chief Executive Officer, Fax No. (518) 462-3045, Telephone: (518) 462-2632, with a copy to: Day, Berry & Howard, One Canterbury Green, Stamford, Connecticut 06901-2047, Attention: Sabino Rodriguez, III, Esq. . WAIVERS; AMENDMENTS. No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holder are cumulative and not exclusive of any rights or remedies which the Holder would otherwise have. The provisions of this Warrant may be amended, modified or waived with (and only with) the written consent of the Company and Required Holders (including any permitted transferee holding a Warrant); PROVIDED, HOWEVER, that no such amendment, modification or waiver shall, without the written consent of the Holder, (a) change the type and number of Voting Preferred Shares subject to purchase upon exercise of this Warrant, the Exercise Price or provisions for payment thereof (except as a result of amendments, modifications or waivers of the provisions of SECTION 8.2 hereof), or (b) amend, modify or waive the provisions of this Section or ARTICLE 5 with respect to the Holder. Any such amendment, modification or waiver effected pursuant to this Section shall be binding upon the Holder, upon each future holder of the Warrants and Warrant Shares issuable hereunder and upon the Company. In the event of any such amendment, modification or waiver the Company shall give prompt notice thereof to all holders of Warrants and, if appropriate, notation thereof shall be made on all Warrants thereafter surrendered for registration of transfer or exchange. No notice or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. . GOVERNING LAW. This Warrant shall be construed in accordance with and governed by the laws of the State of New York. . SURVIVAL OF AGREEMENTS. All covenants and agreements made by the Company herein shall be considered to have been relied upon by the Holder and shall survive the issuance and delivery of the Warrant, and shall continue in full force and effect so long as this Warrant is outstanding. . COVENANTS TO BIND SUCCESSOR AND ASSIGNS. All covenants, stipulations, promises and agreements in this Warrant contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. . SEVERABILITY. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. . SECTION HEADINGS. The section headings used herein are for convenience of reference only, are not part of this Warrant and are not to affect the construction of or be taken into consideration in interpreting this Warrant. . NO RIGHTS AS STOCKHOLDER. This Warrant shall not entitle any Holder to any rights as a stockholder of the Company and no dividends shall be payable or accrue in respect of this Warrant or the interest represented hereby or the Warrant Shares exercisable hereunder unless and until and only to the extent this Warrant shall be exercised. . NO REQUIREMENT TO EXERCISE. Nothing contained in this Warrant shall be construed as requiring the Holder to exercise this Warrant. } { IN WITNESS WHEREOF, CAI Wireless Systems, Inc. has caused this Stage II Warrant to be executed in its corporate name by one of its officers thereunto duly authorized. CAI Wireless Systems, Inc. By: /S/ JARED E. ABBRUZZESE Jared E. Abbruzzese Chairman, Chief Executive Officer & President } { SUBSCRIPTION NOTICE (To be executed upon exercise of Warrant) To CAI WIRELESS SYSTEMS, INC. The undersigned hereby irrevocably elects to exercise the right of purchase represented by the attached Warrant for, and to purchase thereunder, the number of Warrant Shares specified below, from the Tier of the Warrant specified below, as provided for therein, and tenders herewith payment of the Tier Exercise Price therefor in full in the form of certified or bank cashier's check or wire transfer: Shares at Number of SPECIFIED PRICE SHARES EXERCISED Tier 1 Exercise Price Tier 2 Exercise Price Tier 3 Exercise Price Tier 4 Exercise Price Please issue a certificate or certificates for such Warrant Shares in the following name or names and denominations: If said number of shares shall not be all the shares issuable upon exercise of the attached Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of such shares less any fraction of a share paid in cash. Dated: ___________________________________ NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant or with the name of the assignee appearing in the assignment form below. } { CONDITIONAL NOTICE (To be executed upon exercise of Warrant) To CAI WIRELESS SYSTEMS, INC. The undersigned hereby irrevocably elects to exercise the right of purchase represented by the attached Warrant for, and to purchase thereunder, the number of Warrant Shares specified below, from the Tier of the Warrant specified below, as provided for in the attached Warrant: Shares at Number of SPECIFIED PRICE SHARES EXERCISED Tier 1 Exercise Price Tier 2 Exercise Price Tier 3 Exercise Price Tier 4 Exercise Price , subject to the following conditions precedent: i) [MFJ WAIVER] ii) [FCC CONSENT] iii) [OTHER MATERIAL CONSENT OR CONDITION] Upon waiver by the undersigned or satisfaction of such conditions, the undersigned shall tender payment of the Exercise Price in full in the form of certified or bank cashier's check or wire transfer. Upon receipt of such payment, please issue a certificate or certificates for such Warrant Shares in the following name or names and denominations (after receipt of this notice, such payment being all the notice required for such issuance): If said number of shares shall not be all the shares issuable upon exercise of the attached Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of such shares less any fraction of a share paid in cash. Dated: ___________________________________ NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant or with the name of the assignee appearing in the assignment form below. } { ASSIGNMENT (To be executed upon assignment of Warrant) For value received, _________________ hereby sells, assigns and transfers unto ______________ the attached Warrant, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _____________________ attorney to transfer said Warrant on the books of CAI Wireless Systems, Inc., a Connecticut corporation, with full power of substitution in the premises. ___________________________________ NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant. EX-10 6 EXHIBIT 10.16 1995 CAI WIRELESS SYSTEMS, INC. INCENTIVE STOCK PLAN . PURPOSE The purpose of the 1995 CAI Wireless Systems, Inc. Incentive Stock Plan is to motivate and reward superior performance on the part of employees of the Company and its subsidiaries and to thereby attract and retain employees of superior ability. In addition, the Plan is intended to further opportunities for stock ownership by such employees in order to increase their proprietary interest in the Company and, as a result, their interest in the success of the Company. Awards will be made, in the discretion of the Committee, to Key Employees (including officers and directors who are also employees) whose responsibilities and decisions directly affect the performance of any Participating Company. Such incentive awards may consist of stock options, stock appreciation rights payable in stock or cash, performance shares, restricted stock or any combination of the foregoing, as the Committee may determine. . DEFINITIONS When used herein, the following terms shall have the following meanings: "Act" means the Securities Exchange Act of 1934. "Award" means an award granted to any Key Employee in accordance with the provisions of the Plan in the form of Options, Rights, Performance Shares or Restricted Stock, or any combination of the foregoing. "Award Agreement" means the written agreement evidencing each Award granted to a Key Employee under the Plan. "Beneficiary" means the beneficiary or beneficiaries designated pursuant to Section 9 to receive the amount, if any, payable under the Plan upon the death of a Key Employee. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. (All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.) "Committee" means the Stock Option or Compensation Committee of the Board or such other committee as may be designated by the Board to administer the Plan. "Company" means CAI Wireless Systems, Inc. and it successors and assigns. "Fair Market Value" means the fair market value as determined by rules to be adopted by the Committee. "Incentive Stock Option" means a stock option qualified under Section 422 of the Code. "Key Employee" means an employee (including any officer or director who is also an employee) of any Participating Company whose responsibilities and decisions, in the judgment of the Committee, directly affect the performance of the Company and its subsidiaries. "Option" means an option awarded under Section 5 of the Plan to purchase Stock of the Company, which option may be an Incentive Stock Option or a non- qualified stock option. "Participating Company" means the Company or any corporation which at the time an Award is granted qualifies as a "subsidiary" of the Company under Section 425(F) of the Code. "Performance Share" means a performance share awarded under Section 6 of the Plan. "Plan" means the 1995 CAI Wireless Systems, Inc. Incentive Stock Plan, as the same may be amended, administered or interpreted from time to time. "Restricted Stock" means Stock awarded under Section 7 of the Plan subject to such restrictions as the Committee deems appropriate or desirable. "Right" means a stock appreciation right awarded in connection with an option under Section 5 of the Plan. "Stock" means the common shares of the Company. "Total Disability" means a permanent and total disability as defined in Section 22(e)(3) of the Code. . SHARES SUBJECT TO THE PLAN In no event shall more than one million two hundred thousand (1,200,000) shares of Stock be cumulatively available for Awards under the Plan. Subject to the above limitation, shares of Stock to be issued under the Plan may be made