SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 0-24924
------------------------------
THE ASSOCIATED GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0260858
(State of Incorporation) (I.R.S. Employer Identification No.)
200 Gateway Towers, Pittsburgh, Pennsylvania 15222
(Address of principal executive offices) (Zip Code)
412-281-1907
(Registrant's telephone number)
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 shares outstanding of each of the issuer's classes of common
stock, as of May 9, 1996:
Common Stock, Class A 9,382,962
Common Stock, Class B 9,382,985
<PAGE>
PART I
FINANCIAL INFORMATION
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
1996 1995
------------------------
(amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents (approximates
fair value) $ 1,480 $ 1,018
Accounts receivable, less allowance for
doubtful accounts (March 31, 1996--$3,380,000;
December 31, 1995--$183,000) 3,544 626
Notes receivable from foreign affiliates 194 191
Inventory held for resale 1,496 1,311
Prepaid expenses and other assets 1,041 860
Deferred income taxes 1,689 1,057
-------- ----------
Total current assets 9,444 5,063
Property and equipment, net of accumulated
depreciation and amortization (March 31, 1996--
$22,384,000; December 31, 1995--$7,676,000) 26,294 3,117
Marketable equity securities, at fair value
(cost: March 31, 1996--$6,886,000;
December 31, 1995--$6,898,000) 499,083 540,082
Notes receivable from foreign affiliates 19,420 11,240
Investments in wireless communications affiliates 13,963 13,602
Other noncurrent assets 6,292 1,367
-------- ----------
Total assets $574,496 $574,471
======== ==========
See notes to consolidated financial statements
<PAGE>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
1996 1995
------------------------
(amounts in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,691 $ 4,681
Other accrued expenses 2,240 1,297
Due to cellular equipment vendor 14,693 --
Short-term obligations 39,890 33,470
Current portion of long-term debt 2,082 --
-------- --------
Total current liabilities 63,596 39,448
Deferred compensation 1,284 1,264
Long-term debt, excluding current portion 10,238 --
Deferred income taxes 160,353 175,564
Minority interests 9,857 797
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, par value $.01 per share;
authorized 5,000,000 shares; none issued -- --
Class A Common Stock, par value $.10 per share;
authorized 100,000,000 shares; 9,382,962 shares
issued and outstanding in 1996 and 1995 938 938
Class B Common Stock, par value $.10 per share;
authorized 50,000,000 shares; 9,382,985 shares
issued and outstanding in 1996 and 1995 938 938
Unrealized gain on marketable equity securities,
net of deferred taxes (March 31, 1996--$172,269,000;
December 31, 1995--$186,614,000) 319,929 346,570
Retained earnings 7,363 8,952
-------- --------
Total stockholders' equity 329,168 357,398
-------- --------
Total liabilities and stockholders' equity $574,496 $574,471
======== ========
See notes to consolidated financial statements
<PAGE>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31,
1996 1995
-----------------------------
(amounts in thousands, except
share and per share amounts)
Revenues:
Cellular communication services $ 3,542 $ --
Microwave communication services 420 482
Radio broadcasting 342 400
Art gallery sales 132 319
------------ ------------
4,436 1,201
Costs and expenses:
Cost of sales:
Cellular communication services 1,904 --
Microwave communication services 194 191
Radio broadcasting 165 131
Art gallery sales 96 270
Direct research and development expenses 1,728 1,008
Sales, general and administrative expenses 4,188 2,575
Depreciation and amortization expense 1,268 347
------------ ------------
9,543 4,522
------------ ------------
Operating loss (5,107) (3,321)
Equity in loss of affiliates (327) (670)
Other income (expense):
Gain on sale of marketable equity securities 2,678 --
Interest and dividend income 696 474
Interest expense (1,194) (302)
Minority interests 850 (1)
------------ ------------
3,030 171
------------ ------------
Loss before income taxes (2,404) (3,820)
Income tax benefit 815 1,313
------------ ------------
