UNITED STATES
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 June 30, 1997 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 No
The number of shares outstanding of each of the issuer's
classes of common stock, as of August 11, 1997:
Common Stock, Class A 9,382,962
Common Stock, Class B 9,399,410
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------------------------------
(amounts in thousands)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents (approximates fair value) $ 4,039 $ 3,341
Accounts receivable, less allowance for
doubtful accounts (June 30, 1997--$2,535,000;
December 31, 1996--$2,355,000) 3,766 4,051
Receivable from related parties 871 203
Inventory held for resale 1,581 1,622
Prepaid expenses and other assets 1,028 651
Deferred income taxes 4,287 2,008
--------------- -------------
Total current assets 15,572 11,876
Property and equipment, net of accumulated
depreciation and amortization (June 30, 1997--
$27,153,000; December 31, 1996--$24,952,000) 29,755 27,513
Marketable equity securities, at fair value
(cost: June 30, 1997--$7,622,000;
December 31, 1996--$6,882,000) 495,181 425,895
Notes receivable from related parties 30,790 28,780
Investments in wireless communications affiliates 16,504 16,108
Other noncurrent assets 14,169 8,762
--------------- -------------
Total assets $ 601,971 $ 518,934
=============== =============
See notes to consolidated financial statements
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) - Continued
June 30, December 31,
1997 1996
----------------------------------------
(amounts in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,936 $ 7,716
Employee compensation 2,158 1,975
Due to cellular equipment vendor 15,069 15,069
Short-term obligations 111,238 77,526
Current portion of long-term debt 2,082 2,082
Subsidiary appreciation rights liability -
current (Note 5) 14,948 1,879
Other current liabilities 2,167 1,004
---------------- -------------
Total current liabilities 154,598 107,251
Deferred compensation 1,919 1,440
Subsidiary appreciation rights liability -
long-term (Note 5) 25,704 899
Long-term debt, excluding current portion 7,286 8,326
Deferred income taxes 140,840 127,183
Minority interests (Note 6) 9,180 7,830
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 issued
and outstanding in 1997 and 1996 938 938
Class B Common Stock, par value $.10 per share;
authorized 50,000,000 shares; 9,398,410 and
9,397,910 issued and outstanding in 1997 and 1996 940 940
Additional paid-in capital 20 12
Unrealized gain on marketable equity securities,
net of deferred taxes (June 30, 1997--$170,645,000;
December 31, 1996--$146,654,000) 316,914 272,359
Retained earnings (deficit) (56,368) (8,244)
---------------- -------------
Total stockholders' equity 262,444 266,005
---------------- -------------
Total liabilities and stockholders' equity $ 601,971 $ 518,934
================ =============
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
------------------------------------ ---------------------------------
(amounts in thousands, except share and per share amounts)
Revenues:
<S> <C> <C> <C> <C>
Wireless communication services $ 5,328 $ 4,323 $ 10,136 $ 8,285
Radio broadcasting 813 588 1,458 930
Art gallery sales 118 178 307 310
------------- ------------------- ------------------- --------------
6,259 5,089 11,901 9,525
Costs and expenses:
Cost of sales:
Wireless communication services 3,655 2,340 6,428 4,438
Radio broadcasting 219 164 405 329
Art gallery sales 83 133 211 229
Direct research and development expenses 1,727 1,955 3,304 3,683
Sales, general and administrative expenses 11,874 4,395 20,706 8,383
Non-cash subsidiary appreciation rights (Note 5) 35,790 - 37,873 -
Depreciation and amortization expense 1,336 1,245 2,668 2,513
------------- ------------------- ------------------- --------------
54,684 10,232 71,595 19,575
------------- ------------------- ------------------- --------------
Operating loss (48,425) (5,143) (59,694) (10,050)
Equity in loss of affiliate - (467) - (794)
Other income (expense):
Gain on sale of marketable equity securities 262 719 2,485 3,397
Interest and dividend income 808 432 1,332 1,128
Interest expense (1,946) (813) (3,512) (2,007)
Other 79 46 111 (154)
Minority interests (Note 6) 43 501 (1,350) 1,351
------------- ------------------- ------------------- --------------
(754) 885 (934) 3,715
------------- ------------------- ------------------- --------------
Loss before income taxes (49,179) (4,725) (60,628) (7,129)
Income tax benefit 10,161 1,512 12,504 2,327
------------- ------------------- ------------------- --------------
Net loss $ (39,018) $ (3,213) $ (48,124) $ (4,802)
============= =================== =================== ==============
Net loss per common share $ (2.08) $ (.17) $ (2.56) $ (.26)
============= =================== =================== ==============
Weighted average common shares outstanding 18,781,372 18,769,428 18,781,229 18,767,936
See notes to consolidated financial statements
</TABLE>
Note:
The net losses for the three and six months ended June 30, 1997 include
non-cash subsidiary rights expense of Teligent, L.L.C., and does not
reflect a minority interest in Teligent's losses for the periods of
$19,400 and $23,715 (income effects) for the three and six months ended
June 30, 1997, respectively. Such minority interest income is not
recognizable under Generally Accepted Accounting Principles due to the
negative equity position of Teligent and the limited liability of the
members of Teligent. If such minority interests were recognized, the
losses would have been $(19,618), or $(1.04) per share, and $(24,409),
or $(1.30) per share, for the respective three and six months ended June
30, 1997.