available from the authorized but unissued shares, or from shares purchased in the open market. For the purpose of computing the total number of shares of Stock available for Awards under the Plan, there shall be counted against the foregoing limitation the number of shares of Stock which equal the value of performance share Awards, in each case determined as at the dates on which such Awards are granted. If any Awards under the Plan are forfeited, terminated, expire unexercised, are settled in cash in lieu of Stock or are exchanged for other Awards, the shares of stock which were theretofore subject to such Awards shall again be available for Awards under the Plan to the extent of such forfeiture or expiration of such Awards. . GRANT OF AWARDS AND AWARD AGREEMENTS () Subject to the provisions of the Plan, the Committee shall (i) determine and designate from time to time those Key Employees or groups of Key Employees to whom Awards are to be granted; (ii) determine the form or forms of Award to be granted to any Key Employee; (iii) determine the amount or number of shares of Stock subject to each Award; and (iv) determine the terms and conditions of each Award. () Each Award granted under the Plan shall be evidenced by a written Award Agreement. Such agreement shall be subject to and incorporate the express terms and conditions, if any, required under the Plan or required by the Committee. . STOCK OPTIONS AND RIGHTS () With respect to Options and Rights, the Committee shall (i) authorize the granting of Incentive Stock Options, non-qualified stock options, or a combination of Incentive Stock Options and non-qualified stock options; (ii) authorize the granting of Rights which may be granted in connection with all or part of any Option granted under this Plan, either concurrently with the grant of the option or at any time thereafter during the term of the Option; (iii) determine the number of shares of Stock subject to each Option or the number of shares of Stock that shall be used to determine the value of a Right; and (iv) determine the time or times when and the manner in which each Option or Right shall be exercisable and the duration of the exercise period. () Any option issued hereunder which is intended to qualify as an Incentive Stock Option shall be subject to such limitations or requirements as may be necessary for the purposes of Section 422 of the Code or any regulations and rulings thereunder to the extent and in such form as determined by the Committee in its discretion () The exercise period for a non-qualified stock option and any related Right shall not exceed ten years and two days from the date of grant, and the exercise period for an Incentive Stock Option and any related Right shall not exceed ten years from the date of grant. () The Option price per share shall be determined by the Committee at the time any Option is granted and shall be not less than the Fair Market Value of one share of Stock on the date the Option is granted. () No part of any Option or Right may be exercised until the Key Employee who has been granted the Award shall have remained in the employ of a Participating Company for such period after the date of grant as the Committee may specify, if any, and the Committee may further require exercisability in installments; provided, however, the period during which a Right is exercisable shall commence no earlier than six months following the date the Option or Right is granted. () The purchase price of the shares as to which an Option shall be exercised shall be paid to the Company at the time of exercise either in cash or Stock already owned by the optionee having a total Fair Market Value equal to the purchase price, or a combination of cash and Stock having a total fair market value, as so determined, equal to the purchase price. The Committee shall determine acceptable methods for tendering Stock as payment upon exercise of an Option and may impose such limitations and prohibitions on the use of Stock to exercise an Option as it deems appropriate. () In case of termination of employment, the following provisions shall apply: () If a Key Employee who has been granted an Option shall die before such Option has expired, his or her Option may be exercised to the extent it was exercisable as of the date of death by the person or persons to whom the Key Employee's rights under the Option pass by will, or if no such person has such right, by his or her executors or administrators, at any time, or from time to time, within one year after the date of the Key Employee's death or within such other period, and subject to such terms and conditions as the Committee may specify, but not later than the expiration date specified in Section 5(D) above. () If the Key Employee's employment by any Participating Company terminates because of his or her Total Disability, he or she may exercise his or her Options to the extent they were exercisable as of the date of termination of employment at any time, or from time to time, within one year after the date of the termination of his or her employment or within such other period, and subject to such terms and conditions as the Committee may specify, but not later than the expiration date specified in Section 5(D) above. () If the Key Employee is terminated for cause, defined as neglect of duty or misconduct, as reasonably determined by the Committee, the Options or Rights shall be cancelled coincident with the effective date of the termination of employment. () If the Key Employee's employment terminates for any other reason, he or she may exercise his or her Options, to the extent that he or she shall have been entitled to do so at the date of the termination of his or her employment, at any time, or from time to time, within three months after the date of the termination of his or her employment or within such other period, and subject to such terms and conditions as the Committee may specify, but not later than the expiration date specified in Section 5(D) above. () No Option or Right granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the optionee, an Option or Right shall be exercisable only by the Key Employee to whom the Option or Right is granted. () With respect to an Incentive Stock Option, the Committee shall specify such terms and provisions as the Committee may determine to be necessary or desirable in order to qualify such Option as an "incentive stock option" within the meaning of Section 422 of the Code. () With respect to the exercisability and settlement of Rights: (i) Upon exercise of a Right, the Key Employee shall be entitled, subject to such terms and conditions the Committee may specify, to receive upon exercise thereof all or a portion of the excess of (A) the Fair Market Value of specified number of shares of Stock at the time of exercise, as determined by the Committee, over (B) a specified amount which shall not, subject to Section 5(E) be less than the Fair Market Value of such specified number of shares of Stock at the time the Right is granted. Upon exercise of a Right, payment of such excess shall be made as the Committee shall specify in cash, the issuance or transfer to the Key Employee of whole shares of Stock with a Fair Market Value at such time equal to any excess, or a combination of cash and shares of Stock with a combined Fair Market Value at such time equal to any such excess, all as determined by the Committee. The Company will not issue a fractional share of Stock and, if a fractional share would otherwise be issuable, the Company shall pay cash equal to the Fair Market Value of the fractional share of Stock at such time. (ii) In the event of the exercise of such Right, the Company's obligation in respect of any related Option or such portion thereof will be discharged by payment of the Right so exercised. . PERFORMANCE SHARES () Subject to the provisions of the Plan, the Committee shall (i) determine and designate from time to time those Key Employees or groups of Key Employees to whom Awards of Performance Shares are to be made, (ii) determine the Performance Period (the "Performance Period") and Performance Objectives (the "Performance Objectives") applicable to such Awards, (iii) determine the form of settlement of a Performance Share and (iv) generally determine the terms and conditions of each such Award. At any date, each Performance Share shall have value equal to the Fair Market Value of a share of Stock at such date; provided that the Committee may limit the aggregate amount payable upon the settlement of any Award. () The Committee shall determine a Performance Period of not less than two nor more than five years. Performance Periods may overlap and Key Employees may participate simultaneously with respect to Performance Shares for which different Performance Periods are prescribed. () The Committee shall determine the Performance Objectives of Awards of Performance Shares. Performance Objectives may vary from Key Employee to Key Employee and between groups of Key Employees and shall be based upon such performance criteria or combination of factors as the Committee may deem appropriate, including, but not limited to, minimum earnings per share or return on equity. If during the course of a Performance Period there shall occur significant events which the Committee expects to have a substantial effect on the applicable Performance Objectives during such period, the Committee may revise such Performance Objectives. () At the beginning of a Performance Period, the Committee shall determine for each Key Employee or group of Key Employees the number of Performance Shares or the percentage of Performance Shares which shall be paid to the Key Employee or member of the group of Key Employees if Performance Objectives are met in whole or in part. () If a Key Employee terminates service with all Participating Companies during a Performance Period because of death, Total Disability, or under other