Net loss $ (1,589) $ (2,507)
============ ============
Net loss per common share $ (.08) $ (.13)
============ ============
Weighted average common shares outstanding 18,765,947 18,765,947
See notes to consolidated financial statements
<PAGE>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
1996 1995
----------------------------
(amounts in thousands)
Cash Flows From Operating Activities
Net loss $(1,589) $(2,507)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,268 347
Provision for losses on accounts receivable 282 4
Gain on sale of marketable equity securities (2,678) --
Equity in loss of affiliates 327 670
Minority interests (850) 1
Provision for deferred income taxes (865) (1,313)
Change in assets and liabilities:
Accounts receivable (669) 37
Inventory held for resale 50 169
Prepaid expenses and other assets 139 92
Accounts payable (2,836) 170
Accrued transaction expenses -- (5,433)
Other accrued expenses (184) (1,026)
Deferred compensation 20 22
------- -------
Net Cash Used In Operating Activities (7,585) (8,767)
Cash Flows From Investing Activities
Cash and cash equivalents resulting from
consolidation of affiliate 751 --
Purchases of property and equipment (163) (116)
Proceeds from sale of marketable equity securities 2,690 --
Repayments of notes receivable from foreign affiliates 25 15
Increase in notes receivable from foreign affiliates (815) (442)
Investments in wireless communications affiliates (1,596) (320)
Other investing activities (428) (26)
------- -------
Net Cash Provided By (Used In) Investing Activities 464 (889)
Cash Flows From Financing Activities
Repayment of short-term obligations (1,600) --
Proceeds from short-term obligations 8,020 8,220
Long-term debt repayment assumed by cellular
equipment vendor (2,845) --
Increase in due to cellular equipment vendor 3,191 --
Repayment of long-term debt (170) --
Investment by minority interests 987 1
------- -------
Net Cash Provided By Financing Activities 7,583 8,221
------- -------
Net Increase (Decrease) In Cash And Cash Equivalents 462 (1,435)
Cash And Cash Equivalents At Beginning Of Period 1,018 1,919
------- -------
Cash And Cash Equivalents At End Of Period $ 1,480 $ 484
======= =======
See notes to consolidated financial statements
<PAGE>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1996, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the financial
statements and footnotes thereto included in The Associated Group, Inc. (the
"Company," as used herein, includes all consolidated subsidiaries, unless the
context otherwise indicates) Annual Report on Form 10-K for the year ended
December 31, 1995. The audited financial statements of Grupo Portatel, S.A. de
C.V. and Subsidiaries for the years ended December 31, 1995, 1994 and 1993 are
included as Exhibit 99.1 to The Associated Group, Inc. Annual Report on Form
10-K for the year ended December 31, 1995.
Certain accounts in the financial statements for the 1995 period have been
reclassified to conform to the financial statement presentation for the current
period. These reclassifications have no effect on net loss.
2. CONSOLIDATION OF GRUPO PORTATEL, S.A. de C.V.
The Company, through a wholly owned subsidiary, Associated Communications of
Mexico, Inc. ("ACM"), has a 30.2% interest in Grupo Portatel, S.A. de C.V.
("Grupo"), of which Portatel del Sureste, S.A. de C.V. ("Portatel"), a Mexican
cellular telephone company, is a wholly owned subsidiary. Effective January 1,
1996, the Company and the other United States shareholder of Grupo have agreed
to contribute their respective stock interests in Grupo, and their rights under
an Association in Participation Agreement described below, to Grupo Holdings,
L.L.C. ("Grupo Holdings"), a new joint venture limited liability company, in
which the Company has a 61.6% controlling equity interest. Through December 31,
1995, the Company recorded its investment in Grupo using the equity method. As a
result of the formation of Grupo Holdings and the effects of the Association in
Participation Agreement described below, the Company has consolidated the
financial statements of Grupo with the Company's financial statements as of
January 1, 1996.