<TABLE>
<CAPTION>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
1997 1996
-----------------------------------
(amounts in thousands)
Cash Flows From Operating Activities
<S> <C> <C>
Net loss $ (48,124) $ (4,802)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,668 2,513
Provision for losses on accounts receivable 554 628
Equity in loss of affiliate - 794
Gain on sales of marketable equity securities (2,485) (3,397)
Minority interests (Note 6) 1,350 (1,351)
Provision for deferred income taxes (12,750) (2,541)
Subsidiary appreciation rights (Note 5) 37,873 -
Other 1,521 -
Changes in assets and liabilities:
Accounts receivable (269) (2,215)
Inventory held for resale 41 137
Prepaid expenses and other assets (377) 407
Accounts payable (780) (804)
Employee compensation 183 (320)
Other current liabilities 1,163 (260)
Deferred compensation 479 39
------------- -------------
Net Cash Used In Operating Activities (18,953) (11,172)
Cash Flows From Investing Activities
Cash and cash equivalents from consolidation of affiliate - 751
Cash paid for acquisition - (2,639)
Purchases of property and equipment, net (4,473) (1,790)
Proceeds from sale of marketable equity securities 2,512 3,412
Purchase of marketable equity securities (767) -
Increase in receivable from related parties (4,063) (1,674)
Investments in wireless communications affiliates (397) (2,672)
Payment relating to acquisition of wireless communications
business (Note 2) (5,770) -
Other investing activities, net (71) (427)
------------- -------------
Net Cash Used In Investing Activities (13,029) (5,039)
Cash Flows From Financing Activities
Proceeds from short-term obligations, net 33,712 14,736
Increase in due to cellular equipment vendor - 605
Repayment of long-term debt (1,040) (1,041)
Investment by minority interests - 2,038
Other financing activities, net 8 13
------------- -------------
Net Cash Provided By Financing Activities 32,680 16,351
------------- -------------
Net Increase In Cash And Cash Equivalents 698 140
Cash And Cash Equivalents At Beginning Of Period 3,341 1,018
============= =============
Cash And Cash Equivalents At End Of Period $ 4,039 $ 1,158
============= =============
See notes to consolidated financial statements
</TABLE>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The
Associated Group, Inc. and Subsidiaries (the "Company," as used herein,
includes all consolidated subsidiaries, unless the context otherwise
indicates) 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 six months ended June 30,
1997, are not necessarily indicative of the results that may be expected
for the year ended December 31, 1997. For further information, refer to
the financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
Certain amounts in the financial statements for the 1996 periods have
been reclassified to conform to the financial statement presentation for
the current period. These reclassifications have no effect on the net
loss.