circumstances where the Committee in its sole discretion finds that a waiver would be in the best interests of the Company, that Key Employee may, as determined by the Committee, be entitled to an Award of Performance Shares at the end of the Performance Period based upon the extent to which the Performance Objectives were satisfied at the end of such period and prorated for the portion of the Performance Period during which the Key Employee was employed by any Participating Company; provided, however, the Committee may provide for an earlier payment in settlement of such Performance Shares in such amount and under such terms and conditions as the Committee deems appropriate or desirable. If a Key Employee terminates service with all Participating Companies during a Performance Period for any other reason, then such Key Employee shall not be entitled to any Award with respect to that Performance Period unless the Committee shall otherwise determine. () Each Award of a Performance Share shall be paid in whole shares of Stock, or cash, or a combination of Stock and cash either as a lump sum payment or in annual installments, all as the Committee shall determine, with payment to commence as soon as practicable after the end of the relevant Performance Period. . RESTRICTED STOCK () Restricted Stock shall be subject to a restriction period (after which restrictions will lapse) which shall mean a period commencing on the date the Award is granted and ending on such date as the Committee shall determine (the "Restriction Period"). The Committee may provide for the lapse of restrictions in installments where deemed appropriate. () Except when the Committee determines otherwise pursuant to Section 7(d), if a Key Employee terminates employment with all Participating Companies for any reason before the expiration of the Restriction Period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Key Employee and shall be reacquired by the Company. () Except as otherwise provided in this Section 7, no shares of Restricted Stock received by a Key Employee shall be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of during the Restriction Period. () In cases of death or Total Disability or in cases of special circumstances, the Committee may, in its sole discretion when it finds that a waiver would be in the best interests of the Company, elect to waive any or all remaining restrictions with respect to such Key Employee's Restricted Stock. () The Committee may require, under such terms and conditions as it deems appropriate or desirable, that the certificates for Stock delivered under the Plan may be held in custody by a bank or other institution, or that the Company may itself hold such shares in custody until the Restriction Period expires or until restrictions thereon otherwise lapse, and may require, as a condition of any Award of Restricted Stock that the Key Employee shall have delivered a stock power endorsed in blank relating to the Restricted Stock. () Nothing in this Section 7 shall preclude a Key Employee from exchanging any shares of Restricted Stock subject to the restrictions contained herein for any other shares of Stock that are similarly restricted. () Subject to Section 7(e) and Section 8, each Key Employee entitled to receive Restricted Stock under the Plan shall be issued a certificate for the shares of Stock. Such certificate shall be registered in the name of the Key Employee, and shall bear an appropriate legend reciting the terms, conditions and restrictions, if any, applicable to such Award and shall be subject to appropriate stop-transfer orders. . CERTIFICATES FOR AWARDS OF STOCK () The Company shall not be required to issue or deliver any certificates for shares of Stock prior to (i) the listing of such shares on any stock exchange on which the Stock may then be listed and (ii) the completion of any registration or qualification of such shares under any federal or state law, or any ruling or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. () All certificates for shares of Stock delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. The foregoing provisions of this Section 8(b) shall not be effective if and to the extent that the shares of Stock delivered under the Plan are covered by an effective and current registration statement under the Securities Act of 1933, or if and so long as the Committee determines that application of such provisions is not required or desirable. In making such determination, the committee may rely upon an opinion of counsel for the Company. () Except for the restrictions on Restricted Stock under Section 7, each Key Employee who receives Stock in settlement of an Award of Stock, shall have all of the rights of a shareholder with respect to such shares, including the right to vote the shares and receive dividends and other distributions. No Key Employee awarded an Option, a Right or Performance Share shall have any right as a shareholder with respect to any shares covered by his or her Option, Right or Performance Share prior to the date of issuance to him or her of a certificate or certificates for such shares. . BENEFICIARY () Each Key Employee shall file with the Company a written designation of one or more persons as the Beneficiary who shall be entitled to receive the Award, if any, payable under the Plan upon his or her death. A Key Employee may from time-to-time revoke or change his or her Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Company. The last such designation received by the Company shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Company prior to the Key Employee's death, and in no event shall it be effective as of a date prior to such receipt. () If no such Beneficiary designation is in effect at the time of a Key Employee's death, or if no designated Beneficiary survives the Key Employee or if such designation conflicts with law, the Key Employee's estate shall be entitled to receive the Award, if any, payable under the Plan upon his or her death. If the Committee is in doubt as to the right of any person to receive such Award, the Company may retain such Award, without liability for any interest thereon, until the Committee determines the rights thereto, or the Company may pay such Award into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Company therefor. . ADMINISTRATION OF THE PLAN () Each member of the Committee shall be a "disinterested person" within the meaning of Rule 16b-3 under the Act or successor rule or regulation. No member of the Committee shall be, or shall have been, eligible to receive an Award under the Plan or any other plan maintained by any Participating Company to acquire stock, stock options, stock appreciation rights, performance shares or restricted stock of a Participating Company at any time within the one year immediately preceding the member's appointment to the Committee. () All decisions, determinations or actions of the Committee made or taken pursuant to grants of authority under the Plan shall be made or taken in the sole discretion of the Committee and shall be final, conclusive and binding on all persons for all purposes. () The Committee shall have full power, discretion and authority to interpret, construe and administer the Plan and any part thereof, and its interpretations and constructions thereof and actions taken thereunder shall be, except as otherwise determined by the Board, final, conclusive and binding on all persons for all purposes. () The Committee's decisions and determinations under the Plan need not be uniform and may be made selectively among Key Employees, whether or not such Key Employees are similarly situated. () The Committee may, in its sole discretion, delegate such of its powers as it deems appropriate. . AMENDMENT, EXTENSION OR TERMINATION The Board may, at any time, amend or terminate the Plan and, specifically, may make such modifications to the Plan as it deems necessary to avoid the application of Section 162(m) of the Code and the Treasury regulations issued thereunder. However, no amendment shall, without approval by a majority of the Company's stockholders, (a) alter the group of persons eligible to participate in the Plan, (b) except as provided in Section 12 increase the maximum number of shares of Stock which are available for Awards under the Plan, (c) materially increase the benefits available to persons under the Plan, or (d) extend the period during which awards may be granted beyond March 27, 2005. No amendment or termination shall impair the rights of any person with respect to a prior Award. . ADJUSTMENTS IN EVENT OF CHANGE IN COMMON STOCK In the event of any recapitalization, reclassification, split-up or consolidation of shares of Stock or, stock dividend, merger or consolidation of the Company or sale by the Company of all or a portion of its assets, the Committee may make such adjustments in the Stock subject to Awards, including Stock subject to purchase by an Option, or the terms, conditions or restrictions on Stock or Awards, including the price payable upon the exercise of such Option, as the Committee deems equitable. . MISCELLANEOUS () Nothing in this Plan or any Award granted hereunder shall confer upon any employee any right to continue in the employ of any Participating Company or interfere in any way with the right of any Participating Company to terminate his or her employment at any time. No Award payable under the Plan shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of any Participating Company for the benefit of its employees unless the Company shall determine otherwise. No Key Employee shall have any claim to an Award until it is actually granted under the Plan. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as provided in Section 7(e) with respect Restricted Stock. () The Committee may cause to be made, as a condition precedent to the payment of any Award, or otherwise, appropriate arrangements with the Key Employee or his or her Beneficiary, for the withholding of any federal, state, local or foreign taxes. () The Plan and the grant of Awards shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. () The terms of the Plan shall be binding upon the Company and its successors and assigns. () Captions preceding the sections hereof are inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provision hereof. . EFFECTIVE DATE, TERM OF PLAN AND SHAREHOLDER APPROVAL The effective date of the Plan shall be March 28, 1995; provided that the Plan shall be approved by the Company's shareholders within twelve months before or after such date. No Award shall be granted under this Plan after the Plan's termination date. The Plan's termination date shall be March 27, 2005. The Plan will continue in effect for existing Awards as long as any such Award is outstanding. EX-10 7 {EXHIBIT 10.17 CONSULTING AND EMPLOYMENT AGREEMENT CONSULTING AND EMPLOYMENT AGREEMENT (this "Agreement") made as of the 3rd day of January, 1996 by and between JOHN PRISCO residing at the address indicated following his signature below (hereinafter referred to as "Executive") and CAI WIRELESS SYSTEMS, INC., a Connecticut corporation having its principal place of business at 18 Corporate Woods Boulevard, Third Floor, Albany, New York (hereinafter referred to as the "Company"). . CAPACITY/TERMS. () CONSULTING PERIOD. Subject to the provisions of this Agreement the Company hereby engages Executive and Executive hereby accepts engagement by the Company as its Chief Operations Officer subject to the provisions of this Agreement during the period commencing as of the date hereof and ending on March 1, 1996 (the "Consulting Period"). During the Consulting Period, Executive shall be deemed an employee of the Company. () EMPLOYMENT TERM. Upon termination of the Consulting Period through January 3, 1998 (the "Employment Term") the Company shall employ Executive and Executive shall work for the Company as its President and Chief Operating Officer on the terms and conditions set forth in this Agreement. The Employment Term shall be automatically renewed annually thereafter for successive one year periods unless either party gives notice to the other of its intention not to renew this Agreement within sixty (60) days of the expiration of the initial Employment Term or applicable renewal term. At the commencement of the Employment Term, the Company shall recommend, and shall propose any action necessary to effect, Executive's addition to the Board of Directors of the Company, subject to applicable law and in accordance with the Company's Certificate of Incorporation and By-Laws. () TERM. Unless otherwise specified, the terms of this Agreement shall be applicable to Executive during both the Consulting Period and the Employment Term, which together with any renewal term are herein referred to together as the "Term". . COMPENSATION/BENEFITS. () SIGNING BONUS. In consideration of Executive entering into this Agreement, upon its execution and delivery, the Company shall pay to Executive the sum of $40,000. () BASE SALARY. During the Term, the Company agrees to pay Executive on the basis of an annualized base salary of $200,000 ("Base Salary"). Such Base Salary shall be reviewed no less frequently than annually during the Term and may be increased but not decreased by the Company's Board of Directors. Such Base Salary shall be payable in accordance with the Company's normal business practices or in such other amounts and at such other times as the parties may mutually agree. () STOCK OPTIONS. Executive shall be granted incentive stock options (as defined in Section 422 of the Internal Revenue Code of 1986) to purchase up to 200,000 shares of Company common stock pursuant an option agreement substantially in the form attached hereto (the "Option Agreement"). Executive will be given at least 10 business days notice of any intent to terminate him for Cause, so that he can exercise his options prior to such termination. () BONUSES. During the Employment Term, the Company shall pay to Executive an annual bonus of up to 35% of the Base Salary paid to Executive during the portion of the Term to which said bonus applies, based upon the achievement of performance targets established within ninety (90) days of the date hereof by the Compensation Committee of the Company's Board of Directors, in consultation with Executive and Chief Executive Officer. The targets will be revised annually, within (90) ninety days of the beginning of each fiscal year or at such other times as may be mutually agreed by the parties. Except for the initial Employment Term, any bonus will normally be payable within 90 days of the close of each fiscal year during the Term such payment to be made with respect to a fiscal year during the Term even after the Term has expired. Bonuses for a portion of a fiscal year shall be paid to the extent earned (as defined in Paragraph 4(D)). () BENEFITS/VACATION. During the Term, the Company shall provide Executive with such other benefits, including medical plans, as are made generally available to employees of the Company from time to time and with such additional benefits as are made available to executive officers of the Company at any time during the Term. Executive shall be entitled to up to five weeks vacation during each year of the Employment Term, provided that the time and duration of vacation periods shall not interfere with the operations of the Company. For purposes of vacation accrual, Executive shall be entitled to credit for the term of service completed during the Consulting Period. Accrued vacation may be carried over or "sold back" to the Company to the extent permitted by, and in accordance with, the policy set forth in the Employee Manual of the Company. () LIFE INSURANCE. Subject to the Executive's submitting to any required physical examinations and provided such policy can be obtained at customary premiums, the Company shall purchase a term insurance policy with the face amount of $200,000 on the life of Executive and shall permit Executive to designate the beneficiary thereof. . SERVICES. During the Term, Executive shall devote substantially all his working time, attention and energies to the business of the Company and its Affiliates (as defined below) under the general direction of the Company's Board of Directors, acting through its Chairman and Chief Executive Officer. Executive agrees to serve, for no additional compensation, as an officer or director of any direct or indirect wholly-owned subsidiary of the Company; provided, that the Executive is entitled to indemnification by the Company, to the full extent permitted by law, with respect to Executive's service in such capacity. The Chief Operating Officer shall be in charge of all day-to-day operations of the Company and the second highest ranking officer of the Company, reporting solely to the Chairman and Chief Executive Officer, who is the highest ranking officer of the Company. Without limiting the generality of the foregoing, during the Term, Executive shall not, without the prior written consent of the Company render services, directly or indirectly, for compensation or otherwise, to or for any other person or firm in competition with the business of the Company in any market served by the Company or its Affiliates without the written consent of the Board of Directors; provided, however, that during the Consulting Period, Executive may remain an employee of Bell Atlantic Corporation, or any Affiliate thereof (collectively, "BAC") until the Closing Date; provided that, notwithstanding anything contained in this Agreement to the contrary, the Company shall not be obligated to pay any amounts due, or provide any benefits, hereunder to Executive to the extent Executive is receiving the same, or an equivalent value therefor, from BAC. As used herein, the term "Affiliate" shall mean any corporation of which the Company directly or indirectly owns at least 51% of the stock and is entitled to elect a majority of the directors. For purposes of this Agreement, CS Wireless Systems, Inc. shall be deemed an Affiliate of the Company for so long as the Company owns not less than 25% of the equity of CS Wireless Systems, Inc. and has the right to actively participate in its management. During the Term, the principal location of Executive's services shall be Albany, New York, except as otherwise mutually agreed. . EARLY TERMINATION. () GENERAL. Executive's employment hereunder shall be terminated and the Company's obligation to employ Executive hereunder shall cease, including the obligation to pay compensation for any period after the date of termination (except as provided in subparagraph 4(D)): (i) immediately upon notice, in the sole discretion of the Company, other than for Cause, (ii) without the necessity of notice, upon the death of Executive, or (iii) upon written notice of a finding that Executive has (a) acted with gross negligence or willful misconduct in connection with the performance of his material duties under Paragraphs 1, 3, 5 and 8, with respect to acts or omissions prior to termination, and has not corrected such action within 15 days of receipt of written notice thereof, (b) defaulted in the performance of his material duties under Paragraphs 1, 3, 5 and 8, with respect to acts or omissions prior to termination, and has not corrected such action within 15 days of receipt of written notice thereof, (c) committed a material act of common law fraud against the Company, or (d) knowingly and in bad faith acted against the best interests of the Company in a manner that has a material adverse affect on the financial condition of the Company (any such finding is referred to herein as "Cause"), provided, however, that for the purposes of this Agreement, in the event that Jared E. Abbruzzese is not the Chief Executive Officer of the Company for any reason, the refusal or unwillingness of the