UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-27582
CELLULARVISION USA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3853788
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
505 PARK AVENUE
NEW YORK, NEW YORK 10022
-----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 751-0900
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
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 number of outstanding shares the registrant's common stock, par value U.S.
$.01 per share, as of, June 30, 1996 was 16,000,000.
Total number of pages in this Report including Exhibits, if any: 31
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-Q
<TABLE>
Page(s)
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
<S> <C>
Consolidated Balance Sheets as of December 31,
1995 and the Six Months Ended June 30,
1996 (unaudited)...........................................................................................1
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1995 and the
Three and Six Months Ended June 30, 1996 (unaudited).......................................................2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1995 and the
Six Months Ended June 30, 1996 (unaudited).................................................................3-4
Notes to Consolidated Financial Statements (unaudited).....................................................5-7
ITEM 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................................................8-10
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings................................................................................11
ITEM 2 -- Changes in Securities............................................................................11
ITEM 3 -- Defaults Upon Senior Securities..................................................................11
ITEM 4 -- Submission of Matters to a Vote
of Security Holders......................................................................11
ITEM 5 -- Other Information................................................................................11-12
ITEM 6 -- Exhibits and Reports on Form 8-K.................................................................12-15
Signature Page.............................................................................................16
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
(Unaudited)
--------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................ $ 3,536,354 $31,790,878
Accounts receivable,
net of allowance for doubtful
accounts of $133,730 and $79,651 ............. 410,141 244,284
Due from affiliates -- 606,207
Prepaid expenses and other ....................... 228,803 210,495
Deferred offering costs .......................... 1,619,972 --
---------- -----------
Total current assets ..................... 5,795,270 32,851,864
Property and equipment, net of
accumulated depreciation of
$981,466 and $1,867,749 ...................... 6,321,768 7,311,853
Intangible assets, net of accumulated
amortization of $39,564 and
$54,671 ...................................... 97,177 157,729
Debt placement fees .............................. 622,678 235,716
Other noncurrent assets .......................... 158,594 116,619
----------- -----------
Total assets ........................ $12,995,487 $40,673,781
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable ............................... $ 355,490 $ 59,092
Accrued liabilities ............................ 2,246,349 1,366,602
Due to affiliates .............................. 1,294,812 --
Note payable to affiliate ...................... 3,521,257 --
Other current liabilities ...................... 24,799 42,810
------------ ------------
Total current liabilities ......... 7,442,707 1,468,504
Convertible exchangeable
subordinated notes payable ................. 12,576,324 --
Exchange notes ................................. 6,295,017 6,254,709
------------ ------------
Total liabilities ................. 26,314,048 7,723,213
Commitments and contingencies (Note 8)
Stockholders' (deficit) equity:
Common Stock, ($.01 par value;
40,000,000 shares authorized;
12,395,142 and 16,000,000 shares
issued and outstanding) .................... 123,951 160,000
Preferred Stock, ($.01 par value; 20,000,000
shares authorized; none issued and
outstanding)
Additional paid-in capital ..................... 6,401,454 58,267,533
Deficit accumulated during the development stage (19,843,966) (25,476,965)
------------ ------------
Stockholders' (deficit) equity ...................... (13,318,561) 32,950,568
------------ ------------
Total liabilities and
Stockholders' (deficit)
equity ............................ $ 12,995,487 $ 40,673,781
============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
1
<PAGE>
CELLULARVISION USA, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
January 1, 1992
Three Months Six Months (date of inception)
Ended June 30, Ended June 30, to June 30,
1995 1996 1995 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue ............................. $ 136,051 $ 384,423 $ 153,725 $ 878,105 2,181,322
------------ ------------ ------------ ------------ ------------
Expenses:
Service costs ............... 67,821 252,876 79, 079 539,024 1,207,718
Selling, general and
administrative .......... 1,216,379 2,606,437 2,273,583 4,794,617 15,613,428
Management fees ............. 674,406 1,347,581 4,494,941
Depreciation and amortization 146,877 576,887 235,534 1,051,390 2,739,807
------------ ------------ ------------ ------------ ------------
2,105,483 3,436,200 3,935,777 6,385,031 24,055,894
------------ ------------ ------------ ------------ ------------
Operating loss ............. (1,969,432) (3,051,777) (3,782,052) (5,506,926) (21,874,572)
Interest income ..................... 102,865 374,611 259,335 517,960 1,548,498
Interest expense .................... (561,834) (180,324) (1,121,776) (644,033) (5,150,891)
------------ ------------ ------------ ------------ ------------
Net loss ................ $ (2,428,401) $ (2,857,490) $ (4,644,493) $ (5,632,999) (25,476,965)
Net loss per common share ........... $ (.20) $ (.18) $ (.37) $ (.37)
------------ ------------ ------------ ------------
Weighted average number of shares of
common stock ........................ 12,395,142 16,000,000 12,395,142 15,138,839
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, JANUARY 1, 1992
----------------------------- (DATE OF
INCEPTION)
TO JUNE 30,
---------------
1995 1996 1996
------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................... $ (4,644,493) $ (5,632,999) $(25,476,965)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ...... 235,534 1,051,390 2,739,807
Amortization of placement fees ..... 96,451 44,136 396,771
Provision for doubtful accounts .... 4,744 209,370 411,478
Stock compensation expense ......... 150,000 150,000
Changes in assets and liabilities:
Accounts receivable .............. (77,039) (43,513) (655,765)
Prepaid expenses and other ....... (59,319) 18,308 (22,041)
Accounts payable and accrued
liabilities ................... 59,475 1,041,713 1,989,205
Other current liabilities ........ 12,549 18,011 40,560
Due to affiliates ................ 637,407 (1,901,019) 2,748,821
Accrued interest ................. 1,020,429 4,954 3,876,295
Other noncurrent assets .......... (8,626) 41,975 (116,619)
------------ ------------ ------------
Net cash used in
operating activities ........ (2,722,888) (4,997,674) (13,918,453)
------------ ------------ ------------
Cash flows from investing activities:
Intangibles .......................... (60,552) (197,293)
Property and equipment additions ..... (3,072,718) (2,041,475) (12,479,842)
Proceeds from sale of property
and equipment ...................... 2,608,261
Purchase of available-for-sale
securities ......................... (2,925,711) (26,916,209)
Maturities of available-for-sale
securities ......................... 8,048,056 26,916,209
------------ ------------ ------------
Net cash provided by (used in)
investing activities ......... 2,049,627 (2,102,027) (10,068,874)
------------ ------------ ------------
Cash flows from financing activities:
Advance to HCM stockholders .......... (3,000,000)
Contributions ........................ 10,821,878
Distribution ......................... (8,331) (13,889) (1,336,614)
Convertible exchangeable subordinated
notes payable ...................... 15,000,000
Proceeds from sale of stock .......... 41,850,000 41,850,000
Repayment of note payable affiliate .. (3,521,257) (3,521,257)
Payment of deferred offering costs ... (2,960,629) (3,060,491)
Placement costs ...................... (65,926) (975,311)
------------ ------------ ------------
Net cash (used in) provided by
financing activities ........... (74,257) 35,354,225 55,778,205
------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents ........... (747,518) 28,254,524 31,790,878
Cash and cash equivalents, beginning of
period .................................. 7,421,171 3,536,354 --
------------ ------------ ------------
Cash and cash equivalents, end of period .. $ 6,673,653 $ 31,790,878 $ 31,790,878
============ ============ ============
</TABLE>
3
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, JANUARY 1, 1992
----------------------------- (DATE OF
INCEPTION)
TO JUNE 30,
---------------
1995 1996 1996
------------- ------------- ---------------
<S> <C> <C> <C>
Supplemental Cash Flow Disclosures:
Cash paid for interest during the period - $ 654,484 $ 654,484
Noncash transactions:
Common stock issued for convertible debt - 12,731,450 12,731,450
Write-off of debt placement fees
in connection with conversion of
debt for common stock - 342,826 342,826
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. However, except for the events disclosed in Note 2, there has been
no other material change in the information disclosed in the notes to the
consolidated financial statements for the Company's fiscal period ended June
30, 1996, as compared to the year ended December 31, 1995.