2. PENDING TRANSACTION
Microwave Services, Inc. ("MSI"), a wholly owned subsidiary of the
Company and a licensee of Digital Electronic Message Services ("DEMS")
channels, and Digital Services Corporation ("DSC"), another licensee of
DEMS channels, hold 55% and 45% voting member equity interests,
respectively, in Teligent, L.L.C. ("Teligent"), formerly known as
Associated Communications, L.L.C., a joint venture limited liability
company which provides administrative and management services to each of
MSI and DSC. On March 10, 1997, Teligent entered into a Stock
Contribution Agreement (the "Stock Agreement") with another DEMS
licensee (the "Licensee") and its sole shareholder (the "Sole
Shareholder") for the contribution of all of the stock of the Licensee
to Teligent in exchange for initial cash payments and additional cash
payments and ownership interests in Teligent upon consummation of the
transaction and Teligent's acquisition of the stock and the licenses
contemplated by the Stock Agreement. Consummation of the transaction and
transfer of these licenses is subject to certain closing conditions and
the receipt of all necessary regulatory approvals, including approval by
the Federal Communications Commission. The amount of equity interest in
Teligent to be issued to the Sole Shareholder is dependent upon certain
conditions, but shall not exceed 5% determined as of the date of the
Stock Agreement. Subsequent to a closing, the Sole Shareholder will have
a full member interest in Teligent pursuant to the Limited Liability
Company Agreement, to which MSI and DSC are parties. Included in other
noncurrent assets on the Company's consolidated balance sheet at June
30, 1997 is $5,770,000 relating to the initial cash payments for the
transaction.
3. MARKETABLE EQUITY SECURITIES
In January 1997, the board of directors of Tele-Communications, Inc.
("TCI") declared a dividend to holders of record of Liberty Media Group
Series A Common Stock ("Liberty Series A") and Liberty Media Group
Series B Common Stock ("Liberty Series B") as of December 27, 1996. In
1997, the Company received one share of Liberty Series A for every two
shares of Liberty Series A owned and one share of Liberty Series A for
every two shares of Liberty Series B owned.
During 1997, the Company has sold 110,000 shares of Liberty Series A for
pretax proceeds of approximately $2,512,000, and has recognized gains on
these sales of approximately $2,223,000 and $262,000 in the first and
second quarters, respectively.
The cost and market value of marketable equity securities classified as
available for sale at June 30, 1997, are as follows:
<TABLE>
<CAPTION>
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.:
<S> <C> <C> <C>
TCI Group Series A Common Stock 12,479,976 $ 3,505 $185,640
TCI Group Series B Common Stock 7,071,852 1,178 114,917
Liberty Media Group Series A Common Stock 5,453,970 1,339 129,532
Liberty Media Group Series B Common Stock 1,767,963 273 44,199
TCI Satellite Entertainment, Inc.:
Series A Common Stock 1,247,997 334 9,828
Series B Common Stock 707,185 90 6,188
Others Various 903 4,877
------------------------------------
$ 7,622 $495,181
====================================
</TABLE>
Including the effects of the sale of marketable equity securities during
the periods, adjustments to the unrealized gain on marketable equity
securities, net of tax, recorded as a separate component of
stockholders' equity were $44,555,000 and ($26,947,000) in the six
months ended June 30, 1997 and 1996, respectively.
4. SHORT-TERM OBLIGATIONS
The Company's outstanding short-term obligations were as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
General Credit Facilities:
<S> <C> <C>
$100 million demand discretionary bank line of credit $ 19,000 $ 19,000
Three brokerage margin loan facilities 67,238 56,526
------------- ----------------
86,238 75,526
Teligent Credit Facility:
$50 million secured bank revolving credit facility 25,000 2,000
============= ================
$111,238 $77,526
============= ================
</TABLE>
Included in the general credit facilities listed above is a brokerage
margin loan facility obtained by the Company in January 1997. At June
30, 1997, an aggregate of 11,879,976 shares of TCI Group Series A Common
Stock was pledged as collateral under the Company's general credit
facilities.
