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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 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
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THE ASSOCIATED GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0260858
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(State of Incorporation) (I.R.S. Employer Identification No.)
200 Gateway Towers, Pittsburgh, Pennsylvania 15222
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(Address of principal executive offices) (Zip Code)
412-281-1907
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(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class
Common Stock, Class A, par value $.10 per share
Common Stock, Class B, par value $.10 per share
Preferred Stock Purchase Rights
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 25, 1998 the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was approximately $978,789,725.
The number of shares of the Registrant's classes of Common Stock
outstanding as of March 25, 1998:
Common Stock, Class A 18,765,924
Common Stock, Class B 19,295,540
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 1998 annual
meeting of stockholders, scheduled for June 4, 1998, are incorporated by
reference into Part III as set forth herein.
Except for any historical information contained herein, the matters
discussed in this Annual Report on Form 10-K contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors including, but not limited to economic,
key employee, competitive, governmental and technological factors affecting the
Company's growth, operations, markets, products, services, licenses and other
factors discussed in the Company's other filings with the Securities and
Exchange Commission. These factors may cause the actual results, performance or
achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements.
PART I
ITEM 1. BUSINESS
The Company
The Associated Group, Inc. (the "Company") is principally engaged in
the ownership and operation of, and also owns interests in, various
communications related businesses. In December 1994, the Company was spun-off
(the "Spin-Off") from Associated Communications Corporation ("ACC"), which at
the time was one of the largest independent cellular telephone system operators
in the United States.
Teligent
The Company holds a 40.8% equity interest in, and is entitled to
designate a majority of the members of the Board of Directors of, Teligent, Inc.
(including its predecessor entities, "Teligent"). Teligent intends to be a
premier provider of high quality, low-cost voice, data, Internet and video
telecommunications services primarily to small and medium-sized businesses
through its own fixed local wireless point-to-multipoint broadband networks and
leased long distance facilities. Teligent holds 24 GHz fixed wireless licenses
which cover over 50% of the nation's business telephone lines and a population
of approximately 130 million. See "Business - Teligent - 24 GHz Licenses."
Teligent anticipates offering an integrated package of services, including local
and long distance telephone services, high speed data connectivity, Internet
access and videoconferencing, in at least 10 market areas by the end of 1998, 30
market areas by the end of 1999, and subsequently in all of its 74 currently
licensed market areas.
Microwave Services, Inc. ("MSI"), a wholly-owned subsidiary of the
Company, founded Teligent in 1996 as a limited liability company joint venture
with Digital Services Corporation ("DSC"), which is an affiliate of Telcom
Ventures, L.L.C. ("Telcom Ventures"). In September 1996, Alex J. Mandl, formerly
President and Chief Operating Officer of AT&T, joined Teligent as its Chairman
of the Board and Chief Executive Officer. In November 1997, Nippon Telegraph and
Telephone Corporation, the world's largest telecommunications carrier, through
an indirect wholly owned subsidiary ("NTT"), made a strategic equity investment
of $100 million in Teligent. In connection with NTT's equity investment, MSI and
DSC made additional cash contributions to Teligent totalling $60 million.
Teligent became a publicly traded company on The Nasdaq Stock Market under the
symbol "TGNT" in November 1997 as a result of the completion of its initial
public offering (the "Teligent IPO") of 6,325,000 shares of Teligent Class A
Common Stock at $21.50 per share. Concurrently with the Teligent IPO, Teligent
issued and sold $300,000,000 in aggregate principal amount of 11 1/2% Senior
Notes due 2007 and, in February 1998, issued and sold $440,000,000 in aggregate
principal amount at maturity of its 11 1/2% Senior Discount Notes due 2008.
Through MSI, the Company holds 21,436,689 shares of Teligent Series B-1 Common
Stock. The Series B-1 Common Stock entitles the Company to designate a majority
of the members of the Board of Directors of Teligent so long as the Company's
ownership of Series B-1 Common Stock represents at least 20% of the equity
interest represented by all outstanding common stock of Teligent. See "Business
- - Teligent - Certain Transactions." In connection with the Teligent IPO,
Teligent became a reporting person under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and files periodic reports under the Exchange Act.
Teligent believes that it is well positioned to capture revenues in the
estimated $110 billion business telecommunications market. Teligent intends to
focus particularly on the estimated $47 billion business local exchange market.
Local exchange services have historically been provided by regional
monopolies known as incumbent local exchange carriers ("ILECs") that have
typically utilized copper wire-based "legacy" networks. The ILECs' legacy
networks, faced with increasing demand from businesses for cost-effective
capacity to support bandwidth-intensive applications such as Internet access,
have created a "last mile bottleneck" in the local loop between the customer
premise and the ILEC network switch. In addition, Teligent's market research
indicates that the ILECs
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have been unable to satisfy customer demands for cost-effective, flexible and
responsive service and that a significant portion of Teligent's target customer
base is currently dissatisfied with its ILEC service. The potential revenue
opportunity in this market, coupled with changes in the regulatory environment
designed to enable facilities-based competition, have created opportunities for
competitive local exchange carriers ("CLECs"). Teligent intends to alleviate
this last mile local bottleneck and gain market share by deploying
technologically advanced, high bandwidth digital wireless technology
complemented by superior customer service and competitive pricing.
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Business Strategy
Teligent's goal is to be a premier facilities-based provider of voice,
data, Internet and video telecommunications services to small and medium-sized
businesses. Teligent intends to leverage its ability to provide cost-effective,
high bandwidth connectivity in order to offer an integrated package of local
and long distance telephone service, high-speed data connectivity, Internet
access and video-conferencing, and is implementing the following initiatives
to achieve this objective:
Target Small and Medium-Sized Businesses. Teligent plans to focus its
primary marketing efforts on small and medium-sized businesses with 5 to 350
telephone lines. Teligent expects to attract these customers through both a
direct sales effort and indirect sales channels by offering (i) an integrated
package of telecommunications services, (ii) competitive pricing, (iii) high
quality and responsive customer service and (iv) high bandwidth services which
may be difficult to obtain from other telecommunications providers.
End User Focus. Teligent intends to approach its target market by
offering services directly to end users, as opposed to positioning itself as a
"carrier's carrier" offering wholesale network capacity. By deriving the
majority of its revenues from providing local switched voice and data
communications services directly to end user customers, Teligent believes that
it will (i) establish a sustainable and broad base of its own customers, thereby
minimizing the risk of generating substantial revenues from a limited number of
sources, (ii) maximize revenues and profitability by accessing the higher priced
retail market and (iii) achieve competitive differentiation based on high
quality service that is responsive to the customer.
Develop Brand Awareness. Teligent will seek to position itself as a
high quality service provider by offering network reliability complemented by
quality customer support and is designing its marketing campaign to reflect
these objectives and intends to build its reputation by (i) working closely
with its customers to develop services tailored to their particular needs and
(ii) targeting advertising and promotion efforts in its coverage areas,
gradually expanding to mass media with market-wide and potentially nationwide
coverage.
Achieve Market Share Via Competitive Pricing. As a new market entrant,
Teligent's strategy will be to price its services competitively to gain market
share early. For switched voice services and other services already provided by
the ILEC, Teligent expects to price at a discount. For certain data and
bandwidth-intensive services that may not be provided by competitors or for
which there may exist an underserved market demand, Teligent may be able to
price its services at a premium.
Rapid Deployment. Teligent intends to take advantage of its network
flexibility and lower incremental capital requirements in order to quickly
roll-out and penetrate its market areas.
Exploit Future Growth Opportunities. Teligent intends to continue
building on the capabilities of its networks to expand its target market and
service offerings. Such expansion may include targeting residential
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customers in multiple dwelling units as well as international opportunities,
either through joint ventures or by direct entry.
Network Architecture
Teligent intends to deploy its own 24 GHz fixed wireless
point-to-multipoint broadband local networks to provide last mile connectivity
in its licensed market areas. The network equipment will use digital wireless
technology to deliver high quality voice, data and videoconferencing services
that Teligent believes will provide comparable performance to that of fiber
optic-based systems. Teligent's networks will also incorporate encryption and
authentication to increase privacy and reduce the potential for fraud. Each
major market area is expected to be served by a voice switching and data routing
center. These switching systems will be engineered to provide interconnection of
customer traffic with other local exchange networks, long distance networks and
the Internet, as well as with other locations the customer may have within the
Teligent network. Teligent plans to have a central Network Operation Center
("NOC") which will monitor its networks 24 hours a day, seven days a week and
provide real-time alarm, status and performance information. Teligent will use a
combination of wired and wireless facilities to connect the NOC to the base
stations distributed throughout the market area. The base stations will transmit
to and receive signals from wireless equipment at a customer premise (the
"customer premise equipment," or, "CPE"), allowing transmissions between
multiple customer antennas and a single base station antenna. The customer
premise equipment includes two components: (i) an integrated radio/antenna unit
installed either on the roof, an exterior wall or inside a window of the
customer's building and (ii) the indoor customer interface equipment installed
within the building, and connected to the internal building wiring. The
radio/antenna unit will communicate with the base station via microwave signal
operating within the 24 GHz band. The base stations will have an average
service radius of approximately three miles (five kilometers), depending on a
number of factors such as power levels used, customer density, local weather
environment and network design. A base station will have the capability to
support customers in line of sight within a 360-degree coverage area. The
modular design of the CPE is intended to make equipment installation easier
and ensure short service activation intervals.
Teligent's point-to-multipoint hardware and network capacity is
expected to be shared among all the customers within the coverage area of a base
station sector. A key feature of its network architecture will be the future
capability to allocate and share network capacity on an as-needed basis. In the
future, Teligent's system is intended to dynamically allocate spectral
bandwidth, and therefore capacity, among the several customers served by a base
station sector based on individual customer demand enabling a customer to
instantaneously increase or decrease the capacity required.
24 GHz Wireless Licenses
Teligent is licensed by the Federal Communications Commission ("FCC")
to operate point-to-point and point-to-multipoint 24 GHz fixed wireless systems
in 74 Standard Metropolitan Statistical Areas ("SMSAs"), covering over 700
municipalities in the United States, including 320-400 MHz of spectrum in 27 of
the 35 most populous market areas in the United States, and at least 80 MHz of
spectrum in 47 other major market areas. The following chart lists Teligent's
license areas in descending order of size based on the estimated 1994 population
of the market (based on U.S. Census Bureau data and Claritas Inc. data),
Teligent's licensed spectrum bandwidth in each market area and the estimated
1994 number of business employees in each market area (based on American
Business Information Inc. data).
BUSINESS
SMSA BANDWIDTH EMPLOYEES IN
RANK MARKET AREAS (MHz) POPULATION MARKET AREA
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1 New York, NY 400 9,434,000 3,597,000
2 Los Angeles, CA 400 9,132,000 3,229,000
3 Chicago, IL 400 7,538,000 3,113,000
4 Philadelphia, PA 320 4,913,000 1,701,000
5 Detroit, MI 400 4,322,000 1,517,000
6 Dallas, TX 400 4,302,000 1,729,000
7 Houston, TX 400 3,925,000 1,471,000
8 Washington, DC 400 3,850,000 1,693,000
9 San Francisco, CA 320 3,814,000 1,629,000
10 Boston, MA 400 3,194,000 1,436,000
12 Atlanta, GA 400 3,015,000 1,236,000
13 San Diego, CA 320 2,674,000 908,000
15 Minneapolis, MN 400 2,586,000 1,271,000
17 St. Louis, MO 400 2,473,000 893,000
18 Baltimore, MD 320 2,435,000 762,000
19 Phoenix, AZ 400 2,309,000 894,000
20 Seattle, WA 400 2,135,000 894,000
21 Pittsburgh, PA 400 2,100,000 665,000
22 Denver, CO 80 2,069,000 890,000
23 Miami, FL 400 2,058,000 768,000
24 Tampa, FL 400 2,016,000 698,000
26 Cleveland, OH 320 1,848,000 803,000
27 Portland, OR 320 1,573,000 618,000
28 San Jose, CA 240 1,541,000 643,000
29 Cincinnati, OH 240 1,510,000 578,000
30 Kansas City, MO 320 1,509,000 643,000
31 Sacramento, CA 320 1,482,000 442,000
32 Milwaukee, WI 320 1,469,000 660,000
33 San Antonio, TX 320 1,402,000 435,000
35 Indianapolis, IN 320 1,333,000 551,000
36 Columbus, OH 160 1,302,000 586,000
37 Salt Lake City, UT 80 1,214,000 499,000
38 Orlando, FL 80 1,206,000 573,000
39 Buffalo, NY 80 1,201,000 442,000
40 New Orleans, LA 80 1,178,000 469,000
41 Hartford, CT 80 1,154,000 540,000
43 Nashville, TN 80 1,060,000 508,000
44 Norfolk, VA 80 1,040,000 321,000
45 Rochester, NY 80 1,038,000 444,000
46 Memphis, TN 80 1,034,000 470,000
47 Jacksonville, FL 80 1,009,000 433,000
48 Oklahoma City, OK 80 977,000 434,000
49 Greensboro, NC 80 963,000 486,000
50 Louisville, KY 80 931,000 414,000
51 West Palm Beach, FL 80 931,000 316,000
52 Las Vegas, NV 80 931,000 445,000
53 Birmingham, AL 80 905,000 386,000
54 Austin, TX 80 884,000 396,000
55 Honolulu, HI 80 881,000 344,000
56 Dayton, OH 80 864,000 389,000
57 Albany, NY 80 851,000 377,000
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58 Charlotte, NC 80 840,000 467,000
60 Richmond, VA 80 792,000 369,000
61 Tulsa, OK 80 788,000 321,000
62 Raleigh, NC 80 788,000 385,000
63 Fresno, CA 80 734,000 240,000
65 Tucson, AZ 80 717,000 280,000
66 Allentown, PA 80 713,000 269,000
68 Ventura, CA 80 694,000 223,000
69 Syracuse, NY 80 681,000 298,000
70 Akron, OH 80 680,000 284,000
71 Greenville, SC 80 674,000 301,000
72 El Paso, TX 80 663,000 209,000
75 Omaha, NE 80 631,000 304,000
78 Wilmington, DE 80 609,000 291,000
79 Albuquerque, NM 80 592,000 272,000
80 Springfield, MA 80 581,000 235,000
82 Baton Rouge, LA 80 562,000 218,000
84 Charleston, SC 80 545,000 197,000
86 New Haven, CT 80 528,000 227,000
87 Stockton, CA 80 522,000 165,000
97 Newport News, VA 80 470,000 170,000
120 Santa Barbara, CA 80 378,000 134,000
135 Trenton, NJ 80 330,000 165,000
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TOTAL 130,027,000 51,663,000
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Competition
Teligent's telecommunications service offerings face competition from
various sources, including ILECs, CLECs and IXCs. The local telecommunications
market is intensely competitive for newer entrants and currently is dominated by
the Regional Bell Operating Companies and other ILECs. Teligent has not begun to
market its point-to-multipoint wireless local broadband services to potential
customers on a widespread basis and is currently providing point-to-point
services on a limited basis. The ILECs have long standing relationships with
their customers, have significant name recognition and financial resources, have
the potential to subsidize competitive services with revenues from a variety of
business services, and benefit from existing state and federal regulations that
favor the ILECs over Teligent in certain respects. Regulatory decisions and
recent legislation, such as the Telecommunications Act of 1996 (the
"Telecommunications Act"), have reduced barriers to entry into new segments of
the industry. Teligent believes that these requirements of the
Telecommunications Act promote greater competition and will help provide
opportunities for broader entrance into the local exchange markets. However, as
ILECs face increased competition, regulatory decisions are likely to provide
them with increased pricing flexibility, which in turn may result in increased
price competition. There can be no assurance that such increased price
competition will not have a material adverse effect on Teligent's business,
financial condition and results of operations. Also, there can be no assurance
that substantial local exchange competition will develop in the near future.
A number of companies are developing enhancements to increase the
performance of ILECs' copper wire-based legacy networks. These generally consist
of digital subscriber line products, such as ADSL, HDSL and VDSL. Teligent also
faces potential competition from other terrestrial fixed wireless providers,
including ILECs, CLECs and other leading telecommunications companies. utilizing
Multichannel Multipoint Distribution Service ("MMDS"), 28 GHz Local Multipoint
Distribution Service ("LMDS") and 38 GHz wireless
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communications systems, 2.8 GHz Wireless Communications Service ("WCS"), FCC
Part 15 unlicensed wireless radio devices, and other services that use existing
point-to-point wireless channels on other frequencies and, potentially,
additional fixed wireless authorizations by the FCC in the 24 GHz band. See
"Business - Teligent - Government Regulation."
In addition, Teligent's Internet access services also are likely to
face significant competition from other Internet Service Providers as well as
from cable television operators deploying cable modems, which provide high speed
data capability over installed coaxial cable television networks and there can
be no assurance that such competition will not be significant. Further, Internet
access services based on existing technologies such as ISDN and, in the future,
on such technologies as ADSL and HDSL will likely provide additional sources of
competition to Teligent's Internet access services.
Government Regulation
Overview. Teligent's fixed wireless broadband services are subject to
varying degrees of federal, state and local regulation. Generally, the FCC
exercises jurisdiction over the use of the electromagnetic spectrum (i.e.,
wireless services) and has exclusive jurisdiction over all interstate
telecommunications services, that is, those that originate in one state and
terminate in another state. State regulatory commissions have jurisdiction over
intrastate communications, that is, those that originate and terminate in the
same state. Municipalities and other local jurisdictions may regulate limited
aspects of Teligent's business by, for example, imposing zoning and franchise
requirements and requiring installation permits. Teligent also is subject to
taxation at the federal and state levels and may be subject to varying taxes and
fees from local jurisdictions.
Federal Regulation. The Telecommunications Act, enacted on February 8,
1996, substantially departs from prior legislation in the telecommunications
industry by establishing local exchange competition as a national policy through
the removal of state regulatory barriers to competition and the preemption of
laws restricting competition in the local exchange market. Under the
Telecommunications Act, states have begun and, in a number of cases, completed
regulatory proceedings to determine the pricing of unbundled network elements
and services, and the results of these proceedings will determine whether it is
economically attractive to use these elements. The Telecommunications Act in
some sections is self-executing, but in most cases the FCC must issue
regulations that identify specific requirements before Teligent and its
competitors can proceed to implement the changes the Telecommunications Act
prescribes. The outcome of these various ongoing FCC rulemaking proceedings or
judicial appeals of such proceedings could materially affect Teligent's
business, financial condition and results of operations.
As required by the Telecommunications Act, the FCC adopted, in August
1996, new rules implementing the interconnection and resale provisions of the
Telecommunications Act which are intended to remove or minimize regulatory,
economic and operational impediments to full competition for local services,
including switched local exchange service. Many of these rules have faced legal
challenges, and no assurances can be given as to the eventual outcome of such
challenges. Teligent does not currently anticipate that the outcome of such
challenges, positive or negative, will have a material adverse effect on
its operations. To date, Teligent has successfully negotiated comprehensive
interconnection agreements with ILECs in 27 markets in 8 states and the
District of Columbia. In addition, it is currently negotiating comprehensive
interconnection agreements in 7 additional states, which cover 18 more
Teligent markets. Teligent has not resorted to arbitration with respect to its
interconnection negotiations as of this date.
Relocation of Licenses to 24 GHz. Beginning in 1993, prior to the FCC's
implementation of spectrum auctions, MSI and DSC applied for, and later
received, FCC licenses to provide Digital Termination Services utilizing
channels in the 18 GHz frequency band (18.870 GHz to 19.260 GHz) allocated
pursuant to the rules governing the Digital Electronic Message Services ("DEMS")
in the United States. Subsequently, in November
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1997, MSI and DSC contributed to Teligent their 24 GHz fixed wireless licenses.
On March 14, 1997, the FCC issued an Order (the "Relocation Order"), providing
for the relocation of certain fixed wireless licenses in the 18 GHz band,
including those held by MSI, DSC and Teligent, to a reallocated portion of the
24 GHz band, pursuant to a request of the National Telecommunications and
Information Administration ("NTIA") acting on behalf of the Department of
Defense. The Relocation Order provided for the relocation of these licenses from
100 MHz over 5 channels in the 18 GHz band to 400 MHz over 5 corresponding
channels in the 24 GHz band. On June 24, 1997, the FCC issued a subsequent order
(the "Modification Order") that implemented the Relocation Order by modifying
the affected 18 GHz licenses, including those held by MSI, DSC and Teligent, to
authorize operations at 24 GHz. Pursuant to the Relocation Order, those 18 GHz
fixed wireless operators in the Washington, DC and Denver, CO areas (including
the Company's Washington, DC, Baltimore, MD and Denver, CO facilities) were
required to relocate to corresponding channels in the 24 GHz band no later than
June 5, 1997. The 18 GHz fixed wireless licensees in all other areas must
relocate to corresponding channels in the 24 GHz band no later than January 1,
2001. Although Teligent is permitted to continue operations in the 18 GHz band
outside of the Washington, DC and Denver, CO areas until January 1, 2001, its
intention is generally to convert all of its facilities to 24 GHz band
operation as soon as possible.
The FCC implemented this relocation without notice and comment
procedures in order to give effect to NTIA's request on behalf of the Department
of Defense to protect national security satellite operations from harmful
interference from 18 GHz license stations. A number of parties have filed
petitions with the FCC seeking a number of remedies including either partial or
full reconsideration or review of one or both of these orders and modification
or revocation of Teligent's licenses. These parties argued, among other things,
that the FCC decision should be reversed because the FCC's allocation of 400 MHz
of 24 GHz spectrum for licenses was unnecessary and that the FCC should not have
so relocated the fixed wireless licensees without conducting prior notice and
comment rulemaking proceedings. Teligent filed timely responses with the FCC
opposing the petitions and continues to build out its networks as permitted
under its licenses, the Relocation Order and the Modification Order. In
addition, one of these parties, DirecTV, has filed a petition for rulemaking
with the FCC requesting that the FCC grant permission for DirecTV and others to
construct and operate broadcast satellite uplink facilities in certain areas on
a portion of the 24 GHz band allocated and granted to the former 18 GHz fixed
wireless licensees. Teligent has filed a timely opposition to this rulemaking
petition.
Teligent cannot determine how the FCC will resolve the petitions for
reconsideration or review of the Relocation Order and the Modification Order and
the DirecTV rulemaking petition. Thus, any construction or operation at 24 GHz
prior to the final resolution of these petitions is at Teligent's risk and
expense. If the Relocation Order or Modification Order was subsequently modified
or reversed, such a modification or reversal could have a material adverse
effect on Teligent's business, financial condition and results of operations. In
particular, it cannot be determined whether, under a modified license
relocation, Teligent's equipment would be rendered unusable or usable only after
significant expense and delay.
Grant of the DirecTV rulemaking petition could materially and adversely
affect the Teligent's business, financial condition and results of operations.
If implemented, DirecTV's proposals could result in the construction and
operation of satellite uplink facilities on 24 GHz frequencies currently
allocated to fixed wireless services, which could interfere with Teligent's
operations in the vicinity of these satellite uplink facilities. In addition, in
the Relocation Order the FCC announced that it will commence a rulemaking
proceeding to address future fixed wireless licensing in the 24 GHz band, which
may include proposals to auction available spectrum and to adopt service rules
for 24 GHz operations. There can be no assurance that Teligent's point-to-point
and point-to-multipoint equipment as currently designed will comply with the
service rules ultimately adopted by the FCC.
The FCC's decisions upon reconsideration will be subject to judicial
appeal to a U.S. court of appeals. There can be no assurance that the FCC will
be able to defend any such litigation successfully. The court may affirm the
Relocation Order or any order made by the FCC upon reconsideration, vacate and
remand the matter to
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the FCC for initiation of a rulemaking proceeding, or make any other ruling. If
the matter is remanded, the FCC could decide this issue in the same way or it
could make a different decision, which may be adverse to Teligent. Failure by
the court to affirm the terms of the Relocation Order or the Modification Order
could have a material adverse effect on Teligent's business, financial condition
and results of operations.