In the opinion of the Management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996.
2. INITIAL PUBLIC OFFERING
The Company completed its Initial Public Offering which was
consummated on February 13, 1996. The net proceeds to the Company from the
Initial Public Offering, after deducting underwriting discounts and
commissions of $1.05 per share and approximately $2.5 million in other
expenses, was $39,350,000.
Immediately prior to the Initial Public Offering, the Company
effected the following events (collectively, the "Incorporation
Transactions"): (i) $10 million principal amount of the convertible
exchangeable subordinated notes was converted into 4,547 shares of Common
Stock pursuant to their conversion provisions, (ii) the Company issued an
aggregate of 93,180 shares of Common Stock to the stockholders of HCM (the
"Founders") in exchange for all outstanding capital stock of HCM, and the
holders of certain partnership interests of CVNY in exchange for all of their
partnership interests in CVNY, and (iii) the Company effected a
133.0236284-for-1 stock split of the outstanding shares of Common Stock and
issued an aggregate of 13,000,000 shares of Common Stock to the holders
thereof. As a result of the consummation of the Incorporation Transactions,
the Company is the sole stockholder of HCM, the managing general partner of
CVNY, and CVNY continues to carry on its business as an indirect wholly owned
subsidiary of the Company.
Stockholders' equity, and all per share data, have been restated to
give retroactive recognition to the stock split in prior periods.
3. LEGAL PROCEEDINGS
In February 1996, a suit was filed against the Company alleging that
the Company caused the U.S. Army to breach a contract with the plaintiff
wherein the plaintiff was to have an exclusive right to provide cable
television services at an army base located in Brooklyn, New York. The suit
alleges that by entering into a franchise agreement with the Army which grants
the Company the right to enter the army base to build, construct, install,
operate and maintain its multi-channel broadband cellular television system,
the Company induced the Army to breach its franchise agreement with the
plaintiff. The Army has advised the Company that it has the right to award the
franchise to the Company and the Company is continuing to provide service to
the army base. The suit seeks $1 million in damages and is in its preliminary
stages. The Company cannot make a determination at this time as to the
possible outcome of the action or whether the case will go to trial. The
Company does not believe that in the event an adverse judgment is rendered,
the effect would be material to the Company's financial position but it could
have a material effect on operating results in the period in which the matter
is resolved.
5
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 1995, a purported class action suit was filed against the
Company in New York State Supreme Court alleging that the Company had engaged
in a systematic practice of installing customer premises equipment in multiple
dwelling units without obtaining certain landlord or owner consents allegedly
required by law. The suit seeks injunctive relief and $4 million in punitive
damages. The Company, believes, based upon advice of counsel, that this suit
is likely to be resolved without a material adverse effect on the financial
condition of the Company, but could have a material effect on operating
results in the period in which the matter is resolved.
4. SUBSEQUENT EVENTS
On July 17, 1996, by unanimous vote, the FCC adopted the First Report
and Order and Fourth NPRM, which formally establishes a band plan and sharing
rules as previously proposed by the FCC in the Third NPRM. This plan allocates
to LMDS 28GHz nationwide, 850 Mhz spectrum from 27.5 - 28.35 GHz on a primary
basis for two-way LMDS transmissions, with an additional non-contiguous 150
MHz from 29.1 - 29.25 GHz to be shared on a co-primary basis with MSS systems.
While the sharing rules adopted for the 150 MHz limit LMDS to
hub-to-subscriber transmissions due to concerns about potential interference
between LMDS and MSS, in the First Report and Order the FCC stated that it
will revisit that limitation if the LMDS industry can demonstrate definitively
that LMDS return links do not interfere with MSS systems.
Further, in the Fourth NPRM portion of the decision, in an effort to
provide additional spectrum for LMDS, the FCC proposed to allocate 300 MHz
from 31.0-31.3 GHz on a primary basis for two-way LMDS use. The FCC reiterated
the potential value of LMDS as "real competition" in the local telephony and
multichannel video distribution markets, and stated that this additional
spectrum would provide consumers access to more choices in the new services
and innovative technologies. The FCC proposed to license the 850 MHz and 150
MHz blocks of 28 GHz spectrum together with the 300 MHz of 31 GHz spectrum as
a single, 1.3 GHz block spectrum for LMDS licensees who prevail at auction.
With regard to eligibility to hold LMDS licenses, the Fourth NPRM seeks
additional comment on whether local exchange carriers and cable operators
should be permitted to hold LMDS licenses in their service areas.
In the First Report and Order, the FCC explicitly recognized the role
of the Company as the only commercial Licensee of LMDS in the United States.
Moreover, the FCC stated "its intention to facilitate the development of LMDS
in New York and the rest of the nation," and noted that "permitting
CellularVision to proceed with its business plan and existing system design in
the contiguous 1 GHz for which it was originally licensed will help ensure a
seamless transition for CellularVision's customers as LMDS is licensed
pursuant to the band plan implemented in this Report and Order." Accordingly,
demonstrating its commitment to the Company's build out of its system in the
New York PMSA, in the First Report and Order the FCC grandfathered the
Company's continued operations in the 27.5-28.5 GHz spectrum (which the
Company currently is licensed to use) for a period of two years from the
release date of the First Report and Order, July 22, 1996, or until the first
GSO/FSS satellite intended to operate in the 28.35-28.50 GHz band is launched,
whichever occurs later. Additionally, under the grandfather provision adopted
by the FCC, the Company is authorized to use the newly designated 150 MHz at
29.1-29.25 GHz for hub-to-subscriber operations during the grandfathered
period, thus allowing the Company currently to use 1,150 MHz in the New York
PMSA. At the conclusion of the grandfathered period, the Company will be
required to cease its operations in the 28.35-28.50 GHz spectrum thus
maintaining its 1000 MHz spectrum allocation, at 27.5.28.35 GHz AND 29.1 -
29.25 GHz. The Company may also have exclusive access to 300 MHz from 31.0 -
31.3 GHz, depending on the resolution of the Fourth NPRM.
In the First Report and Order, the FCC stated that it anticipates
processing the Company's pending application for renewal of its commercial
license for the New York PMSA "at , or shortly after, the time
generally-applicable LMDS service rules are adopted." The Company believes
that the processing of its renewal application at the time proposed by the FCC
will allow the renewed license to conform to the final rules for
6
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LMDS, including the authorization of the Company to offer the panoply of LMDS
services contemplated by the FCC.