5. SUBSIDIARY APPRECIATION RIGHTS
On September 1, 1996, Teligent granted six separate Company Appreciation
Rights ("CARs") to Teligent's Chairman and CEO (the "Executive") under
his employment agreement (the "Agreement"). For each CAR, the Executive
is entitled to receive, as soon as practicable after the "settlement
date", as defined in the Agreement, an amount equal to a percentage
(initially 3%) of the excess of Teligent's fair market value over the
target value for that CAR. Teligent's Board of Directors, in its sole
discretion, shall determine if the CAR amount is settled with cash,
equity securities of Teligent, a combination thereof, or any other form
of consideration as the Board may determine. The CAR percentage and
target values are subject to adjustment for equity contributions and
other transactions of Teligent, as defined in the Agreement, and expire
ten years after the grant date. The vesting date and unadjusted target
value for each CAR granted is as follows:
Unadjusted
CAR Vesting Date Target Value
- -----------------------------------------------------------------------------
1 September 1, 1997 $ 200,000,000
2 September 1, 1998 250,000,000
3 September 1, 1999 325,000,000
4 September 1, 2000 425,000,000
5 September 1, 2001 500,000,000
6 September 1, 2002 2,750,000,000
In addition, Teligent has a Long-Term Incentive Compensation Plan (the
"Plan") under which an aggregate of 1,600,000 appreciation rights
("Rights") may be granted to employees, directors, and consultants (the
"Grantees") of Teligent. Each appreciation right represents .00001%
(subject to adjustment) of the Appreciation Value associated with that
Right, as defined in the Plan. As of June 30, 1997, 1,450,950 Rights
have been granted for a term of ten years with a five-year vesting
period. Teligent's Board of Directors, in its sole discretion, shall
determine if the amount payable to a Grantee under the Plan is settled
in cash, an actual or "phantom" equity interest in Teligent, a
combination thereof, or any other form of consideration as the Teligent
Board may determine.
The Company has recognized a liability and related compensation expense
for the CARs and the Rights under the provisions of Accounting
Principals Board Opinion No. 25 ("APB 25") "Accounting for Stock Issued
to Employees". Under APB 25, expense recognition is accelerated such
that the expense recorded exceeds the actual amount exerciseable under
the vesting schedules applicable to the CARs and Rights. The recorded
liability under APB 25 is $40,652,000 as of June 30, 1997, however there
were no CARs or Rights exerciseable as of that date.. The actual amount
of compensation payable, if any, to the Executive and the Grantees at
the time of settlement, as well as the cumulative amount of compensation
expense recorded in the financial statements, if any, will depend upon
the vesting status and the fair market value of Teligent, among other
factors.
6. MINORITY INTEREST
The minority interest liability and related income or expense reflects
the outside minority ownership of consolidated subsidiaries. However, in
1997 the minority interest for the three and six month periods ended
June 30, 1997 do not reflect the minority interest in Teligent's losses
of $19,400 and $23,715 (income effects). Such minority interest income
is not recognizable under Generally Accepted Accounting Principles due
to the limited liability of the members of Teligent. If such minority
interests were recognized, the Company's losses would have been
$(19,618), or $(1.04) per share, and $(24,409), or $(1.30) per share,
for the respective three and six months ended June 30, 1997.
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest was approximately $1,578,000 and $1,107,000 for
the six months ended June 30, 1997 and 1996, respectively. The Company
made no federal or state income tax payments during the six months ended
June 30, 1997 and 1996. Grupo Portatel, S.A. de C.V. ("Grupo"), a
consolidated subsidiary of the Company, paid approximately $251,000 and
$394,000 in Mexican taxes in the six months ended June 30, 1997 and
1996, respectively. Noncash financing activities of the Company for the
six months ended June 30, 1996 include a contribution by minority
interests of notes receivable from related parties of $7,162,000 and
long-term debt of $2,845,000 assumed by a cellular equipment vendor, as
guarantor of Grupo's long-term debt.
8. 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.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FASB 128"). FASB 128 specifies the computation, presentation
and disclosure requirements for earnings per share. FASB 128 is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, and requires restatement
of all prior-period per share data presented. Earlier application is not
permitted. The Company plans to adopt FASB 128 at year-end 1997. The
implementation of FASB 128 is not expected to have a material impact on
the reported per share data of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Form 10-Q contains certain forward looking statements
about the Company's completion of pending transactions and availability
of certain tax benefits. Any such statements are subject to risks that
could cause the actual results or needs to vary materially.
Financial Condition
Currently, the Company's cash requirements (other than those
of Teligent) are being met by a $100,000,000 demand discretionary bank
line of credit and margin loan facilities with three brokerage firms.
Borrowings under the $100,000,000 line of credit are limited to 65% of
the market value of the TCI Group common stock pledged as security under
the agreement, and bear interest at rates as offered by the bank at the
time of borrowing. The line expires on November 30, 1997, and the
Company presently anticipates renewal of such facility.