Teledesic. On September 6, 1996, Teledesic Corporation ("Teledesic")
filed a petition seeking the dismissal of then-pending applications for
additional transmission (nodal) stations in seven licensed MSI fixed wireless
markets, and the rescission of existing licenses, then held by or belonging to
MSI or DSC. In its petition, Teledesic claimed that its then-proposed satellite
system was incompatible with existing licensed terrestrial networks in the 18
GHz band, that the FCC's initial grants of the fixed wireless licenses to MSI
and DSC was inappropriate, and that MSI and DSC had failed to construct and
operate their licensed facilities in compliance with the FCC's rules. Teligent,
MSI and DSC opposed Teledesic's petition in their respective pleadings filed
with the FCC.
In November and December 1996, the FCC inspected each of the MSI and
DSC fixed wireless facilities and determined that the companies had complied
with all applicable construction and operational requirements. In letters dated
April 2, 1997, and April 8, 1997, the FCC notified MSI and DSC, respectively,
that the FCC "concluded its inquiry" and "determined not to take any further
action" in connection with the investigation. Moreover, on February 24, 1997,
Teligent, MSI and DSC entered into an agreement with Teledesic whereby Teledesic
agreed to withdraw its petition and reimburse MSI, DSC and Teligent,
respectively, for some of the costs related to the relocation of their 18 GHz
fixed wireless systems to the 24 GHz band, conditioned upon the FCC's relocation
of 18 GHz fixed wireless licensees to the 24 GHz band.
In their petitions for reconsideration of the Relocation Order, a
number of parties raised substantially similar arguments to those initially
raised by Teledesic against the validity of the licenses now held by, and the
constructed fixed wireless facilities now owned by, Teligent. Teligent, MSI and
DSC have opposed those claims.
On March 21, 1997, Teledesic withdrew its petition against Teligent's
pending applications and MSI's and DSC's licenses.
State Regulation. Many of Teligent's services will be classified as
intrastate services subject to state regulation. All of the states where
Teligent operates, or will operate, require some degree of state regulatory
commission approval to provide certain intrastate services. In most states,
intrastate tariffs are also required for various intrastate services, although
Teligent is not typically subject to price or rate of return regulation for
tariffed intrastate services. To date, Teligent has already received
authorization to provide facilities-based local services in California,
Colorado, the District of Columbia, Florida, Georgia, Hawaii, Illinois,
Indiana, Iowa, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Nevada,
New York, Ohio, Texas, Virginia and Washington. In summary, Teligent has
obtained state authorization in 45 markets and has applied for state
authorization in the remaining 29 markets where it holds FCC licenses.
Local Regulation. Teligent is also subject to varying degrees of
regulation by local governments with regard to taxes and fees and the siting of
telecommunications equipment. Some local governments have been requiring
substantial filings and review before telecommunications carriers can operate in
their licensed areas and have also required the payment of significant franchise
fees or taxes. Some of these disputes involving licensing of telecommunications
carriers, antenna siting, and rights of way are in litigation and more
administrative and court litigation is likely. No assurance can be given that
the outcome of such litigation will not create additional barriers to, or impose
additional costs on, Teligent's ability to compete freely in certain local
markets.
<PAGE>
Certain Terms of, and Agreements Relating to, Teligent Common Stock
Description of the Teligent Series B-1 Common Stock.
The Company, through its wholly owned subsidiary MSI, holds 21,436,689
shares of Series B-1 Common Stock of Teligent, which represents 40.8% of all
outstanding equity securities (and the voting power represented by such
securities) of Teligent. The holders of shares of all classes and series of
Teligent's common stock vote together as a single class. Each share of
Teligent's common stock entitles the registered holder thereof to one vote,
and there is no cumulative voting.
Pursuant to Teligent's Certificate of Incorporation, MSI, as the sole
holder of Series B-1 Common Stock, voting as a separate class, is entitled to
elect a majority of Teligent's Board of Directors (the "Series B-1 Directors").
The holders of Class A Common Stock and Class B Common Stock, voting together as
a single class, are entitled to elect all members of Teligent's Board of
Directors, other than the Series B-1 Directors, and the directors elected by the
holders of the Series B-2 Common Stock or Series B-3 Common Stock who are each
entitled to elect one director. Teligent's Board currently comprises seven
directors. At the present time, therefore, MSI is entitled to elect four of
Teligent's seven directors as Series B-1 Directors, Telecom-DTS Investors,
L.L.C., an affiliate of Telcom Ventures (the "Telecom Stockholder"), as the
holder of Series B-2 Common Stock is entitled to elect one director, NTT, as the
holder, through an indirect wholly owned subsidiary, of Series B-3 Common Stock,
is entitled to elect one director, and the holders of Class A and Class B Common
Stock, voting together as a single class, are entitled the remaining director.
Pursuant to the Stockholders Agreement, described below, the Company has agreed
to vote all its shares of Series B-1 Common Stock in favor of the election of
Teligent's Chief Executive Officer as a Director. If, however, at any time the
number of MSI's shares of Series B-1 Common Stock is less than 20% of the
aggregate number of issued and outstanding shares of Teligent's common stock
then, without any further action of any party or Teligent, all of MSI's Series
B-1 Common Stock will automatically convert into an equal number of shares of
Class A Common Stock with the result that MSI will no longer be entitled
pursuant to Teligent's Certificate of Incorporation to elect a majority of
Teligent's Board of Directors.
Pursuant to Teligent's Certificate of Incorporation, if a holder of
shares of Class B Common Stock transfers any such shares to any person or
entity other than a Permitted Transferee of such holder, such transfer,
without any further action of any party or Teligent, will automatically
and irrevocably convert such shares into an equal number of shares of
Teligent's Class A Common Stock from the date of such transfer. In the case
of any holder of shares of Series B-1 Common Stock, Teligent's Certificate of
Incorporation defines "Permitted Transferee" to mean only the
<PAGE>
Company and any corporation, partnership or other business entity
directly or indirectly controlled by the Company at the time of transfer.
Stockholders Agreement. Immediately prior to consummation of the
Teligent IPO, MSI, the Telcom Stockholder, NTT (collectively, the "Stockholder
Parties") and Teligent entered into a Stockholders Agreement (the
"Stockholders Agreement"). Pursuant to the Stockholders Agreement, NTT and the
Telcom Stockholder have certain rights and obligations with respect to their
ownership interest in, and the governance of, Teligent, including, so long as
the Telcom Stockholder and NTT, respectively, have the right to elect a member
of Teligent's Board, the right of such respective directors to approve, among
other matters, any amendment to Teligent's Certificate of Incorporation which
materially and adversely affects the rights of NTT or the Telcom Stockholder,
respectively, in a discriminatory manner vis-a-vis one or more of the other
Stockholder Parties. The Stockholders Agreement also provides that so long as
the Telcom Stockholder and NTT, respectively, have the right to elect a member
of Teligent's Board of Directors, Teligent will afford to representatives of the
Telcom Stockholder and NTT, respectively, certain business consultation rights,
including with respect to any action (each a "Consultation Event") which (i)
materially changes the fundamental character of Teligent's business, (ii)
replaces Teligent's Chief Executive Officer or Chief Operating Officer, (iii)
involves the sale or pledge by Teligent of a substantial portion of its assets
or any acquisition, divestiture or merger of Teligent with another entity or any
joint venture outside the ordinary course of Teligent's business or (iv)
involves the issuance by Teligent of shares of common stock or preferred stock
to any telecommunications carrier. With respect to any Consultation Event,
Teligent is required to provide reasonable advance notice to NTT and the
Telcom Stockholder and, in the case of the Consultation Event referred to in
clause (iv) of the immediately preceding sentence, to give due consideration to
their objections. In the Stockholders Agreement each stockholder party has
agreed to vote, or act by written consent with respect to, all of its
shares of Teligent's common stock in favor of the election of Teligent's Chief
Executive Officer as a member of Teligent's Board of Directors. The
Stockholders Agreement also provides, in effect, that until November 13,
1999, each Stockholder Party will hold at least one-half of the shares of
Teligent's common stock held by such Stockholder Party as of November 26, 1997
(the date of the consummation of the Teligent IPO), except that such
requirement will lapse and be without further effect automatically as to NTT and
the Telcom Stockholder, respectively, if a Consultation Event occurs even though
NTT or the Telcom Stockholder, respectively, has objected thereto. Under the
Stockholders Agreement, if such requirement so lapses with respect to the Telcom
Stockholder and, at the time of such lapsing, MSI is not entitled, pursuant to
Teligent's Certificate of Incorporation, to elect a majority of the members of
Teligent's Board, then such requirement shall also lapse and be without further
effect with respect to MSI. In addition, in the Stockholders Agreement, MSI and
the Telcom Stockholder have each granted to NTT co-sale rights with respect to
any sale or transfer by either of them (other than to an affiliate or pursuant
to a pledge arrangement, and excluding any public sale or distribution whether
pursuant to a registration statement, Rule 144 or otherwise) of shares of
Teligent's common stock (other than Teligent's common stock acquired in public
market transactions). Under the Stockholders Agreement, if Teligent is required
by a change in law or other circumstance to reduce its level of foreign
ownership and is unable to obtain a waiver of such requirement, Teligent will
have the right, and will be required, at NTT's election, to refuse to sell stock
in Teligent to any Foreign Owner (as defined in the Stockholders Agreement) if
such a transaction would adversely impact NTT's ability to hold its
then-existing
<PAGE>
share ownership in Teligent, and, in addition, Teligent will have the right, and
will be required, at the election of any Stockholder Party, to repurchase for
cash (to the extent permitted by applicable Delaware corporation law) shares
first from all other Foreign Owners other than the Stockholder Parties, if
applicable, and thereafter from each of the Stockholder Parties, on a pro rata
basis (based on the percentage of foreign ownership attributable to each
Stockholder Party) at the fair market value thereof based on Teligent's then
public trading value.
Members Agreement. In connection with the Teligent IPO, Teligent,
MSI, the Company, DSC, the Telcom Stockholder and the owners of the Telcom
Stockholder entered into an agreement (the "Members Agreement") whereby
Teligent granted to DSC certain demand and "piggyback" registration
rights with respect to Common Stock held by DSC at the time of consummation of
the Teligent IPO. In addition, in the Members Agreement, the Company and
MSI agreed with DSC that upon a "Change in Control" (as defined in the
Members Agreement) of the Company or MSI, (i) the Company will immediately
convert, and cause its controlled affiliates to immediately convert, all of the
Series B-1 Common Stock owned by it into Class A Common Stock such that, under
Teligent's Certificate of Incorporation as then in effect, the Company, alone or
together with its controlled affiliates, will no longer have the right to elect
a majority of Teligent's Board of Directors, (ii) MSI will cause its designees
on Teligent's Board of Directors to cause Teligent's Board of Directors to
convene a meeting of Teligent's stockholders and (iii) promptly after taking the
action described in (ii) immediately above, MSI will cause such number of its
designees on Teligent's Board of Directors to resign so that such designees no
longer constitute a majority thereof. Under the Members Agreement, in order for
a "Change in Control" of the Company or MSI to occur, in addition to certain
changes in equity ownership or board composition of the Company or MSI as set
forth in the Members Agreement, the Telcom Stockholder and its affiliates must
own shares of Series B-2 Common Stock representing at least 10% of all then
outstanding shares of Teligent's common stock and must continue to be controlled
by Rajendra Singh, Neera Singh, any estates or trusts of which such persons are
executors, trustees or beneficiaries and any entities controlled by such
persons. In the Members Agreement, each of the Company and MSI also agreed with
DSC that it will not transfer control of any entity which holds Class B Common
Stock to any third party (other than an affiliate of the Company, provided such
affiliate agrees to be bound by the provisions of the Members Agreement
applicable to MSI) without the consent of DSC unless, concurrently with or prior
to such transfer, the Company and MSI take the actions described in clauses (i)
through (iii) above. In addition, in the Members Agreement, MSI and the Telcom
Stockholder have each granted to the other rights of first refusal and co-sale
rights with respect to any sale or transfer by the other (other than to an
affiliate or pursuant to a pledge arrangement, and excluding any public sale or
distribution whether pursuant to a registration statement, Rule 144 or
otherwise) of shares of Teligent's common stock (other than Teligent's common
stock acquired in public market transactions). Pursuant to the Members
Agreement, the Company and the owners of the Telcom Stockholder have also each
granted to the other rights of first refusal and co-sale rights, with the same
exceptions, with respect to any sale or transfer by the other of shares of MSI,
or member or other equity interests of the Telcom Stockholder, but only if
shares of Teligent's common stock constitute all or substantially all of the
assets of MSI or the Telcom Stockholder, respectively.
Registration Rights Agreement. Teligent and MSI have entered into a
Registration Rights Agreement dated as of March 6, 1998 (the "Registration
Rights Agreement"), whereby Teligent has granted to MSI certain registration
rights substantially similar to those granted to NTT and to DSC. The
Registration Rights Agreement provides that, subject to meeting certain minimum
number of shares or anticipated offering price thresholds and to certain
holdback periods, MSI may demand registration (each, a "Demand Registration") of
the shares of Class A Common Stock into which its shares of Series B-1 Common
Stock have been converted or are convertible ("Registrable Securities"), at any
time (subject to a maximum of three Demand Registrations in total) commencing
six months after November 26, 1997 (the date of consummation of the Teligent
IPO). In addition, the Registration Rights Agreement provides that, subject
to certain limitations, MSI may include Registrable Securities in any
registration of common stock by Teligent under the Securities Act (other than
on Form S-4 or S-8 under the Securities Act) (each, a "Piggyback Registration").
MSI also has the right, commencing six months after November 26, 1997, subject
to certain limitations, to demand
<PAGE>
that Teligent effect a registration on Form S-3 under the Securities Act, if
available (a "Form S-3 Registration"), of all or part of its Registrable
Securities, so long as the anticipated aggregate offering price for such
Registrable Securities is in excess of $10 million. Under the Registration
Rights Agreement, Teligent is required to pay all registration expenses (other
than underwriting discounts and commissions and fees and disbursements of
counsel of the selling stockholders) with respect to all Demand Registrations
and Form S-3 Registrations and up to three Piggyback Registrations. Under the
Registration Rights Agreement, Teligent is required to indemnify the selling
stockholders, and Teligent may request, as a condition to effecting any
registration, indemnification from the selling stockholders against certain
liabilities in respect of any registration statement covered by the Registration
Rights Agreement.
TruePosition, Inc.
TruePosition, Inc., a wholly owned subsidiary of the Company ("TruePosition"),
intends to be a leading provider in the emerging wireless location services
market. TruePosition has developed and is commercializing its TruePosition(TM)
Wireless Location System (the "TruePosition System"), which is a patented system
for locating wireless telephones and transmitters. TruePosition's strategic
objective is to position itself as both an equipment supplier to carriers and
E911 providers which implement its system, as well as an ongoing service
provider to these customers. The TruePosition System is designed to enable
mobile wireless service providers (i.e., cellular and Personal Communication
Services ("PCS") carriers) to determine the location of any cellular or PCS
telephone. Using its patented advanced time difference of arrival ("TDOA")
technology and applications, the TruePosition System calculates the latitude and
longitude of any designated wireless telephone or transmitter and forwards this
information in real time to any desired application software. The Company
believes that the TruePosition system enjoys several key competitive advantages
over alternative wireless location systems and
<PAGE>
technologies, including its speed to market, patented technology, value-added
enhancement applications and low cost of network deployment.
An important segment of the wireless location market is location-based
emergency and information services, allowing 911 public safety and emergency
service agencies to provide the same level of service afforded to wireline
subscribers. This emerging market is driven principally by a Report and Order
(the "Order") issued by the FCC on June 12, 1996. The Order requires all mobile
wireless providers of real time voice services to offer enhanced 911 ("E911")
access and services to mobile radio callers, and the full implementation of
location technology by wireless carriers, by October 2001. See "Business -
TruePosition - Government Regulation." The Company believes that the
TruePosition System is the only wireless location system that is currently
commercially available. See "Business - TruePosition - Competition."
TruePosition's initial focus is on the commercialization of its E911 wireless
location solution, which it is marketing to wireless carriers based not only
upon the obligations imposed by the Order, but also on the Company's belief that
emergency location services are increasingly important to wireless subscribers,
and that wireless carriers will obtain a competitive advantage by offering
wireless location services, and in particular, the TruePosition System. The
Cellular Telephone Industry Association ("CTIA") estimates that there are
currently over 56.5 million wireless service subscribers in the U.S. According
to the CTIA, nearly two-thirds of such wireless subscribers cited "personal
safety" and "emergency services" as their primary motivations for purchasing
their wireless service.
The TruePosition System has been successfully tested in commercial
trials in 1996 and 1997. In December 1996, in cooperation with the Greater
Harris County 911 Emergency Network and Houston Cellular Telephone Company, a
partnership of BellSouth and AT&T Wireless, TruePosition successfully
demonstrated the first installed TruePosition System in an eight cell-site
platform in Houston, Texas. From January to June 1997, in conjunction with
Comcast Cellular Communications, Inc. ("Comcast"), the State of New Jersey, Bell
Atlantic Corporation and other E911 participants, TruePosition successfully
demonstrated the first live trial of wireless E911 with location technology (the
"New Jersey Trial"), which covered the southernmost fifty miles of the I-295/New
Jersey Turnpike corridor, and provided real time location information for
wireless E911 calls originating from Comcast subscribers within the trial area.
On June 16, 1997, the State of New Jersey issued a report (the "Report") on the
first 100 days of the New Jersey Trial, concluding that the trial was successful
in demonstrating that commercial technology exists today to meet the needs of
the FCC's Phase I and Phase II requirements in New Jersey and elsewhere. See
"Business - TruePosition - Government Regulation." The Report's conclusions were
based on over 3,500 live wireless 911 calls received and over 81,000 test calls
placed by participants in the trial. The Company is currently in discussions
with several major wireless carriers regarding commercial implementation of the
TruePosition System.
In addition to the potential opportunities presented by the Order and
subscriber demand for wireless location services, the Telecommunications Act of
1996 (the "Telecommunications Act") permits alternative carriers, including
wireless carriers, to compete for the traditional wireline local loop market.
The TruePosition System is designed to support value-added applications, such as
location sensitive billing, which will enable wireless carriers to utilize their
excess capacity to offer a single-handset solution for both home and mobile use.
Location sensitive billing allows carriers to charge subscribers differing rates
for usage based upon their location, and may help to facilitate potential plans
by carriers to position a wireless product for home use.
<PAGE>
Business Strategy
In support of TruePosition's goal to be a premier provider of wireless
location systems and related services, it is implementing the following
initiatives:
Target Large and Medium Market Wireless Carriers. TruePosition is
focusing its initial marketing and sales efforts on the wireless carriers in the
top 25 to 30 U.S. markets, and also on medium-sized cellular markets in the U.S.
These large and medium cellular markets are dominated by the top cellular
operators, such as AT&T Wireless, GTE Wireless, Southwestern Bell Mobile
Systems, AirTouch/US West, Bell Atlantic Mobile Systems, Ameritech Cellular,
BellSouth Mobility and Comcast Cellular. The Company is currently in discussions
with several of these carriers regarding the implementation of the TruePosition
System in selected markets. In addition, the Company has received inquiries from
international wireless carriers regarding implementation of the TruePosition
System.
Develop Partnering Opportunities with Major Wireless Infrastructure
Providers, and E911 Providers. In addition to targeting the wireless carriers
themselves, TruePosition is seeking to create relationships and technological
synergies with companies which may influence wireless carriers' implementation
of location technology. TruePosition therefore seeks to develop partnering
opportunities with major wireless infrastructure providers such as Lucent
Technologies, Ericsson, Northern Telecom, Qualcomm, Motorola and others, in
order to leverage their established relationships with wireless carriers and
their technological support networks. In addition, TruePosition will target
providers of E911 equipment and services as potential partners in selling
turnkey wireless E911 systems.
Continue Development and Deployment of Value-Added Enhancement
Applications. TruePosition is continuing its development of value-added
enhancements to the TruePosition System, including location sensitive billing,
fraud location and management and vehicle and fleet management. The Company
believes that such enhancements should allow carriers to create an added revenue
base by offering expanded services to their
<PAGE>
subscribers, thereby increasing the attractiveness of the TruePosition System in
advance of the deadlines imposed by the Order.
Continue Development of Support for Digital Formats of Cellular
Telephony. Of the approximately 56 million wireless telephones, over 90% are
analog based. Because the cellular and PCS industries are in the process of
deploying systems utilizing various digital formats, TruePosition is currently
developing support for Time Division Multiple Access ("TDMA") and Global
Standard for Telecommunication Mobile ("GSM"). TruePosition also intends to
develop support for Code Division Multiple Access ("CDMA").
Develop Service Capabilities to Wireless Carriers. The TruePosition
System is being marketed as a revenue generating service to wireless carriers.
TruePosition plans to offer a full range of support options, such as network
design, turnkey installation, 24 hour monitoring from a centralized
network operations center, routine system maintenance and custom software
development for special interfaces.
Build Core Management Team. TruePosition is continuing to build its
core management team. In March 1997, Kent R. Sander joined TruePosition as
President and Chief Operating Officer. Mr. Sander spent 14 years at
Ericsson Radio Systems, Inc., the principal U.S. subsidiary of the Swedish
telecommunications firm, LM Ericsson, most recently as Vice President, Business
Operations, East Region, in which he managed all of Ericsson's activities in the
East Region, including sales, operations and engineering. In addition, Michael
Amarosa, former deputy commissioner of the New York City Police Department,
joined TruePosition in October 1997 as Vice President for Public Affairs. Mr.
Amarosa has 24 years of law enforcement experience and, during his tenure with
the City of New York, managed the construction, implementation and operation of
its 911 system.
Network and System Overview
The TruePosition System. The TruePosition System is a passive overlay
system designed to enable mobile wireless service providers to determine the
location of any cellular telephone and, as discussed below, TruePosition is in
the process of developing support for PCS telelephones. Using patented advanced
TDOA technology, the TruePosition System calculates the latitude and longitude
of any designated wireless telephone or transmitter and forwards this
information in real time to any desired application software. TruePosition
"listens" to transmissions already occurring on the reverse control channel of
wireless telephones and uses TDOA techniques to calculate the geographic
location, as well as the direction of travel and velocity of a telephone or
other wireless transmitter. Initially, the TruePosition System has been
developed to support analog cellular telephony, which is the largest market
segment of the cellular industry with an existing United States base of an
estimated 56 million wireless telephones. Due to this large installed base of
analog cellular telephones, as well as the rapidly expanding base of digital
cellular and PCS telephones, TruePosition selected a method which does not
require alteration of the cellular telephone handset. Instead, the TruePosition
System is designed as an overlay to the existing wireless network, and also does
not require construction of a separate terrestrial network.
The TruePosition System is composed of four main elements, as follows:
Signal Collection System ("SCS"). The Signal Collection System is a
receiver designed specifically for location applications, and its modular
architecture supports any traditional cell site configuration. It is typically
located at "coverage" cell sites or other sites that provide good signal
visibility. The SCS uses wideband digital receivers to receive the reverse
control channel transmissions occurring on all wireless phones in the covered
area. In most cases, the SCS uses the existing wireless system omni- or
sectored- antennae and can employ additional receivers that can be used for
voice channel tracking.
<PAGE>
TDOA Location Processor ("TLP"). The TDOA Location Processor is a
powerful digital signal processing array designed for high volume location
processing. The TLP contains the patented TDOA algorithms for computing
position, confidence interval, speed, and direction of travel. The TLP also
selectively determines which telephones to locate based upon any number of
criteria, including the dialed number (such as "911") or the mobile
identification number ("MIN"). For security and network architecture purposes,
the TLP is typically co-located with the wireless switch. The TLP uses a
distributed, scaleable architecture to fit any wireless market size and is fully
redundant.
Applications Processor ("AP"). The Applications Processor is a high
performance database software system that controls the TruePosition network and
provides carrier and subscriber access to the location database records. One or
more APs may be located anywhere within a carrier's network, and then remotely
connected to the TLP. The AP provides full network management, configuration,
and control of the TruePosition System, including remote software download to
all components. It also provides a variety of secure application interfaces for
direct connect or remote dial-in applications. The AP's open architecture is
based on a state-of-the-art client/server architecture and is available for
custom application development by third parties and the inclusion of value-added
applications by TruePosition.