Finally, the FCC, commenting in the First Report and Order and Fourth
NPRM that "it is vital to the LMDS industry to commence the licensing process
as soon as possible," stated that it intends "to resolve all remaining issues
on an expedited timeframe." Accordingly, the formal comment cycle in response
to the Fourth NPRM begins on August 12, 1996 and concludes on August 22, 1996,
an accelerated timeframe which the Company believes reflects the FCC's
commitment to conclude this proceeding promptly. Thus, following the close of
the Fourth NPRM's comment cycle, and possibly as soon as early Fall 1996, the
Company expects the FCC to adopt a Second Report and Order in this proceeding,
including final service, auction and eligibility rules for LMDS, and
addressing the proposed allocation of 300 MHz in the 31 GHz band for LMDS.
Additionally, the FCC could address the issue of the Company's tentative
Pioneer's Preference at that time. FCC officials have stated their intent to
commence the nationwide licensing of LMDS through spectrum auctions before the
end of 1996.
There can be no assurance as to when the final FCC rules for LMDS
will be adopted or whether such rules, when, as if adopted, will confer upon
the Company the benefits contemplated by the Third NPRM or the Fourth NPRM, or
that such final rules might not have a material adverse effect on the Company.
On August 2, 1996, House Telecommunications Subcommittee Chair Jack
Fields (R-TX), together with ranking minority full committee member John
Dingell (D-MI), introduced "The FCC Modernization Act of 1996," which would,
among other things, repeal the FCC's authority to award pioneer's preference
licenses as of the date of enactment of the bill. It is unclear whether this
legislation will be enacted as proposed, and within the two month window for
legislative actions by the 104th Congress when Congress reconvenes in early
September. If this legislation is enacted as proposed, it is unclear how the
language will be interpreted by the FCC in regard to the Company. The Company
was one of six recipients of tentative pioneer's preference grants for various
new services in 1992. Five of these tentative grants were confirmed with final
grants as part of the FCC's conclusion of various rulemaking proceedings in
1993 and 1994. The Company was again granted a tentative pioneer's preference
in July 1995, consistent with applicable pioneer's preference provisions of
the General Agreement on Tariffs and Trade. Thus, the Company enjoys a unique
status as the FCC's only outstanding tentative pioneer's preference awardee,
and it therefore is distinguishable from 13 pending pioneer's preference
requests that have not progressed to tentative awardee status. In no case,
however, would this legislation, if enacted, impact the Company's current
operations as commercially licensed by the FCC to serve consumers in the New
York PMSA.
On July 29, 1996 the Company distributed a preliminary offering
memorandum in connection with its offering of approximately $235 million
aggregate principal amount of Senior Notes due 2006. The Company intends to
use the proceeds of this offering for the expansion of its communication and
entertainment services to cover most of the New York PMSA and the potential
expansion of its existing licensed territory to include the entire New York
BTA.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the corresponding
discussion and analysis included in the Company's Report on Form 10-K for the
year ended December 31, 1995.
RESULTS OF OPERATIONS
The operational priority for the second quarter of 1996 was the
continued build-out of our infrastructure, with two additional cell sites
completed and five additional sites presently under construction. In addition,
the Company tightened credit controls on subscribers, increased its marketing
efforts, and continued to explore new services (i.e. high speed Internet
access) to deliver to our subscribers.
The Company experienced an increase in monthly revenue per subscriber
of $5.00 from $37.00 for the second quarter of 1995 to $42.00 for the second
quarter of 1996. This increase is due in part to the Company beginning to
offer premium services in April 1995 and pay-per-view services at the end of
June 1995. The Company's pay-to-basic ratio (the number of premium channels
subscribed to, divided by the aggregate number of subscribers) was 256% for
the second quarter of 1996. The Pay-Per-View buy rate (the number of
pay-per-view events purchased per month, divided by the aggregate number of
subscribers) was 21% for the quarter. This percentage was affected by the lack
of a major pay-per-view event during the second quarter of 1996.
Since resuming marketing efforts in early April 1996, the Company
added approximately 2,500 new net subscribers, bringing the total as of August
12, to approximately 6,500 subscribers, a growth rate of over 62%. During the
second quarter, the Company tightened credit terms resulting in the Company's
termination of delinquent subscriber accounts (primarily in the Company's
experimental cell), resulting in an overall churn rate of 13.8% for the
quarter. The churn rate for the Company's commercial cells was 6.1% for the
quarter. For the month of July 1996, the Company's overall churn rate was
5.1%.
Six and Three Months Ended June 30, 1996 Compared to Six and
Three Months Ended June 30, 1995.
Revenue increased $724,000 from $154,000 for the six months ended
June 30, 1995 to $878,000 for the six months ended June 30, 1996 and increased
$248,000 from $136,000 for the three months ended June 30, 1995 to $384,000
for the three months ended June 30, 1996. These increases in revenue are due
primarily to an increase in subscribers and the addition of premium and
pay-per-view services during the second quarter of 1995.
Operating expenses increased $2,449,000 from $3,936,000 for the six
months ended June 30, 1995 to $6,385,000 for the six months ended June 30,
1996 and increased $1,331,000 from $2,105,000 for the three months ended June
30, 1995 to $3,436,000 for the three months June 30, 1996. These increases are
primarily attributable to costs associated with the Company's commercial
roll-out, including service costs, selling, general and administrative
expenses, and depreciation and amortization, offset in part by the decrease in
management fees due to the termination of the management agreement with the
Bell Atlantic Corporation as of December 31, 1995.
Service costs increased $460,000 from $79,000 for the six months
ended June 30, 1995 to $539,000 for the six months ended June 30, 1996 and
increased $185,000 from $68,000 for the three months ended June 30, 1995 to
$253,000 for the three months ended June 30, 1996. These increases are due
primarily to fees paid to providers of television programming which increase
with the growth of revenues and subscribers.
Selling, general and administrative expenses increased $2,521,000
from $2,274,000 for the six months ended June 30, 1995 to $4,795,000 for the
six months ended June 30, 1996 and increased $1,390,000 from $1,216,000 for
the three months ended June 30, 1995 to $2,606,000 for the three months ended
June 30, 1996. These increases are primarily attributable to headcount-related
costs (as the Company's employee base rose from
8
<PAGE>
48 at June 30, 1995 to 79 at June 30, 1996), legal costs primarily
associated with the FCC licensing process, payment on sale and leaseback
transactions entered into December 15, 1995, and increased bad debt expense
attributed to the Company's increased subscriber base.