Executive to relocate to Albany, New York, or elsewhere shall not constitute "Cause," and further provided that from and after an event described in Exhibit A to the Option Agreement only events under (iii)(a) above shall constitute "Cause." Upon any termination of Executive's employment, the Term shall expire. Any a breach by the Company of its material obligations under Paragraphs 1(B), 2(A)-(D), 3, 4(D), 4(E), 6(B) and 6(C), which are not corrected within 15 days of receipt of written notice thereof from Executive, shall be deemed a termination by the Company of Executive's employment other than for Cause. () DISABILITY. If Executive shall become unable to efficiently perform the essential functions of his job, even with reasonable accommodation, as a result of a disability or illness, as such terms are defined by the Americans with Disabilities Act, he shall be entitled to his regular compensation until the total period of disability or illness shall exceed: (i) 90 days during any calendar year in the Term hereunder (whether or not continuous and whether or not the same disability or illness); or (ii) 60 continuous days during any calendar year in the Term hereunder, provided, that Executive is eligible for and is receiving payments under any disability plan of the Company. This Agreement may thereafter be terminated by the Company and the Company's obligations hereunder shall cease, including the obligation to pay compensation for any period after the date of termination. Any amounts payable as compensation during the period of disability or illness shall be reduced by any amounts paid during such period under any disability plan or similar insurance wholly paid for by the Company. () EXECUTIVE'S RIGHT TO TERMINATE. Executive may, at any time during the Term, resign. () AMOUNTS PAYABLE TO EXECUTIVE UPON TERMINATION. Upon any termination of Executive's employment hereunder for any reason, the Company shall pay to Executive or his executor or legal representative, as the case may be, any unpaid portion of his Base Salary up to the date of termination, any unpaid bonus for any fiscal year completed prior to date of termination of Executive's employment, the bonus for the fiscal year in which Executive's employment is terminated to the extent earned (as defined below), any expenses incurred in accordance with subparagraph 6(A) and not reimbursed prior to the date of termination, and benefits up to the date of Executive's termination of employment. In addition, in the event of Executive's termination under subparagraph 4(A) other than for Cause (as defined therein) or the death of Executive, the Company shall (i) pay to executive severance in an amount (the "Severance Amount") equal to the greater of (x) his then Base Salary under Paragraph 3, payable in twelve equal monthly installments or (y) the total Base Salary that would have been payable for the balance of the Term (without giving effect to any early termination), payable in equal such monthly installments, and (ii) continue the benefits provided in Paragraph 7 and maintain, or obtain replacement coverage for, all disability insurance, life insurance (including any insurance provided under subparagraph 2(F)), group insurance, medical and dental plans to which Executive and his spouse were receiving as of the date of the termination of his employment under subparagraph 2(E) and containing comparable coverages and benefits, for the period during which Executive is entitled to receive the Severance Amount ("Severance Period") as described above; provided, however, the Company shall not be obligated to provide such benefits under clause (ii) above to the extent Executive is receiving the same, or an equivalent value therefor, from a subsequent employer. With respect to the fiscal year in which the Term expires or Executive's employment is terminated, and provided that the performance targets for such fiscal year established pursuant to subparagraph 2(D) are met as determined with respect to the executive officers of the Company by the Compensation Committee of the Board of Directors of the Company, the portion of such bonus which is deemed "earned" for such fiscal year, shall be calculated as follows: (i) determine the bonus which would have been paid to Executive for the full fiscal year if the financial results for the portion of the fiscal year prior to termination were pro rated to the entire fiscal year; and (ii) multiply the amounts of such bonus as calculated under clause (I) by the fraction of the full fiscal year prior to such termination (determined by dividing the number of days during such fiscal year prior to termination by 365 days). This subparagraph 4(D) shall survive the termination of this Agreement. () NO MITIGATION; LEGAL FEES. In the event of the termination of Executive's employment for any reason, Executive shall have no duty to mitigate damages, and any earnings of Executive shall not reduce the payments otherwise due to Executive hereunder or otherwise, except with respect to benefits as provided for in subparagraph 4(D)(II). Executive shall be entitled to legal fees and costs if Executive institutes any legal action to enforce the Company's obligations hereunder provided that he is the prevailing party. This subparagraph 4(E) shall survive the termination of this Agreement. . EMPLOYER'S AUTHORITY. Executive agrees to observe and comply with the rules and regulations of the Company as adopted by the Company's Board of Directors respecting the performance of his duties and to carry out and perform orders, directions and policies communicated to him from time to time by the Company's Chairman and Chief Executive Officer provided such rules, regulations, orders, directions and policies do not violate any applicable law, rule or regulation or require the commission of a tort or crime. . EXPENSES. () GENERAL. During the Term, the Company shall reimburse Executive for the reasonable business expenses incurred by Executive in the course of performing his duties for the Company hereunder approved in advance or otherwise in accordance with the procedures then in place for such reimbursement. () APARTMENT/COMMUTING. The Company shall arrange, or otherwise reimburse Executive for, accommodations approved by the Company's Chairman and Chief Executive Officer and weekly round trip airline tickets to and from his current residence and Albany, New York during the Term; provided that in the event Executive shall relocate pursuant to the terms of subparagraph 6(C) below, the obligations of the Company under this subparagraph 6(B) shall cease upon Executive's completion of such relocation. In the event Executive is required to pay federal or state taxes in respect of any accommodation or travel expenses hereunder, Executive shall be grossed up for the amount of such taxes and the receipt of the gross up payment. () RELOCATION. By March 1, 1996, the Company's senior management, including Executive, shall evaluate the location of the Company's operations headquarters to determine if more than one headquarters location is appropriate and financially viable. If as a result of such evaluation, the Company's Board of Directors determines that the Executive should relocate to Albany, New York, or elsewhere, then Executive shall relocate to the greater Albany, New York area, or such other designated location, as soon as practicable after the commencement of the Employment Term. Executive shall be reimbursed for expenses reasonably incurred related to sale of his existing house and related relocation expenses as follows: (i) cost of packing and moving; (ii) sales commissions on the sale of his current home equal to local custom and reasonable closing and financing costs of the sale of his current home and the purchase of a home in New York; (iii) seller's and buyer's customary portion of transfer taxes, if any; (iv) payment of interest portion of mortgage payment on his current residence for up to three months during any period such residence is not sold following the acquisition of a residence in New York, or such other location, (subject to extension in the discretion of the Company's Board of Directors); and (v) an amount equal to any federal and state capital gains taxes currently recognized as a result of the purchase of a home in New York, or such other location, for a sales price that is less than the sales price of his current home. Amounts payable under the foregoing clauses (i) through (v) of this subparagraph 6(C) shall be grossed up for any federal and state taxes attributable to the receipt of such payments and attributable to the receipt of gross up payments under this clause. The Company may reimburse Executive for other relocation expenses incurred by Executive during his relocation to New York, with the prior written approval of the Company's Board of Directors. Notwithstanding the foregoing, the maximum amount payable to Executive in respect of this subparagraph 6(C), including the gross up for taxes, shall not exceed $85,000 in the aggregate. . AUTOMOBILE ALLOWANCE. During the Term, Executive shall be entitled to an automobile allowance of $750.00 per month, payable monthly in arrears. . NON-DISCLOSURE/NON-COMPETITION. () Executive will execute the Nondisclosure Agreement of the Company, a copy of which is attached as Annex A hereto and made a part hereof. Said agreement shall survive any termination of the Term hereunder. () Because Executive's services to the Company are special and because Executive has access to the Company's confidential information, Executive covenants and agrees that if (i)(x) Executive's employment is terminated for Cause or (y) Executive voluntarily terminates his employment relationship hereunder with the Company or Executive elects not to renew his employment with the Company following the expiration of the Term, for a period of twelve (12) months following the termination of this Agreement, or (ii) Executive's