Network Operations Center ("NOC"). The Network Operations Center
provides single-point control of a TruePosition System, using an open
object-oriented software architecture and a graphical user interface. It is
designed and built for wireless engineers and technicians, and offers complete
network configuration and control capability, including status indicators,
alarms, system diagnostics and reporting.
911 Systems. E911 systems were originally designed and constructed to
support landline telephones, which are connected via fixed wires back to the
telephone company offices, creating a permanent and precise geographical
relationship between the telephone and central office. This geographical
information is stored by the E911 system in a location database and a related
street address database. When a 911 emergency call is received from a landline
telephone, the central office passes both the call and the caller's 7-digit
telephone number to a 911 switch. The 911 switch uses the phone number to look
up the caller's name and billing address and determines the closest public
safety answering point ("PSAP") to the caller. At the same time, the street
address database identifies phone numbers for the nearest police, fire and
medical agencies. This information is simultaneously displayed in text form on
the PSAP's screen while the call is being answered.
Most wireless switches, however, are not currently configured to pass
the caller's phone number to the 911 switch - only the voice traffic is passed.
Without the caller's phone number and location, the 911 switch cannot perform
any intelligent routing, so calls for a large area may instead be routed to one
PSAP. Phase I of the Order requires that the PSAP be provided with the caller's
cellular telephone number and the identity of the nearest cell site. Compliance
with Phase I will require modifications to the wireless carrier's mobile switch
and the PSAP itself. The Company believes that there is growing momentum within
the E911 community for such modifications. Phase II of the Order requires that
the wireless carrier also provide location information to the PSAP. The
TruePosition System enables Phase II compliance by determining the caller's
latitude/longitude location, and forwarding that information, within seconds and
completely transparent to the caller, to the 911 switch for processing by the
appropriate PSAP.
Service Offerings
The TruePosition System's design is intended to support many
value-added end-user applications, other than E911 services. The following is a
description of such other applications. The Company believes that these
applications will make the TruePosition System more attractive to wireless
carriers as the basis for additional sources of revenue.
<PAGE>
Location Sensitive Billing. The TruePosition System can provide a
method for implementing location sensitive billing, which is more accurate than
currently proposed per-cell-site systems. TruePosition believes that location
sensitive billing can be an increasingly important source of revenue for many
wireless carriers. The Company believes that the TruePosition System's location
sensitive billing application will enable carriers to utilize their excess
capacity to offer a single-handset solution for both home and mobile telephony,
which could represent an important new revenue opportunity with the enactment of
the Telecommunications Act. Location sensitive billing will allow carriers to
charge subscribers differing rates for usage based upon their location.
Vehicle and Fleet Management. The TruePosition System offer customers
a low-cost method to address vehicle and fleet management, because it relies on
locating existing cellular telephones that are already installed in most fleets.
In addition to fleet management, the TruePosition System can be adapted to
stolen car retrieval, taxi dispatch, delivery routing, roadside assistance and
traffic flow analysis. The TruePosition AP has been designed to support a
variety of interfaces that permit end-user applications to access location data
in real time. For example, the display graphics could be accessed and viewed via
high-speed modems on the Internet, which is already accessible to many consumers
and businesses. To allay security concerns, the AP has been designed with
appropriate partitions and security mechanisms to prevent unauthorized access of
any user's location data.
Fraud Location and Control. Wireless fraud has become a serious problem
that adversely affects the financial performance of wireless carriers. To manage
fraud, wireless carriers have waged a technological war against perpetrators
with call profiling software, personal identification numbers and radio
fingerprinting systems. By linking TruePosition's AP with the wireless carrier's
clone detection or call profiler system, a wireless carrier can automatically
and immediately begin tracking any phone number identified as a probable clone.
The Company believes that the use of the TruePosition System will help a
carrier reduce fraud losses by enabling the location and prosecution of the
perpetrators.
RF Optimization. In order to aid wireless carriers in the optimization,
maintenance and improvement of their networks, TruePosition has demonstrated a
prototype of an RF Optimization Tool add-on to the TruePosition System. The RF
Optimization Tool is designed to use the real-time location data generated by
the TruePosition System to provide engineers with uplink signal strength and
interference data.
Object and Personal Location. The Company believes that future advances
in hardware development and battery life may enable miniature transmitters to be
included in overnight packages, shipping crates, trailers or attached to any
valuable item. A wireless carrier could then offer delivery tracking using the
TruePosition System. Such miniature location transmitters could also be employed
as child location devices, in-house detention monitors or in any situation in
which determining an individual's location is crucial.
Competition
The TruePosition System is one of several known alternatives for
locating cellular telephones and wireless transmitters, and there exist several
competitors which are developing wireless location products and services
utilizing these alternative technologies. Such technologies include use of
variations of TDOA, use of the Global Positioning System, measuring signal
attenuation and measuring angle of arrival. Although the Company believes that
the implementation of TDOA in the TruePosition System provides it with
significant advantages over alternative technologies, there can be no assurance
that the Company will be able to maintain this advantage with respect to new
technologies, or to new implementations of, or improvements in, existing
technologies for locating wireless transmitters.
TDOA. Although TruePosition holds two patents for the use of TDOA
technologies for the location of wireless telephones and other transmitters,
several companies are developing wireless location systems using
<PAGE>
variations of TDOA. The Company believes that its patents present a significant
barrier to the introduction of non-infringing uses of TDOA in wireless telephone
location.
Global Positioning System ("GPS"). Use of GPS involves establishing a
caller's location by a timing and distance calculation, called triangulation,
between the caller's GPS receiver and a minimum of 3 of the 24 GPS satellites.
The Company believes that the use of GPS has two disadvantages when compared
with the TruePosition System. First, GPS requires alteration of the telephone
handset to accommodate a GPS receiver. TruePosition believes that any method
requiring alteration of the telephone handset would be prohibitively expensive,
due to the large installed base of approximately 56 million cellular telephones
in the U.S. Second, GPS requires direct line of sight between the GPS receiver,
in this case in the telephone handset, and 3 of the 24 GPS satellites.
Therefore, the Company believes that a GPS based wireless location system would
not be universally available within a cellular network, for example in
buildings, in tunnels or wherever there exists an obstruction between the
telephone and the satellites. The TruePosition System, on the other hand, is
developed to function wherever a caller can receive a cellular signal.
Signal Attenuation Method. The signal attenuation method involves
estimating distance, and therefore, location, based on the principal that the
transmitted power of a cellular telephone signal attenuates over distance. If
the transmitted power of the cellular phone is known, and the power is measured
at another point, the distance can be estimated using one of several propagation
methods. The Company believes that this technique is generally less accurate
than the TruePosition System for several reasons. First, discovering transmitted
power levels is a burden that is complicated by cell site sectoring, antennae
down-tilting and continuous wireless system tuning. In addition, signals
attenuate for reasons other than distance traveled, such as atmospheric
conditions and passage through walls and other objects.
Angle of Arrival Method. The angle of arrival method relies on
equipping cell sites with a complex antenna array that is capable of determining
the angle (relative to the cell site) from which a cellular signal originated.
The location of the cellular telephone can then be estimated by triangulating
the data from several cell sites, each determining their respective angles of
arrival. The Company believes that angle of arrival systems will be more
expensive and suffer from possible zoning and regulatory implications of adding
additional complex antenna arrays to existing cell sites. In addition, the
Company believes that the angle of arrival method is less successful in
determining position as a caller moves from cell to cell and the call is handed
off from channel to channel.
Government Regulation
TruePosition does not require licensing from the FCC or other federal,
state or local authorities. However, the provision of E911 services is subject
to regulation at federal, state and local levels in the United States. While the
regulatory environment of the E911 community currently does not impose direct
obligations upon TruePosition, it does affect the market available for the
TruePosition System with regard to E911 services.
Federal Regulation. On June 12, 1996, the FCC issued the Order which
requires Commercial Mobile Radio Service providers of real time voice services
to offer E911 access and services to mobile radio callers. On December 1, 1997,
the FCC adopted a Memorandum Opinion and Order ("MO&O") that modified certain
rules adopted in the Order and reaffirmed the E911 implementation schedule.
These orders collectively mandate the implementation of E911 in two phases:
Phase 1 must be implemented by April 1, 1998, and requires wireless
carriers to provide a wireless caller's Automatic Number Identification ("ANI")
and Pseudo-ANI ("PANI") to a requesting E911 PSAP. The caller's ANI is the
call-back number for the phone, which is generally the Mobile Identification
Number ("MIN") of the mobile phone. The PANI is a unique number that represents
the cell-site and sector from which the wireless caller originated.
<PAGE>
Phase 2 must be implemented by October 1, 2001, and requires wireless
carriers to provide the location of the wireless E911 caller in two dimensions
(latitude and longitude, but not altitude) to a requesting PSAP in addition to
the Phase 1 requirements. The location must be accurate to within 125 meters
(410 feet) Root Mean Square ("RMS"). RMS is a standard scientific and
statistical measurement in which any error in the location estimates are first
squared, then an average of the squared numbers is calculated, and the square
root of the average is then determined. Typically, the RMS accuracy measurement
of a Phase 2 location system will mean that between 63% and 75% of the locations
will be within 125 meters radial error of the caller's actual location.
The FCC rules are applicable to wireless carriers upon two conditions:
(i) a carrier must receive a request for E911 from a PSAP capable of receiving
and utilizing the relevant data, and (ii) a state or local cost recovery
mechanism must be in place to compensate the wireless carrier for the cost of
implementing the Phase 1 and 2 requirements. The Company believes that there is
significant momentum within the E911 community to request full compliance with
the provisions of the Order by the wireless carriers. Cost recovery mechanisms
are generally regulated by state and local governments.
Recently, the FCC received two petitions for reconsideration and/or
clarification of the rules adopted in the MO&O. Specifically, CTIA requested
that, among other things, the FCC clarify the Phase 2 implementation schedule
for handset-based mobile phone location technologies such as GPS. In addition,
CTIA and a cellular carrier urged the FCC to condition the provision of E911
services on a state-by-state basis upon each state's adoption of wireless
carrier liability protections. The outcome of these proceedings cannot be
determined at this time, however, such outcome may affect TruePosition's ability
to market its E911 services.
State Regulation. E911 services are regulated to varying degrees on a
state-by-state basis. In general, guidelines for implementation and funding
mechanisms are issued at a state level, but then implemented at a local level.
The local level may be a region, single or multiple counties, or a city or
community. The guidelines at the state level generally govern items such as (i)
service levels to be provided to the public, (ii) deadlines by which systems
must be implemented, (iii) responsibility and liability of the parties providing
911 service, (iv) treatment of privacy issues in the creation and provision of
information, (v) funding mechanisms, and (vi) monitoring mechanisms.
The majority of states with funding mechanisms raise revenue to pay for
E911 systems through a charge to wireline telephone bills. The Company believes
that current legislative trends indicate that states will permit wireless
carriers to charge a fee for E911 location services on its bill, just as
wireline carriers charge an E911 access charge to their subscribers. The Company
believes that over half of all states have enacted or introduced such
legislation. Across the country charges or proposed charges for wireless E911
range from approximately $.20 per month per telephone line to almost $2.50
per month per telephone line. The most common range for charges is $.75 to
$1.25 per month per telephone line.
TruePosition also owns a 12.7% equity interest in Teletrac, Inc.
("Teletrac"), consisting of a combination of common stock and preferred stock,
for which TruePosition paid in the aggregate $6 million. Teletrac is in the
business of providing location and messaging services primarily for vehicle and
fleet management. Its technology differs from that of TruePosition in that it
requires the installation of dedicated equipment in the vehicle to be located,
and operates in a band which requires Teletrac to have a specific license for
location services from the FCC. TruePosition, on the other hand, is designed to
operate on mobile telephone systems already licensed by the FCC.
Mexican Cellular Telephone System
As of December 31, 1997, the Company, through a wholly owned
subsidiary, Associated Communications of Mexico, Inc. ("ACM"), owned 23.6% of
the capital stock of Grupo Portatel, S.A. de C.V. ("Grupo"), a Mexican
corporation of which Portatel del Sureste, S.A. de C.V. ("Portatel") is a wholly
owned subsidiary. Portatel is licensed to provide cellular telephone services
covering Region 8 of Mexico. In June 1994, the Company entered into an
Association in Participation ("AP Agreement") and a related Joint Venture
Agreement (together, the "Grupo Documents") with a United States corporation
(the "Grupo Shareholder") and a Mexican national with, at December 31, 1997,
14.8% and 1.3% equity interests in Grupo, respectively. Through the AP
Agreement, the Mexican national, acting as the Active Partner (as defined in the
AP Agreement), held a 31.9% equity interest in Grupo as of December 31, 1997.
ACM and the Grupo Shareholder are Silent Partners as defined in the AP
Agreement. The Grupo Documents provide for the allocation to the parties to the
Grupo
<PAGE>
Documents, at a given ratio, of proceeds received from distributions made
by Grupo to its stockholders 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 ACM and the Grupo Shareholder and related
investment fees thereon (the "Distribution of Proceeds Provision"). In the event
that the Active Partner, after consultation with the Silent Partners, votes
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 after
the execution of the AP and Joint Venture Agreements, the Silent Partners have
the 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.
ACM and the Grupo Shareholder have contributed their respective voting
interests in Grupo and the AP Agreement to a joint venture limited liability
company, known as Grupo Holdings, L.L.C. ("Grupo Holdings"). ACM and the Grupo
Shareholder are the only members of Grupo Holdings, in which ACM has a 61.6%
controlling equity interest.
Grupo, Portatel, and certain shareholders of Grupo (including ACM),
are parties to a Contribution Agreement, dated as of January 31, 1996 (the
"Contribution Agreement"), with a vendor of Portatel which had guaranteed
certain debt payments of Portatel under various credit facilities (the
"Guarantor"). Pursuant to the Contribution Agreement, on October 21, 1997,
approximately $14.7 million of Portatel's debt, which was paid by the Guarantor
on Portatel's behalf to Portatel's lenders, was converted into an approximate
21.7% equity interest in Grupo, thereby diluting ACM's direct ownership of Grupo
from 30.2% to 23.6%. The Guarantor continues to guarantee the remaining debt of
Portatel of approximately $8.3 million, secured by an approximate 31% equity
interest in Portatel.
After the closing under the Contribution Agreement, excluding the
effect of the AP Agreement, Grupo Holdings has a direct 38.4% voting equity
interest in Grupo. Through the AP Agreement and control of Grupo
Holdings, ACM has sufficient control over the assets of Grupo such that the
Company consolidated the financial statements of Grupo effective January 1,
1996. See Note 2 to the Company's financial statements included in Item 14 of
this Annual Report on Form 10-K.
A subsidiary of Telefonos de Mexico, S.A. de C.V. ("RadioMovil") holds
the "B" band license to provide nationwide cellular service in Mexico. The
Company believes that Portatel competes effectively with RadioMovil, however,
competition has been intense and there can be no assurance that Portatel will
continue to be able to compete effectively. The Mexican governmental regulatory
authority ("SCT") regulates the tariffs of cellular service providers in Mexico
and service rate increases may be implemented with SCT approval.
Portatel has been significantly affected by the decline in the state of
the Mexican economy, which began in late 1994 as a result of the devaluation of
the Mexican new peso. Resulting high inflation rates have continued into 1997
and have impacted Portatel's revenues, financing and procurement. The Company's
operating results with respect to its investment in Grupo will continue to be
subject to fluctuations in the peso's exchange rate and inflation in the Mexican
economy. One potential impact on the Company is the possibility of an increase
in cash outlays to Grupo, the extent of which is not readily determinable.
Marketable Equity Securities
<PAGE>
As of March 25, 1998, the Company's portfolio of marketable equity
securities (the "Portfolio Securities"), with a market value of approximately $1
Billion, includes 9,111,202 shares of Tele-Communications, Inc. ("TCI") Series
A TCI Group common stock, 7,123,167 shares of Tele-Communications, Inc. Series B
TCI Group common stock, 8,180,955 shares of Tele-Communications, Inc. Series A
Liberty Media ("Liberty") Group common stock, 2,651,944 shares of
Tele-Communications, Inc. Series B Liberty Media Group common stock, 6,737,548
shares of Tele-Communications, Inc. Series A TCI Ventures ("Ventures") Group
common stock, 1,247,997 shares of TCI Satellite Entertainment, Inc. ("TCI
Satellite") Class A Common Stock and 707,185 shares of TCI Satellite
Entertainment, Inc. Class B common Stock, as well as other securities.
Tele-Communications, Inc. is a reporting person under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and files periodic reports under
the Exchange Act.
Holdings in TCI, Liberty and Ventures account for over 98% of the
value of the Company's portfolio of marketable equity securities at March 25,
1998. TCI is principally engaged in the development and operation of cable
television systems and is one of the nation's largest cable television companies
in terms of subscribers. Liberty is the cable television programming "tracking"
stock of TCI. Ventures consists of TCI's principal international assets and
substantially all of its non-cable and non-programming domestic assets,
including its telephony businesses and its 39% equity interest in a high-speed
multimedia Internet service provider, At Home Corporation, and also including
its interest in Teleport Communications Group, Inc., which has recently
announced its proposed merger with AT&T. Upon conclusion of the AT&T - Teleport
merger, which is subject to regulatory approval, Ventures would hold
approximately 49.95 million shares of AT&T common stock.
On September 10, 1997, TCI concluded an exchange offering (the
"Exchange Offering") whereby it offered to exchange shares of Series A TCI
Ventures Group common stock and Series B TCI Ventures Group common stock for
shares of Series A TCI Group common stock and Series B TCI Group common stock,
respectively, on a one-to-one ratio. Pursuant to the terms of the Exchange
Offering, the Company tendered 3,368,774 shares of Series A TCI Group common
stock for a like number of shares of Series A TCI Ventures Group common stock.
On January 8, 1998, the TCI Board of Directors declared a two-for-one stock
split, effected in the form of a stock dividend, of the Series A TCI Ventures
Group common stock with the result that the Company now owns 6,737,548 shares of
Series A TCI Ventures Group common stock. Based on the number of outstanding TCI
and Liberty shares as of January 30, 1998 reported in TCI's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, the Company's TCI,
Liberty and Ventures holdings represent approximately 9.24%, 5.41% and .95% of
the outstanding voting power of TCI, Liberty and Ventures, respectively.
The Company utilizes the Portfolio Securities as a source of funds for
operations and development of its various businesses. In this regard, in order
to provide TruePosition and MSI with an assured source of capital for their
respective development programs, in 1996 the Company and its wholly-owned
subsidiary which holds the Portfolio Securities ("Portfolio Sub") entered into
an agreement with TruePosition and MSI whereby the Company committed to
contribute to them as working capital during 1996 and 1997 specified minimum
annual amounts. In turn, Portfolio Sub agreed to obtain through borrowings or
other sources of funds and to distribute to the Company the cash amounts
necessary for the Company to meet such capital contribution commitments to
TruePosition and MSI, as well as certain additional specified minimum quarterly
cash amounts during 1996 and 1997 to fund the Company's operating cash
requirements during those years. In addition, the Company adopted a policy of
disposing of a portion of the Portfolio Securities from time to time, to the
extent net operating loss carryforwards are available to offset tax liabilities
resulting from such dispositions and otherwise as deemed appropriate by the
Company, to fund the development and commercialization of its wireless
communications technologies and to make acquisitions of operating companies.
Consistent with this policy, in 1996 the Company sold certain of its marketable
securities for pretax proceeds of approximately $3,414,000 at a gain of
$3,398,000, and in 1997 for pretax proceeds of approximately $2,512,000 at a
gain of $2,485,000. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations, Liquidity and Capital Resources."
<PAGE>
Radio Broadcasting
The Company owns and operates WSTV-AM and WRKY-FM in Steubenville, Ohio
and WOMP-AM/FM located in Bellaire, Ohio, which serves Bellaire and the adjacent
Wheeling, West Virginia markets. Since the Bellaire and Wheeling markets are
adjacent to the Steubenville market, the radio operations share certain
services. Additionally, the Company owns and operates WLYR-FM located in
Delaware, Ohio, serving the Delaware/Columbus markets. The Company's radio
stations are authorized to operate 24 hours a day.
The following table sets forth certain information concerning the
broadcasting stations:
Stations in
Market Station License Format Market (AM &
Expires FM Combined)
Steubenville, OH WSTV-AM 10/1/04 News-Talk-Sports 5
WRKY-FM 10/1/04 Country
Bellaire, OH and WOMP-AM 10/1/04 News-Talk-Sports 12
Wheeling, WV WOMP-FM 10/1/04 Bright Adult Contemporary
Soft Adult Contemporary
Delaware and
Columbus, OH WLYR-FM 10/1/04 30
The Company's radio broadcasting stations are subject to the
regulations and licensing requirements of the FCC. The FCC is authorized to
issue, revoke and modify broadcasting licenses, determine station frequencies,
areas to be served and power to be used, and to impose penalties for
noncompliance with its regulations. Pursuant to the Telecommunications Act,
radio broadcast licenses may be granted by the FCC for a maximum period of eight
years, and, upon application, may be renewed for successive eight year periods.
Each of the radio broadcast licenses listed above have been renewed under the
Telecommunications Act for such eight year periods.
Personal Communications Services
The Company has a 75% interest in a general partnership which holds a
4.42% interest in Omnipoint Communications, Inc. ("OCI"), a subsidiary of
Omnipoint Corporation ("Omnipoint Parent"). OCI was awarded one of three
pioneer's preferences by the FCC to receive a license to construct and operate a
broadband PCS system. The license received by OCI covers the New York Major
Trading Area ("MTA"), a region with a population of approximately 27 million,
including New York City. Omnipoint Parent is traded on The Nasdaq Stock Market
under the symbol "OMPT." As of March 25, 1998, Omnipoint Parent had an aggregate
market capitalization of approximately $1.4 billion.
Other Wireless Communications Businesses
The Company owns a digital wireless communications network in the Los
Angeles, California market. The microwave network operates as a Competitive
Access Provider ("CAP") of local exchange service to interexchange carriers and
private users, who transmit voice and data through the network. The Company
maintains two international teleport earth stations in Los Angeles to market
satellite-based voice, data and video
<PAGE>
traffic between the western United States and Mexico and the Pacific Rim. On
November 6, 1997, the Company entered into an agreement with Teligent, pursuant
to which the Company agreed to transfer all the assets and liabilities of the
CAP, including the earth stations, to Teligent (the "CAP Contribution") and, in
consideration of such agreement, MSI received on the date of the execution of
the agreement an additional equity interest in Teligent. Completion of the CAP
Contribution is subject only to certain routine regulatory approvals. Pending
completion of the CAP Contribution, Teligent has leased the CAP assets from the
Company in order to provide services to its customers in the Los Angeles,
California market.
Retail Art Gallery
Associated American Artists ("AAA") is an art gallery owned by the
Company which sells original prints, drawings, oil paintings, sculptures and
related works of art, located at Twenty West 57th Street in New York City. The
gallery's extensive inventory has been acquired directly from artists, as well
as from dealers, collectors and estates of artists. The gallery also holds
inventory for sale on consignment. The need to maintain a broad selection of
works requires a large inventory investment in relation to sales volume. AAA
competes with other galleries in the United States and recently introduced a
website on the Internet to market its monthly exhibitions and other works as a
"virtual gallery" (www.aaartists.com). AAA presents, almost monthly, exhibitions
of outstanding artists from Old Masters to Contemporary Masters, and loans works
for exhibitions to major museums, universities, libraries and other institutions
around the country.
Industry Segments
Financial information by industry segment is included in Note 17 to the
Company's financial statements included in Item 14 elsewhere in this Annual
Report on Form 10-K.
Regulatory Environment
The Company's indirect interest in the Portfolio Securities has
historically constituted, and currently constitutes, a significant portion of
the total value of its assets, and accordingly, depending on the value and
nature of the Company's other assets and businesses, and on other factors, the
Company could in certain circumstances be considered to be engaged in the
business of holding or owning investment securities within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act"), potentially
subjecting the Company to regulation as an investment company by the Securities
and Exchange Commission (the "SEC") and potentially significantly and adversely
affecting its activities. Based upon the value of such other assets and
businesses and the nature of the Company's activities, the Company believes that
it is not required to register as an investment company. However, the Company's
ability to continue not being subject to such regulation is subject to various
factors, some of which may be outside the Company's control. These factors
include, among others, whether the Company's businesses continue to develop
favorably, the terms and extent of the Company's ownership interest in Teligent,
whether the Company makes additional acquisitions, whether the Portfolio
Securities increase or decrease in value and the rate at which the Company
borrows against or disposes of Portfolio Securities in order to finance its
developing businesses and acquisitions. No assurance can be given that the
Company will not at some point in the future be required to register as an
investment company or business development company under the 1940 Act.