Management fees decreased $1,348,000 from $1,348,000 for the six
months ended June 30, 1995 to $0 for the six months ended June 30, 1996 and
decreased $674,000 from $674,000 for the three months ended June 30, 1995 to
$0 for the three months ended June 30, 1996. The decrease in management fees
is attributable to the termination of the management agreement with the Bell
Atlantic Corporation as of December 31, 1995.
Depreciation and amortization increased $815,000 from $236,000 for
the six months ended June 30, 1995 to $1,051,000 for the six months ended June
30, 1996 and increased $430,000 from $147,000 for the three months ended June
30, 1995 to $577,000 for the three months ended June 30, 1996. These increases
were due primarily to the purchase and installation of customer premises
equipment, equipment for the Company's transmitter sites, and the continued
build-out of the Company's customer service/administrative facilities.
Interest expense decreased $478,000 from $1,122,000 for the six
months ended June 30, 1995 to $644,000 for the six months ended June 30, 1996
and $382,000 from $562,000 for the three months ended June 30, 1995 to
$180,000 for the three months ended June 30, 1996. These decreases are due
primarily to the conversion of approximately $12.6 million of convertible
exchangeable subordinated notes payable to common stock in conjunction with
the IPO, and the repayment of approximately $3.5 million notes payable from
the proceeds of the IPO which occurred in February 1996.
Interest income increased $259,000 from $259,000 for the six months
ended June 30, 1995 to $518,000 for the six months ended June 30, 1996 and
$272,000 from $103,000 for the three months ended June 30, 1995 to $375,000
for the three months ended June 30, 1996. These increases are primarily due to
the interest earned on the proceeds of the IPO not yet expended.
Net loss for the six months ended June 30, 1996 was $5,633,000
compared to a net loss of $4,644,000 for the six months ended June 30, 1995.
The net loss for the three months ended June 30, 1996 was $2,857,000 compared
to $2,428,000 for the three months ended June 30, 1995. The increase in net
loss is due primarily to increased operating expenses due to costs associated
with the Company's continued build-out of its infrastructure, increased
workforce, and increased subscriber base.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company consummated the Initial Public Offering
of 3,333,000 shares of Common Stock (including an aggregate of 333,000 shares
sold by certain shareholders of the Company) at the initial offering price of
$15.00 per share. The net proceeds to the Company from the Initial Public
Offering, after deducting underwriting discounts and commissions of $1.05 per
share and approximately $2.5 million of other expenses, were approximately
$39,350,000.
With the proceeds from the initial public offering, the Company paid
approximately $3.6 million in principal and interest to Bell Atlantic
Corporation to satisfy the note payable at December 31, 1995. In addition, the
Company paid $3 million of deferred offering costs during the first and second
quarters.
For the six months ended June 30, 1996, the Company expended
$4,998,000 on operating activities. Of these expenditures, $2.3 million
related to payments of liabilities and obligations incurred during the fourth
quarter of 1995.
For the six months ended June 30, 1996, the Company expended $2.1
million on property and equipment additions, consisting primarily of
transmitter equipment and customer premises equipment, as the Company
continues its buildout of its infrastructure and adds to its subscriber base.
9
<PAGE>
The Company anticipates 1996 capital expenditures of approximately
$34 million, which includes the cost of constructing approximately 15
additional cell sites, an additional head-end facility, purchasing customer
premises equipment, related installation costs and various office- and
warehouse- related costs. The actual amount of costs for such capital
expenditures may differ.
On July 17, 1996, by unanimous vote, the FCC adopted the First Report
and Order and Fourth NPRM. The FCC commented in the First Report and Order and
Fourth NPRM that "it is vital to the LMDS industry to commence the licensing
process as soon as possible," and stated that it intends "to resolve all
remaining issues on an expedited timeframe." Accordingly, the formal comment
cycle in response to the Fourth NPRM begins on August 12, 1996 and concludes
on August 22, 1996, an accelerated timeframe which the Company believes
reflects the FCC's commitment to conclude this proceeding promptly. Thus,
following the close of the Fourth NPRM's comment cycle, and possibly as soon
as early Fall 1996, the company expects the FCC to adopt a Second Report and
Order in this proceeding, including final service, auction and eligibility
rules for LMDS, and addressing the proposed allocation of 300 Mhz in the 31
Ghz band for LMDS. Additionally, the FCC could address the issue of the
Company's tentative Pioneer's Preference at that time. FCC officials have
stated their intent to commence the nationwide licensing of LMDS through
spectrum auctions before the end of 1996.
Because of these FCC actions, the Company believes that it has an
unprecedented opportunity to expand its service territory and operations by
participating in the LMDS spectrum auctions. It is anticipated that this may
create significant additional capital requirements, beyond the resources
currently available to the Company. Therefore, the Company is actively
exploring debt financing alternatives and potential strategic relationships to
ensure maximum flexibility in pursuing these growth opportunities.
The Company has recorded net losses and negative operating cash flow
in each period of its operations since inception. While such losses and
negative operating cash flow are attributable to the start-up costs incurred
in connection with the roll-out of the Company's system, the Company expects
to continue experiencing operating losses and negative cash flow for at least
one year as a result of its planned expansion within the New York PMSA.
The Company is able to control the timing of deployment of capital
resources based on the variable cost nature of the business and the
incremental fixed cost per transmitter site constructed. The Company's current
business strategy is based on rapid subscriber growth. Should capital
conservation measures be required, the Company may slow the rate of subscriber
growth or delay additional transmitter deployment, enabling the Company to
operate for an extended period of time.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
In February 1996, a suit was filed against the Company alleging that
the Company caused the U.S. Army to breach a contract with the plaintiff
wherein the plaintiff was to have an exclusive right to provide cable
television services at an army base located in Brooklyn, New York. The suit
alleges that by entering into a franchise agreement with the Army which grants
the Company the right to enter the army base to build, construct, install,
operate and maintain its multi-channel broadband cellular television system,
the Company induced the Army to breach its franchise agreement with the
plaintiff. The Army has advised the Company that it has the right to award the
franchise to the Company and the Company is continuing to provide service at
the army base. The suit seeks $1 million in damages and is in its preliminary
stages. The Company cannot make a determination at this time as to the
possible outcome of the action or whether the case will go to trial. The
Company does not believe that in the event an adverse judgment is rendered,
the effect would be material to the Company's financial position but it could
have a material effect on operating results in the period in which the matter
is resolved.