The Company's margin loan facilities are also secured by
shares of TCI Group common stock. Borrowings under one of the margin
loan facilities are limited to 65% of the market value of the pledged
stock, with an additional 15% collateral requirement if borrowings
exceed $100,000,000, up to a maximum of $200,000,000. Borrowings under
the other two brokerage margin loan facilities are limited to 50% of the
market value of the pledged stock. Borrowings under the three margin
loan facilities bear interest at variable rates based upon the broker
call rate or the Fed Funds rate plus an applicable margin, as offered by
the brokerage firm at the time of borrowing. The weighted average
interest rate under the $100,000,000 line of credit and the margin loan
facilities for the six months ended June 30, 1997 was approximately
6.2%.
As of August 11, 1997, based on the market value of the
11,879,976 shares of TCI Group Series A Common Stock pledged in the
aggregate and aggregate outstanding short-term obligations under these
credit facilities of approximately $88,586,000 the Company's unused
borrowing capacity is approximately $52,346,000. 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 can be pledged as additional
security, the Company's borrowing facilities provide for maximum
aggregate unused borrowings of approximately $237,269,000 as of August
11, 1997. The Company's ability to meet cash needs in the near term for
future development depends in large part on the value of the marketable
equity securities. The Company periodically evaluates its financial
position and alternative financing arrangements.
In addition, Teligent has a $50,000,000 secured bank
revolving credit facility which is available to meet the cash needs of
Teligent. Borrowings under this credit facility bear interest at
variable rates based upon the LIBOR rate, prime rate or the Fed Funds
rate, plus an applicable margin, as offered by the bank. The weighted
average interest rate under this credit facility for the six months
ended June 30, 1997 was approximately 8.1%. A facility fee of 1/2% of
the total credit available and a commitment fee of 1/2% of the unused
portion of the facility are payable quarterly. Borrowings under
Teligent's credit facility are secured by a pledge of the Company's
stock in MSI, a pledge of the stock of DSC, a pledge of MSI's and DSC's
member interests in Teligent, and a pledge of all of the assets of MSI,
DSC, and Teligent, and are guaranteed by MSI and DSC. The revolving
credit facility restricts the payment of distributions or dividends by
Teligent. Based upon outstanding short-term obligations under the
Teligent credit facility of $29,000,000 as of August 11, 1997, Teligent
has unused borrowing capacity of $21,000,000. The revolving credit
facility matures on December 19, 1997, and Teligent is presently
evaluating its long-term financing options.
In the six months ended June 30 1997, the Company sold
110,000 shares of Liberty Series A for pretax proceeds of approximately
$2,512,000, and has recognized a gain on the sale of approximately
$2,485,000. The Company expects to utilize its federal net operating
loss carryforwards to offset the taxes resulting from the gain. The
Company used the proceeds from the sale of the securities for working
capital and to fund the development of its wireless communications
businesses.
Portatel del Sureste, S.A. de C.V. ("Portatel"), a wholly
owned subsidiary of Grupo, 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 telephone
infrastructure equipment. The outstanding debt under the Portatel Credit
Agreements at June 30, 1997 is $9,368,000. Grupo and Portatel have no
external available lines of credit as of June 30, 1997. The Company may
be required to meet additional capital requirements with respect to its
ownership interest in Grupo.
Pursuant to the Stock Agreement, Teligent has made payments
totaling $5,770,000 (see Note 2 to the consolidated financial statements
included elsewhere herein). Upon consummation of the transaction
contemplated by the Stock Agreement, Teligent may be required to make an
additional cash payment of up to $4,950,000.
Net cash used in operating activities was $18,953,000 and
$11,172,000 for the six months ended June 30, 1997 and 1996,
respectively. The Company's operating cash needs increased in the 1997
period primarily for expenses of Teligent, which was formed in March
1996. Net cash used in investing activities was $13,029,000 for the six
months ended June 30, 1997 and $5,039,000 for the same period of 1996.
The $7,990,000 change between periods was primarily due to $5,770,000
paid pursuant to the Stock Agreement (see Note 2 to the consolidated
financial statements included elsewhere herein) and an increase in
capital expenditures attributable to construction of Teligent's
broadband wireless network. Net cash provided by financing activities in
the 1997 and 1996 periods of $32,680,000 and $16,351,000, respectively,
was principally from borrowings by the Company. The increase between
periods is primarily the result of higher borrowings in the 1997 period
principally to finance the investing and operating activities of
Teligent and TruePosition(TM), the Company's cellular telephone and
wireless transmitter location system.