Employees
As of March 25, 1998, the Company had a total of 761 employees, 43 of
which are employed by TruePosition, 474 of which are employed by Teligent, and
153 of which are employed by Grupo.
<PAGE>
ITEM 2. PROPERTIES
The Company owns its principal executive office in Pittsburgh,
Pennsylvania. Additional executive offices are leased in New York, New York,
Bala Cynwyd, Pennsylvania, Tampa, Florida and Wilmington, Delaware. In addition,
TruePosition leases office space in Wayne, Pennsylvania and Vienna, Virginia.
Teligent leases office space primarily in Vienna, Virginia and leases
transmitter and antenna sites and office space in certain of its licensed areas.
Grupo leases sales and administrative offices as well as certain transmitter and
antenna sites throughout its cellular service area in Mexico. The Company's
radio broadcast operations maintain administrative offices, studios, transmitter
and antenna sites, located in Bellaire, Columbus and Steubenville, Ohio, which
are either owned or leased. The Company's wireless communications business
leases administrative offices, transmitter and antenna sites in and around Los
Angeles, California. The Company's New York City art gallery leases sales and
administrative offices.
See Note 12 to the Company's financial statements included in Item 14
elsewhere in this Annual Report on Form 10-K for additional information
regarding future minimum lease commitments.
The Company's management believes that its properties are adequate for
the existing business conditions and are in adequate operating condition.
ITEM 3. LEGAL PROCEEDINGS
For a description of certain license and regulatory proceedings
relating to Teligent, see "Business -- Teligent Government Regulation." The
Company is not currently a party to any legal proceedings, which, individually
or in the aggregate, the Company believes will have a material adverse effect on
the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Annual
Report on Form 10-K, there were no matters submitted to a vote of public
security holders through the solicitation of proxies or otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock (symbol: AGRPA) and Class B Common
Stock (symbol: AGRPB) are traded on The Nasdaq Stock MarketSM. The table below
sets forth the quarterly high and low sales quotations for the Class A Common
Stock and the Class B Common Stock for each quarter since January 1, 1996,
compiled from information supplied by Nasdaq(R). Historical prices have been
restated to reflect the Company's two-for-one stock split declared in October
1997. All prices represent inter-dealer quotations without retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions.
Class A Class B
High Low High Low
---- --- ---- ---
1996:
First Quarter......... $10.50 $ 8.88 $10.38 $ 9.00
Second Quarter........ 17.38 9.50 17.13 9.38
Third Quarter......... 17.00 11.13 16.50 11.13
Fourth Quarter........ 16.75 13.75 16.75 13.63
1997:
First Quarter......... $23.75 $14.50 $23.25 $14.13
Second Quarter........ 21.88 16.38 21.00 15.63
Third Quarter......... 40.75 19.13 39.50 18.63
Fourth Quarter........ 42.63 27.00 40.12 26.50
On March 25, 1998, the Company's Class A Common Stock and Class B
Common Stock were held by approximately 454 and 429 stockholders of record,
respectively, which numbers do not include stockholders who beneficially own
shares held in street name by brokers.
The Company does not anticipate the payment of cash dividends in the
foreseeable future.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of
the Company for each of the past five years. The financial data is on a
consolidated basis for the periods subsequent to the Spin-Off in December 1994
and on a combined basis for the periods prior to the Spin-Off. Combined
financial data for 1994 and 1993 includes the accounts of the Company, certain
of its subsidiaries, and certain other assets and liabilities of ACC, all
transferred to the Company prior to the Spin-Off. The table should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements of the Company
and notes thereto, referred to in Item 8. All historical per share data and
average shares outstanding have been restated to reflect the Company's
two-for-one stock split declared in October 1997.
<TABLE>
<CAPTION>
Year ended December 31
1997 (A) 1996 (A) 1995 1994 1993
------------ --- ------------- --- ------------ --- ----------- ---- ----------- ----
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues $ 25,835 $ 20,864 $ 4,272 $ 4,664 $ 6,075
Cost and expenses 179,797 (B) 53,533 (B) 20,938 17,555 (C) 10,360
Operating loss (153,902) (32,669) (16,666) (12,891) (4,285)
Equity in loss of affiliates -- (2,119) (2,912) (2,957) (1,239)
Other income (expense) 88,407 (D)(E) 9,256 (D)(E) (458) 3,599 (D) 3,215
Loss before cumulative effect of
accounting change for income taxes (65,495) (17,196) (13,213) (9,436) (1,971)
Cumulative effect of accounting
change for income taxes -- -- -- -- 883 (F)
Net loss $ (51,665) $(17,196) $(13,213) $ (9,436) $ (1,088)
Loss per share before cumulative
effect of
accounting change for income taxes $(1.38) $(.46) $(.35) $(.25) $(.05)
Loss per share $(1.38) $(.46) $(.35) $(.25) $(.03)
Average shares outstanding 35,573 37,548 37,532 37,532 37,532
Balance Sheet Data
Total assets $1,503,122 $ 518,934 $574,471 $478,555 $653,282
Working capital (deficit) 326,653 (96,274) (34,385) (15,986) 3,899
Long-term debt 306,244 8,326 -- -- --
</TABLE>
(A)--Reflects consolidation of Grupo Portatel, S.A. de C.V. and subsidiaries as
of January 1, 1996.
(B)--Includes $84,042,000 and $2,778,000 of non-cash expense for stock-based
compensation in 1997 and 1996, respectively.
(C)--Includes $4,026,000 in net transaction expenses relating to the Spin-Off.
(D)--Includes $2,485,000, $3,398,000 and $2,831,000 gain on sale of marketable
equity securities in 1997, 1996 and 1994, respectively.
(E)--Includes $80,621,000 and $7,893,000 for minority interests in the net loss
of consolidated subsidiaries in 1997 and 1996, respectively. 1997 also
includes $12,177,000 gain on the sale of a wireless communications
investment.
(F)--Reflects the adoption as of January 1, 1993 of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for any historical information contained herein, the matters
discussed in this Annual Report on Form 10-K contain certain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors including, but not limited to economic,
key employee, competitive, governmental and technological factors affecting the
Company's growth, operations, markets, products, services, licenses and other
factors discussed in the Company's other filings with the Securities and
Exchange Commission. These factors may cause the actual results, performance or
achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements.
As discussed in Notes 1 and 2 to the financial statements of the
Company, included elsewhere in this Annual Report, as of January 1, 1996 the
Company began consolidating the financial statements of Grupo, an investment
which was previously accounted for under the equity method. As a result of the
consolidation of Grupo, and the formation of Grupo Holdings, equity in loss of
affiliates in the 1997 and 1996 periods no longer reflect Grupo, and the
Company's minority interests at December 31, 1997 and 1996 include third-party
ownership interests for Grupo and Grupo Holdings.
Liquidity and Capital Resources
Corporate
The Company has funded significant start-up operating and capital costs
for its wireless communications related businesses and interests, primarily
Teligent and TruePosition, during 1997 and 1996. Except with regard to Teligent,
the Company expects to continue to incur substantial costs developing these
businesses and technologies. Currently, the Company's cash requirements (other
than those of Teligent) are being met by margin loan facilities with three
brokerage firms and a $19 million bank demand loan. The Company's margin loan
facilities are secured by shares of Series A TCI Group common stock and Series A
TCI Ventures Group common stock. Borrowings under one of the margin loan
facilities are limited to 65% of the market value of the pledged stock, 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. As of
December 31, 1997, the weighted average interest rate under the margin loan
facilities and the $19 million bank demand loan was approximately 6.4%.
As of March 25, 1998, based on (a) the market value of the 9,511,202
and 6,737,548 shares of Series A TCI Group common stock and Series A TCI
Ventures Group common stock, respectively, pledged in the aggregate and (b)
aggregate outstanding short-term obligations under these credit facilities of
approximately $118,460,000, the Company's unused borrowing capacity is
approximately $131,380,000. 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 the Portfolio Securities that can be
pledged as additional security, the Company's borrowing facilities may provide
for maximum aggregate unused borrowings of approximately $446,559,000 as of
March 25, 1998. 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 August 1997, the Company sold its ownership interest in Corporacion
Mobilcom, S.A. de C.V. ("Mobilcom") to Nextel Communications, Inc. ("Nextel")
for proceeds of approximately $21,371,000, and has recognized a pretax gain on
the sale of approximately $12,177,000. Also in 1997, the Company sold certain
marketable equity securities for $2,512,000, and has recognized a pretax gain on
the sale of approximately $2,485,000. The Company used the proceeds from these
investment sales for working capital and to fund the development of its wireless
communications businesses.
Teligent
<PAGE>
On November 7, 1997, using the proceeds from contributions from its
members, Teligent L.L.C., the predecessor to Teligent, paid off and terminated
its $50,000,000 secured bank revolving credit facility which was previously used
to meet the cash needs of Teligent L.L.C. Borrowings under this credit facility
bore 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.
In November 1997, Teligent received net proceeds of cash contributions
totaling $99.0 million from NTT pursuant to a Securities Purchase Agreement, and
Teligent received an additional $414.3 million of net proceeds from the
issuance of $300 million 11 1/2 % Senior Notes due 2007 (the "Notes"), and an
initial public offering of 6,325,000 of Class A Common Stock offered at $21.50
per share. Teligent used $93.9 million of the net proceeds from the Notes to
purchase a portfolio of U.S. Treasury Securities, pledged as collateral for the
payment of interest on the Notes through December 1, 2000.
Teligent has entered into a Network Products Purchase Agreement with
Nortel for the purchase of certain telecommunications system equipment, software
and services (collectively, the "Deliverables"). Teligent has also entered into
a commitment letter with Nortel that expires on May 31, 1998, setting forth
the anticipated terms and conditions under which Nortel will provide loans in an
aggregate amount of up to $780 million which will be used to finance the
purchase of the Deliverables and provide working capital. Teligent is currently
negotiating a new credit facility (the "Credit Facility") with which it will
finance all purchases made under the Network Products Purchase Agreement. The
purchase and sale of certain Deliverables from Nortel has commenced in advance
of the signing of this agreement, however, Teligent's obligations under the
Network Products Purchase Agreement are conditioned upon securing financing.
In October 1997, Teligent consummated its acquisition of FirstMark,
whereby it acquired all of the capital stock of FirstMark, which holds
additional FCC authorizations and licenses, for an aggregate purchase price
(before related expenses) of approximately $42 million, which consisted of $10.5
million and a 5% member interest in Teligent, L.L.C (which such member interest
was subsequently converted to 1,831,410 shares of Teligent Class A Common
Stock). Teligent may, when and if the opportunity arises, acquire other spectrum
rights or related businesses, incur expenses in the development of new
technologies and expand its fixed wireless broadband services into new market
areas.
On February 20, 1998, Teligent completed an offering (the "Discount
Notes Offering") of $440 million in principal amount of its 11 1/2% Senior
Discount Notes due 2008 (the "Discount Notes"). The Discount Notes carry
zero-coupon interest until March 1, 2003, after which the Discount Notes pay
interest at 11 1/2% per annum payable March 1 and September 1, through March 1,
2008. Teligent received approximately $243.1 million net proceeds from the
Discount Notes Offering, after deductions for offering expenses of approximately
$7.6 million.
The development of Teligent's business and deployment of its services
and systems will require significant capital to fund capital expenditures,
working capital, debt service and operating losses. Teligent currently forecasts
that its capital requirements from March 5, 1996 (inception) through December
2000 will be approximately $1 billion. Based on Teligent's current business
plan, Teligent anticipates its existing cash balances and restricted funds,
together with the Credit Facility and proceeds from the Discount Notes Offering,
will be sufficient to fund Teligent's capital requirements through December
2000. Actual capital requirements may vary based upon the timing and success of
the Company's roll-out. If demand for Teligent's services is lower than
expected, it expects to be able to reduce demand-driven capital expenditures. If
Teligent accelerates implementation of its network roll-out, it may be required
to obtain additional financing earlier than anticipated.
Teligent expects that its capital requirements after December 2000 will
require it to obtain additional financing, which may include commercial bank
borrowings, additional vendor financing or the sale or issuance of equity and
debt securities either through one or more offerings or to one or more strategic
investors. There can be no assurance that Teligent will be successful in raising
sufficient additional capital at all or on terms acceptable to Teligent.
<PAGE>
Grupo Portatel
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 telephone
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 a portion of
its debt obligations under such credit facilities. Accordingly, payments were
made by the Guarantor to Portatel's lenders on Portatel's behalf. 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 by the Guarantor in 1995 and
January 1996 on behalf of Portatel into capital stock of Grupo. Closing under
the Contribution Agreement occurred in 1997, pursuant to which the $15,069,000
due to the Guarantor was converted into equity in Grupo. The Guarantor continues
to guarantee the remaining debt of Portatel of approximately $8.3 million at
December 31, 1997, secured by an approximate 30.7% equity interest in Portatel.
Grupo and Portatel have no external available lines of credit as of
December 31, 1997. The Company may be required to meet additional capital
requirements 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 requirements
with respect to his ownership interest.
Historical Cash Flows
In 1997, 1996 and 1995, the Company's operations used cash of
$46,005,000, $25,803,000, and $16,319,000, respectively. The increase in cash
used in operations of $9,484,000 from 1995 to 1996, and $20,202,000 from 1996 to
1997 was due primarily to Teligent and TruePosition start-up expenses.
In 1997, 1996 and 1995, the Company used cash of $103,847,000,
$20,552,000, and $3,052,000, respectively, in investing activities. The increase
from 1996 to 1997 in cash used in investing activities of $83,295,000 is
primarily the result of the funding of $93,907,000 to a restricted account of
Teligent in order to provide for the payment of interest on its outstanding
long-term obligations, $16,043,000 for capital expenditures, and $11,116,000 of
cash used for the acquisition of and investment in wireless communications
businesses (principally the FirstMark acquisition). These cash outlays were
offset in part by $23,883,000 of proceeds received in 1997 from the sale of
Mobilcom and marketable equity securities. The increase in cash used in
investing activities from 1995 to 1996 of $17,500,000 was primarily due to 1996
cash outlays of $2,639,000 for the acquisition of a radio broadcasting station,
$5,533,000 invested in Teletrac, an $11,117,000 increase in notes receivable
from related parties (including the $8,250,000 advance made to the Teligent
Executive described in Note 6 to the financial statements included elsewhere in
this Annual Report), and $4,435,000 in capital expenditures. These cash outlays
were partially offset by proceeds of $3,414,000 from the sale of marketable
equity securities in the 1996 period.
In 1997, 1996 and 1995, the Company's financing activities provided net
cash of $573,107,000, $48,678,000 and $18,470,000, respectively. The increase
from 1996 to 1997 is primarily due to proceeds from Teligent's $300 million debt
offering, the Teligent equity offering, and other shareholder investments in
Teligent.
<PAGE>
Increases in net cash from financing activities from 1995 to 1996 related
primarily to higher short-term borrowings to finance the investing and operating
activities described above.
Operating Results
Wireless Communications
Revenues from wireless communication services were $21,985,000,
$17,435,000, and $1,884,000 in 1997, 1996, and 1995, respectively. Cost of
wireless communications services were $13,672,000, $10,137,000 and $778,000 in
1997, 1996, and 1995, respectively. In 1997, increases in wireless
communications revenues and costs are primarily attributable to results of
Grupo, whose revenue increased primarily as a result of an increase in cellular
subscribers. Teligent, which is currently in the development stage, provided
only a limited amount of revenue and cost of services in 1997 and 1996. The
majority of the increases in both revenues and costs from 1995 to 1996 was
attributable to the consolidation of Grupo. Direct research and development
expenses were $7,401,000, $7,562,000, and $7,361,000 in 1997, 1996, and 1995,
primarily for expenditures for TruePosition.
Radio Broadcasting
Revenues from radio broadcasting were $3,087,000, $2,688,000, and
$1,854,000 in 1997, 1996, and 1995, respectively. Cost of radio broadcasting was
$843,000, $698,000, and $599,000, and gross margins were 73%, 74%, and 68% in
1997, 1996, and 1995, respectively. The increases in revenues and costs in each
of the past two years are principally the result of the acquisition of WLYR-FM
in the second quarter of 1996. The lower margin in 1995 was the result of
expenses related to programming changes at the Company's radio stations in that
year.
General
Sales, general and administrative expenses were $61,446,000,
$26,714,000, and $10,466,000 in 1997, 1996, and 1995, respectively. The increase
in 1997 of $34,732,000 over 1996 is primarily for expenses of Teligent,
including payroll and consulting costs incurred for the development of its
business. The increase from 1995 to 1996 of $16,248,000 was the result of the
consolidation of Grupo, as well as expenditures for Teligent.
Non-cash stock-based compensation expense of $84,042,000 and $2,778,000
has been recognized in 1997 and 1996, respectively, in connection with Teligent
equity awards issued to its employees and directors. The increase in 1997 is
primarily the result of the increase in the fair value of Teligent, granting of
additional awards, and additional vesting of the awards. These awards were
considered to be variable awards due to certain provisions thereof, and
therefore gave rise to compensation expense. At the time of the Teligent IPO,
the awards were converted into stock options of Teligent having the same vesting
schedule, vesting rights and term as the original awards. This conversion
created a measurement date whereby the variable awards were converted to
non-variable stock options. The intrinsic value of unvested awards at the time
of conversion to stock options was $186.3 million, of which $86.8 million was
expensed in the aggregate in 1997 and 1996 and therefore up to $99.5 million
(subject to forfeitures) will be expensed ratably through 2002.
Depreciation and amortization expense in 1997, 1996, and 1995 was
$11,726,000, $5,056,000, and $1,302,000, respectively. Expense in the 1997
period includes a $5 million impairment loss for certain operating equipment of
Teligent. The increase from 1995 to 1996 is principally due to the consolidation
of Grupo.
The Company's equity in loss of affiliates was $2,119,000 and
$2,912,000 in 1996 and 1995, respectively. Due to the consolidation of Grupo,
the Company's equity in loss of affiliates in 1996 reflects only the Company's
share of the results of Teletrac for 1996. Due to a decrease in its equity
interest in Teletrac, Inc. in late 1996, the Company ceased recording its
investment Teletrac under the equity method. The Company's equity in loss of
affiliates in the 1995 period reflects principally the Company's share of the
results of Grupo.
<PAGE>
Foreign currency translation losses of Grupo are included in the
statement of operations and are immaterial in 1997 and 1996. On an equity basis,
translation losses included in the equity in loss of affiliates in 1995 were
$473,000. Grupo's operating results will continue to be subject to fluctuations
in the Mexican peso's exchange rate based upon changes in the Mexican economy,
the extent of which is unknown.
The Company recognized $2,485,000 and $3,398,000 gains from sales of
marketable equity securities in 1997 and 1996, respectively. A pretax gain of
$12,177,000 was realized in the third quarter of 1997 on the sale of the
Company's ownership interest in Mobilcom to Nextel for proceeds of approximately
$21,371,000. Interest and dividend income was $5,142,000, $2,296,000 and
$1,223,000 in 1997, 1996 and 1995, respectively. The increase in 1997 is
primarily the result of earnings realized by Teligent from the investment of
proceeds received from its debt and equity offerings and other capital provided
by stockholders. The increase from 1995 to 1996 was the result of additional
interest income on notes receivable from related parties included as a result of
the formation and consolidation of Grupo Holdings. Interest expense was
$12,018,000, $4,328,000, and $1,689,000 in 1997, 1996 and 1995, respectively.
The $7,690,000 increase from 1996 to 1997 is primarily due to an increase in
outstanding borrowings, including the $300 million Senior Notes issued by
Teligent in November 1997. The increase from 1995 to 1996 of $2,639,000 was the
result of an increase in the level of outstanding short-term obligations and
interest on the borrowings of Grupo. Minority interests were $80,621,000,
$7,893,000, and $1,000 in 1997, 1996, and 1995, respectively. The 1997 increase
of $72,728,000 is primarily due to the increase in Teligent's net loss as well
as a decrease in the Company's ownership percentage of Teligent. The increase of
$7,892,000 from 1995 to 1996 was a result of the start-up expenditures of
Teligent and the consolidation of Grupo.
The Company recognized an income tax benefit (net of foreign tax
expense of Grupo in 1997 and 1996) at an effective rate of approximately 21%,
33%, and 34% in 1997, 1996, and 1995, respectively. The 1997 effective rate is
less than the statutory rate primarily as a result of the merger of Teligent,
L.L.C. (which was treated as a partnership for federal income taxes) into
Teligent, Inc. in November 1997. See Note 13 to the financial statements
included elsewhere in this Annual Report. As of December 31, 1997, the Company
has recorded net deferred tax assets of $48,695,000, including net operating
loss carryforwards. Management believes that it is more likely than not that
such assets, net of the valuation allowance provided, will be realized based on
the Company policy referred to above of disposing of a portion of the Portfolio
Securities from time to time to the extent net operating loss carryforwards are
available to offset tax liabilities resulting from such dispositions and
otherwise as deemed appropriate by the Company. See "Business -- Marketable
Equity Securities."
The Company's net loss was $51,665,000 for the year ended December 31,
1997 compared to a net loss of $17,196,000 for the year ended December 31, 1996.
The higher loss in 1997 of $34,469,000 resulted primarily from start-up
expenditures of Teligent and Teligent's non-cash expense for stock-based
compensation. Such expenses were offset in part by gains on the sale of
marketable equity securities and investments of $14,662,000. The Company's net
loss was $17,196,000 for the year ended December 31, 1996 compared to a net loss
of $13,213,000 for the year ended December 31, 1995. The higher loss in 1996
resulted primarily from start-up costs of Teligent.
Year 2000 Costs
The Company is aware of the issues associated with the Year 2000 as it
relates to computer software systems, including its information systems and its
wireless network infrastructure. Management has initiated discussions with its
suppliers, software providers, and other parties whose computer systems impact
the Company's operations, to ensure that those parties are Year 2000 compliant,
or have appropriate plans to remediate any Year 2000 issues. Currently, the
Company does not anticipate that incremental expenditures to ensure that its
systems, and those of others which may impact the Company, are Year 2000
compliant will be
<PAGE>
material to the Company's liquidity, financial position or results of operations
over the next few years. Such costs will be expensed as they are incurred.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and supplementary data, together
with the reports of independent auditors, are included or incorporated by
reference elsewhere herein. Reference is made to the "Index of Financial
Statements and Financial Statement Schedule" following the signature page
hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by
reference to the Company's definitive proxy statement for the 1998 annual
meeting of stockholders scheduled to be held on June 4, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the Company's definitive proxy statement for the 1998 annual
meeting of stockholders scheduled to be held on June 4, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the Company's definitive proxy statement for the 1998 annual
meeting of stockholders scheduled to be held on June 4, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the Company's definitive proxy statement for the 1998 annual
meeting of stockholders scheduled to be held on June 4, 1998.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedules. The list of
financial statements and financial statement schedule following the Exhibit
Index is incorporated herein by reference.
Exhibits. The following exhibits are filed as a part of this Annual
Report on Form 10-K:
Exhibit No.
-----------
2.1 Agreement and Plan of Distribution, dated as of December 14, 1994,
among Associated Communications Corporation, Associated
Communications of Delaware, Inc. and Associated Cellular Holdings,
Inc., filed as Exhibit 2.1 to Registration Statement on Form 10/A
dated November 15, 1994 and incorporated herein 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.
10.1 Tax Disaffiliation Agreement, dated as of December 14, 1994, by
and among Associated Communications Corporation, Associated
Communications of Delaware, Inc. and Associated Cellular Holdings,
Inc., filed as Exhibit 10.1 to Registration Statement on Form 10/A
dated November 15, 1994 and incorporated herein by reference.
10.2 The Associated Group, Inc. 1994 Amended and Restated Stock Option
and Incentive Award Plan.