In November 1995, a purported class action suit was filed against the
Company in New York State Supreme Court alleging that the Company had engaged
in a systematic practice of installing customer premises equipment in multiple
dwelling units without obtaining certain landlord or owner consents allegedly
required by law. The suit seeks injunctive relief and $4 million in punitive
damages. The Company, believes, based upon advice of counsel, that this suit
is likely to be resolved without a material adverse effect on the financial
condition of the Company, but could have a material effect on operating
results in the period in which the matter is resolved.
Prior to 1992, Vahak and Shant Hovnanian were officers, directors and
principal shareholders of Riverside Savings Bank, a state-chartered savings
and loan association that entered receivership in 1991. In certain civil
litigation against the Hovnanians and others that ensued, which is pending in
the U.S. District Court for the District of New Jersey, the Resolution Trust
Corporation has alleged simple and gross negligence and breaches of fiduciary
duties of care and loyalty on the part of the defendants. Although this action
is still in its preliminary stages, the defendants have obtained dismissal of
certain allegations and intend to continue to vigorously defend the action.
ITEM 2 -- CHANGES IN SECURITIES
None.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 -- OTHER INFORMATION
On July 31, 1996 the Company signed an employment agreement with Charles N.
Garber as Chief Financial Officer of CellularVision USA and Vice President of
Finance for CellularVision of New York (a wholly owned subsidiary of the
Company). This position had previously been vacant.
On July 29, 1996 the Company distributed a preliminary offering memorandum in
connection with its offering of approximately $235 million aggregate principal
amount of Senior Notes due 2006. The Company intends to use the proceeds of
this offering for the expansion of its communication and entertainment
services to cover most of the New York PMSA and the potential expansion of its
existing licensed territory to include the entire New York BTA.
11
<PAGE>
In June 1996, Hye Crest Management Inc., a wholly owned subsidiary of the
Company, changed its name to CellularVision Capital Corporation.
The Company believes that Peter Rinfret, one of its directors, may assert a
claim, based upon an alleged oral understanding , for a consulting fee that
could range from $750,000 to $1.2 million or more. The Company has informed
Mr. Rinfret that it intends to contest any such claim, if asserted, by
appropriate legal proceedings. The Company has been advised by counsel that,
under pertinent provisions of New York law, the likelihood of any recovery for
such an alleged oral understanding beyond the time value of actual services
rendered is remote.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
a. Exhibits:
3.1* Certificate of Incorporation.
3.2* By-laws.
4.1* Form of Common Stock Certificate.
4.2* Stockholders Agreement, dated as of January 12, 1996, by and among CellularVision USA, Inc., Shant
S. Hovnanian, Bernard B. Bossard and Vahak S. Hovnanian.
4.3* Registration Rights Agreement, dated as of January 12, 1996, by and
among CellularVision USA, Inc., Bell Atlantic Ventures XXIII, Inc.,
Philips PGNY Corp., Inc. and Morgan Guaranty Trust Company of New
York, as Trustee of the Commingled Pension Trust Fund (Multi-Market
Special Investment) of Morgan Guaranty Trust Company of New York,
and as Investment Manager and Agent for an Institutional Investor.
10.1* Amended and Restated License Agreement, together with Addendum to License Agreement, each dated as
of July 7, 1993, by and between CellularVision Technology & Telecommunications, L.P. and
CellularVision of New York, L.P. and certain amendments and supplements thereto.
10.2* Reserved Channel Rights Agreement, dated as of July 7, 1993, by and between Vahak S. Hovnanian,
Shant S. Hovnanian, Bernard B. Bossard, CellularVision of New York, L.P. and Bell Atlantic Ventures
XXIII, Inc.
10.3* Restructuring Agreement, dated as of January 12, 1996, by and among
the Company, CellularVision of New York, L.P., Hye Crest
Management, Inc., Suite 12 Group, Bell Atlantic Ventures XXIII,
Inc., Philips PGNY Corp., Morgan Guaranty Trust Company of New
York, as Trustee of the Commingled Pension Trust Fund (Multi-Market
Special Investment) of Morgan Guaranty Trust Company of New York,
and as Investment Manager and Agent for an Institutional Investor,
Shant S. Hovnanian, Bernard B. Bossard and Vahak S. Hovnanian.
10.4* CellularVision USA, Inc. 1995 Stock Incentive Plan.
10.5* Employment Agreement, dated as of October 18, 1995, between CellularVision USA, Inc. and Bernard B.
Bossard.
10.6* Employment Agreement, dated as of October 18, 1995, between CellularVision USA, Inc. and Shant S.
Hovnanian.
10.7* Employment Agreement, dated as of January 1, 1996, between CellularVision USA, Inc. and John Walber.
12
<PAGE>
10.8** Employment Agreement, dated as of July 31, 1996, between CellularVision USA, Inc. and Charles N.
Garber.
10.9* Intercompany Agreement, dated January 12, 1996, by and among CellularVision USA, Inc., CellularVision
Technology & Telecommunications, L.P., CellularVision of New York, L.P., Shant S.
Hovnanian, Bernard B. Bossard and Vahak S. Hovnanian.
10.10* Second Addendum to License Agreement, dated as of January 12, 1996, by and between CellularVision
Technology & Telecommunications, L.P. and CellularVision of New York, L.P.
10.11* Corporate Name License and Grant of Future Licenses Agreement, dated as of January 12, 1996, by and
between CellularVision Technology & Telecommunications, L.P. and CellularVision USA, Inc.
10.12* Amended and Restated Agreement of Limited Partnership of CellularVision of New York, L.P., dated as
of July 7, 1993, by and between Hye Crest Management, Inc., Bell Atlantic Ventures, XXIII,
Inc. and the limited partners set forth on the signature page thereto.
10.13* Master Amendment Agreement, dated as of October 8, 1993, by and among Vahak S. Hovnanian, Shant S.
Hovnanian, Bernard B. Bossard, Hye Crest Management, Inc., Suite 12 Group, CellularVision of New
York, L.P., CellularVision Technology & Telecommunications, L.P., Bell Atlantic Ventures XXIII, Inc.
and Philips PGNY Corp.
10.14* Second Master Amendment Agreement, dated as of December 29, 1993, by and among Hye Crest Management,
Inc., Suite 12 Group, CellularVision of New York, L.P., CellularVision Technology &
Telecommunications, L.P., Bell Atlantic Ventures XXIII, Inc., Philips PGNY Corp., Morgan Guaranty Trust
Company of New York, as trustee of the Commingled Pension Trust Fund (Multi-Market Special
Investment) of Morgan Guaranty Trust Company of New York, and as Investment Manager and Agent for an
Institutional Investor.
10.15*+ Note Purchase Agreement, dated as of December 29, 1993, between CellularVision of New York, L.P. and
Morgan Guaranty Trust Company of New York, as trustee of the Commingled Pension Trust Fund
(Multi-Market Special Investment) of Morgan Guaranty Trust Company of New York with respect to the
issuance and sale of $12,000,000 principal amount of Convertible Exchangeable Subordinated Notes of
CellularVision of New York, L.P.