employment is terminated and Executive is receiving the Severance Amount, for a period not to exceed twelve (12) months during the Severance Period, whichever is applicable, he will not, directly or indirectly, either on his own behalf or on behalf of any person, partnership, corporation, limited liability company or otherwise, (i) engage in any business or undertaking directly competitive with the wireless cable television, cable television, subscription television (excluding video dialtone), direct broadcast satellite or direct-to-home businesses (each a "Related Business") being carried on by the Company, in any market serviced by the Company or any Affiliate thereof at the time of Executive's termination of employment, or in any "Service Area" (as defined in the Business Relationship Agreement referenced below) in which the Company or any Affiliate thereof, could be required to provide transport services for affiliates of BAC or NYNEX Corporation ("NYNEX") (any such BAC or NYNEX affiliates are collectively referred to as "BANX"), pursuant to the Business Relationship Agreement between the Company and BANX as in effect on the date of termination, or (ii) be employed by or provide consulting services to or be an investor, partner, member or shareholder in, any entity or other person in Related Business within 25 miles of any city in which the Company or any Affiliate thereof, does business at time of execution or in which the Company or any Affiliate thereof, is, at the time of Executive's termination of employment, providing transport services for BANX or has rights to broadcast or transmit television programing or in which the Company or any Affiliate thereof, has a transmission license at the time of termination, without the prior written consent of a majority of the independent members of the Board of Directors. The parties agree that the time period and geographical area of noncompetition specified above are reasonable and necessary in light of the transactions entered into this Agreement. If, however, it shall be determined at any time by a court of competent jurisdiction that either the time period restriction or the geographical area restriction, or both, are invalid or unenforceable, the parties agree that any such restriction determined to be invalid or unenforceable shall be deemed so amended as to make such restriction valid and enforceable in the determination of said court, and such restriction, as so amended, shall be enforceable between the parties to the same extent as if such amendment had been made as of the date of this Agreement. This subparagraph 8(B) shall survive the termination of this Agreement and shall not apply to investments constituting not more than 1% of the common equity of a publicly traded company. . NOTICES. Any notice permitted or required hereunder shall be deemed sufficient when hand-delivered or mailed by certified mail, postage prepaid, and addressed if to the Company at the address indicated above and if to the Executive at the address indicated below (or to such other address as may be provided by notice) provided that if a notice is mailed, a copy of such notice is sent the same day to the facsimile number set forth below for the addressee. . MISCELLANEOUS. This Agreement (i) constitutes the entire agreement between the parties concerning the subjects hereof and supersedes any and all prior agreements or understandings, (ii) may not be assigned by Executive without the prior written consent of the Company, and (iii) may not be assigned by the Company except in the event of a sale of substantially all of the assets of the Company to a third party who assumes in writing the Company's obligations (naming Executive as a third party beneficiary of the assumption) and furnishes a copy of such assumption of the Executive hereunder (and provided such assignment shall not release the Company of its financial obligations hereunder in case of a default by the assignee) and (iv), subject to clauses (ii) and (iii) hereof, shall be binding upon, and inure to the benefit of, the Executive, his heirs and personal representatives, and the Company and its successors and assigns. Headings herein are for convenience of reference only and shall not define, limit or interpret the contents hereof. . AMENDMENT. This Agreement may be amended, modified or supplemented by the mutual consent of the parties in writing, but no oral amendment, modification or supplement shall be effective. . SPECIFIC ENFORCEMENT. The parties acknowledge that the Company would be irreparably damaged and there would be no adequate remedy at law for the Executive's breach of Paragraph 8 of this Agreement, and accordingly, the terms thereof shall be specifically enforced. Executive hereby consents to the entry of any temporary restraining order or preliminary or ex parte injunction, in addition to any other remedies available at law or in equity, to enforce the provisions hereof. . SEVERABILITY. The provisions of this Agreement are severable. The invalidity of any provision shall not affect the validity of any other provision. . GOVERNING LAW. This Agreement shall be construed and regulated in all respects under the laws of the State of New York. . LEGAL FEES AND COSTS. The Company shall pay Executive's reasonable legal fees and costs in negotiating this Agreement up to a maximum of $10,000 against submission by Executive of itemized invoices. This Paragraph 15 shall survive the termination of this Agreement. } { IN WITNESS WHEREOF, this Agreement is entered into as of the date and year first above written. CAI WIRELESS SYSTEMS, INC. By /S/ JARED E. ABBRUZZESE Its Chairman and Chief Executive Officer EXECUTIVE: /S/ JOHN PRISCO Name: John Prisco Address: } { Annex A NONDISCLOSURE AGREEMENT AGREEMENT made as of the 3rd day of January, 1996 by and between the undersigned individual residing at the address indicated following his signature below (hereinafter referred to as "Executive") and CAI WIRELESS SYSTEMS, INC., a Connecticut corporation, having its principal place of business in Albany, New York (hereinafter referred to as the "Company"). WHEREAS, Executive is being employed by the Company in a capacity wherein Executive will come into possession of material of a confidential, sensitive or proprietary nature concerning the business, plans and trade secrets of the Company and its Affiliates (as defined below) and of third parties; and WHEREAS, the continued confidential treatment of such information is vital to the success of the Company's business, NOW THEREFORE, the parties agree as follows: . Executive acknowledges that his work as an employee of the Company will bring him into close contact with the Confidential Information (as defined below) of the Company and of third parties. Executive acknowledges that such Confidential Information is reposed in him in trust. . Executive hereby agrees that he shall, both during and after his employment, maintain such Confidential Information in confidence and neither disclose to others (nor cause to be disclosed) nor use personally (nor cause to be used) such Confidential Information without the prior written permission of the Company. Executive will also take reasonable precautions to prevent the inadvertent exposure of Confidential Information to unauthorized persons or entities. The restrictions contained in this Agreement shall expire four years after termination of Executive's employment with the Company, regardless of the reason for the termination. . Executive acknowledges that he may, during his employment, add to the Company's Confidential Information in accordance with Paragraph 8 below and he agrees that any such additions shall fall within the strictures of this Agreement in accordance with Paragraph 8 below. . Executive agrees that upon any termination of his employment with the Company or any Affiliate thereof, or upon request if sooner, he shall forthwith return to the Company all reports, correspondence, notes, financial statements, computer printouts and other documents and recorded material of every nature (including all copies thereof) which may be in his possession or under his control dealing with Confidential Information. . Executive acknowledges that the covenants in this Agreement have existed since the commencement of his engagement with the Company. These covenants are expressions of his duty as an employee not to use the Confidential Information to the detriment of the Company. In addition, Executive acknowledges that he shall benefit from entry into this Agreement as the Company shall be willing to continue to provide access to Confidential Information to Executive. . Executive acknowledges that the Company would be irreparably damaged and there would be no adequate remedy at law for Executive's breach of this Agreement, and accordingly, the terms of this Agreement shall be specifically enforced. Executive hereby consents to the entry of any temporary restraining order or preliminary or ex parte injunction, in addition to any other remedies available at law or in equity, to enforce the provisions hereof. . This Agreement is not an agreement of employment and nothing herein shall be construed to obligate the Company to employ Executive for any definite duration or upon any specific terms. It is understood that the Company has agreed to employ Executive pursuant to a separate Consulting and Employment Agreement with the Company of even date herewith. . As used herein, "Confidential Information" shall mean all confidential information and trade secrets of the Company or any of its Affiliates (as such term is defined in the aforesaid Consulting and Employment Agreement), whether now existing or hereafter acquired or developed, including' without limitation financial statements, business plans, working methods, investments, materials, processes, programs, designs, drawings, names of and relationships with current or potential vendors and lenders