In June 1994, the Company entered into an Association in Participation Agreement
("AP Agreement") and a related Joint Venture Agreement (together, the "Grupo
Documents") with the other United States shareholder of Grupo and one of the
Mexican nationals to whom the Company has loaned funds for the acquisition of
Grupo stock. The United States shareholder and the Mexican national have 18.8%
and 1.7% direct equity interests in Grupo, respectively. Through the AP
Agreement, the Mexican national, acting as the Active Partner (as defined in the
AP Agreement), holds a 39.8% equity interest in Grupo. The Company and the other
United States shareholder are Silent Partners (as defined in the AP Agreement)
in the AP Agreement. The Grupo Documents provide for the allocation to the
parties to the Grupo Documents, at a given ratio, of proceeds received from
distributions made by Grupo to its shareholders or from the sale of shares held
pursuant to the AP Agreement, after adjustment to such proceeds for income tax
liabilities and payment of capital advanced by the Silent Partners and related
investment fees thereon (the "Distribution of Proceeds Provision"). In the event
that the Active Partner, after consultation with the Silent Partners, votes in
such a way that is against the express will of the Silent Partners, then the
Active Partner's proceeds from the sale of Grupo will be reduced by 50%, in
accordance with the Distribution of Proceeds Provision. Additionally, the Grupo
Documents provide that in the event of a change in Mexican law which would allow
for the Silent Partners to hold direct ownership in Grupo without any percentage
limitation, then, at the option of the Silent Partners, the Silent Partners may
cause the AP Agreement to be dissolved, and the Silent Partners' ownership
increase in Grupo will be determined based upon an allocation methodology
consistent with the Distribution of Proceeds Provision. As a result of a change
in Mexican law, the Silent Partners have the
<PAGE>
ability to increase their direct percentage ownership in Grupo without any
percentage limitation, subject to certain Mexican regulatory approvals which are
routine in nature, and thus, are entitled at their option to cause the AP
Agreement to be dissolved.
Excluding the effects of the AP Agreement and any dilution that may result from
the debt to equity conversion discussed in Note 8, the Company has a 30.2%
economic ownership interest and through Grupo Holdings controls a 49.0% voting
interest in Grupo. Accordingly, through the AP Agreement and control of Grupo
Holdings, the Company has sufficient control over the assets of Grupo such that
the financial statements of Grupo have been consolidated with the Company's
financial statements effective January 1, 1996. Upon closing of the agreement
discussed in Note 8, excluding the effects of the AP Agreement, the Company's
ownership interest in Grupo will be reduced to approximately 23.6%. Subsequent
to this transaction, the Company will continue to exert sufficient control over
Grupo to warrant consolidation of Grupo's financial statements.
As a result of the consolidation of Grupo's financial statements and the
formation of Grupo Holdings, equity in loss of affiliates in the 1996 period no
longer includes Grupo, and the Company's minority interests include third-party
ownership interests of 69.8% and 38.4% for Grupo and Grupo Holdings,
respectively. The Company's balance sheet includes $7,393,000 of notes
receivable from foreign affiliates resulting from the formation of and initial
contributions to Grupo Holdings by the minority member of Grupo Holdings. The
consolidation of Grupo has no effect on the Company's consolidated net equity,
consolidated net loss or per share data since its economic ownership percentage
is the same regardless of consolidation of Grupo. The pro forma consolidated
revenues of the Company for the three months ended March 31, 1995 would have
been $4,834,000, assuming consolidation of Grupo as of January 1, 1995.
3. FOREIGN CURRENCY TRANSLATION
The financial statements of Grupo are translated from Mexican new pesos to U.S.
dollars in accordance with Financial Accounting Standards No. 52, "Foreign
Currency Translation." Based upon the inflationary and political environment in
Mexico, along with the economic dependency Grupo has had on its shareholders
(including the Company) and the source of its cash outflows, the U.S. dollar has
been utilized as the functional currency. Nonmonetary assets and liabilities
have been translated at historical exchange rates and monetary assets and
liabilities have been translated based on the current exchange rate. Revenues
and expenses have been translated at the weighted average exchange rate in
effect during the period. Foreign currency translation gains and losses are
included in the statement of operations.
4. INVENTORY
Inventory, which consists of art prints of $1,286,000 and $1,311,000 at March
31, 1996 and December 31, 1995, respectively, and cellular telephones and
related equipment of $210,000 and $0 at March 31, 1996 and December 31, 1995,
respectively, is recorded at the lower of cost or market value. Cost of art
prints is determined under the first-in, first-out method and cost of cellular
telephones and related equipment is determined under the last-in, first-out
method. Inventory is reported net of a market valuation reserve relating to art
inventory of $1,582,000 at March 31, 1996 and December 31, 1995.