10.16* Agreement of Lease, dated May 9, 1994, by and between CellularVision of New York and New York City
Economic Development Corporation and Sublease, dated March 8, 1995, between
CellularVision of New York, L.P. and Harvard Fax, Inc.
10.17* Communications Antenna Site Agreement, dated December 6, 1994, between CellularVision of New York
L.P. and Tower Owners, Inc., as amended.
10.18* Master Lease Agreement No. 6035, dated December 12, 1995, between Linc Capital Management, a
division of Scientific Leasing Inc., and CellularVision of New York, L.P., together with the
Schedules and Addendum No. 1 thereto; Warrant Certificate Nos. 1, 2 and 3, dated December 14, 1995,
issued to Linc Capital Partners, Inc. by the Company.
10.19* Master Equipment Lease, dated December 14, 1995 between Boston
Financial & Equity Corporation and CellularVision of New York,
L.P., together with the Schedules and the Addendum thereto; Warrant
Certificate Nos. 4 and 5, dated December 14, 1995, issued to Boston
Financial & Equity Corporation by the Company.
13
<PAGE>
10.20* Senior Convertible Term Note, dated December 1, 1995, in the principal amount of $3,521,257 issued
to Bell Atlantic Ventures XXIII, Inc. by CellularVision of New York, L.P. and CellularVision
USA, Inc. and the Agreement, dated as of December 1, 1995, by and among CellularVision USA, Inc.,
CellularVision of New York, L.P.,and Bell Atlantic Ventures XXIII, Inc.
10.21* Warrant, dated June 1, 1994, issued by CellularVision of New York, L.P. to Alex. Brown & Sons
Incorporated.
10.22* Warrant, dated June 1, 1994, issued by CellularVision of New York, L.P. to Mark B. Fisher.
10.23* Warrant, dated December 29, 1993, issued by CellularVision of New York, L.P. to Peter Rinfret.
10.24* Warrant, dated October 8, 1993, issued by Vahak S. Hovnanian to Alex. Brown
Financial Corporation.
10.25* Warrant, dated October 8, 1993, issued by Vahak S. Hovnanian to Mark B.
Fisher.
10.26* Non-qualified Stock Option Agreement under the CellularVision USA, Inc. 1995 Stock Incentive Plan,
dated as of January 15, 1996, by and between the Company and John Walber.
10.27* Non-qualified Stock Option Agreement under the CellularVision USA, Inc. 1995 Stock Incentive Plan,
dated as of January 15, 1996, by and between the Company and George J. Parise.
10.28* Agreement, dated as of January 12, 1996, by and among CellularVision USA, Inc., CellularVision of
New York, L.P., Hye Crest Management, Inc., Shant S. Hovnanian, Vahak S. Hovnanian, Bernard B.
Bossard and Bell Atlantic Ventures XXIII, Inc.
10.29* Exchange Notes, dated as of December 15, 1995, of CellularVision USA, Inc. issued to Morgan Guaranty
Trust Company of New York, as trustee of the Commingled Pension Trust Fund (Multi-Market Special
Investment) of Morgan Guaranty Trust Company of New York, and as Investment Manager and Agent for an
Institutional Investor, in the principal amounts of approximately $5.0 million and $1.3 million,
respectively (form of Exchange Note included as Exhibit A-2 to Exhibit 10.15 above).
21* Subsidiaries of CellularVision USA, Inc.
23.1* Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Willkie Farr & Gallagher (included in Exhibit 5).
24* Power of Attorney.
<FN>
- ------------------
* Incorporated by reference to the Company's Registration Statement in Form S-1 (File No. 33-98340) which was declared
effective by the Commission on February 7, 1996.
** Filed herewith.
+ An identical note purchase agreement has been entered into by CellularVision of New York, L.P. and Morgan Guaranty Trust
Company of New York, as Investment Manager and Agent for an Institutional Investor with respect to the issuance and sale
of $3,000,000 principal amount of Convertible Exchangeable Subordinated Notes of CellularVision of New York, L.P.
</TABLE>
14
<PAGE>
b. Current Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during the period
beginning January 1, 1996 and ending June 30, 1996.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CELLULARVISION USA, INC.
Date: August 12, 1996 By: /s/ Shant S. Hovnanian
----------------------------
Shant S. Hovnanian
President and
Chief Executive Officer
16
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement is dated as of July 31, 1996,
and is entered into between CELLULARVISION OF NEW YORK, L.P. (The "Company"),
CELLULARVISION USA, INC. ("CV USA") and CHARLES N. GARBER ("Executive").
WHEREAS, Executive, the Company and CV USA desire to embody in this
Agreement the terms and conditions of Executive's employment by the Company
and CV USA.
NOW, THEREFORE, the parties hereby agree:
ARTICLE I
Employment, Duties and Responsibilities
---------------------------------------
1.01. Employment. The Company and CV USA shall employ
----------
Executive as Vice President - Finance of the Company and Chief Financial
Officer of CV USA. Executive hereby accepts such employment. Subject to
Article IV, Executive agrees to devote his full business time and efforts to
promote the interests of the Company and CV USA.
1.02. Duties and Responsibilities. Executive shall have such
---------------------------
duties and responsibilities as are consistent with his position and shall
perform such services not inconsistent with his position as shall from time
to time be assigned to him by the Board of Directors of the Company or CV
USA, the Chief Executive Officer of the Company or CV USA, or any other
officer of the Company or CV USA in a position superior to Executive.
ARTICLE II
Term and Locale
---------------
2.01. Term. (a) The term of this Agreement (the "Term") shall
----
commence on July 15, 1996 and shall continue for a period of three years
until July 14, 1999. Thereafter, the Term shall continue on a monthly basis
unless terminated by any party upon one month's prior written notice.
(b) Executive represents and warrants to the Company and CV
USA that to the best of his knowledge, neither the execution and delivery of
this Agreement nor the performance of his duties hereunder violates or will
violate the provisions of any other agreement to which he is a party or by
which he is bound.
2.02. Locale. Executive shall be based at the CVUSA's principal
------
offices in the New York metropolitan area. In the event that CVUSA's offices
are moved outside the New York metropolitan area and the Company and CVUSA
require the Executive to be based at such new location, then the Company or
CVUSA will bear the actual reasonable costs of relocating the Executive and
his family to the new office location area, including a tax "gross up" amount
to
1
<PAGE>
reflect the tax impact of such additional income so as to keep the employee
whole on an after tax basis.
ARTICLE III
Compensation and Expenses
-------------------------
3.01. Salary, Bonuses and Benefits. As compensation and
----------------------------
consideration for the performance by Executive of his obligations under this
Agreement to the Company, Executive shall be entitled to the following
(subject, in each case, to the provisions of ARTICLE V hereof):
(a) Signing Bonus. As consideration for entering into this
-------------
Agreement and commencing employment with the Company, as set forth hereunder,
the Company shall pay to Executive a signing bonus equal to $50,000, such
bonus to be payable as soon as practical after Executive's commencement of
employment with the Company, as set forth hereunder. Employee shall, also,
receive an additional $50,000 bonus upon closing a lump-sum financing of no
less than $50 million by the Company or CVUSA.