Operating Results for the Three Months Ended June 30, 1997, Compared to
the Three Months Ended June 30, 1996
Revenues from wireless communication services increased
$1,005,000, or 23% in the 1997 period compared to the 1996 period. The
increase is attributable to an increase in Grupo's cellular
communication services revenue, principally a result of growth in
Grupo's subscriber base. Cost of wireless communication services
increased $1,315,000, or 56% between periods principally due to the
costs associated with the growth of Grupo's subscriber base and to
operating costs incurred by Teligent, which began providing wireless
communication services in 1996.
Radio broadcasting revenues increased $225,000, or 38% for
the 1997 period compared to the 1996 period, and the cost of radio
broadcasting increased $55,000, or 34%. The increase in revenues and
costs is principally the result of the acquisition of WLYR-FM (formerly
known as WCEZ-FM) on May 31, 1996.
Direct research and development expenses of $1,727,000 and
$1,955,000 in the 1997 and 1996 periods, respectively, primarily
represent expenditures for TruePosition. Sales, general and
administrative expenses were $11,874,000 and $4,395,000 in the 1997 and
1996 periods, respectively. The increase from 1996 to 1997 of $7,479,000
was principally the result of expenditures for Teligent, which was
formed in March 1996.
The subsidiary appreciation rights expense for Teligent of
$35,790,000 recorded in the second quarter of 1997 reflects a non-cash
charge resulting from additional grants, vesting, and the appreciation
in value of Teligent. Grants commenced in September 1996, thus there is
no comparable expense in the 1996 period.
The Company's equity in loss of affiliate was $467,000 in the
1996 period and reflects the Company's share of the results of Teletrac,
Inc. ("Teletrac") for the 1996 period. Through November 1996, the
Company held 20% of the voting stock of Teletrac and accounted for its
investment in Teletrac under the equity method. As a result of
Teletrac's issuance of convertible preferred stock in early December
1996, the Company's voting interest in Teletrac was reduced to
approximately 13% and, accordingly, the Company began accounting for its
investment under the cost method.
The $262,000 gain on the sale of marketable equity securities
in the 1997 period is the result of the sale of 10,000 shares of Liberty
Series A and the $719,000 gain on the sale of marketable equity
securities in the 1996 period is the result of the sale of 90,000 shares
of General Communication, Inc. Class A Common Stock. Interest and
dividend income was $808,000 and $432,000 in the 1997 and 1996 periods,
respectively. The increase in 1997 of $376,000 is primarily the result
of an increase in the level of receivables from related parties, which
includes certain interest-bearing notes. Interest expense was $1,946,000
and $813,000 in the 1997 and 1996 periods, respectively. The increase in
1997 of $1,133,000 is the result of an increase in the level of
short-term obligations, offset in part by a decrease in the level of
Portatel's long-term debt. Minority interests were $43,000 and $501,000
in the 1997 and 1996 periods, respectively. The 1997 minority interest
expense represents the minority ownership interest in the net income of
all consolidated subsidiaries except Teligent. The 1996 minority
interest included the minority interest ownership interest in Teligent's
net loss. Such interest is not recognized in 1997 under Generally
Accepted Accounting Principles ("GAAP") due to the negative equity
position of Teligent in 1997 (See Note 6 to the consolidated financial
statements included elsewhere herein).
The Company recognized an income tax benefit (net of foreign
tax expense of Grupo) at an effective rate of approximately 26% and 32%
in the 1997 and 1996 periods, respectively. The principal difference
between the 1997 effective tax rate and the statutory rate is the
recognition by the Company of 100% of the net loss of Teligent with no
minority interest adjustment (see Note 6 to the consolidated financial
statements included elsewhere herein), while the Company's tax benefit
reflects 55% of such 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, 1997.
The Company's net loss was $39,018,000 for the three months
ended June 30, 1997, compared to a net loss of $3,213,000 for the three
months ended June 30, 1996. The higher loss in the 1997 period of
$16,405,000 resulted primarily from the non-cash charge recorded for the
Teligent appreciation rights (net of the income tax benefit), as well as
increased operating and administrative expenditures for the start-up of
Teligent.