10.3 Associated RT, Inc. (now known as TruePosition, Inc.) 1995 Stock
Incentive Plan, filed as Exhibit 10.3 to Annual Report on Form
10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference.
10.4 Microwave Services, Inc. 1996 Stock Incentive Plan, filed as
Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996 and incorporated herein by reference.
10.5 Form of Employment Agreement, dated December 15, 1994, between
Associated Communications of Delaware, Inc. and Myles P. Berkman,
filed as Exhibit 10.6 to Registration Statement on Form 10/A dated
November 15, 1994 and incorporated herein by reference.
<PAGE>
10.6 Form of Employment Agreement, dated December 15, 1994, between
Associated Communications of Delaware, Inc. and David J. Berkman,
filed as Exhibit 10.7 to Registration Statement on Form 10/A dated
November 15, 1994 and incorporated herein by reference.
10.7 Employment Agreement, dated as of August 19, 1996, between
Associated Communications, L.L.C. and Alex J. Mandl, filed as
Exhibit 99.2 to Form 8-K, dated September 6, 1996 and incorporated
herein by reference.
10.8 Margin Agreement, dated January 31, 1995, by and between
Associated Investments, Inc. and Pershing, a Division of
Donaldson, Lufkin & Jenrette Securities Corporation, filed as
Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference.
10.9 Corporate Margin Account Application and Agreement, dated February
15, 1995, by and between Associated Investments, Inc. and Goldman
Sachs & Co., filed as Exhibit 10.10 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 and incorporated
herein by reference.
10.10 Letter Agreement, dated as of March 6, 1998 by and between
Associated Investments, Inc. and Goldman Sachs & Co.
10.11 Letter Agreement dated as of December 12, 1997, by
and between Associated Investments, Inc. and PNC Bank, National
Association.
10.12 Form of Amended and Restated Discretionary Line of Credit Demand
Note, between Associated Investments, Inc. and PNC Bank,
National Association.
10.13 Form of Amended and Restated Pledge Agreement, by Associated
Investments, Inc. in favor of PNC Bank, National Association.
10.14 Client Agreement, dated January 28, 1997, by and between
Associated Investments, Inc. and Lehman Brothers, filed as Exhibit
10.13 to Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 and incorporated herein by reference.
10.15 Agreement, dated September 29, 1997, among Teligent, L.L.C.,
Digital Services Corporation, Telcom-DTS Investors, L.L.C.,
Microwave Services, Inc., The Associated Group, Inc. and certain
other parties, filed as Exhibit 1 to Schedule 13D of the Company
with regard to its holdings in Teligent, Inc. and dated as of
December 8, 1997 and incorporated herein by reference.
10.16 Stockholders Agreement, dated as of November 26, 1997, by and
among Teligent, Inc., Microwave Services, Inc., Telcom-DTS
Investors, L.L.C., and NTTA&T Investment Inc., filed as Exhibit 2
to Schedule 13D of the Company with regard to its holdings in
Teligent, Inc. and dated as of December 8, 1997 and incorporated
herein by reference.
10.17 Registration Rights Agreement, dated as of March 6, 1998, by and
between Teligent, Inc. and Microwave Services, Inc., filed as
Exhibit 6 to Sechedule 13D/A of the Company with regard to its
holdings in Teligent, Inc. and dated as of March 9, 1998 and
incorporated herein by reference.
<PAGE>
21 Subsidiaries of the Registrant.
23 Consents of Independent Accountants.
27 Article 5 Financial Data Schedule for Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (filed only
electronically with the Securities and Exchange Commission).
Reports on Form 8-K. No reports on Form 8-K were filed during the fourth
quarter of 1997.
<PAGE>
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c) and (d)
Financial Statements and Supplementary Data
Index of Financial Statements and Financial Statement Schedule
Certain Exhibits
Financial Statement Schedule
Year ended December 31, 1997
The Associated Group, Inc. and Subsidiaries
Pittsburgh, Pennsylvania
<PAGE>
The Associated Group, Inc. and Subsidiaries
Form 10-K--Item 14(a)(1) and (2)
Index of Financial Statements and Financial Statement Schedule
The following financial statements of The Associated Group, Inc. and
subsidiaries are included in Item 8:
Balance Sheets--December 31, 1997 and 1996
Statements of Operations--Years ended December 31, 1997, 1996, and 1995
Statements of Stockholders' Equity--Years ended December 31, 1997, 1996,
and 1995
Statements of Cash Flows--Years ended December 31, 1997, 1996, and 1995
Notes to Financial Statements--December 31, 1997
The following financial statement schedule of The Associated Group, Inc. is
included in Item 14(d):
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
<PAGE>
Report of Independent Auditors
To the Stockholders and Directors
The Associated Group, Inc.
We have audited the accompanying balance sheets of The Associated Group, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of Grupo
Portatel, S.A. de C.V. ("Grupo"), a consolidated subsidiary as of January 1,
1996, and an investment accounted for on the equity method for the year ended
December 31, 1995. Grupo's statements reflect total assets of $26,966,000 and
$30,000,000 at December 31, 1997 and 1996, and total revenues of $20,398,000 and
$15,175,000, respectively, for the years then ended. The Company's equity in
Grupo's net loss was $2,751,000 in 1995. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Grupo, is based solely upon the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of The Associated Group, Inc. and subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Pittsburgh, Pennsylvania
February 27, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Grupo Portatel, S.A. de C.V.:
We have audited the consolidated balance sheets of Grupo Portatel, S.A. de
C.V. and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997 (not
presented separately herein). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Mexico which are substantially the same as those followed in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Grupo
Portatel, S.A. de C.V. and Subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles in the United States.
KPMG CARDENAS DOSAL, S.C.
Felipe Lopez Villegas
Merida, Yuc., Mexico
February 20, 1998
F-2
<PAGE>
The Associated Group, Inc. and Subsidiaries
Balance Sheets
December 31
---------------------
1997 1996
---------- ----------
(Dollars in Thousands)
Assets
Current assets:
Cash and cash equivalents $ 426,596 $ 3,341
Accounts receivable, less allowance for doubtful
accounts (1997--$2,495; 1996--$2,355) 3,188 4,051
Receivable from related parties 3,977 203
Inventory held for resale 2,175 1,622
Prepaid expenses and other assets 2,485 651
Restricted cash and investments 30,373 -
Deferred income taxes 1,523 2,008
---------- ----------
Total current assets 470,317 11,876
Property and equipment--net of accumulated depreciation
and amortization 33,837 27,513
Marketable equity securities, at fair value (cost:
1997--$7,726; 1996--$6,882) 841,311 425,895
Notes receivable from related parties 20,558 28,780
Restricted investments 64,702 -
Other noncurrent assets 72,397 24,870
---------- ----------
Total assets $1,503,122 $518,934
========== ==========
F-3
<PAGE>
December 31
---------------------
1997 1996
---------- ----------
(Dollars in Thousands)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 18,083 $ 7,716
Employee compensation 2,748 4,753
Due to cellular equipment vendor - 15,069
Short-term obligations 110,991 77,526
Current portion of long-term debt 2,082 2,082
Other current liabilities 9,760 1,004
---------- ----------
Total current liabilities 143,664 108,150
Long-term debt, excluding current portion 306,244 8,326
Deferred compensation 2,417 1,440
Deferred income taxes 257,689 127,183
Minority interests 174,588 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; 18,765,924 and
9,382,962 shares issued and outstanding in 1997
and 1996, respectively 1,876 938
Class B Common Stock, par value $.10 per share;
authorized 50,000,000 shares; 18,854,760 and
9,397,910 shares issued and outstanding in 1997
and 1996, respectively 1,885 940
Additional paid-in capital 134,716 12
Unrealized gain on marketable equity securities,
net of deferred taxes (1997--$291,755;
1996--$146,654) 541,830 272,359
Accumulated deficit (61,787) (8,244)
---------- ----------
Total stockholders' equity 618,520 266,005
---------- ----------
Total liabilities and stockholders' equity $1,503,122 $518,934
========== ==========
See accompanying notes.
F-4
<PAGE>
The Associated Group, Inc. and Subsidiaries
Statements of Operations
Year ended December 31
--------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands,
Except Per Share Amounts)
Revenues:
Wireless communication services $ 21,985 $ 17,435 $ 1,884
Radio broadcasting 3,087 2,688 1,854
Art gallery 763 741 534
--------- ---------- ----------
25,835 20,864 4,272
Cost and expenses:
Cost of sales and services:
Wireless communication services 13,672 10,137 778
Radio broadcasting 843 698 599
Art gallery 587 591 432
Direct research and development expenses 7,401 7,562 7,361
Sales, general and administrative expenses 61,466 26,714 10,466
Stock-based compensation expense 84,042 2,778 -
Depreciation and amortization expense 11,726 5,056 1,302
---------- ---------- ----------
179,737 53,536 20,938
---------- ---------- ----------
Operating loss (153,902) (32,672) (16,666)
Equity in loss of affiliates - (2,119) (2,912)
Other income (expense):
Gain on sale of marketable equity securities 2,485 3,398 7
Gain on sale of wireless communications
investment 12,177 - -
Interest and dividend income 5,142 2,296 1,223
Interest expense (12,018) (4,328) (1,689)
Minority interests 80,621 7,893 1
---------- ---------- ----------
88,407 9,259 (458)
---------- ---------- ----------
Loss before income taxes (65,495) (25,532) (20,036)
Income tax benefit (13,830) (8,336) (6,823)
---------- ---------- ----------
Net loss $ (51,665) $ (17,196) $ (13,213)
========== ========== ==========
Net loss per common share $ (1.38) $ (.46) $ (.35)
========== ========== ==========
Weighted average common shares outstanding 37,573 37,548 37,532
See accompanying notes.
F-5
<PAGE>
The Associated Group, Inc. and Subsidiaries
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional Retained Total
------------------ ----------------- Paid-in Unrealized Earnings Stockholders'
Shares Amount Shares Amount Capital Gains (Deficit) Equity
------- ------- ------ ------ ---------- ---------- ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 9,382,962 $ 938 9,382,985 $ 938 $ - $282,023 $ 22,165 $306,064
Net loss - - - - - - (13,213) (13,213)
Change in unrealized gain on
marketable equity
securities, net of income
taxes of $34,756 - - - - - 64,547 - 64,547
--------- ------ ---------- ------- -------- -------- --------- ---------
Balance, December 31, 1995 9,382,962 938 9,382,985 938 - 346,570 8,952 357,398
Net loss - - - - - - (17,196) (17,196)
Change in unrealized gain on
marketable equity
securities, net of income
taxes of $39,960 - - - - - (74,211) - (74,211)
Stock options exercised - - 14,925 2 12 - - 14
--------- ------ ---------- ------- -------- -------- --------- ---------
Balance, December 31, 1996 9,382,962 938 9,397,910 940 12 272,359 (8,244) 266,005
Stock dividend 9,382,962 938 9,397,910 940 - - (1,878) -
Net loss - - - - - - (51,665) (51,665)
Change in unrealized gain on
marketable equity
securities, net of income
taxes of $145,100 - - - - - 269,471 - 269,471
Stock options exercised - - 58,940 5 58 - - 63
Stock issuance of
consolidated subsidiaries - - - - 134,646 - - 134,646
--------- ------ ---------- ------- -------- -------- --------- ---------
Balance, December 31, 1997 18,765,924 $1,876 18,854,760 $1,885 $134,716 $541,830 $(61,787) $618,520
========== ====== ========== ====== ======== ======== ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
The Associated Group, Inc. and Subsidiaries
Statements of Cash Flows
Year ended December 31
1997 1996 1995
---------- --------- --------
(In Thousands)
Cash flows from operating activities
Net loss $ (51,665) $(17,196) $(13,213)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 10,113 4,205 1,291
Amortization 1,613 851 11
Provision for losses on accounts receivable 1,058 1,275 114
Equity in loss of affiliates - 2,119 2,912
Gain on sale of investments (14,662) (3,398) (7)
Stock-based compensation 84,042 2,778 -
Minority interests (80,621) (7,893) (1)
Provision for deferred income taxes (14,256) (8,743) (6,823)
Other 1,250 738 198
Change in assets and liabilities:
Accounts receivable (195) (2,221) (54)
Inventory held for resale (553) (76) 224
Prepaid expenses and other assets (1,834) 571 868
Restricted cash (1,168) - -
Accounts payable 10,367 189 3,776
Accrued transaction expenses - - (5,433)
Employee compensation 773 996 (629)
Other current liabilities 8,756 (174) 242
Deferred compensation 977 176 205
---------- --------- ---------
Net cash used in operating activities (46,005) (25,803) (16,319)
Cash flows from investing activities
Cash and cash equivalents from
consolidation of affiliate - 751 -
Purchases of property and equipment, net (16,043) (4,435) (642)
Proceeds from sale of investments 23,883 3,414 15
Purchase of marketable equity securities (871) - -
Restricted cash and investments (93,907) - -
Increase in notes receivable from related
parties (5,249) (11,117) (1,152)
Investments in and acquisitions of
wireless communications and
broadcasting affiliates (11,116) (8,172) (784)
Other investing activities, net (544) (993) (489)
---------- --------- ---------
Net cash used in investing activities (103,847) (20,552) (3,052)
F-7
<PAGE>
Statements of Cash Flows (continued)
Year ended December 31
1997 1996 1995
---------- --------- --------
(In Thousands)
Cash flows from financing activities
Proceeds from short-term obligations $ 100,938 $44,056 $18,470
Repayment of short-term obligations (67,491) - -
Proceeds from long-term debt 300,000 - -
Repayment of long-term debt (2,082) (2,082) -
Payment of debt and equity issue costs (21,675) - -
Investment by minority interests 263,302 6,235 -
Other financing activities, net 115 469 -
---------- --------- ---------
Net cash provided by financing activities 573,107 48,678 18,470
---------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 423,255 2,323 (901)
Cash and cash equivalents at beginning of
year 3,341 1,018 1,919
---------- --------- ---------
Cash and cash equivalents at end of year $ 426,596 $ 3,341 $ 1,018
========== ========= =========
Supplemental disclosure of noncash
financing activities
Contribution by minority interests of
notes receivable from related parties $ - $ 7,162 $ -
========== ========= =========
Long-term debt assumed by cellular
equipment vendor, as guarantor $ - $ 2,845 $ -
========== ========= =========
See accompanying notes.
F-8
<PAGE>
The Associated Group, Inc. and Subsidiaries
Notes to Financial Statements
December 31, 1997
1. Significant Accounting Policies
Business
The Associated Group, Inc. ("Associated") is principally engaged in the
ownership and operation of, and also owns interests in, a variety of wireless
communications and cable related businesses which operate throughout the United
States and internationally. Associated also has domestic operations in radio
broadcasting and retail art.
Principles of Consolidation
These financial statements include the accounts of Associated and its wholly
owned and majority owned subsidiaries (the "Company"). Investments in which the
Company has a minority economic interest, but, through stockholder agreements,
voting interest or Board representation is able to exert control over the
majority of the assets and operations of the investee, are also consolidated. As
of December 31, 1997 and 1996, these subsidiaries include Teligent, Inc.
("Teligent") (the successor of Teligent, L.L.C.), a development stage company
founded in 1996 which intends to be a provider of high-quality, low-cost voice,
data and video telecommunications services primarily to small and medium-sized
businesses in 74 of the more populous U.S. metropolitan areas in which it holds
licenses from the Federal Communications Commission ("FCC"), and Grupo Portatel,
S.A. de C.V. and subsidiaries ("Grupo"), a cellular telephone service provider
in southeastern Mexico. Minority investments in affiliates where the Company
exercises significant influence over operating and financial affairs are
recorded under the equity method. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-9
<PAGE>
Revenue Recognition
Wireless communication services revenues are recognized when the service is
provided. Radio broadcasting revenues are recognized when the commercial matter
is aired. Art gallery sales are recorded at the time of shipment of art works.
Cash Equivalents
The Company considers all unrestricted highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
Inventory Held for Resale
Inventory held for resale, comprised of finished goods, includes art prints of
$1,097,000 and $1,145,000 at December 31, 1997 and 1996, respectively, and
cellular telephones and related equipment of $1,078,000 and $477,000 at December
31, 1997 and 1996, respectively, and 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 $1,570,000 at December 31, 1997 and 1996.
Provision for the difference between the cost and market value of art
inventories is made based on management's periodic analysis of the composition
of inventory and current art market conditions. The Company also sells art
inventory held on consignment from others. The Company does not own these art
prints, therefore, their cost is not included in the Company's balance sheets at
December 31, 1997 and 1996.
Marketable Equity Securities
Under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the Company's marketable
equity securities, which are classified as available-for-sale, are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders' equity until realized.
Foreign Currency Translation
The financial statements of Grupo are translated from Mexican new pesos to U.S.
dollars in accordance with SFAS 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,
except depreciation which has been translated at historical exchange rates.
Foreign currency translation gains and losses are included in the statement of
operations. For the years ended December 31, 1997 and 1996, the translation loss
F-10
<PAGE>
of Grupo consolidated in the statement of operations was $5,000 and $178,000,
respectively. For the year ending December 31, 1995, the equity in loss of
affiliates includes the effects of foreign currency translation adjustments for
Grupo. On an equity basis, translation losses were $473,000 in 1995.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization are
computed on the straight-line method.
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," management periodically
reviews, if impairment indicators exist, the carrying value and lives of
property and equipment and intangible assets based on estimated future cash
flows.
The Company has recorded, as a component of depreciation expense, an impairment
loss of $5 million in 1997, which represents the difference between the net book
value of certain operating assets prior to the impairment loss and the present
value of estimated future cash flows to be derived by the assets.
Income Taxes
Income taxes have been recorded using the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes."
Stock-Based Compensation
In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock Based Compensation." The accounting standards prescribed
by SFAS No. 123 are optional, and the Company has elected to continue to account
for its stock-based compensation plans under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, as the
Company grants stock options for a fixed number of shares with an exercise price
equal to the fair value of the shares at the date of grant, the Company
recognizes no compensation expense for the stock option grants. Compensation
expense is recorded for grants under variable award plans, based on the
intrinsic value of the grant.
Common Stock
On October 7, 1997, the Company's Board of Directors approved a two-for-one
stock split of the Company's Class A Common Stock and Class B Common Stock
effected in the form of a stock dividend of one share of Class A Common Stock
and one share of Class B Common Stock for each outstanding share of Class A
Common Stock and Class B Common Stock, respectively, held by stockholders of
record on October 17, 1997. Accordingly, all historical weighted
F-11
<PAGE>
average number of shares, per share amounts, Associated stock options and their
related exercise prices presented in these financial statements have been
restated retroactively to reflect the stock dividend.
Loss Per Share
In 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which specifies the
computation, presentation and disclosure requirements for earnings per share.
All loss per share amounts have been presented in accordance with SFAS No. 128.
Net loss per common share data is calculated using the weighted average number
of shares of common stock outstanding. Fully diluted net loss per share
including stock options is not presented since the effect of including the stock
options would be antidilutive.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is required to be adopted during the first quarter of fiscal 1998. SFAS
No. 130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in the financial statements and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the Statement of Stockholders'
Equity. The Company will be required to restate earlier periods provided for
comparative purposes, but believes that the adoption of SFAS No. 130 will not be
material to the Company's reported financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which is required to be adopted during the
year ended December 31, 1998. SFAS No. 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The effect of the disclosure for segment information on
the Company's reported financial condition or results of operations is not
expected to be significant.
Reclassifications
Certain reclassifications have been made to prior years' financial statements to
conform to the current year presentation. These reclassifications have no effect
on the Company's net losses.
2. Consolidation of Grupo Portatel, S.A. de C.V.
Effective January 1, 1996, the Company and the other United States shareholder
of Grupo agreed to contribute their respective voting interests in Grupo,
including their voting rights under an Association in Participation Agreement
("AP Agreement") and a related Joint Venture Agreement, to Grupo Holdings,
L.L.C. ("Grupo Holdings"), a new joint venture limited liability company, in
which the Company has a 61.6% controlling interest. Through December 31, 1995,
the Company recorded its investment in Grupo using the equity method. As a
result of the
F-12
<PAGE>
formation of Grupo Holdings and the effects of the AP Agreement, the Company
exerts significant control over the assets and operations of Grupo, and has
consolidated Grupo's financial statements as of January 1, 1996. At December 31,
1997, the Company has a 23.6% economic interest in Grupo. The pro forma
consolidated revenues of the Company for the year ended December 31, 1995 would
have been $17,800,000, assuming consolidation of Grupo as of January 1, 1995.
Summary financial information, in thousands, of Grupo for 1995, the period prior
to consolidation of Grupo, is as follows:
Current assets $ 4,584
Noncurrent assets 28,240
Current liabilities 20,517
Noncurrent liabilities 10,408
Revenues 13,558
Expenses 20,708
Foreign currency translation loss (1,569)
Net loss (8,719)
The Company's share of the net deficit of Grupo was approximately $9,273,000 at
December 31, 1995. The Company has paid $9,690,000 for stock in Grupo as of
December 31, 1995.
Included in other noncurrent assets are the cost of concession rights granted to
Portatel S.A. de C.V. ("Portatel"), a wholly owned subsidiary of Grupo, from the
Mexican Ministry of Communications and Transportation ("SCT") to operate
cellular telephone services in the southeast region of Mexico, and preoperating
costs. 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.
3. Stock Issuance of Consolidated Subsidiaries
As of December 31, 1997, the Company's additional paid-in capital includes
approximately $134,646,000 resulting from issuances of stock in consolidated
subsidiaries to third parties at per share amounts in excess of the per share
book value of the Company's investment in these subsidiaries. The majority of
this amount relates to third party investments in Teligent, in which the Company
was a founding member, including an initial public offering of Teligent's Class
A Common Stock completed in November 1997.
F-13
<PAGE>
4. Property and Equipment
Property and equipment, in thousands, consists of the following:
Estimated
December 31 Useful
1997 1996 Life-Years
--------- ---------- ----------
Land $ 577 $ 448
Buildings and leasehold improvements 5,833 5,209 3-20
Operating equipment 42,073 39,349 4-10
Office furniture and equipment 11,551 6,296 3-10
Wireless communications systems in progress 8,630 1,163
--------- ----------
68,664 52,465
Less accumulated depreciation and amortization (34,827) (24,952)
--------- ----------
$ 33,837 $ 27,513
========= ==========
5. Marketable Equity Securities
The cost and market value of the Company's marketable equity securities
classified as available for sale, at December 31, 1997, are as follows:
Cost of Market Value
Name of Issuer and Number of Each Issue in of Each Issue
Title of Each Issue Shares Thousands in Thousands
- -------------------- ---------- -------------- -------------
Tele-Communications, Inc.:
Series A TCI Group Common Stock 9,111,202 $2,559 $254,544
Series B TCI Group Common Stock 7,071,852 1,178 208,620
Series A TCI Ventures Group Common
Stock 3,368,774 946 95,378
Series A Liberty Media Group Common
Stock 5,453,970 1,339 197,706
Series B Liberty Media Group Common
Stock 1,767,963 273 66,299
TCI Satellite Entertainment, Inc.:
Series A Common Stock 1,247,997 334 8,580
Series B Common Stock 707,185 90 4,950
Others Various 1,007 5,234
------- --------
$7,726 $841,311
====== ========
During the first quarter of 1996, the Company sold 41,598 shares of
Tele-Communications, Inc. ("TCI") Class B 6% Cumulative Redeemable Exchangeable
Junior Preferred Stock for
F-14
<PAGE>
proceeds of approximately $2,690,000, and has recognized a pretax gain on the
sale of approximately $2,678,000. During the second quarter of 1996, the Company
sold 90,000 shares of General Communication, Inc. ("GCI") Class A Common Stock
for proceeds of approximately $722,000, and has recognized a pretax gain on the
sale of approximately $719,000. During 1997, the Company sold 110,000 shares of
TCI Series A Liberty Media Group Common Stock ("Liberty Series A") for proceeds
of approximately $2,512,000, and has recognized pretax gains on these sales of
approximately $2,485,000.