(b) Salary. The Company shall pay Executive a base salary
------
during the Term, payable in accordance with the normal payment procedures of
the Company and subject to such withholdings and other normal employee
deductions as may be required by law, at the annual rate of $175,000. The
Compensation Committee of the Board of Directors of the Company shall review
such compensation for a possible increase not less frequently than annually
during the Term.
(c) Annual Bonus. Executive shall receive an annual bonus
------------
(the " Annual Bonus") of no less than $50,000 per year during the term. The
Annual bonus specified herein is in addition to any bonuses payable per
Paragraph 3.01 (a) of this Employment Agreement. Subject to the foregoing,
the amount of the Annual Bonus will be based on annual individual and/or
corporate performance goals set by the compensation committee of the Board of
Directors of the Company (the "Compensation Committee") after a
determination that such goals have been achieved is made by the Chief
Executive Officer.
In the event that Executive shall terminate employment with the Company
for any reason prior to the end of the fiscal year for which an Annual Bonus
can be earned, Executive shall forfeit all entitlement to such Annual Bonus
and neither the Company nor CV USA shall be obligated to pay any portion of
the Annual Bonus to Executive.
(d) Benefits. Executive shall participate during the Term in
--------
such pension, life insurance, health, disability and major medical insurance
plans, and in such other employee benefit plans and programs, for the benefit
of the employees of the Company, as may be maintained from time to time
during the Term, in each case to the extent and in the manner available to
other officers of the Company and subject to the terms and provisions of such
plans or programs.
(e) Vacation. Executive shall be entitled to a paid vacation
--------
of at least 3 weeks per annum, in accordance with Company policy (but not
necessarily consecutive vacation weeks) during the Term.
2
<PAGE>
(f) Stock Awards. Subject to approval by the Compensation
------------
Committee of the Board of Directors of CV USA, CV USA shall grant Executive
an option (the "Option") to purchase 25,000 shares of common stock of CV USA,
par value $.01 per share, (the "Common Stock"), pursuant to CV USA's 1995
Stock Incentive Plan (the "Plan"). The Option shall be immediately
exercisable at the time of grant and will have an exercise price per share
equal to the Fair Market Value (as defined in the Plan) of one share of
Common Stock on the date of this Agreement. The Option will have such other
terms and conditions as shall be set forth in a stock option agreement (the
"Option Agreement") between Executive and CV USA. Thereafter, Executive
shall be eligible to participate in the Plan to the extent the compensation
committee of the Board of Directors of CV USA determines to grant Executive a
discretionary award under the Plan.
3.02. Expenses.
--------
(a) The Company will reimburse Executive for reasonable business-
related expenses incurred by him in connection with the performance of his
duties hereunder during the Term, subject, however, to the Company's policies
relating to business-related expenses as in effect from time to time during
the Term.
(b) The Company shall also reimburse Executive $350 per month to
cover the cost of commuting from his home to New York, New York on a daily
basis, subject to the good faith approval of the Chief Executive Officer of
the Company.
3.03. Moving Expenses.
---------------
The Company will pay to Employee the sum of $50,000 as
reimbursement for moving expenses associated with moving himself and his
family from Cincinnati to the New York area. Such amount shall be payable
upon Employee's relocation to the New York area.
ARTICLE IV
Exclusivity, Etc.
-----------------
4.01. Exclusivity. Executive agrees to perform his duties,
-----------
responsibilities and obligations hereunder efficiently and to the best of his
ability. Executive agrees that he will devote his entire working time, care
and attention and best efforts to such duties, responsibilities and
obligations with the Company and CV USA throughout the Term; provided,
however, that Executive shall be allowed a reasonable amount of time, within
the discretion of the Chief Executive Officer of the Company, to wind down
his obligations to his previous employer. Subject to the preceding sentence,
Executive also agrees that he will not engage in any other business
activities, pursued for gain, profit or other pecuniary advantage that are
competitive with the activities of the Company, except as permitted in
Section 4.02 below. Executive agrees that all of his activities as an
employee of the Company shall be in conformity with all policies, rules and
regulations and directions of the Company not inconsistent with this
Agreement.
3
<PAGE>
4.02. Other Business Ventures; Noncompetition.
---------------------------------------
(a) Executive agrees that, so long as he is employed by the
Company, he will not own, directly or indirectly, any controlling stock or
other beneficial interest in any business enterprise which is engaged in, or
competitive with, any business engaged in by the Company. Notwithstanding
the foregoing, Executive may own, directly or indirectly, up to 5% of the
outstanding capital stock of any business having a class of capital stock
which is traded on any national stock exchange or in the over-the-counter
market.
(b) Executive agrees that for a period of two years following
Executive's termination of employment with the Company for any reason,
Executive shall not, directly or indirectly, operate, manage, own or
participate in, or in any manner be affiliated with, any business or venture
that (i) engages in business as a subscription television provider in any
market in which the Company, CV USA or any subsidiary of either does
business, or (ii) engages in business as a Local Multipoint Distribution
Service operator anywhere in the United States of America.
4.03. Confidentiality. Executive agrees that he will not, at
---------------
any time during or after the Term, make use of or divulge to any other
person, firm or corporation any trade or business secret, process, method or
means, or any other confidential information concerning the business or
policies of the Company, which he may have learned in connection with his
employment. For purposes of this Agreement, a "trade or business secret,
process, method or means, or any other confidential information" shall mean
and include written information treated as confidential or as a trade secret
by the Company. Executive's obligation under this Section 4.03 shall not
apply to any information which (i) is known publicly; (ii) is in the public
domain or hereafter enters the public domain through no action of Executive;
(iii) is known to Executive prior to his receipt of such information from the
Company, as evidenced by written records of Executive, or (iv) is hereafter
disclosed to Executive by a third party not under an obligation of confidence
to the Company. Executive agrees not to remove from the premises of the
Company, except as an employee of the Company in pursuit of the business of
the Company or except as specifically permitted in writing by the Company,
any document or other object containing or reflecting any such confidential
information. Executive recognizes that all such documents and objects,
whether developed by him or by someone else, will be the sole exclusive
property of the Company. Upon termination of his employment hereunder,
Executive shall forthwith deliver to the Company all such confidential
information, including without limitation all lists of customers,
correspondence, accounts, records and any other documents or property made or
held by him or under his control in relation to the business or affairs of
the Company, and no copy of any such confidential information shall be
retained by him.
ARTICLE V
Termination
-----------
5.01. Termination by the Company. The Company shall have the
--------------------------
right to terminate the Executive's employment at any time, with or without
"Cause." For purposes of this Agreement, "Cause" shall mean (i) substantial
and continued failure by the Executive to perform his duties
4
<PAGE>
hereunder, (ii) conduct grossly insubordinate or disloyal to the Company, or
(iii) pleading no contest or guilty to a felony charge or being convicted of
a felony.