<PAGE>
5. MARKETABLE EQUITY SECURITIES
The cost and market value of marketable equity securities classified as
available for sale at March 31, 1996, are as follows:
Cost of Market Value of
Name of Issuer and Number of Each Issue Each Issue
Title of Each Issue Shares In Thousands In Thousands
- - --------------------------------------------------------------------------------
Tele-Communications, Inc.:
TCI Group Series A Common Stock 12,479,976 $ 3,839 $231,660
TCI Group Series B Common Stock 7,071,852 1,268 130,829
Liberty Media Group Series A
Common Stock 3,119,993 1,229 82,290
Liberty Media Group Series B
Common Stock 1,767,963 410 50,497
General Communication, Inc.:
Class A Common Stock 416,000 12 2,496
Class B Common Stock 138,668 4 693
Others Various 124 618
-----------------------------
$ 6,886 $499,083
=============================
During March 1996, the Company sold its 41,598 shares of Tele-Communications,
Inc. ("TCI") Class B 6% Cumulative Redeemable Exchangeable Junior Preferred
Stock for pretax proceeds of approximately $2,690,000, and has recognized a gain
on the sale of approximately $2,678,000. Subsequent to March 31, 1996 and
through May 9, 1996, the Company has also sold 68,200 shares of General
Communication, Inc. ("GCI") Class A Common Stock for pretax proceeds of
approximately $536,000, and will recognize a gain on the sale of approximately
$534,000 in the three months ended June 30, 1996.
Including the effects of the sale of marketable equity securities during the
March 31, 1996 period, the decrease in the unrealized gain on marketable equity
securities, net of tax, recorded as a separate component of stockholders' equity
was $26,641,000 and $11,558,000 in the three months ended March 31, 1996 and
1995, respectively.
As of May 9, 1996, the aggregate market value of the marketable equity
securities held by the Company declined to approximately $480,475,000,
representing an approximate $18,199,000 decrease from March 31, 1996, net of
approximately $409,000 relating to the March 31, 1996 market value of securities
sold subsequent to March 31, 1996.
6. OTHER NONCURRENT ASSETS
At March 31, 1996, included in other noncurrent assets are amounts for
preoperating expenses of Grupo of $1,413,000, net of accumulated amortization of
$1,557,000, and amounts for the cost of concession rights granted to Portatel
from the Mexican Ministry of Communications and Transportation ("SCT") to
operate cellular telephone services in the southeast region of Mexico of
$2,587,000, net of accumulated amortization of $938,000. The preoperating
expenses are being amortized over a ten year period and the cost of concession
rights is being amortized over twenty years, the life of the concession.
<PAGE>
7. SHORT-TERM OBLIGATIONS
As of March 31, 1996, the Company has outstanding short-term obligations of
$39,890,000 under its demand discretionary bank line of credit and a brokerage
margin loan facility, with an aggregate of 4,819,994 shares of TCI Group Series
A Common Stock pledged as security under the Company's credit facilities.
Subsequent to March 31, 1996 and through May 9, 1996, an additional 600,000
shares of TCI Group Series A Common Stock were pledged, increasing the total
number of shares pledged to 5,419,994.
8. LONG-TERM DEBT AND AMOUNTS DUE TO CELLULAR EQUIPMENT VENDOR
Portatel has long-term debt obligations under various credit facilities with a
U.S. bank and various related parties (the "Portatel Credit Agreements"). Such
long-term obligations are denominated in U.S. dollars and were incurred for
working capital, including the purchase and construction of cellular
infrastructure equipment. The outstanding debt under the Portatel Credit
Agreements is guaranteed by a cellular equipment vendor of Portatel (the
"Guarantor"). During 1995 and January 1996, Portatel failed to meet all of its
debt obligations under such credit facilities. Accordingly, payments were made
by the Guarantor to Portatel's lenders on Portatel's behalf. Such amounts are
included in current liabilities at March 31, 1996. As a result of Portatel's
failure to make such payments, the Guarantor had the right to require Grupo to
transfer to the Guarantor 40% of the stock of Portatel held in trust as
collateral for such guarantee, but did not exercise its right to acquire such
shares. Grupo, Portatel and certain shareholders of Grupo (including the
Company) entered into a Contribution Agreement with the Guarantor effective
January 31, 1996 to convert the payments made in 1995 and January 1996 on behalf
of Grupo into capital stock of Grupo. Closing under the Contribution Agreement
is contingent upon certain Mexican regulatory consents and approvals. Upon
closing, excluding the effects of the AP Agreement, the conversion provided for
in the Contribution Agreement will result in a reduction of the Company's
ownership interest in Grupo to approximately 23.6%. The Guarantor will continue
to guarantee the remaining debt of Portatel secured by an approximate 30.7%
equity interest in Portatel. In the event that Portatel is unable to make its
remaining debt service payments, the Guarantor is obligated to do so on behalf
of Portatel.