and other third parties, contractual arrangements, profit formulas, experimental investigations, studies, current or potential customer names and requirements, current or potential professional associations or contacts, information submitted to Employer or its Affiliates by third parties on a confidential basis and similar other non-public or otherwise confidential, sensitive or proprietary information. "Confidential Information" shall not include (i) information that has become generally known within the wireless cable industry without breach of any obligation of confidentiality of Executive or any third party, (ii) information known to Executive prior to December 31, 1995, (iii) information obtained by Executive from third persons without breach of any obligations owed to the Company or any of its Affiliates or (iv) information provided by the Company or any of its Affiliates to third persons without confidentiality restrictions. . This Agreement shall survive the termination of the employment of Executive and shall not be amended except by a writing signed by the parties hereto. This Agreement shall be binding upon the Executive and his heirs, legal representatives, successors and assigns. . This Agreement shall be governed and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. CAI WIRELESS SYSTEMS, INC. By Its EXECUTIVE: Name: John Prisco Address: EX-10 8 EXHIBIT 10.18 TERMINATION AGREEMENT TERMINATION AGREEMENT (this "Agreement") made as of the 23rd day of February, 1996 by and between ALAN SONNENBERG, residing at the address indicated following his signature below (hereinafter referred to as "Employee") and CAI WIRELESS SYSTEMS, INC., a Connecticut corporation having its principle place of business at 18 Corporate Woods Boulevard, Third Floor, Albany, New York 11221 (hereinafter referred to as the "Company"). W I T N E S S E T H: WHEREAS, Employee and the Company are parties to that certain Employment Agreement dated as of September 29, 1995 (the "Employment Agreement"); and WHEREAS, the Company has requested that Employee serve as an officer of CS Wireless Systems, Inc., and Employee is willing to serve in such capacity and terminate the Employment Agreement on the terms and conditions contained herein. NOW THEREFORE, in consideration of their mutual promises, and for other good and valuable consideration, the parties, intending to be legally bound, agree as follows: . TERMINATION OF EMPLOYMENT. The Employment Agreement is hereby terminated, effective immediately, and shall be of no further force and effect. . STOCK OPTIONS. Employee hereby surrenders to the Company any and all Stock Options (as defined in the Employment Agreement), whether vested or unvested, under the Employment Agreement. . NON-COMPETITION. (a) Notwithstanding anything to the contrary contained in the Employment Agreement, the non-competition covenants contained in subparagraph 9(b) of the Employment Agreement shall not survive the termination of the Employment Agreement and in consideration therefore, Employee agrees to be bound by the covenants contained in subparagraph (b) below. (b) Because Employee's services to the Company are special and because Employee has access to the Company's confidential information, Employee covenants and agrees that from the date hereof until such time as Employee is no longer serving the Company in the capacity of either a director or consultant, he will not, directly or indirectly, either on his own behalf or on behalf of any person, partnership, corporation or otherwise, (i) engage in any business or undertaking directly competitive with the wireless cable television, direct broadcast satellite, direct-to-home or non-wired video programming businesses (the "Related Businesses") being carried on by the Company in any market serviced by the Company, or in any market in which the Company provides any transport services for Bell Atlantic Corporation, or any affiliate thereof (collectively, "BAC"), or NYNEX, Inc., or any affiliate thereof (collectively, "NYNEX"), (ii) be employed by or provide consulting services to or be an investor, limited partner or shareholder (other than one owning less than a 5% equity interest) in, any entity or other person in any Related Business within 25 miles of any city in which the Company does business at time of execution or any other city or community in which the Company is providing transport services for BAC or NYNEX or has rights to broadcast or transmit television programming or in which the Company has a transmission license at the time of termination, without the prior written consent of the Board of Directors. The parties agree that the time period and geographical area of noncompetition specified above are reasonable and necessary in light of the transactions entered into in this Agreement. If, however, it shall be determined at any time by a court of competent jurisdiction that either the time period restriction or the geographical area restriction, or both, are invalid or unenforceable, the parties agree that any such restriction valid and enforceable in the determination of said court, and such restriction, as so amended, shall be enforceable between the parties to the same extent as if such amendment had been made as of the date of this Agreement. . NON-DISCLOSURE. The Non-Disclosure Agreement dated as of September 29, 1995 (the "Non-Disclosure Agreement") between the parties shall remain in full force and effect. . NOTICES. Any notice permitted or required hereunder shall be deemed sufficient when hand-delivered or mailed by certified mail, postage prepaid, and addressed if to the Company at the address indicated above and if to Employee at the address indicated below (or to such other address as may be provided by notice). . MISCELLANEOUS. This Agreement (i) together with the Non- Disclosure Agreement, constitutes the entire agreement between the parties concerning the subjects hereof and supersedes any and all prior agreements or understandings, (ii) may not be assigned by Employee without the prior written consent of the Company and (iii) may be assigned by the Company and shall be binding upon, and inure to the benefit of, the Company's successors and assigns. Headings herein are for convenience of reference only and shall not define, limit or interpret the contents hereof . AMENDMENT. This Agreement may be amended, modified or supplemented by the mutual consent of the parties in writing, but no oral amendment, modification or supplement shall be effective. . SPECIFIC PERFORMANCE. The parties acknowledge that the Company would be irreparably damaged and there would be no adequate remedy at law for Employee's breach of PARAGRAPH 3 of this Agreement, and accordingly, the terms thereof shall be specifically enforced. Employee hereby consents to the entry of any temporary restraining order or preliminary or ex parte injunction, in addition to any other remedies available at law or in equity, to enforce the provisions hereof. . AFFILIATES. As used herein, the term "Affiliate" shall mean any individual or entity controlling, controlled by or under common control with the Company, now or in the future, including without limitation, partnerships in which the Company or any Affiliate may invest as a limited or general partner and limited liability companies in which the Company or any Affiliate may become a member. . SEVERABILITY. The provisions of this Agreement are severable. The invalidity of any provision shall not affect the validity of any other provision. . GOVERNING LAW. This Agreement shall be construed and regulated in all respects under the laws of the State of New York. IN WITNESS WHEREOF, this Agreement is entered into as of the date and year first above written. CAI WIRELESS SYSTEMS, INC. By /S/ JARED E. ABBRUZZESE Name: Jared E. Abbruzzese Title: Chairman and Chief Executive Officer EMPLOYEE: /S/ ALAN SONNENBERG Name: Alan Sonnenberg Address: EX-10 9 {EXHIBIT 10.19 CONSULTING AGREEMENT CONSULTING AGREEMENT (this "Agreement") made as of the 23RD day of February, 1996 by and between ALAN SONNENBERG, residing at the address indicated following his signature below (hereinafter referred to as the "Consultant"), and CAI WIRELESS SYSTEMS, INC., a Connecticut corporation having its principal place of business at 18 Corporate Woods Boulevard, Third Floor, Albany, New York (hereinafter referred to as the "Company"). . ENGAGEMENT AND TERM. The Company hereby engages the Consultant and the Consultant hereby accepts engagement by the Company subject to the provisions of this Agreement for a term commencing on the date hereof and ending on the thirty-month anniversary of this Agreement (the "Consulting Period") at which time this Agreement, if not earlier terminated as provided below, shall terminate. . DUTIES OF THE CONSULTANT. The Consultant is hereby retained by the Company in the capacity of Consultant to consult and advise, by telephone or in person, with the officers, directors, employees and other representatives of the Company with respect to the Company's business and operations. Consultant shall at all times faithfully, industriously and to the best of his skill, ability, experience and talent, perform all of those duties of a responsible nature and not inconsistent with this position as Consultant that may be required of Consultant pursuant to the express and implied terms hereof. . INDEPENDENT CONTRACTOR. () Consultant shall at all times be deemed an independent contractor and not an employee or agent of the Company. Consultant shall have no power or authority by virtue of his capacity as Consultant to act on behalf or in the name of the Company or to bind the Company. () Consultant shall be wholly responsible for the payment of all federal, state and local income, social security, sales and other taxes with respect to Consultant's compensation and services under this Agreement. . COMPENSATION. For his services during the Consulting