5.02. Death. In the event Executive dies during the Term, this
-----
Agreement shall automatically terminate, such termination to be effective on
the date of Executive's death.
5.03. Disability. In the event that Executive shall suffer a
----------
disability which shall have prevented him from performing satisfactorily his
obligations hereunder for a period of at least 90 consecutive days, or 180
non-consecutive days within any 365 day period, the Company shall have the
right to terminate this Agreement, such termination to be effective upon the
giving of notice thereof to Executive in accordance with Section 6.03 hereof.
5.04. Effect of Termination. (a) In the event of termination
---------------------
of Executive's employment for any reason, the Company shall pay to Executive
(or his beneficiary in the event of his death) any base salary or other
compensation earned but not paid to Executive prior to the effective date of
such termination.
(b) In the event of termination of Executive's employment (i)
by the Company for Cause, (ii) by Executive for any reason, (iii) because of
Executive's death, or (iv) pursuant to Section 5.03, because of Executive's
disability, neither the Executive nor any beneficiary of Executive shall be
entitled to any further compensation other than the amounts described in
Section 5.04(a) hereof.
(c) In the event of termination of Executive's employment by
the Company other than for Cause, the Company shall pay Executive, in
addition to the amounts described in Section 5.04(a) hereof, an amount equal
to the value of the continued payment of Executive's base salary and minimum
Annual Bonus for the remainder of the Term. Such amount shall be payable, at
the discretion of the Company, either (i) in a lump sum or (ii) in equal
monthly installments.
(d) The Executive's rights upon termination of employment with
respect to the Option or other incentive awards not covered by this Agreement
shall be governed by the terms and conditions of the Option Agreement or such
other award agreement.
ARTICLE VI
Miscellaneous
-------------
6.01. Mitigation; Offset. In the event that an amount becomes
------------------
payable to Executive pursuant to Section 5.04(c) above, such amount shall be
reduced, on a dollar-for-dollar basis, by (i) any outstanding amounts owed by
Executive to the Company and (ii) the amount of any compensation for services
earned by Executive during the remainder of the Term, from any source,
whether paid currently or deferred, less the Executive's reasonable and
documentable out-of-pocket costs in searching for employment and obtaining
said compensation. In such event, Executive shall cooperate with the Company
and shall provide such information to the Company as it may reasonably
require in order to calculate the amount of the reduction described above.
5
<PAGE>
Executive shall have an affirmative obligation to mitigate any amounts to be
paid under Section 5.04(c) above by seeking employment comparable to his
prior position with the Company.
6.02. Benefit of Agreement; Assignment; Beneficiary. (a) This
---------------------------------------------
Agreement shall inure to the benefit of and be binding upon the Company, CV
USA and their successors and assigns (but only to the extent the Agreement
relates to such entity), including, without limitation, any corporation or
person which may acquire all or substantially all of the Company's assets or
business, or with or into which the Company may be consolidated or merged.
This Agreement shall also inure to the benefit of, and be enforceable by, the
Executive and his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
the Executive should die while any amount would still be payable to the
Executive hereunder if he had continued to live, all such amounts shall be
paid in accordance with the terms of this Agreement to the Executive's
beneficiary, devisee, legatee or other designee, or if there is no such
designee, to the Executive's estate.
(b) The Company and CV USA shall require any successor
(whether direct or indirect, by operation of law, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company or CV USA to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company or CV USA would be required to perform it if no such succession had
taken place.
6.03 . Notices. Any notice required or permitted hereunder
-------
shall be in writing and shall be sufficiently given if personally delivered
or if sent by registered or certified mail, postage prepaid, with return
receipt requested, addressed: (a) in the case of the Company or CV USA to
CellularVision of New York, L.P., 505 Park Avenue, New York, New York 10022,
Attention: General Counsel, or to such other address and/or to the attention
of such other person as the Company shall designate by written notice to
Executive; and (b) in the case of Executive, to Executive's last known
address as reflected in the Company's records, or to such other address as
Executive shall designate by written notice to the Company. Any notice given
hereunder shall be deemed to have been given at the time of receipt thereof
by the person to whom such notice is given if personally delivered or at the
time of mailing if sent by registered or certified mail.
6.04. Entire Agreement; Amendment. This Agreement contains the
---------------------------
entire agreement of the parties hereto with respect to the terms and
conditions of Executive's employment during the Term and supersedes any and
all prior agreements and understandings, whether written or oral, between the
parties hereto with respect to compensation due for services rendered
hereunder. This Agreement may not be changed or modified except by an
instrument in writing signed by both of the parties hereto.
6.05. Waiver. The waiver by either party of a breach of any
------
provision of this Agreement shall not operate or be construed as a continuing
waiver or as a consent to or waiver of any subsequent breach hereof.
6
<PAGE>
6.06. Headings. The Article and Section headings herein are
--------
for convenience of reference only, do not constitute a part of this Agreement
and shall not be deemed to limit or affect any of the provisions hereof.
6.07. Governing Law. This Agreement shall be governed by, and
-------------
construed and interpreted in accordance with, the internal laws of the State
of New York without reference to the principles of conflict of laws.
6.08. Agreement to Take Actions. Each party hereto shall
-------------------------
execute and deliver such documents, certificates, agreements and other
instruments, and shall take such other actions, as may be reasonably
necessary or desirable in order to perform his or its obligations under this
Agreement or to effectuate the purposes hereof.
6.9. Arbitration. Except for disputes with respect to Article IV
-----------
hereof, any dispute between the parties hereto respecting the meaning and
intent of this Agreement or any of its terms and provisions shall be
submitted to arbitration in New York, New York, in accordance with the
Commercial Rules of the American Arbitration Association then in effect, and
the arbitration determination resulting from any such submission shall be
final and binding upon the parties hereto. Judgment upon any arbitration
award may be entered in any court of competent jurisdiction.
6.10. Survivorship. The respective rights and obligations of
------------
the parties hereunder shall survive any termination of this Agreement to the
extent necessary to the intended preservation of such rights and obligations.
6.11. Validity. The invalidity or unenforceability of any
--------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision or provisions of this Agreement, which
shall remain in full force and effect. If any provision of this Agreement is
held to be invalid, void or unenforceable, any court so holding shall
substitute a valid, enforceable provision that preserves, to the maximum
lawful extent, the terms and intent of this Agreement.
6.12. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
7
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has duly executed
this Agreement effective as of the date first written above.
CELLULARVISION OF NEW YORK, L.P.
By: /s/ John Walber
----------------------------------
Name: John Walber
Title: Chief Operating Officer
CELLULARVISION USA, Inc.
By: /s/ Shant S. Hovnanian
----------------------------------
Name: Shant S. Hovnanian
Title: President and Chief Executive Officer
/s/ Charles N. Garber
---------------------------------
CHARLES N. GARBER
8
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