Operating Results for the Six Months Ended June 30, 1997, Compared to
the Six Months Ended June 30, 1996
Revenues from wireless communication services increased
$1,851,000, or 22% in the 1997 period compared to the 1996 period. The
increase is attributable to an increase in Grupo's cellular
communication services revenue, principally a result of growth in
Grupo's subscriber base. Cost of wireless communication services
increased $1,990,000, or 45% between periods principally due to the
costs associated with the growth of Grupo's subscriber base and to
operating costs incurred by Teligent, which began providing wireless
communication services in 1996.
Radio broadcasting revenues increased $528,000, or 57% for
the 1997 period compared to the 1996 period, and the cost of radio
broadcasting increased $76,000, or 23%. The increase in revenues and
costs is principally the result of the acquisition of WLYR-FM (formerly
known as WCEZ-FM) on May 31, 1996.
Direct research and development expenses of $3,304,000 and
$3,683,000 in the 1997 and 1996 periods, respectively, primarily
represent expenditures for TruePosition. Sales, general and
administrative expenses were $20,706,000 and $8,383,000 in the 1997 and
1996 periods, respectively. The increase from 1996 to 1997 of
$12,323,000 was principally the result of expenditures for Teligent,
which was formed in March 1996.
The subsidiary appreciation rights expense for Teligent of
$37,873,000 recorded in the first half of 1997 reflects a non-cash
charge resulting from additional grants, vesting, and the appreciation
in value of Teligent. Grants commenced in September 1996, thus there is
no comparable expense in the 1996 period.
The Company's equity in loss of affiliate was $794,000 in the
1996 period and reflects the Company's share of the results of Teletrac,
Inc. ("Teletrac") for the 1996 period. Through November 1996, the
Company held 20% of the voting stock of Teletrac and accounted for its
investment in Teletrac under the equity method. As a result of
Teletrac's issuance of convertible preferred stock in early December
1996, the Company's voting interest in Teletrac was reduced to
approximately 13% and, accordingly, the Company began accounting for its
investment under the cost method.
The $2,485,000 gain on the sale of marketable equity
securities in the 1997 period is the result of the sale of 110,000
shares of Liberty Series A and the $3,397,000 gain on the sale of
marketable equity securities in the 1996 period is the result of the
sale of 41,598 shares of Tele-Communications, Inc. Class B 6% Cumulative
Redeemable Exchangeable Junior Preferred Stock and 90,000 shares of
General Communication, Inc. Class A Common Stock. Interest and dividend
income was $1,332,000 and $1,128,000 in the 1997 and 1996 periods,
respectively. The increase in 1997 of $204,000 is primarily the result
of an increase in the level of receivables from related parties, which
includes certain interest-bearing notes. Interest expense was $3,512,000
and $2,007,000 in the 1997 and 1996 periods, respectively. The increase
in 1997 of $1,505,000 is the result of an increase in the level of
short-term obligations, offset in part by a decrease in the level of
Portatel's long-term debt. Minority interests were $1,350,000 of expense
in the 1997 period and $1,351,000 of income in the 1996 period. The 1997
minority interest expense represents the minority ownership interest in
the net income of all consolidated subsidiaries except Teligent. The
1996 minority interest included the minority interest ownership interest
in Teligent's net loss. Such interest is not recognized in 1997 under
GAAP due to the negative equity position of Teligent in 1997 (See Note 6
to the consolidated financial statements included elsewhere herein).
The Company recognized an income tax benefit (net of foreign
tax expense of Grupo) at an effective rate of approximately 21% and 33%
in the 1997 and 1996 periods, respectively. The principal difference
between the 1997 effective tax rate and the statutory rate is the
recognition by the Company of 100% of the net loss of Teligent with no
minority interest adjustment (see Note 6 to the consolidated financial
statements included elsewhere herein), while the Company's tax benefit
reflects 55% of such 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, 1997.