In December 1996, TCI spun-off its satellite business unit, TCI Satellite
Entertainment, Inc. ("TCI Satellite") to holders of Series A TCI Group and
Series B TCI Group Common Stock. The Company received a distribution of one
share of TCI Satellite Series A Common Stock and one share of TCI Satellite
Series B Common Stock for every ten shares of Series A TCI Group Common Stock
and Series B TCI Group Common Stock owned, respectively.
In January 1997, the board of directors of TCI declared a stock split, effected
in the form of a dividend, to holders of record of Liberty Series A and 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.
In the third quarter 1997, TCI consummated an exchange offer, whereby, subject
to certain terms, conditions and limits, TCI offered to issue one share of
Series A TCI Ventures Group or Series B TCI Ventures Group Common Stock in
exchange for each validly tendered share of Series A TCI Group or Series B TCI
Group Common Stock, respectively. In September 1997, in connection with this
exchange offer, the Company tendered 3,368,774 shares of Series A TCI Group
Common Stock in exchange for 3,368,774 shares of Series A TCI Ventures Group
Common Stock.
On February 27, 1998, the aggregate market value of marketable equity securities
held by the Company was approximately $887,471,000.
6. Notes Receivable from Related Parties
Included in noncurrent notes receivable from related parties at December 31,
1997 and December 31, 1996 are amounts and accrued interest due from certain
Mexican stockholders of Grupo of $14,238,000 and $21,080,000, respectively, used
for their purchase of Grupo stock which is secured by said stock. Interest
accrues on certain of these notes at the prime rate plus 2%.
Also included in noncurrent notes receivable from related parties at December
31, 1997 and 1996 is a note due from the Chairman and Chief Executive Officer
(the "Executive") of Teligent with a principal amount of $8,250,000. Under the
terms of the Executive's employment agreement, one-fifth of the principal and
interest due under the note will be forgiven on each of the Executive's first
two employment anniversary dates if he is still employed by Teligent, and the
remainder due will be forgiven on the fifth anniversary of employment. In the
event that the Executive terminates his employment prior to the fifth
anniversary date (other than by reason of his death or disability or for good
reason as defined in the employment agreement), any outstanding principal and
accrued interest
F-15
<PAGE>
on the note will become immediately due and payable. As a result, the Company is
expensing the accrued interest and principal over five years, the term of the
employment agreement. The unamortized balance is $6,050,000 and $7,700,000 as of
December 31, 1997 and 1996, respectively.
7. Investments in Wireless Communications Affiliates
Teletrac, Inc. ("Teletrac")
As of December 31, 1997, TruePosition, Inc. ("TruePosition"), a wholly-owned
subsidiary of Associated, held a 12.7% interest in Teletrac. Teletrac is in the
business of providing location and, potentially, messaging services primarily
for vehicle and fleet management. TruePosition has paid a total of $6,000,000
for Teletrac stock. Through November 1996, TruePosition 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 Series A Convertible Preferred
Stock in early December 1996, TruePosition's voting interest was reduced and,
accordingly, TruePosition began accounting for its investment under the cost
method.
Specialized Mobile Radio ("SMR")
The Company had an equity investment in a Mexican SMR operator, Corporacion
Mobilcom, S.A. de C.V. ("Mobilcom"). In August 1997, the Company sold its
ownership interest in Mobilcom to Nextel Communications, Inc. for proceeds of
approximately $21,371,000, and has recognized a pretax gain on the sale of
approximately $12,177,000.
Personal Communications Services ("PCS")
The Company has a 75% interest in a general partnership (the "PCS Partnership")
which holds a 4.42% interest in Omnipoint Communications, Inc. ("OCI"), a
subsidiary of Omnipoint Corporation ("Omnipoint Parent"). Omnipoint Parent,
through OCI, was awarded one of three pioneer's preference licenses by the FCC
to construct and operate a broadband PCS system in the New York Major Trading
Area, a region with a population of approximately 27 million. Omnipoint Parent
is traded on The Nasdaq Stock Market under the symbol "OMPT."
F-16
<PAGE>
8. Acquisitions
In October 1997, Teligent acquired all of the outstanding stock of FirstMark
Communications, Inc. ("FirstMark"), for an aggregate purchase price of
approximately $42 million which consisted of $10.5 million in cash and a 5%
member interest in Teligent, L.L.C. valued at $31.5 million. The acquisition was
accounted for under the purchase method of accounting. The majority of the
purchase price ($41.6 million) was allocated to the FCC licenses acquired and
the remaining amount was allocated to the net assets acquired. The license cost
is being amortized over 15 years.
In the second quarter of 1996, the Company purchased the assets of radio
broadcasting station WLYR-FM (formerly known as WCEZ-FM) located in Delaware,
Ohio for consideration of $3,250,000, including amounts for noncompete and
consulting agreements. Intangible assets of $2,584,000 were recorded in
connection with the purchase. Goodwill is being amortized over 15 years, and
amounts attributable to noncompete and consulting agreements are being amortized
over three years, the term of the agreements.
These acquisitions, individually, and in the aggregate, were not material to the
Company's financial position or results of operations, in the year of purchase.
Therefore, pro forma financial information has not presented.
F-17
<PAGE>
9. Short-Term Obligations
The Company's short-term borrowings as of December 31 (in thousands) were as
follows:
1997 1996
---- ----
General Credit Facilities:
Bank borrowing $ 19,000 $19,000
Three brokerage margin loan facilities 91,991 56,526
-------- -------
110,991 75,526
Teligent Credit Facility:
$50 million secured bank revolving credit facility - 2,000
-------- -------
$110,991 $77,526
======== =======
Weighted average interest rate 6.4% 6.3%
a. General Credit Facilities
In December 1997, the Company's $100,000,000 bank line of credit was converted
into a $19,000,000 demand loan. The loan is secured by a pledge of certain
marketable equity securities, and bears interest at a variable rate which is
tied to the Federal Funds Rate.
Borrowings under one of the brokerage margin loan facilities are limited to 65%
of the market value of the marketable equity securities pledged, up to a maximum
of $200,000,000. Borrowings under the other brokerage margin loan facilities are
limited to 50% of the market value of the pledged stock. Borrowings under these
facilities bear interest at variable rates based upon the broker call rate or
the Federal Funds rate plus an applicable margin, as offered by the brokerage
firm at the time of borrowing.
As of December 31, 1997, 8,511,202 shares of Series A TCI Group Common Stock and
3,368,774 shares of Series A TCI Ventures Group Common Stock were pledged as
security under the line of credit and brokerage margin loan facilities.
b. Teligent Credit Facility
Teligent had a $50,000,000 secured bank revolving credit facility which was used
to meet the cash flow needs of Teligent only. The facility was repaid and
cancelled in November 1997. Borrowings under this credit facility bore interest
at variable rates based upon the LIBOR rate, prime rate, or the Federal Funds
rate plus an applicable margin, as offered by the bank. Teligent also paid 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.
F-18
<PAGE>
10. Long-Term Debt
The Company's long-term debt as of December 31 (in thousands) consists of the
following:
1997 1996
---- ----
Teligent 11.5% Senior Notes due 2007 $300,000 $ -
Portatel loans 6,244 8,326
--------- ---------
$306,244 $ 8,326
========= =========
Maturities of long-term debt for the next five years and thereafter are as
follows (in thousands):
1998 $ 2,082
1999 2,082
2000 2,081
2001 2,081
2002 -
Thereafter 300,000
---------
Total 308,326
Less current portion (2,082)
---------
Total long-term debt $306,244
=========
Teligent 11.5% Senior Notes due 2007
In November 1997, Teligent issued $300 million of 11.5% Senior Notes due 2007
(the "Teligent Notes"). Teligent used approximately $94 million of the net
proceeds of this offering to purchase a portfolio of U.S. Treasury securities
which are classified as restricted cash and investments on the balance sheet,
and have been pledged as collateral for the payment of interest on the Teligent
Notes through December 1, 2000. Interest on the Teligent Notes accrues at a rate
of 11.5% per annum and is payable semiannually on June 1 and December 1,
commencing June 1, 1998.
On or after December 1, 2002, the Teligent Notes will be redeemable at the
option of Teligent, in whole at any time or in part from time to time, at the
following prices (expressed in percentages of the principal amount thereof):
Year Percentage
---- ----------
2002 105.750%
2003 103.833
2004 101.917
2005 and thereafter 100.000
Upon the occurrence of a change in control, as defined in the Teligent Notes
agreement, each holder of the Teligent Notes will have the right to require
Teligent to repurchase all or any part of such holder's notes at a purchase
price in cash equal to 101% of the principal amount thereof on any change of
control payment date, plus accrued and unpaid interest, if any, to such change
of
F-19
<PAGE>
control payment date. Teligent capitalized $11,344,0000 of costs incurred for
the offering which is being amortized to interest expense over ten years, the
term of the related debt.
Portatel loans
Portatel has long-term debt obligations under various credit facilities with a
U.S. bank and various related parties (the "Portatel Credit Agreements"). Such
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 is guaranteed by a cellular equipment vendor of Portatel (the
"Guarantor"). During 1995 and January 1996, Portatel failed to meet a portion of
its debt obligations under such credit facilities. Accordingly, payments were
made by the Guarantor to Portatel's lenders on Portatel's behalf. 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 by the Guarantor on behalf of
Portatel into capital stock of Grupo. Upon closing of the Contribution Agreement
in 1997, the Guarantor received an equity interest in Grupo in exchange for the
debt paid by the Guarantor on Portatel's behalf. The Guarantor continues to
guarantee the remaining debt of Portatel secured by an approximate 30.7% equity
interest in Portatel. Portatel has complied with its debt covenants or has
obtained waivers as of December 31, 1997.
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
December 31, 1997 (in thousands) are as follows:
Tranche I Tranche II Total
--------- ---------- -----
Current $ 1,742 $ 340 $ 2,082
Long-term 5,222 1,022 6,244
------- ------- -------
$ 6,964 $ 1,362 $ 8,326
======= ======= =======
Weighted average interest
rate at year-end 8.12% 12.49%
Cash paid for interest on both short-term and long-term debt obligations
amounted to approximately $5,017,000, $2,211,000, and $1,116,000 for the years
ended December 31, 1997, 1996, and 1995, respectively.
11. Deferred Compensation
Two executive officers of the Company serve under employment agreements that
provide for the annual payment for ten years to the officers' beneficiary of
one-half of the officers' base salary upon termination due to disability or
death. The Company accrues the present value of the
F-20
<PAGE>
estimated payments due over the expected service period of the employees, which
is based on their life expectancy.
The Executive of Teligent serves under an employment agreement that provides
for, among other things, a payment of $5,000,000 on the fifth anniversary of the
Executive's employment, or earlier in certain circumstances. In the event of
termination of employment prior to his fifth anniversary, the Executive will
receive either $5,000,000, or a pro-rata portion thereof, depending on the
circumstances of his termination. The Company accrues the present value of the
payment due over the expected service period of five years.
12. Leases
The Company and its subsidiaries lease sales, studio, administrative, and
certain corporate offices, as well as transmitter and antenna sites, under
operating lease agreements. Total rent expense was approximately $4,142,000,
$2,424,000, and $1,390,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
Approximate future minimum lease payments, in thousands, by year and in the
aggregate, are as follows at December 31, 1997:
1998 $ 6,246
1999 6,287
2000 5,953
2001 5,829
2002 4,780
2003 and thereafter 21,764
-------
$50,859
=======
13. Income Taxes
The Company's income tax provision includes the income taxes for the
consolidated income tax returns of Associated as well as the separate income tax
returns of Grupo and Teligent. As a result of the merger of Telegent, L.L.C.
into Teligent on November 26, 1997, the Company's pro-rata share of Teligent's
losses for the periods prior to the merger were included in Associated's tax
returns; however, subsequent to the merger Teligent will file separate income
tax returns.
The tax effects of temporary differences that give rise to the net deferred tax
liability, in thousands, are as follows:
December 31
1997 1996
---- ----
Deferred tax assets:
Net operating loss and assets tax
credit carryforwards:
United States $ 26,921 $ 13,781
Mexican 6,526 6,235
Stock-based compensation 29,519 -
Excess of tax basis over book basis of
investments in affiliates 9,165 4,462
Inventory reserves and capitalized costs 618 994
Property and equipment 2,023 1,117
F-21
<PAGE>
Other 3,227 1,545
---------- ---------
Total deferred tax assets 77,999 28,134
Valuation allowances (29,304) (6,512)
---------- ----------
Net deferred tax assets 48,695 21,622
Deferred tax liabilities:
Unrealized gain on marketable equity securities (291,754) (146,654)
Intangible assets (13,107) -
Other - (143)
---------- ----------
Total deferred tax liabilities (304,861) (146,797)
---------- ----------
Net deferred tax liability $(256,166) $(125,175)
========== ==========
The changes in the valuation allowances, which are related to Grupo and
Teligent, were as follows (in thousands):
Year ended December 31,
1997 1996
---- ----
Beginning balance $ 6,512 $6,437
Provision 22,975 187
Foreign currency translation gain (183) (112)
-------- -------
Ending balance $29,304 $6,512
======= =======
Mexican tax law does not permit the use of net operating losses of one Mexican
subsidiary to offset the taxable income of other Mexican subsidiaries. Current
Mexican income taxes are computed taking into consideration the taxable and
deductible effects of inflation, such as depreciation calculated on restated
asset values and the deduction of purchases in place of cost of sales, which
permit the deduction of current cost, and taxable income is increased or reduced
by the effects of inflation on certain monetary assets and liabilities through
the inflationary component.
Mexican tax law provides for an alternative minimum tax ("assets tax"). The
assets tax is computed at an annual rate of 1.8% of the average of the majority
or restated assets less certain liabilities, and the tax is paid only to the
extent that it exceeds regular income tax of the period. Any required payment of
assets tax is refundable against the excess of income taxes over asset taxes for
the following ten years. Cash paid for Mexican income taxes for the years ended
December 31, 1997 and 1996 was approximately $440,000 and $553,000,
respectively.
The income tax benefit for the three years ended December 31, 1997, in
thousands, consists of the following:
1997 1996 1995
---- ---- ----
Current:
Mexican $ 426 $ 407 $ -
F-22
<PAGE>
Deferred:
United States (14,270) (8,967) (6,823)
Mexican 14 224 -
--------- -------- --------
Total deferred (14,256) (8,743) (6,823)
--------- -------- --------
$(13,830) $(8,336) $(6,823)
========= ======== ========
At December 31, 1997, the Company's federal net operating loss ("NOL")
carryforwards and Mexican NOL and assets tax credit carryforward of Grupo were
as follows (in thousands):
Federal Mexican Mexican Assets
NOL NOL Tax Credit
-------- -------- ---------------
Expiration date:
2001 $ - $ 59 $ -
2002 - 73 -
2003 - 587 353
2004 - 3,574 341
2005 - 5,596 399
2006 - 2,144 391
2007 - 1,676 381
2013 1,003 - -
2014 980 - -
2015 18,872 - -
2016 19,613 - -
2017 38,714 - -
-------- -------- -------
$79,182 $13,709 $1,865
======== ======== =======
Two subsidiaries of Grupo realized taxable income for the years ended December
31, 1997 and 1996. Net operating losses of $1,513,000 and $1,925,000 were
utilized in 1997 and 1996 to offset the liability for current Mexican tax
expense.
A reconciliation between income taxes computed using the statutory federal
income tax rate (34%) and the effective rate, in thousands, is as follows:
1997 1996 1995
---- ---- ----
Federal income tax (credit) at statutory rate $(22,268) $(8,681) $(6,812)
Effects of minority interests and
consolidation (39,118) 214 -
Valuation allowance 21,360 75 -
Operating losses of Teligent L.L.C. 13,350 - -
Purchase accounting difference of Teligent 13,107 - -
Tax effects attributable to Mexican operations (478) 856 -
Other 217 (800) (11)
--------- -------- --------
$(13,830) $(8,336) $(6,823)
========= ======== ========
F-23
<PAGE>
14. Common Stock
The Company's capital stock consists of Class A Common Stock and Class B Common
Stock. Each share of Class A Common Stock entitles the holder to one vote and
each share of Class B Common Stock entitles the holder to one twenty-fifth
(1/25) of a vote. There is no cumulative voting.
On October 7, 1997, the Company's Board of Directors approved a two-for-one
stock split of the Company's Class A Common Stock and Class B Common Stock
effected in the form of a stock dividend of one share of Class A Common Stock
and one share of Class B Common Stock for each outstanding share of Class A
Common Stock and Class B Common Stock, respectively, held by stockholders of
record on October 17, 1997.
Class B Common Stock is mandatorily convertible at the election of the Company
and without stockholder action, into one share of Class A Common Stock, upon the
determination of the Company's Board of Directors that such a conversion is
necessary or appropriate in connection with an election by the Company to become
a business development company under the Investment Company Act of 1940, as
amended ("1940 Act"), or to register as an investment company under the 1940
Act. A total of 21,647,336 shares of Class A Common Stock are reserved for
issuance in the event of such a conversion.
The Company maintains a Stockholder Rights Plan pursuant to which each Right
entitles the registered holder to purchase from the Company a unit consisting of
one one-hundredth of a share (a "Unit") of Series A Junior Participating
Preferred Stock, par value $.01 per share, at a purchase price of $100 per Unit,
subject to adjustment (the "Purchase Price"). Upon occurrence of certain events
as set forth in the Stockholder Rights Plan, each holder of a Right will
thereafter have the right to receive, upon exercise, Class B Common Stock (or,
in certain circumstances, cash, property, or other securities of the Company)
having a value equal to two times the Purchase Price.
15. Stock-Based Compensation
1994 Stock Option and Incentive Award Plan ("1994 Plan")
The 1994 Plan authorizes, among other award programs, the granting of options to
purchase up to 2,881,366 shares of Class B Common Stock. Under the Plan, in
general, options may be granted at an option price no less than the fair market
value of the stock covered by the option on the grant date, for an option period
of ten years. Options become exercisable over a period determined by the
committee of nonemployee directors which administers the 1994 Plan.
F-24
<PAGE>
Activity of the 1994 Plan is summarized below:
Weighted
Average
Number of Exercise
Options Price
-------------- ---------
Options outstanding, January 1, 1995 991,366 $ 0.63
Granted 1,312,000 $ 8.25
Exercised -
Canceled and returned to plan -
----------
Options outstanding, December 31, 1995 2,303,366 $ 4.97
Granted 70,000 $17.45
Exercised (29,850) $ 0.45
Canceled and returned to plan (20,000) $ 8.25
----------
Options outstanding, December 31, 1996 2,323,516 $ 5.38
Granted 95,000 $18.83
Exercised (58,940) $ 2.17
Canceled and returned to plan -
----------
Options outstanding, December 31, 1997 2,359,576 $ 6.03
==========
Weighted average remaining contractual life 5.7 years
Options exercisable as of December 31, 1997 1,880,376 $ 4.66
Teligent Stock-Based Compensation
Teligent, L.L.C. Appreciation Rights and Appreciation Units
On September 1, 1996, Teligent, L.L.C. granted six separate Company Appreciation
Rights ("CARs") to the Executive pursuant to an employment agreement. For each
CAR, the Executive was entitled to receive a percentage of the excess of
Teligent's fair market value, as defined, over the target value for the CAR. The
CARs vest over a period of six years.
Also in 1996, Teligent, L.L.C. adopted a Long-Term Incentive Compensation Plan
(the "Teligent LTIP") under which an aggregate of 1,600,000 appreciation units
(the "Appreciation Units") were available and granted to employees and directors
of the Company in 1996 and 1997.
The CARs and Appreciation Units (the "Equity Awards") could be settled in cash,
equity securities of Teligent, L.L.C., a combination thereof, or any other form
of consideration as the Board determined. These Equity Awards were considered to
be variable under the provisions of APB Opinion No. 25, and therefore gave rise
to compensation expense.
Conversion of CARs and Appreciation Units into Teligent Stock Options
In connection with the conversion of Teligent, L.L.C. to Teligent and the public
offering of Teligent Class A Common Stock (see Note 3) the Equity Awards were
converted into options (the "Teligent Conversion Options") to purchase
12,480,779 shares of Teligent Class A Common Stock at exercise prices ranging
from $3.35 to $46.00 per share, such that the intrinsic value of the stock
options approximated the intrinsic value of the Equity Awards. The Teligent
stock options granted in connection with this conversion are
F-25
<PAGE>
governed by and subject to the terms of the 1997 Teligent Plan (see below) and
have the same vesting schedule, vesting rights and term as the applicable Equity
Awards which were converted.
Teligent recognized stock-based compensation expense of $84,042,000 and
$2,778,000 in 1997 and 1996, respectively. The conversion created a measurement
date whereby the variable Equity Awards were converted to nonvariable Stock
Options. Upon conversion, the related liability was reclassed to additional
paid-in capital and the difference between the intrinsic value of the Equity
Awards at the time of conversion, and the cumulative compensation expense
recognized to date, is being recognized over the remaining vesting period of the
Teligent Conversion Options.
Teligent, Inc. 1997 Stock Incentive Plan
In 1997, Teligent established the Teligent, Inc. 1997 Stock Incentive Plan (the
"Teligent Plan"). As of December 31, 1997, the maximum number of shares of
Teligent common stock available for grant under the 1997 Plan was 14,729,125.
Generally, all options granted vest over a period of five years and expire ten
years from the date of grant. Additional information with respect to the
Teligent Plan is as follows:
Number of Weighted Average
Options Exercise Price
-------- ----------------
Options at beginning of year - -
Converted from Appreciation Units 6,471,047 $ 7.07
Converted from CARs 6,009,732 $12.41
Options granted under Teligent plan 380,450 $22.18
Options forfeited and returned to the plan (50,544) $12.94
-----------
Options outstanding at end of year 12,810,685 $10.00
===========
Weighted average remaining contractual life 9.4 years
Options exercisable at end of year:
Exercise price of $6.52 1,455,729
Exercise price of $3.35 1,001,622
-----------
Total 2,457,351
===========
TruePosition, Inc. 1995 Stock Incentive Plan ("TruePosition Plan")
The TruePosition Plan authorizes the granting of options to purchase up to
200,000 shares of common stock of TruePosition. Total shares authorized under
the TruePosition Plan represent 10% of the fully diluted shares of TruePosition.
Under the True Position Plan, in general, options may be granted at an option
price no less than the fair value of the stock covered by the option on the
grant date, for an option period of ten years. Options become exercisable over a
period determined by the committee of nonemployee directors which administers
the TruePosition Plan. Options granted to date are exercisable over either a
one- or four-year period.
F-26
<PAGE>
Activity of the TruePosition Plan is summarized below:
Number of Weighted Average
Options Exercise Price
-------- ----------------
Options outstanding, January 1, 1995 -
Granted 97,500 $21.00
Exercised -
Canceled and returned to plan -
--------
Options outstanding, December 31, 1995 97,500 $21.00
Granted 41,050 $42.00
Exercised -
Canceled and returned to plan (10,000) $21.00
--------
Options outstanding, December 31, 1996 128,550 $27.71
Granted 56,550 $42.00
Exercised -
Canceled and returned to plan (2,500) $42.00
--------
Options outstanding, December 31, 1997 182,600 $31.94
========
Weighted average remaining contractual life 8.4 years
Options exercisable as of December 31, 1997 67,110 $23.54
Microwave Services, Inc. 1996 Stock Incentive Plan ("MSI Plan")
The MSI Plan, adopted in April 1996, authorizes the granting of options to
purchase up to 200,000 shares of common stock of Microwave Services, Inc.
("MSI"), a wholly owned subsidiary of the Company which holds the Company's
ownership interest in Teligent. Total shares authorized under the MSI Plan
represent 10% of the fully diluted shares of MSI. Under the MSI Plan, in
general, options may be granted at an option price no less than the fair value
of the stock covered by the option on the grant date, for an option period of
ten years. Options become exercisable over a period determined by the committee
of nonemployee directors which administers the MSI Plan. In 1996, substantially
all of the options authorized under the MSI Plan were granted at a weighted
average exercise price of approximately $25.00 per share. Such options are
exercisable over either a one- or four-year period.
F-27
<PAGE>
SFAS 123 Pro forma Disclosures
Had compensation expense been determined in accordance with SFAS No. 123, the
Company's net loss for the years ended December 31, 1997 and 1996 would have
been $(62,738,000), or $(1.67) per share, and $(20,888,000), or $(0.56) per
share, respectively.