The remaining debt of Portatel is subdivided into various pieces, referred to as
Tranches. The loans under Tranche I bear interest at the LIBOR rate plus 2.5%.
Interest and principal are payable in semiannual installments through November
15, 2001. The loans under Tranche II bear interest at the LIBOR rate plus 6%.
Interest and principal are payable in semiannual installments through September
25, 2001. The amounts outstanding under the Portatel Credit Agreements at March
31, 1996 are as follows:
Tranche I Tranche II Total
--------- ---------- -----
Current $ 1,742 $ 340 $ 2,082
Long-Term 8,706 1,532 10,238
----- ------ -------
$10,448 $1,872 $12,320
======= ====== =======
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest was approximately $380,000 and $283,000 for the three
months ended March 31, 1996 and 1995, respectively. The Company made no federal
and state income tax payments and through Grupo, paid approximately $158,000 in
Mexican taxes during the three months ended March 31, 1996. The Company made no
federal and state income tax payments in the three months ended March 31, 1995.
10. PER SHARE DATA
Weighted average common shares outstanding do not include common stock
equivalents since their effect on the net loss per common share would be
antidilutive.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As of and for the three months ended March 31, 1996, the Company has
consolidated the financial statements of Grupo, which investment was previously
accounted for under the equity method (see Note 2 to the consolidated financial
statements included elsewhere herein). As a result of the consolidation of Grupo
and the formation of Grupo Holdings (see Note 2 to the consolidated financial
statements included elsewhere herein), equity in loss of affiliates in the 1996
period no longer reflects Grupo, and the Company's minority interests include
third-party ownership interests of 69.8% and 38.4% for Grupo and Grupo Holdings,
respectively. In addition, the Company's balance sheet at March 31, 1996
reflects higher notes receivable from foreign affiliates due to the formation of
and initial contributions to Grupo Holdings by the minority member of Grupo
Holdings.
Financial Condition
Currently, the Company is financing its cash requirements from two credit
facilities: a $100,000,000 demand discretionary bank line of credit (the "line
of credit") and a brokerage margin loan facility. The line of credit expires on
November 16, 1996 and the Company presently anticipates renewal of such
facility. Short-term obligations outstanding as of March 31, 1996 were
$19,000,000 under the line of credit and $20,890,000 under the brokerage margin
loan facility. The Company has one other brokerage margin loan facility
available under which no borrowings were outstanding at March 31, 1996. The
Company has pledged in the aggregate as of May 9, 1996, 5,419,994 shares of TCI
Group Series A Common Stock as collateral, and borrowings under each of these
credit facilities are limited to 50% of the market value of such stock pledged,
with an additional 15% collateral requirement on the brokerage margin loan
facility currently in use, if borrowings exceed $100,000,000, up to a maximum of
$200,000,000. Based on the market value of the stock currently pledged, and
outstanding short-term obligations of approximately $40,953,000 as of May 9,
1996, the Company's unused borrowing capacity under the three existing credit
facilities is approximately $6,811,000. A significant portion of the Company's
assets are liquid, and can be pledged as security for added borrowing capacity.
Given the market value of the remaining shares of marketable equity securities
that could potentially be pledged as additional security, the Company's three
credit facilities provide for maximum additional borrowings of up to
approximately $198,625,000 as of May 9, 1996. The Company's ability to meet cash
needs in the near term for future development depends in large part on the value
of its portfolio of securities. The Company periodically evaluates its financial
position and alternative financing arrangements.