The Company's net loss was $48,124,000 for the six months
ended June 30, 1997, compared to a net loss of $4,802,000 for the six
months ended June 30, 1996. The higher loss in the 1997 period of
$43,322,000 resulted primarily from the non-cash charge recorded for the
Teligent appreciation rights (net of the income tax benefit), as well as
increased operating and administrative expenditures for the start-up of
Teligent.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, the Federal Communications
Commission (the "FCC") issued an Order (the "Relocation
Order") on March 14, 1997 providing for the relocation of the
digital electronic message system licenses ("DEMS") from the
18 GHz band to a reallocated portion of the 24 GHz band,
pursuant to a request by the National Telecommunications &
Information Administration acting on behalf of the Department
of Defense. The Relocation Order provided for the relocation
of DEMS from 100 MHz over 5 channels at 18 GHz to 400 MHz
over 5 channels at 24 GHz, allowing DEMS systems to maintain
equivalent information capacity to similarly engineered
systems at 18 GHz. On June 24, 1997, the FCC issued an
additional order (the "Implementation Order"), which
implemented the Relocation Order in part by modifying various
DEMS licenses, including those held by affiliates of the
Company, to authorize DEMS operations at 24 GHz. The
Relocation Order and the Implementation Order were subject to
an administrative and judicial review period and, during this
period, five parties filed petitions with the FCC seeking
either partial or full reconsideration or review of one or
both orders. The parties -- BellSouth Corporation, WinStar
Communications, Inc., Millimeter Wave Carrier Association,
Inc., DirecTV Enterprises, Inc. and WebCel Communications,
Inc. -- have challenged the FCC's issuance of the Relocation
Order without conducting a notice and comment rulemaking
proceeding pursuant to the national security exemption to the
FCC's otherwise applicable statutory requirement to
promulgate rules through notice and comment proceedings. In
addition, DirectTV Enterprises, Inc. has filed a petition for
rulemaking with the FCC, requesting that the FCC grant
permission for DirecTV to construct and operate satellite
uplink facilities in certain areas on a portion of the 24 GHz
frequencies allocated and granted to DEMS licensees. The FCC
has the option to dismiss the petitions or to initiate public
notice and comment proceedings concerning the issues which
the FCC decided in the Relocation Order. The Company and its
affiliates have filed timely responses with the FCC opposing
the petitions for reconsideration and review, and continue to
build-out their networks as permitted under their licenses,
the Relocation Order and the Implementation Order.
Item 4. Submission of Matters to a Vote of Security Holders
On June 5, 1997, the Company held its 1997 Annual Meeting, at
which the Company's stockholders elected Donald H. Jones as a
director of the Company to hold office for a term of three
years. 8,165,087 votes were cast for the election of Mr.
Jones, and there were 106,865 votes to withhold authority.
The terms of Myles P. Berkman and Joseph A. Katarincic as
directors continue until such terms expire at the Company's
1998 Annual Meeting and the term of David J. Berkman
continues until such term expires at the Company's 1999
Annual Meeting.
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 June 30, 1997 (filed only
electronically with the Securities and
Exchange Commission).
(b) Reports on Form 8-K. The Company did not file any reports
on Form 8-K during the three months ended June 30, 1997.
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: August 11, 1997 By: /s/ Myles P. Berkman
--------------------
Myles P. Berkman
Chairman, President, Chief Executive
Officer and Treasurer
(Principal Financial and Accounting
Officer)
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 June 30, 1997.
- ---------------------
* Previously filed and incorporated by reference
** Filed only electronically with the Securities and Exchange Commission
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the financial statements of The Associated Group, Inc. as of
and for the six months ended June 30, 1997 included in Form 10-Q
for the quarter ending June 30, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,039
<SECURITIES> 0<F1>
<RECEIVABLES> 6,301
<ALLOWANCES> 2,535
<INVENTORY> 1,581
<CURRENT-ASSETS> 15,572
<PP&E> 56,908
<DEPRECIATION> 27,153
<TOTAL-ASSETS> 601,971
<CURRENT-LIABILITIES> 154,598
<BONDS> 7,286
0
0
<COMMON> 1,878
<OTHER-SE> 260,566
<TOTAL-LIABILITY-AND-EQUITY> 601,971
<SALES> 307
<TOTAL-REVENUES> 11,901
<CGS> 211
<TOTAL-COSTS> 7,044
<OTHER-EXPENSES> 5,972
<LOSS-PROVISION> 554
<INTEREST-EXPENSE> 3,512
<INCOME-PRETAX> (60,628)
<INCOME-TAX> (12,504)
<INCOME-CONTINUING> (48,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,124)
<EPS-PRIMARY> (2.56)
<EPS-DILUTED> 0
<FN>
<F1>Does not include $495,181 of noncurrent marketable equity securities.
</FN>
</TABLE>