F-28
<PAGE>
The following summarizes the weighted average fair value of options granted
using the Black-Scholes option pricing model and assumptions used:
<TABLE>
<CAPTION>
1994 Plan Teligent Plan TruePosition Plan MSI Plan
Grants in 1997 1996 1997 1996 1997 1996 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average fair value $11.84 $ 6.37 $18.57 $14.04 $26.15 $24.35 $14.99
Weighted average assumptions:
Risk-free interest rate 6.6% 6.5% 6.6% 7.0% 6.5% 6.0% 6.7%
Expected life 10 years 10 years 10 years 10 years 10 years 10 years 10 years
Expected volatility 39% 34% 50% 34% 39% 34% 34%
Expected dividends 0% 0% 0% 0% 0% 0% 0%
</TABLE>
16. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Cash and Cash Equivalents
The carrying amount reported in the balance sheets for cash and cash equivalents
approximates its fair value.
Marketable Equity Securities
The fair values of marketable equity securities are based on quoted market
prices.
Notes Receivable from Related Parties
The fair value of the notes receivable from related parties is estimated using
discounted cash flow analyses.
Due to Cellular Equipment Vendor
The carrying amount of the amount due to cellular equipment vendor approximates
its fair value.
Short-Term Obligations
The carrying amount of the Company's short-term borrowings approximates fair
value.
Long-Term Debt
F-29
<PAGE>
The fair value of long-term debt is based on quoted market prices for similar
types of borrowing arrangements.
Considerable judgment enters into estimates of fair value. Accordingly, the
estimates presented may not be indicative of the amounts that the Company could
realize in a current market exchange.
F-30
<PAGE>
The carrying amounts and fair values of the Company's financial instruments, in
thousands, were as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $426,596 $426,596 $ 3,341 $ 3,341
Restricted cash and investments 95,075 95,075 - -
Marketable equity securities 841,311 841,311 425,895 425,895
Receivables from related parties 24,535 24,535 28,983 28,983
Due to cellular equipment vendor - - 15,069 15,069
Short-term obligations 110,991 110,991 77,526 77,526
Long-term debt, including current portion 308,326 309,916 10,408 10,408
</TABLE>
Based upon the information reasonably available to it, including the information
set forth in Note 7, the Company believes that the fair market value of its
investments in Teletrac and PCS are in excess of carrying value.
17. Segment Information
The Company operates principally in three industry segments: wireless
communication services in major cities across the United States and southeastern
Mexico, radio broadcasting in Ohio, and retail art in New York, New York.
Financial information by industry segment, in thousands, is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues:
Wireless communication services $ 21,985 $ 17,435 $ 1,884
Radio broadcasting 3,087 2,688 1,854
Art gallery sales 763 741 534
----------------- ----------------- ----------------
Total revenues $ 25,835 $ 20,864 $ 4,272
================= ================= ================
Operating loss:
Wireless communication services $(145,526) $ (25,484) $ (7,462)
Radio broadcasting (883) (645) (293)
Art gallery (661) (731) (742)
Corporate (6,832) (5,812) (8,169)
----------------- ----------------- ----------------
Operating loss (153,902) (32,672) (16,666)
Equity in loss of affiliates - (2,119) (2,912)
Other income (expense) 88,407 9,259 (458)
----------------- ----------------- ----------------
Loss before income taxes $ (65,495) $ (25,532) $ (20,036)
================= ================= ================
</TABLE>
F-31
<PAGE>
<TABLE>
<S> <C> <C> <C>
Identifiable assets:
Wireless communication services $ 651,796 $ 82,209 $ 26,489
Radio broadcasting 3,534 3,740 947
Art gallery 1,294 1,290 1,421
Corporate 846,498 431,695 545,614
----------------- ----------------- ----------------
$ 1,503,122 $ 518,934 $ 574,471
================= ================= ================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Depreciation and amortization:
Wireless communication services $10,920 $ 4,426 $ 906
Radio broadcasting 489 330 112
Art gallery 16 13 10
Corporate 301 287 274
------------------- ------------------- -------------------
$11,726 $ 5,056 $ 1,302
=================== =================== ===================
Capital expenditures:
Wireless communication services $14,771 $ 4,070 $ 269
Radio broadcasting 347 179 115
Art gallery 2 23 12
Corporate 923 163 246
------------------- ------------------- -------------------
$16,043 $ 4,435 $ 642
=================== =================== ===================
</TABLE>
Segment information by geographic area, in thousands, is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------- ------------------- --------------------
<S> <C> <C> <C>
Revenues:
United States $ 5,437 $ 5,689 $ 4,272
Mexico 20,398 15,175 -
------------------- ------------------- --------------------
$ 25,835 $ 20,864 $ 4,272
=================== =================== ====================
Operating loss:
United States $ (154,273) $ (30,381) $ (16,666)
Mexico 371 (2,291) -
------------------- ------------------- --------------------
$ (153,902) $ (32,672) $ (16,666)
=================== =================== ====================
Identifiable assets:
United States $1,476,156 $ 488,934 $ 574,471
Mexico 26,966 30,000 -
------------------- ------------------- --------------------
$1,503,122 $ 518,934 $ 574,471
=================== =================== ====================
</TABLE>
F-32
<PAGE>
Revenues from wireless communication services included sales to one customer
representing approximately 19% of total revenues in 1995. No single customer
accounted for more than 10% of the Company's total revenues in 1997 and 1996.
Approximately 80% and 50% of the Company's accounts receivable at December 31,
1997 and 1996, respectively, relate to Grupo. As part of its business of
rendering cellular telephone services in the southeast region of Mexico, Grupo
grants unsecured credit to customers, the majority of which are residents of
that area. Grupo estimates an allowance for doubtful accounts based on the
credit worthiness of its customers as well as general economic conditions.
Consequently, an adverse change in those factors could affect the Company's
estimates for bad debts.
Corporate assets consist principally of cash and cash equivalents, marketable
equity securities, and prepaid expenses and other assets. Assets of the wireless
communications segment include Mexican cellular telephone services, microwave
communications services (including Teligent and Associated's microwave business,
a competitive access provider in Los Angeles, California), the investments in
Grupo (equity method in 1995), Omnipoint, Teletrac, and Mobilcom (prior to the
1997 sale discussed in Note 7), in addition to assets related to TruePosition.
18. Related Party Transactions
Related parties provided technical, administrative and management services to
Teligent. In 1997, Teligent entered into a five-year technical service agreement
(the "TSA") with a subsidiary of one of its stockholders (the "Provider"). Under
the terms of the TSA, the Provider will provide certain technical services to
Teligent relating to network design and implementation. During the first two
years of the TSA, Teligent is required to pay the Provider a fee in the amount
of $4 million per year. Payments during the remaining three years shall be
negotiated annually based on the scope of technical services to be provided.
Total expenses for services provided by related parties was approximately
$257,000 and $378,000 on a net equity basis in 1997 and 1996, respectively.
Accounts payable at December 31, 1997 and 1996 includes approximately $333,000
and $576,000, respectively, for balances due to related parties for such
services.
Receivable from related parties at December 31, 1997 and 1996 includes amounts
due from related parties for technical, administrative, and management services
provided by the Company, as well as loans granted to certain Teligent executives
in 1997.
19. Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------------------------
First Second Third Fourth
----------------- ---------------- ----------------- -----------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
1997
Revenues $ 5,642 $ 6,259 $ 6,233 $ 7,701
Operating loss (11,269) (48,425) (31,836) (62,372)
</TABLE>
F-33
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net income (loss) (9,106) (39,018) (18,628) 15,087
Net income (loss) per common share $ (.24) $ (1.04) $ (.50) $ .40
1996
Revenues $ 4,436 $ 5,089 $ 5,122 $ 6,217
Operating loss (4,907) (5,143) (9,050) (13,572)
Net loss (1,589) (3,213) (4,966) (7,428)
Net loss per common share $ (.04) $ (.09) $ (.13) $ (.20)
</TABLE>
20. Subsequent Event
On February 20, 1998, Teligent completed an offering (the "Discounted Notes
Offering") of $440 million 11.5% Discount Notes due 2008 (the "Discount Notes").
The Discount Notes carry zero-coupon interest until March 1, 2003, after which
the Discount Notes pay interest at 11.5% payable March 1 and September 1 through
March 1, 2008. Teligent received approximately $243.1 million net proceeds from
the Discount Notes Offering, after deductions for offering expenses.
[co] F-34
<PAGE>
The Associated Group, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ----------- ---------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Deducted from assets:
Allowance for doubtful accounts
(deducted from accounts
receivable) $2,355 $ 1,058 $ - $ 918(A) $ 2,495
============== =============== ============== ============== ===============
Inventory market valuation reserve
(deducted from inventory) $1,570 $ - $ - $ - $ 1,570
============== =============== ============== ============== ===============
Deferred tax asset valuation
allowance (deducted from deferred
taxes) $6,512 $22,975 $ - $ 183 (B) $ 29,304
============== =============== ============== ============== ===============
Year ended December 31, 1996:
Deducted from assets:
Allowance for doubtful accounts
(deducted from accounts
receivable) $ 183 $ 1,275 $ 2,730 (C) $ 1,833 (A) $ 2,355
============== =============== ============== ============== ===============
Inventory market valuation reserve
(deducted from inventory) $1,582 $ - $ - $ 12 (D) $ 1,570
============== =============== ============== ============== ===============
Deferred tax asset valuation
allowance (deducted from deferred
taxes) $ - $ 187 $ 6,325 (C) $ - $ 6,512
============== =============== ============== ============== ===============
Year ended December 31, 1995:
Deducted from assets:
Allowance for doubtful accounts
(deducted from accounts
receivable) $ 92 $ 114 $ - $ 23 (A) $ 183
============== =============== ============== ============== ===============
Inventory market valuation
reserve (deducted from
inventory) $1,573 $ 60 $ - $ 51 (D) $ 1,582
============== =============== ============== ============== ===============
</TABLE>
(A)--Accounts written off, net of recoveries.
(B)--Foreign currency translation gain.
(C)--Consolidation of Grupo Portatel, S.A. de C.V.
(D)--Inventory written off or sold below cost.
F-35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 25, 1997 By: /s/ Myles P. Berkman
-------------------------------
Myles P. Berkman
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 25, 1997 By: /s/ Myles P. Berkman
-------------------------------
Myles P. Berkman
Chairman, President and
Chief Executive Officer
(Principal Financial and
Accounting Officer)
Date: March 25, 1997 By: /s/ David J. Berkman
-------------------------------
David J. Berkman
Director and Executive
Vice President
Date: March 25, 1997 By: /s/ Donald H. Jones
-------------------------------
Donald H. Jones
Director
Date: March 25, 1997 By: /s/ Joseph A. Katarincic
--------------------------------
Joseph A. Katarincic
Director
<PAGE>
EXHIBIT INDEX
Exhibit No. Page Where
Found or
Incorporated
by Reference
2.1 Agreement and Plan of Distribution, dated as of December *
14, 1994, among Associated Communications Corporation,
Associated Communications of Delaware, Inc. and Associated
Cellular Holdings, Inc., filed as Exhibit 2.1 to
Registration Statement on Form 10/A dated November 15, 1994
and incorporated herein 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
10.1 Tax Disaffiliation Agreement, dated as of December 14, *
1994, by and among Associated Communications Corporation,
Associated Communications of Delaware, Inc. and Associated
Cellular Holdings, Inc., filed as Exhibit 10.1 to
Registration Statement on Form 10/A dated November 15,
1994 and incorporated herein by reference.
10.2 The Associated Group, Inc. 1994 Amended and Restated Stock
Option and Incentive Award Plan.
10.3 Associated RT, Inc. (now known as True Position, Inc.) 1995 *
Stock Incentive Plan, filed as Exhibit 10.3 to Annual Report
on Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference.
10.4 Microwave Services, Inc. 1996 Stock Incentive Plan, *
filed as Exhibit 10.1 to Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 and
incorporated herein by reference.
10.5 Form of Employment Agreement, dated December 15, 1994, *
between Associated Communications of Delaware, Inc.
and Myles P. Berkman, filed as Exhibit 10.6 to
Registration Statement on Form 10/A dated November 15,
1994 and incorporated herein by reference.
- -------------------
* Previously filed and incorporated by reference
** Filed only electronically with the Securities and Exchange Commission
<PAGE>
10.6 Form of Employment Agreement, dated December 15, 1994, *
between Associated Communications of Delaware, Inc. and
David J. Berkman, filed as Exhibit 10.7 to Registration
Statement on Form 10/A dated November 15, 1994 and
incorporated herein by reference.
10.7 Employment Agreement, dated as of August 19, 1996, between *
Associated Communications, L.L.C. and Alex J. Mandl,
filed as Exhibit 99.2 to Form 8-K, dated September 6, 1996 and
incorporated herein by reference.
10.8 Margin Agreement, dated January 31, 1995, by and between *
Associated Investments, Inc. and Pershing, a Division of
Donaldson, Lufkin & Jenrette Securities Corporation, filed as
Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference.
10.9 Corporate Margin Account Application and Agreement, dated *
February 15, 1995, by and between Associated Investments,
Inc. and Goldman Sachs & Co., filed as Exhibit 10.10 to
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference.
10.10 Letter Agreement, dated as of March 6, 1998 by and between
Associated Investments, Inc. and Goldman Sachs & Co.
10.11 Letter Agreement, dated as of December 12, 1997, by and
between Associated Investments, Inc. and PNC Bank, National
Association.
10.12 Form of Amended and Restated Discretionary Line of Credit *
Demand Note by and between Associated Investments, Inc. and
PNC Bank, National Association.
10.13 Form of Amended and Restated Pledge Agreement by Associated
Investments, Inc. in favor of PNC Bank, National Association.
10.14 Client Agreement, dated January 28, 1997, by and between *
Associated Investments, Inc. and Lehman Brothers, filed as
Exhibit 10.13 to Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 and incorporated herein by
reference.
10.15 Agreement, dated September 29, 1997, among Teligent, L.L.C., *
Digital Services Corporation, Telcom-DTS Investors, L.L.C.,
Microwave Services, Inc., The Associated Group, Inc. and
certain other parties, filed as Exhibit 1 to Schedule 13D of
the Company with regard to its holdings in Teligent, Inc.
and dated as of December 8, 1997 and incorporated herein
by reference.
10.16 Stockholders Agreement, dated as of November 26, 1997, by *
and among Teligent, Inc., Microwave Services, Inc.,
Telcom-DTS Investors, L.L.C., and NTT Investment Inc.,
filed as Exhibit 2 to Schedule 13D of the Company with
regard to its holdings in Teligent, Inc. and dated as of
December 8, 1997, and incorporated herein by reference.
- -------------------
* Previously filed and incorporated by reference
** Filed only electronically with the Securities and Exchange Commission
<PAGE>
10.17 Registration Rights Agreement, dated as of March 6, 1998, *
by and between Teligent, Inc. and Microwave Services, Inc.,
filed as Exhibit 1 to Schedule 13D/A of the Company with
regard to its holdings in Teligent, Inc. and dated as of
March 9, 1998, and incorporated herein by reference.
21 Subsidiaries of the Registrant.
23 Consents of Independent Accountants.
27 Article 5 Financial Data Schedule for Annual Report on **
Form 10-K for the fiscal year ended December 31, 1996
(filed only electronically with the Securities and
Exchange Commission).
- -------------------
* Previously filed and incorporated by reference
** Filed only electronically with the Securities and Exchange Commission
<PAGE>
Index of Financial Statements and Financial Statement Schedule
The following financial statements of The Associated Group, Inc. and
subsidiaries are included in Item 8:
Balance Sheets--December 31, 1997 and 1996
Statements of Operations--Years ended December 31, 1997, 1996,
and 1995
Statements of Stockholders' Equity--Years ended December 31,
1997, 1996, and 1995
Statements of Cash Flows--Years ended December 31, 1997, 1996,
and 1995
Notes to Financial Statements--December 31, 1997
The following financial statement schedule of The Associated Group, Inc.
and is included in Item 14(d):
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
<PAGE>
Exhibit 10.2
THE ASSOCIATED GROUP, INC.
AMENDED AND RESTATED
1994 STOCK OPTION AND INCENTIVE AWARD PLAN
1. Purpose.
The purpose of The Associated Group, Inc. Amended and Restated
1994 Stock Option and Incentive Award Plan, as hereby amended and restated (the
"Plan"), is to align the interests of officers, other employees, consultants and
non-employee directors of The Associated Group, Inc. (formerly known as
Associated Communications of Delaware, Inc.), a Delaware corporation ("AGRP"),
and its subsidiaries, now held or hereafter acquired (collectively, the
"Company"), with those of the stockholders of AGRP; to attract, motivate and
retain the best available executive personnel and key employees of the Company
by permitting them to acquire or increase their proprietary interest in AGRP; to
compensate AGRP's non-employee directors and provide incentives to such
non-employee directors which are directly linked to increases in stock value; to
reinforce corporate, organizational and business-development goals; to promote
the achievement of year-to-year and long-range financial and other business
objectives; and to reward the performance of individual officers, other
employees and non-employee directors in fulfilling their personal
responsibilities for long-range achievements.
2. Definitions.
The following terms, as used herein, shall have the following
meanings:
(a) "AGRP" shall have the meaning set forth in Section 1 hereof.
(b) "ACORN Plan" shall mean the Associated Communications
Resources, Inc. 1989 Stock Option Plan.
(c) "Annual Base Salary," with respect to a Participant who is a
Covered Employee as of the end of a Per-
<PAGE>
formance Period, shall mean the annual rate of base salary of such Participant
as in effect as of the first day of any Performance Period, without regard to
any deferral of base salary pursuant to a salary deferral arrangement.
(d) "Annual Incentive Compensation Award" shall mean an Award, pursuant
to the Annual Incentive Compensation Program, contingent upon the attainment of
Performance Goals with respect to a Performance Period.
(e) "Annual Incentive Compensation Program" shall mean the program set
forth in Section 9 of the Plan.
(f) "Award" shall mean any Option (including Roll-Over Options and
Conversion Options), Restricted Stock, Incentive Unit, Annual Incentive
Compensation Award, SAR or LSAR granted pursuant, or which is otherwise subject,
to the Plan.
(g) "Award Agreement" shall mean any written agreement, contract or
other instrument or document between AGRP and a Participant evidencing an Award.
(h) "Board" shall mean the Board of Directors of AGRP.
(i) "Change in Control" shall have the meaning set forth in Section
10(f) hereof.
(j) "Class A Common Stock" shall mean the Class A Common Stock, par
value $.10 per share (together with the accompanying Preferred Stock Purchase
Rights), of AGRP.
(k) "Class B Common Stock" shall mean the Class B Common Stock, par
value $.10 per share (together with the accompanying Preferred Stock Purchase
Rights), of AGRP.
(l) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(m) "Committee" shall mean the Compensation Committee or other
committee of the Board comprised of non-employee directors of AGRP which
administers the Plan.
(n) "Company" shall have the meaning set forth in
<PAGE>
Section 1 hereof.
(o) "Conversion Options" shall mean options originally granted pursuant
to the MSI Plan, which have been equitably adjusted to become Nonqualified Stock
Options under the Plan.
(p) "Covered Employee" shall have the meaning set forth in Section
162(m)(3) of the Code.
(q) "Disability" shall mean a disability which would qualify as such
under the long-term disability plan of the Company.
(r) "Effective Date" shall have the meaning set forth in Section 10(k)
hereof.
(s) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(t) "Executive Officer" shall mean an officer of the Company who, as of
the beginning of a Performance Period, is an "executive officer" within the
meaning of Rule 3b-7 promulgated under the Exchange Act.
(u) "Fair Market Value" per share of Stock as of a particular date
shall mean (i) the closing sale price per share of Stock (A) on the national
securities exchange on which the Stock is principally traded for the last
preceding date on which there was a sale of such Stock on such exchange or (B)
if the Stock is not then traded on a national securities exchange, on the NNM
for the last preceding date on which a sale of the Stock was reported on the
NNM, (ii) if the Stock is not then traded on a national securities exchange and
sales of the Stock are not then reported on the NNM, but the Stock is then
quoted on an over-the-counter market other than the NNM, the average of the
closing per share bid and asked prices for the Stock in such over-the-counter
market for the last preceding date on which such prices were quoted in such
market, (iii) if the shares of Stock are not then traded on a national
securities exchange, sales of the Stock are not then reported on the NNM and the
Stock is not then quoted on an over-the-counter market other than the NNM, (A)
as to Awards granted under Section 7 hereof, the
<PAGE>
average of the closing prices per share of the Stock on the NNM over the ten
trading days commencing five trading days after the date of grant or (B) as to
all other Awards, such value as the Committee, in its sole discretion, shall
determine.
(v) "Incentive Stock Option" shall mean an Option that meets the
requirements of Section 422 of the Code, or any successor provision, and is
designated by the Committee as an Incentive Stock Option.
(w) "Incentive Unit" shall mean a unit which is assigned a dollar value
and which relates to a Long-Term Incentive Compensation Award.
(x) "Initial Director" shall mean a Non-Employee Director of AGRP who
is a member of the Board at the date of requisite AGRP stockholder approval of
this Plan.
(y) "Insider" shall mean a Participant who is subject to the reporting
requirements of Section 16(a) of the Exchange Act.
(z) "LSAR" shall mean a stock appreciation right granted pursuant to
Section 6 which, in general, may be exercised only following a Change in
Control.
(aa) "Long-Term Incentive Compensation Award" shall mean an Award,
granted pursuant to the Long-Term Incentive Compensation Program, the payment of
which is contingent upon the attainment of Performance Goals with respect to a
Performance Period.
(bb) "Long-Term Incentive Compensation Program" shall mean the
program set forth in Section 8 of the Plan.
(cc) "MSI Plan" shall mean the Microwave Services, Inc. 1996 Stock
Incentive Plan.
(dd) "NNM" shall mean the Nasdaq National Market.
(ee) "Non-Employee Director" shall mean a member of the Board who is
not also an employee of the Company.
<PAGE>
(ff) "Nonqualified Stock Option" shall mean an Option other than an
Incentive Stock Option.
(gg) "Option" shall mean the right, granted pursuant to the Plan, of a
holder to purchase shares of Stock under the Stock Option and SAR Program (or,
with respect to a Non-Employee Director, pursuant to Section 7 hereof) at a
price and upon the terms to be specified by the Committee (or, with respect to a
Non-Employee Director, pursuant to Section 7 hereof).
(hh) "Participant" shall mean an officer, other employee or consultant
of the Company who is, pursuant to Section 4 of the Plan, selected to
participate in the Plan and, with respect to Awards under Section 7 hereof, each
Non-Employee Director.
(ii) "Performance Goal" shall mean, with respect to the Long-Term
Incentive Compensation Program and the Annual Incentive Compensation Program,
the criteria and objectives, determined by the Committee, which must be met
during the applicable Performance Period as a condition of the Participant's
receipt of payment (or, in the case of Restricted Stock, the lapse of
restrictions) with respect to an Award.
(jj) "Performance Period" shall mean (i) with respect to the Long-Term
Incentive Compensation Program, the period of three consecutive Plan Years or
such other period (which in no case may be less than one Plan Year) as may be
determined by the Committee and (ii) with respect to the Annual Incentive
Compensation Program, each Plan Year.
(kk) "Plan" shall have the meaning set forth in Section 1 hereof.
(ll) "Plan Year" shall mean AGRP's fiscal year.
(mm) "Restricted Stock" shall mean any shares of Stock issued to a
Participant, without payment to AGRP, pursuant to Section 8(a) of the Plan.
(nn) "Roll-Over Options" shall mean options originally granted pursuant
to the ACORN Plan, which have been
<PAGE>
equitably adjusted to become Nonqualified Stock Options under the Plan.
(oo) "Stock" shall mean shares of Class B Common Stock unless, pursuant
to Article Fourth of AGRP's Restated Certificate of Incorporation, all
outstanding shares of Class B Common Stock shall have become shares of Class A
Common Stock, par value $.10 per share, in which event "Stock" shall mean shares
of Class A Common Stock.
(pp) "SAR" shall mean a tandem stock appreciation right, granted to a
Participant under Section 6, to be paid in an amount measured by the
appreciation in the Fair Market Value of Stock from the date of grant to the
date of exercise of the right.