In March 1996, the Company sold its 41,598 shares of TCI Class B 6%
Cumulative Redeemable Exchangeable Junior Preferred Stock for pretax proceeds of
approximately $2,690,000. The Company recognized a gain on the sale of
approximately $2,678,000 in the first quarter of 1996. Subsequent to March 31,
1996 and through May 9, 1996, the Company has also sold 68,200 shares of General
Communication, Inc. Class A Common Stock for pretax proceeds of approximately
$536,000, and will recognize a gain on the sale of approximately $534,000 in the
three months ended June 30, 1996. The Company will utilize current year losses
and/or net operating loss carryforwards to offset the federal income taxes
resulting from these gains. Proceeds from these sales were used for working
capital and to fund the development of the Company's wireless technologies, as
well as for the repayment of $1,600,000 of short-term obligations in March 1996.
Portatel has long-term debt obligations under various credit facilities
with a U.S. bank and various related parties (the "Portatel Credit Agreements").
Such long-term obligations are denominated in U.S. dollars and were incurred for
working capital, including the purchase and construction of cellular
infrastructure equipment. The outstanding debt under the Portatel Credit
Agreements is guaranteed by a cellular equipment vendor of Portatel (the
"Guarantor"). During 1995 and January 1996, Portatel failed to meet all of its
debt obligations under such credit facilities. Accordingly, payments were made
by the Guarantor to Portatel's lenders on Portatel's behalf. Such amounts are
included in current liabilities at March 31, 1996. As a result of Portatel's
failure to make such payments, the Guarantor had the right to require Grupo to
transfer to the Guarantor 40% of the stock of Portatel held in trust as
collateral for such guarantee, but did not exercise its right to acquire such
shares. Grupo, Portatel and certain shareholders of Grupo (including the
Company) entered into a Contribution Agreement effective
<PAGE>
January 31, 1996 with the Guarantor to convert the payments made in 1995 and
January 1996 on behalf of Grupo into capital stock of Grupo. Closing under the
Contribution Agreement is contingent upon certain Mexican regulatory consents
and approvals. Upon closing, excluding the effects of the AP Agreement, the
conversion provided for in the Contribution Agreement will result in a reduction
of the Company's ownership interest in Grupo from 30.2% to approximately 23.6%.
The Guarantor will continue to guarantee the remaining debt of Portatel of
$12,320,000 at March 31, 1996, secured by an approximate 30.7% equity interest
in Portatel. In the event that Portatel is unable to make its remaining debt
service payments, the Guarantor is obligated to do so on behalf of Portatel.
Grupo and Portatel have no external available lines of credit as of March
31, 1996. The Company may be required to meet additional capital commitments
with respect to its ownership interest in Grupo, and is committed to making
additional loans to the Grupo stockholder who is a Mexican national and a party
to the AP Agreement for a portion of any such capital commitments with respect
to his ownership interest. The Company is required to make a payment in May 1996
of approximately $839,000 for such commitments. Such amount includes
approximately $323,000 to be funded by the minority member of Grupo Holdings.
As of May 9, 1996, the Company has funded an additional $513,000 for stock
in Teletrac, Inc. ("Teletrac") since March 31, 1996, and has subscribed to
purchase additional stock (on a pro rata basis with other Teletrac stockholders)
for $2,426,000. Such amount is due as capital is needed by Teletrac.
On March 11, 1996, the Company signed a definitive purchase agreement to
purchase the Federal Communications Commission ("FCC") license and related
assets of radio broadcasting station WCEZ-FM located in Delaware, Ohio, serving
the Delaware/Columbus, Ohio market. The purchase is subject to approval by the
FCC and the Company currently expects to close the transaction in the second
quarter of 1996. The total consideration for this acquisition will be
approximately $3,250,000, including amounts for noncompete and consulting
agreements.
Net cash used in operating activities was $7,585,000 and $8,767,000 for
the three months ended March 31, 1996 and 1995, respectively. The decrease in
cash used in operating activities of $1,182,000 was primarily the result of
changes in working capital items (primarily a decrease in accounts payable of
$2,836,000 in the 1996 period and payments made in the 1995 period for accrued
transaction expenses of $5,433,000 related to the December 1994 merger and
spin-off of the Company from Associated Communications Corporation) and higher
expenditures for direct research and development and interest expense in the
1996 period of $720,000 and $892,000, respectively. Cash provided by investing
activities for the three months ended March 31, 1996 was $464,000 and cash used
in investing activities for the three months ended March 31, 1995 was $889,000.