Period, the Company shall pay Consultant an annual fee of $75,000 less any fees paid by the Company to the Consultant for the Consultant's services as a director of the Company (the "Consulting Fee"). The Consulting Fee shall be payable in accordance with the Company's normal business practices or in such other amounts and at such other times as the parties may mutually agree. . TERMINATION. () UPON NOTICE. The Consultant and the Company may terminate this Agreement at any time upon notice one to the other. () PAYMENT IN CERTAIN TERMINATIONS. Upon the voluntary termination of this Agreement by Consultant, or upon the termination of this Agreement by the Company following a termination of the Consultant as an employee of CS Wireless Systems, Inc. ("CS") for "Cause" under Consultant's Employment Agreement with CS dated as of the date hereof, the Company's obligation to pay the Consulting Fee for any period after the date of termination shall cease; provided that, in the event of a voluntary termination by Consultant of his employment with CS under circumstances where he continues to receive his Base Salary, Consultant shall continue to be entitled to receive the Consulting Fee hereunder for the same period not to exceed six months. . EXPENSES. During the Consulting Period, the Company shall reimburse Consultant for the reasonable business expenses approved in advance by the Company incurred by Consultant in the course of performing his services for the Company hereunder in accordance with the procedures then in place for such reimbursement. . NOTICES. Any notice permitted or required hereunder shall be deemed sufficient when hand-delivered or mailed by certified mail, postage prepaid, and addressed if to the Company at the address indicated above and if to the Consultant at the address indicated below (or to such other address as may be provided by notice). . MISCELLANEOUS. This Agreement (i) together with the Nondisclosure Agreement dated as of September 29, 1995 between the parties, constitutes the entire agreement between the parties concerning the subjects hereof and supersedes any and all prior agreements or understandings, including any prior or existing employment agreement with the Company and such employment agreement shall be of no further force and effect, (ii) may not be assigned by Consultant without the prior written consent of the Company, and (iii) may be assigned by the Company and shall be binding upon, and inure to the benefit of, the Company's successors and assigns. Headings herein are for convenience of reference only and shall not define, limit or interpret the contents hereof. . AMENDMENT. This Agreement may be amended, modified or supplemented by the mutual consent of the parties in writing, but no oral amendment, modification or supplement shall be effective. . SEVERABILITY. The provisions of this Agreement are severable. The invalidity of any provision shall not affect the validity of any other provision. . GOVERNING LAW. This Agreement shall be construed and regulated in all respects under the laws of the State of New York. IN WITNESS WHEREOF, this Agreement is entered into as of the date and year first above written. CAI WIRELESS SYSTEMS, INC. By /S/ JARED E. ABBRUZZESE Name: Jared E. Abbruzzese Title: Chairman and Chief Executive Officer CONSULTANT: /S/ ALAN SONNENBERG Name: Alan Sonnenberg Address: EX-11 10 {EXHIBIT 11.1 CAI WIRELESS SYSTEMS, INC. LOSS PER SHARE COMPUTATION
Seven-month Period Ended March 31, Year Ended March 31, Year Ended March 31, 1994 1995 1996 Net loss $ (7,520,869) $ (14,106,837) $ (40,985,572) Preferred stock dividend - 328,011 5,878,960 Loss applicable to common stock shareholders $ (7,520,869) $ (14,434,848) $ (46,864,532) Weighted average number of shares 12,278,220 15,456,540 27,075,578 outstanding Loss per share $ (0.61) $ (0.93) $ (1.73)
COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Weighted Shares COMMON STOCK TRANSACTIONS SHARES OUTSTANDING For seven-month period ended March 31, 1994 Beginning Balance 11,500,000 11,500,000 2/25/94 3,400,000 545,283 3/24/94(1) 510,000 0 Warrants(2)(3) 1,214,000 232,937 Options(3) 451,000 0 12,278,220 For the year ended March 31, 1995 }Beginning Balance 15,410,000 15,410,000 Warrants exercised 74,000 29,417 Series A Preferred Stock{(3)(4)} 1,640,909 0 Series B Preferred Stock{(5)} 271,739 17,123 Warrants{(3)} 2,020,578 0 Options{(3)} 956,500 0 15,456,540 For the year ended March 31, 1996 Beginning Balance 15,754,018 15,754,018 Common stock sold 179,765 174,824 Common stock issued to acquire 49% minority interest in Hampton Roads Wireless, Inc. 652,523 467,107 Common stock issued in ACS Merger 19,362,611 9,734,209 Common stock issued in ECNW Merger 1,880,565 945,420 Series A Preferred Stock{(3)(4)} 2,546,198 0 Warrants{(3)} 2,310,541 0 Options{(3)} 1,274,134 0 27,075,578
(1)} On March 24, 1994, the Company received a stock subscription for the over allotment portion of the initial public offering. The subscription proceeds were received on April 8, 1994. {(2)} The effect of warrants issued in connection with the purchase of the Master Sublease and Bridge Loans were included as shares outstanding for all reported periods prior to the IPO because their exercise prices EXHIBIT 11.1 COMPUTATION OF WEIGHTED SHARES OUTSTANDING (CONTINUED) ($.25 and $6.60) were substantially below the IPO price. Subsequent to the IPO, such warrant shares were determined to be anti-dilutive and eliminated from the weighted average shares outstanding. { (3)} For the periods subsequent to the public offering, outstanding convertible preferred stock, warrants and options are not considered for the purposes of calculating the weighted shares outstanding since these securities are anti-dilutive. {(4)} The Series A 8% Redeemable Convertible Preferred Stock of 180,500 shares would be converted at a minimum into 1,640,909 Common Shares assuming the maximum conversion price of $11 per share. As of March 31, 1996, 2,546,198 shares are assumed based on actual shares issued upon conversion subsequent to March 31, 1996, and $9.00 per share for those preferred shares not converted. {(5)} The Series B 6% Redeemable Convertible Preferred Stock of 20,000 shares was converted into 271,739 Common Shares in April 1995 which is reflected as being issued on March 8, 1995, the date of issuance of the Series B Preferred Stock. { EX-11 11 EXHIBIT 11.2 CAI WIRELESS SYSTEMS, INC. COMPUTATION OF FULLY DILUTED LOSS PER COMMON SHARE
Year ended MARCH 31, 1996 Loss applicable to common stock shareholders $ (46,864,532) Less: Preferred stock dividends 5,878,960 Net loss used to calculate fully diluted loss per common share, before adjustments (40,985,572) LESS: ADJUSTMENTS: Interest expense on term notes assumed to be converted, net of deferred tax effect 2,432,557 Interest expense reduction resulting from the assumed proceeds from exercise of warrants and options in excess of the 20% buyback applied against short and long term debt, net of deferred tax effect. * 5,574,056 Adjusted net loss (32,978,959 Weighted average fully diluted loss per share ($ 0.71) Weighted average common and equivalent shares outstanding as of March 31, 1996 27,075,578 ADD SHARES ASSUMING CONVERSION OF:{ Warrants ** 2,310,541 Options ** 1,274,134 Series A preferred stock 2,546,158 Treasury stock repurchase with proceeds ** (3,075,454) Total before BANX 30,130,957 Assumed conversion of Term Note and Senior Preferred Stock - BANX (collectively 45%) 36,751,083 Less shares assumed repurchased, with proceeds applicable to above ** Treasury stock repurchase 20% limit 7,565,896 Less amount used above (3,075,454) (4,490,442) BANX shares for a full year 32,260,641 BANX shares outstanding for 184/366 days 16,218,464 Weighted average number of shares used to compute fully diluted loss per share 46,349,421
* Interest expense reduction resulting from excess proceeds (over 20% treasury stock purchase) used to reduce debt is limited to interest calculated at 12 1/4 % per annum, of excess proceeds for the six-month period ended March 31, 1996. ** Treasury stock method used on options and warrants to the extent of their proceeds and then to the 20% limit on BANX. This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. EX-21 12 {EXHIBIT 21 CAI WIRELESS SYSTEMS, INC. LIST OF SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY NAME UNDER WHICH SUBSIDIARY CONDUCTS STATE OF INCORPORATION BUSINESS Greater Albany Wireless Systems, Inc. Capital Choice Television New York Rochester Choice Television, Inc. Delaware Hampton Roads Wireless, Inc. Virginia Eastern New England TV, Inc. Delaware Connecticut Choice Television, Inc. Connecticut Commonwealth Choice Television, Inc. Delaware Atlantic Microsystems, Inc. Delaware Housatonic Wireless, Inc. New York New York Choice Television, Inc. Wireless Cable of New York New York Niskayuna Associates, Inc. Delaware Onteo Associates, Inc. New York CAI Transactions P, Inc. Delaware Washington Choice Television, Inc. Atlantic Wireless Delaware CAI CT Holdings Corp. Delaware CAI Developments, Inc. Delaware CAI/AMI Spectrum Management, Inc. Delaware Philadelphia Choice Television, Inc. Popvision Pennsylvania ACS License, Inc. Pennsylvania CS Wireless Systems, Inc., Delaware ACS Ohio License, Inc. Delaware ACS California License, Inc. Delaware ACS Pennsylvania License, Inc. Delaware Onondaga Wireless, Inc. New York Chenango Associates, Inc. New York
} EX-23 13 {EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration No. 33-99770) and in the Registration Statement on Form S-3 (Registration No. 333-3334), filed by CAI Wireless Systems, Inc., of the consolidated balance sheets of CAI Wireless Systems, Inc. and Subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended March 31, 1996 and 1995 and for the seven-month period ended March 31, 1994 contained in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Albany, New York June 26, 1996 -----END PRIVACY-ENHANCED MESSAGE-----