The $1,353,000 change between periods was primarily due to proceeds of
$2,690,000 from the sale of marketable equity securities in the 1996 period,
partially offset by greater investments in wireless communications affiliates in
the 1996 period. The Company's borrowings comprise most of the net cash provided
by financing activities in the 1996 and 1995 periods of $7,583,000 and
$8,221,000, respectively. The decrease between periods is primarily the result
of the repayment of $1,600,000 of short-term obligations in the first quarter of
1996 from a portion of the proceeds on the sale of marketable equity securities.
Other financing cash flows in the 1996 period reflect the repayment by the
Guarantor of amounts due for Grupo's long-term debt (see Note 8 to the
consolidated financial statements included elsewhere herein).
<PAGE>
Operating Results for the Three Months Ended March 31, 1996, Compared
to the Three Months Ended March 31, 1995
Total revenues increased $3,235,000, or 269% in the 1996 period compared
to the 1995 period. This increase is attributable to the inclusion of cellular
communication services revenues resulting from the consolidation of Grupo
described above. The increase in cost of cellular communication services is also
attributable to the consolidation of Grupo.
Microwave communication services revenues decreased $62,000, or 13% for
the 1996 period compared to the 1995 period. The decrease in microwave
communication services revenues reflects the continuing effects of price
competition from alternate access providers and local exchange carriers. Cost of
microwave communication services, which to a large extent are fixed in nature,
are comparable between periods.
Broadcasting revenues decreased $58,000, or 15% for the 1996 period
compared to the 1995 period. Format and programming changes at the Company's
radio stations in late 1995 caused a short-term fall in revenues in the first
quarter of 1996. Cost of radio broadcasting increased $34,000, or 26% in the
first quarter of 1996 as compared to the same period in 1995, as a result of
costs associated with programming changes.
Art gallery revenues decreased $187,000, or 59% for the 1996 period
compared to the 1995 period. The decrease in art gallery revenues for the 1996
quarter reflects a decline in sales volume as compared to the 1995 quarter. The
cost of art sales decreased $174,000, or 64% in the first quarter of 1996
compared to the first quarter of 1995, reflecting the reduced sales volume in
the 1996 period.
Direct research and development expenses were $1,728,000 and $1,008,000 in
the 1996 and 1995 periods, respectively. The increase in 1996 was primarily due
to increased expenditures for TruePosition(Trademark), the Company's cellular
telephone and wireless transmitter location system, and for costs in obtaining
FCC licenses and preliminary construction activities for the Company's digital
termination services business. Sales, general and administrative expenses were
$4,188,000 and $2,575,000 in the 1996 and 1995 periods, respectively. The
increase from 1995 to 1996 of $1,613,000 was primarily the result of the
consolidation of Grupo. Similarly, the increase in depreciation and amortization
expense from 1995 to 1996 of $921,000 was also primarily the result of the
consolidation of Grupo.
The Company's equity in loss of affiliates was $327,000 and $670,000 in
the 1996 and 1995 periods, respectively. Due to the consolidation of Grupo in
the 1996 period, the Company's equity in loss of affiliates in 1996 reflects
only the Company's approximate 21% share of the first quarter 1996 results of
Teletrac. The Company's initial equity investment in Teletrac was made in
November 1995. The Company's equity in loss of affiliates in the 1995 period
reflects only the Company's share of the first quarter 1995 results of Grupo.
The $2,678,000 gain on the sale of marketable equity securities in the
1996 period is the result of the sale of 41,598 shares of TCI Class B 6%
Cumulative Redeemable Exchangeable Junior Preferred Stock. Interest and dividend
income was $696,000 and $474,000 in the 1996 and 1995 periods, respectively. The
increase in 1996 of $222,000 is the result of additional interest income on
notes receivable from foreign affiliates included as a result of the formation
and consolidation of Grupo Holdings. Interest expense was $1,194,000 and
$302,000 in the 1996 and 1995 periods, respectively. The increase in 1996 of
$892,000 is the result of the consolidation of the financial statements of Grupo
and an increase in the level of outstanding short-term obligations. Minority
interests increased $851,000 in the 1996 period over the 1995 period, reflecting
the 69.8% and 38.4% third-party ownership interests in Grupo and Grupo Holdings,
respectively, described above.
<PAGE>
The Company recognized an income tax benefit at an effective rate of
approximately 34% in both the 1996 and 1995 periods. The tax benefit recorded
for the three months ended March 31, 1996 includes approximately $611,000 of net
operating loss. Based on current projections, the company anticipates it will
generate a net operating loss for federal income taxes for the year ended
December 31, 1996.
The Company's net loss was $1,589,000 for the three months ended March 31,
1996, compared to a net loss of $2,507,000 for the three months ended March 31,
1995. The primary reason for the decreased loss of $918,000 in the 1996 period
was the gain on marketable equity securities of $2,678,000, offset by increased
research and development costs relating primarily to TruePosition(Trademark) and
the Company's digital termination services business of $720,000, and increased
interest expense of $892,000. The consolidation of the financial statements of
Grupo had no effect on the Company's consolidated net loss.
<PAGE>
PART II
OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
See Note 8 to the Company's consolidated financial statements included
herein, which is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed as part of this Form 10-Q:
Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation, filed as Exhibit 3.1
to Registration Statement on Form 10/A dated November 15,
1994 and incorporated herein by reference.
3.2 Amended and Restated By-Laws, filed as Exhibit 3.2 to
Registration Statement on Form 10/A dated November 15, 1994
and incorporated herein by reference.
4.1 Common Stock Certificates, filed as Exhibits 4.2 and 4.3 to
Form 8-K, dated December 22, 1994 and incorporated herein by
reference.
4.2 Rights Agreement, dated as of December 15, 1994, by and
between the Company and Mellon Bank, N.A., filed as Exhibit
4.1 to Form 8-K, dated December 22, 1994 and incorporated
herein by reference.
27 Article 5 Financial Data Schedule for Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the three months ended March 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ASSOCIATED GROUP, INC.
(Registrant)
Date: May 9, 1996 By: /s/ Myles P. Berkman
--------------------
Myles P. Berkman
Chairman, President, Chief Executive Officer
and Treasurer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
Page Where
Found or
Exhibit Incorporated
Number by Reference
--------- --------------
3.1 Restated Certificate of Incorporation, filed as *
Exhibit 3.1 to Registration Statement on Form 10/A
dated November 15, 1994 and incorporated herein by
reference.
3.2 Amended and Restated By-Laws, filed as Exhibit 3.2 to *
Registration Statement on Form 10/A dated November 15,
1994 and incorporated herein by reference.
4.1 Common Stock Certificates, filed as Exhibits 4.2 and *
4.3 to Form 8-K, dated December 22, 1994 and
incorporated herein by reference.
4.2 Rights Agreement, dated as of December 15, 1994, by *
and between the Company and Mellon Bank, N.A., filed
as Exhibit 4.1 to Form 8-K, dated December 22, 1994
and incorporated herein by reference.
27 Article 5 Financial Data Schedule for Quarterly Report **
on Form 10-Q for the quarter ended March 31, 1996.
---------------
* Previously filed and incorporated by reference
** Filed electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of The Associated Group, Inc. included in Form
10-Q for the quarterly period ending March 31, 1996 and is qualified in its
entirety by reference to such consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,480
<SECURITIES> 0<F1>
<RECEIVABLES> 6,924
<ALLOWANCES> 3,380
<INVENTORY> 1,496
<CURRENT-ASSETS> 9,444
<PP&E> 48,678
<DEPRECIATION> 22,384
<TOTAL-ASSETS> 574,496
<CURRENT-LIABILITIES> 63,596
<BONDS> 10,238
0
0
<COMMON> 1,876
<OTHER-SE> 327,292
<TOTAL-LIABILITY-AND-EQUITY> 574,496
<SALES> 132
<TOTAL-REVENUES> 4,436
<CGS> 96
<TOTAL-COSTS> 2,359
<OTHER-EXPENSES> 2,996
<LOSS-PROVISION> 282
<INTEREST-EXPENSE> 1,194
<INCOME-PRETAX> (2,404)
<INCOME-TAX> (815)
<INCOME-CONTINUING> (1,589)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,589)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> 0
<FN>
<F1>
Does not include $499,083 of noncurrent marketable equity securities.
</TABLE>