(qq) "Stock Option and SAR Program" shall mean the program set forth
in Section 6 hereof.
(rr) "Subsequent Director" shall mean a Non-Employee Director of AGRP
who becomes a member of the Board (or with respect to directors who are also
employees of the Company, a director who becomes a Non-Employee Director)
subsequent to the requisite AGRP stockholder approval of the Plan.
(ss) "Ten Percent Stockholder" shall mean a Participant who, at the
time an Incentive Stock Option is to be granted to such Participant, owns
(within the meaning of Section 422(b)(6) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company within the meaning of Sections 422(e) and 422(f), respectively, of
the Code.
3. Administration.
The Plan shall be administered by the Committee. The Committee
shall have the authority, in its sole discretion, subject to and not
inconsistent with the express provisions of the Plan, to administer the Plan and
to exercise all the powers and authorities either specifically granted to it
under the Plan or necessary or advisable in connection with the administration
of the
<PAGE>
Plan, including, without limitation, the authority to grant Awards (except under
Section 7 hereof); to determine the persons to whom and the time or times at
which Awards shall be granted (except under Section 7 hereof); to determine the
type and number of Awards to be granted, the number of shares of Stock to which
an Award may relate and the terms, conditions, restrictions and performance
criteria relating to any Award (except under Section 7 hereof); to determine
whether, to what extent, and under what circumstances an Award may be settled,
cancelled, forfeited, exchanged, or surrendered or accelerated or an Option or
Options may be repriced to a lower exercise price (except under Section 7
hereof); to make adjustments in Performance Goals in recognition of unusual or
non-recurring events affecting the Company or the financial statements of the
Company, or in response to changes in applicable laws, regulations, or
accounting principles; to construe and interpret the Plan and any Award; to
prescribe, amend and rescind rules and regulations relating to the Plan; to
determine the terms and provisions of Award Agreements, consistent with the
terms and provisions of the Plan; and to make all other determinations deemed
necessary or advisable for the administration of the Plan, consistent with the
terms and provisions of the Plan.
The Committee shall consist of two or more persons, who are
intended to be "disinterested persons" within the meaning of Rule 16b-3 under
the Exchange Act and to meet the requirements of Section 162(m) of the Code with
respect to Awards granted by them in their capacity as members of the Committee.
4. Eligibility.
Awards may be granted to officers, other employees and
consultants of the Company in the sole discretion of the Committee. In
determining the persons to whom Awards shall be granted and the type of Award,
the Committee shall take into account such factors as the Committee shall deem
relevant in connection with accomplishing the purposes of the Plan. Awards shall
also be made to Non-Employee Directors in accordance with the provisions of
Section 7 hereof.
<PAGE>
5. Stock Subject to the Plan; Limitation on Grants.
The maximum number of shares of Stock reserved for issuance
pursuant to the Plan shall be (i) 1,900,000* shares of Stock, with up to
300,000* of such shares being authorized to be issued as Restricted Stock, plus
(ii) 981,366* shares of Stock which shall become issuable upon the exercise of
Roll-Over Options plus (iii) 1,727,438 shares of Stock which shall become
issuable upon the exercise of Conversion Options. All such shares of Stock shall
be subject to equitable adjustment as provided herein. Such shares may, in whole
or in part, be authorized but unissued shares or shares that shall have been or
may be reacquired by the Company in the open market, in private transactions or
otherwise. If any shares subject to an Award are forfeited, cancelled, exchanged
or surrendered or if an Award otherwise terminates or expires without a
distribution of shares to the Participant, the shares of Stock with respect to
such Award shall, to the extent of any such forfeiture, cancellation, exchange,
surrender, termination or expiration, again be available for Awards under the
Plan to the extent permitted under Rule 16b-3 promulgated under the Exchange
Act. Upon the exercise of any Award granted in tandem with any other Awards,
such related Awards shall be cancelled to the extent of the number of shares of
Stock as to which the Award is exercised and, notwithstanding the foregoing,
such number of shares shall no longer be available for Awards under the Plan.
During the term of this Plan, no Participant can receive
stock-based Awards, including Options, Restricted Stock and SARs (but excluding
Roll-Over Options and Conversion Options), relating to shares of Stock which in
the aggregate exceed 20% of the total number of shares of Stock authorized
pursuant to the Plan, as adjusted pursuant to the terms hereof.
In the event that the Committee shall determine that any
dividend or other distribution (whether in the form of cash, Stock or other
property), recapitalization,
- --------
* Stated number gives effect to the adjustment, pursuant to this Section 5, as a
result of the two-for-one stock dividend which was paid on October 27, 1997.
<PAGE>
stock split, reverse stock split, reorganization, merger, consolidation,
spin-off, combination, repurchase, or share exchange, or other similar corporate
transaction or event, affects the Stock such that an adjustment is appropriate
in order to prevent dilution or enlargement of the rights of Participants under
the Plan, then the Committee shall make such equitable changes or adjustments as
it deems necessary or appropriate to any or all of (i) the number and kind of
shares of Stock which may thereafter be issued in connection with Awards, (ii)
the number and kind of shares of Stock issued or issuable in respect of
outstanding Awards, and (iii) the exercise price, grant price, or purchase price
relating to any Award; provided that, with respect to Incentive Stock Options,
such adjustment shall be made in accordance with Section 424 of the Code.
6. Stock Option and SAR Program.
Each Option and SAR granted pursuant to this Section 6 shall
be evidenced by an Award Agreement, in such form and containing such terms and
conditions as the Committee shall from time to time approve, which Award
Agreement shall comply with and be subject to the following terms and
conditions, as applicable.
(a) Stock Options
(1) Number of Shares. Each Award Agreement shall
state the number of shares of Stock to which the Option relates.
(2) Type of Option. Each Award Agreement shall state
that the Option constitutes an Incentive Stock Option or a Nonqualified Stock
Option.
(3) Option Price. Each Award Agreement shall state
the Option price, which, except as provided in Section 6(a)(8)(B) below, shall
not be less than one hundred percent (100%) of the Fair Market Value of the
shares of Stock covered by the Option on the date of grant, provided, however,
that the Option price of the Roll-Over Options and the Conversion Options,
respectively, shall be such price which results from the equitable adjustment of
the related options originally
<PAGE>
granted pursuant to the ACORN Plan and the MSI Plan, respectively. The Option
price shall be subject to adjustment as provided in Section 5 hereof. Unless
otherwise expressly stated in the Committee resolution expressly granting an
Option, the date as of which the Committee adopts the resolution expressly
granting an Option shall be considered the day on which such Option is granted.
(4) Method and Time of Payment. The Option price
shall be paid in full, at the time of exercise, in cash (including cash received
from the Company as compensation or cash borrowed from the Company), in shares
of Stock having a Fair Market Value equal to such Option price, in a combination
of cash and Stock or, in the sole discretion of the Committee, through a
cashless exercise procedure.
(5) Term and Exercisability of Options. Each Award
Agreement shall provide that each Option shall become exercisable over a period
determined by the Committee in its discretion, provided, that the Committee
shall have the authority to accelerate the exercisability of any outstanding
Option at such time and under such circumstances as it, in its sole discretion,
deems appropriate. The exercise period shall be not more than ten (10) years
from the date of the grant of the Option, except as provided in Section
6(a)(8)(B) below, or such shorter period as is determined by the Committee. The
exercise period shall be subject to earlier termination as provided in Section
6(a)(6) hereof. An Option may be exercised, as to any or all full shares of
Stock as to which the Option has become exercisable, by written notice delivered
in person or by mail to the Secretary of AGRP, specifying the number of shares
of Stock with respect to which the Option is being exercised, together with
payment in full of the Option price. For purposes of the preceding sentence, the
date of exercise will be deemed to be the date upon which the Secretary of AGRP
receives both the notification and the payment.
(6) Termination. If a Participant's employment by
the Company terminates, the Committee will have the exclusive authority to
determine if and for how long, and under what conditions, such Option may be
exer-
<PAGE>
cised after such termination; however, in no event will an Option continue
to be exercisable beyond the expiration date of such Option.
(7) Stock Appreciation Rights. The Committee shall
have authority to grant a tandem SAR to the grantee of any Option under the Plan
with respect to all or some of the shares of Stock covered by such related
Option. A SAR shall, except as provided in this paragraph (7), be subject to the
same terms and conditions as the related Option. Each such tandem SAR granted
pursuant to the Plan shall be reflected in the Award Agreement relating to the
related Option.
(A) Time of Grant. A SAR may be granted
either at the time of grant, or at any time thereafter during the term of the
Option; provided, however, that SARs related to Incentive Stock Options may only
be granted at the time of grant of the related Option.
(B) Payment. A SAR shall entitle the holder
thereof, upon exercise of the SAR or any portion thereof, to receive payment of
an amount computed pursuant to paragraph (D) below.
(C) Exercise. A SAR shall be exercisable at
such time or times and only to the extent that the related Option is
exercisable, and will not be transferable except to the extent the related
Option may be transferable. A SAR granted in connection with an Incentive Stock
Option shall be exercisable only if the Fair Market Value of a share of Stock on
the date of exercise exceeds the purchase price specified in the related
Incentive Stock Option.
(D) Amount Payable. Upon the exercise of
a SAR, the Participant shall be entitled to receive an amount determined by
multiplying (i) the excess of the Fair Market Value of a share of Stock on the
date of exercise of such SAR over the price of the Option, by (ii) the number of
shares of Stock as to which such SAR is being exercised. Notwithstanding the
foregoing, the Committee may limit in any manner the amount payable with respect
to any SAR by including such a limit at the time
<PAGE>
it is granted.
(E) Treatment of Related Options and SARs
Upon Exercise. Upon the exercise of a SAR, the related Option shall be
cancelled to the extent of the number of shares of Stock as to which the SAR is
exercised (and will be deemed to have been exercised for purposes of determining
the number of shares available for the grant of Options under the Plan), and
upon the exercise of an Option granted in connection with a SAR, the SAR shall
be cancelled to the extent of the number of shares of Stock as to which the
Option is exercised.
(F) Method of Exercise. SARs shall be
exercised by a Participant only by a written notice delivered in person or by
mail to the Secretary of AGRP, specifying the number of shares of Stock with
respect to which the SAR is being exercised. If requested by the Committee, the
Participant shall deliver the Award Agreement evidencing the SAR and the related
Option to the Secretary of AGRP, who shall endorse thereon a notation of such
exercise and return such Award Agreement to the Participant. For purposes of
this paragraph (F), the date of exercise will be deemed to be the date upon
which the Secretary of AGRP receives such notification.
(G) Form of Payment. Payment of the amount
determined under paragraph (D) above may be made solely in whole shares of Stock
in a number determined based upon their Fair Market Value on the date of
exercise of the SAR or, alternatively, at the sole discretion of the Committee,
solely in cash, or in a combination of cash and shares of Stock as the Committee
deems advisable. If the Committee decides to make full payment in shares of
Stock, and the amount payable results in a fractional share, payment for the
fractional share will be made in cash. Notwithstanding the foregoing, to the
extent required by Rule 16b-3 promulgated under the Exchange Act, no payment in
the form of cash may be made upon the exercise of a SAR to a Participant who is
subject to the reporting requirements of Section 16(a) of the Exchange Act,
unless the exercise of such SAR is made during the period beginning on the third
business day and ending on the twelfth business day following the date of
release for publication of AGRP's quarterly or annual
<PAGE>
statements of earnings or is otherwise made under circumstances which comply
with said Rule 16b-3.
(8) Incentive Stock Options. Options granted as
Incentive Stock Options shall be subject to the following special terms and
conditions, in addition to the general terms and conditions specified in this
Section 6.
(A) Value of Shares. The aggregate Fair
Market Value (determined as of the date the Incentive Stock Option is granted)
of the shares of Stock with respect to which Incentive Stock Options granted
under this Plan and all other Plans of the Company become exercisable for the
first time by each Participant during any calendar year shall not exceed
$100,000.
(B) Ten Percent Stockholder. In the case
of an Incentive Stock Option granted to a Ten Percent Stockholder, (x) the
Option Price shall not be less than one hundred ten percent (110%) of the Fair
Market Value of the shares of Stock on the date of grant of such Incentive Stock
Option, and (y) the exercise period shall not exceed five (5) years from the
date of grant of such Incentive Stock Option.
(9) Limited Stock Appreciation Rights.
The Committee shall have the authority to grant a SAR which
shall become exercisable only in the event of a Change in Control (as defined in
Section 10(f) hereof) (a "LSAR") to the grantee of any Option under the Plan
with respect to all or some of the shares of Stock covered by such related
Option and shall be subject to such terms and conditions as the Committee may
specify at the time of grant. Each LSAR granted pursuant to the Plan shall be
evidenced by an Award Agreement. A LSAR granted to a Participant who is an
Insider shall be subject to such additional terms and conditions as the
Committee may deem necessary to comply with the requirements of Rule 16b-3 under
the Exchange Act. In the case of a LSAR granted in respect of an Incentive Stock
Option, the grantee may not receive an amount in excess of the maximum amount
that will enable such option to continue to qualify as an Incentive Stock
Option.
<PAGE>
1. Non-Employee Directors Formula Award Program.
The provisions of this Section 7 (and not those of Section 6
hereof) shall apply only to grants of Options to Non-Employee Directors. The
provisions of this Section 7 shall not be amended more than every six months,
other than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder.
(a) General. Non-Employee Directors shall receive Nonqualified
Stock Options under the Plan. The exercise price per share of Stock purchasable
under Options granted to Non-Employee Directors shall be the Fair Market Value
of a share of Stock on the date of grant. No Option granted to a Non-Employee
Director may be subject to a discretionary acceleration of exercisability except
upon a Change in Control as defined in Section 10(f) hereof.
(b) Initial Grants to Initial Directors. Upon the Effective
Date, each Initial Director was granted an Option to purchase 5,000 shares of
Stock.
(c) Initial Grants To Subsequent Directors. Each Subsequent
Director will, at the time such director becomes a member of the Board, be
granted automatically an Option to purchase 5,000* shares of Stock.
(d) Subsequent Grants To Directors. On the date of each annual
meeting of stockholders of AGRP subsequent to the Effective Date, each
continuing Initial Director will be granted automatically an Option to purchase
5,000* shares of Stock. On the date of each annual meeting of stockholders of
AGRP subsequent to a Subsequent Director's becoming a Non-Employee Director,
each Subsequent Director will be granted automatically an Option to purchase
5,000* shares of Stock.
(e) Method and Time of Payment. The Option
- --------
* Stated number gives effect to the adjustment, pursuant to this Section 5, as a
result of the two-for-one stock dividend which was paid on October 27, 1997.
<PAGE>
price shall be paid in full, at the time of exercise, in cash (including cash
received from the Company as compensation or cash borrowed from the Company), in
shares of Stock having a Fair Market Value equal to such Option price, in a
combination of cash and Stock or through a cashless exercise procedure.
(f) Term and Exercisability. Each Option granted under this
Section 7 shall be exercisable as to 50 percent of the shares of Stock covered
by the Option on the first anniversary of the date the Option is granted and as
to the remaining 50 percent of the shares of Stock covered by the Option on the
second anniversary of such date of grant. Each Option granted under this Section
7 shall expire ten (10) years from the date of grant. To the extent not
exercised, installments shall accumulate and be exercisable, in whole or in
part, at any time after becoming exercisable, but not later than the date the
Option expires.
(g) Termination. Upon the termination of a Non-Employee
Director from such position, for any reason, all Options granted to such
Non-Employee Director pursuant to this Section 7 shall remain exercisable for a
period of one year following the date of such termination, but in no event may
the term of an Option be extended beyond its expiration date.
2. Long-Term Incentive Compensation Program.
Awards granted pursuant to this Section 8 shall be evidenced
by an Award Agreement in such form as the Committee shall from time to time
approve and the terms and conditions of such Awards shall be set forth therein.
Awards may be granted in the form of Restricted Stock or Incentive Units.
(a) Restricted Stock. The Committee shall determine the number
of shares of Restricted Stock granted pursuant to the Award and the Performance
Goals for the Performance Period, the attainment of which will cause the
restrictions to lapse in whole or in part and allow all or a specified portion
of the Restricted Stock to vest, as specified in the Award Agreement.
<PAGE>
(1) Restrictions. During the Performance Period,
shares of Restricted Stock may not be sold, assigned, transferred, pledged,
hypothecated or otherwise disposed of, except by will or the laws of descent and
distribution. Certificates for shares of Stock issued pursuant to Awards of
Restricted Stock shall bear an appropriate legend referring to such
restrictions, and any attempt to dispose of any such shares of Stock in
contravention of such restrictions shall be null and void and without effect.
During the Performance Period, such certificates shall be held in escrow by an
escrow agent appointed by the Committee.
(2) Forfeiture. Subject to such exceptions as may be
determined by the Committee, if the Participant's continuous employment with the
Company shall terminate for any reason prior to the expiration of the
Performance Period of an Award, or to the extent any Performance Goals for the
Performance Period are not met, any shares remaining subject to restrictions
shall thereupon be forfeited by the Participant and transferred to, and
reacquired by, AGRP at no cost to AGRP.
(3) Ownership. Except to the extent otherwise set
forth in the Award Agreement, during an Performance Period the Participant shall
possess all incidents of ownership of such shares, subject to Section 8(a)(1),
including the right to receive dividends with respect to such shares and to vote
such shares.
(b) Incentive Units. The Committee shall determine the value
of Incentive Units granted pursuant to the Award and the Performance Goals for
the Performance Period with respect to such Award. Unless otherwise provided by
the Committee in connection with specified terminations of employment, or except
as set forth in Section 10(f) hereof, payment in respect of Incentive Units
shall be made only if and to the extent the Performance Goals with respect to
such Performance Period are attained. Performance Goals may include a level of
performance below which no payment shall be made and levels of performance at
which specified percentages (which may be greater than 100%) of the value of the
Incentive Units shall be paid.
<PAGE>
(c) Special Provisions Regarding Awards. Notwithstanding
anything to the contrary contained in this Section 8, (1) the Performance Goals
in respect of Long-Term Incentive Compensation Awards granted pursuant to this
Section 8 to Participants who are Executive Officers shall be based on the
attainment of specified increases to the trading price of Stock during a
Performance Period, (2) in no event shall payment in respect of Incentive Units
granted for a Performance Period be made to a Participant who is a Covered
Employee as of the end of such Performance Period in an amount which exceeds
100% of such Participant's Annual Base Salary and (3) in no event shall payment
in respect of Incentive Units granted for a Performance Period be made to a
Participant who is a Covered Employee as of the end of such Performance Period
in an amount which exceeds $5,000,000 per year.
(d) Time and Form of Payment. Unless otherwise determined by
the Committee, all payments in respect of Incentive Units granted under this
Section 8 shall be made within a reasonable period after the end of the
Performance Period. In the case of Participants who are Covered Employees as of
the end of the Performance Period, unless otherwise determined by the Committee,
such payments shall be made (and the restrictions on shares of Restricted Stock
shall lapse and such shares shall vest) only after achievement of the applicable
Performance Goals has been certified by the Committee. Payments in respect of
Incentive Units shall be made either in cash or in Stock, or in combination of
cash and Stock, as determined by the Committee. For purposes of the preceding
sentence, the Fair Market Value of Stock (as of the date of payment) delivered
in full or partial payment of Incentive Units shall equal the portion of the
value of Incentive Units (determined as of the end of the Performance Period)
with respect to which such payment is being made.
3. Annual Incentive Compensation Program.
Awards granted pursuant to this Section 9 shall be evidenced
by an Award Agreement in such form as the Committee shall from time to time
approve and the terms and conditions of such Awards shall be set forth therein.
<PAGE>
(a) General. The Committee shall determine the amount of each
Annual Incentive Compensation Award and shall specify with respect to a
Performance Period the Performance Goals applicable to the Award. Unless
otherwise provided by the Committee in connection with specified terminations of
employment, or except as set forth in Section 10(f) hereof, payment in respect
of Annual Incentive Compensation Awards shall be made only if and to the extent
the Performance Goals with respect to such Performance Period are attained.
Performance Goals may include a level of performance below which no payment
shall be made and levels of performance at which specified percentages (which
may not be greater than 100%) of the Annual Incentive Compensation Award shall
be paid.
(b) Special Provisions Regarding Awards. Notwithstanding
anything to the contrary contained in this Section 9, (1) the Performance Goals
in respect of Annual Incentive Compensation Awards granted pursuant to this
Section 9 to Participants who are Executive Officers shall be based on the
attainment of specified increases to the trading price of Stock during a
Performance Period, (2) in no event shall payment in respect of Annual Incentive
Compensation Awards granted for a Performance Period be made to a Participant
who is a Covered Employee as of the end of such Performance Period in an amount
which exceeds 100% of such Participant's Annual Base Salary and (3) in no event
shall payment in respect of Incentive Units granted for a Performance Period be
made to a Participant who is a Covered Employee as of the end of such
Performance Period in an amount which exceeds $1,500,000 per year.
(c) Time and Form of Payment. Unless otherwise determined by
the Committee, all payments in respect of Annual Incentive Compensation Awards
granted under this Section 9 shall be made within a reasonable period after the
end of the Performance Period. In the case of Participants who are Covered
Employees as of the end of the Performance Period, unless otherwise determined
by the Committee, such payments shall be made only after achievement of the
Performance Goals has been certified by the Committee. Payments shall be made
either in cash or in Stock, or in a combination of cash and Stock, as
<PAGE>
determined by the Committee. For purposes of the preceding sentence, the Fair
Market Value of Stock (as of the date of payment) delivered in full or partial
payment of Annual Incentive Compensation Awards shall equal the portion of the
value of Annual Incentive Compensation Awards (determined as of the end of the
Performance Period) with respect to which such payment is being made.
4. General Provisions.
(a) Compliance with Legal Requirements. The Plan and the
granting and exercising of Awards, and the other obligations of the Company
under the Plan and any Award Agreement or other agreement shall be subject to
all applicable federal and state laws, rules and regulations and to such
approvals by any regulatory or governmental agency as may be required. The
Company, in its discretion, may postpone the issuance or delivery of Stock under
any Award as the Company may consider appropriate and may require any
Participant to make such representations and furnish such information as it may
consider appropriate in connection with the issuance or delivery of Stock in
compliance with applicable laws, rules and regulations.
(b) Nontransferability. Awards shall not be transferable by a
Participant other than transfers by the holder of an Award to his or her family
members (to the extent permitted by Rule 16b-3 under the Exchange Act) by will
or the laws of descent and distribution or, if then permitted by Rule 16b-3
under the Exchange Act, pursuant to a qualified domestic relations order as
defined under the Code or Title I of the Employee Retirement Income Security Act
of 1974, as amended, or the rules thereunder, and shall be exercisable during
the lifetime of a Participant only by such Participant or his guardian or legal
representative.
(c) No Right To Continued Employment. Nothing in the Plan or
in any Award granted or any Award Agreement or other agreement entered into
pursuant hereto shall confer upon any Participant the right to continue in the
employ of the Company or to be entitled to any remuneration or benefits not set
forth in the Plan or such Award Agreement or other agreement or to interfere
<PAGE>
with or limit in any way the right of the Company to terminate such
Participant's employment.
(d) Withholding Taxes. Where a Participant or other person is
entitled to receive shares of Stock pursuant to the exercise of an Option or is
otherwise entitled to receive shares of Stock or cash pursuant to an Award
hereunder, the Company shall have the right to require the Participant or such
other person to pay to the Company the amount of any taxes which the Company may
be required to withhold before delivery to such Participant or other person of
cash or a certificate or certificates representing such shares.
Upon the disposition of shares of Stock acquired
pursuant to the exercise of an Incentive Stock Option, the Company shall have
the right to require the payment of the amount of any taxes which are required
by law to be withheld with respect to such disposition.
Unless otherwise prohibited by the Committee or by
applicable law, a Participant may satisfy any such withholding tax obligation by
any of the following methods, or by a combination of such methods: (a) tendering
a cash payment; (b) authorizing the Company to withhold from the shares of Stock
or cash otherwise payable to such Participant (1) one or more of such shares
having an aggregate Fair Market Value, determined as of the date the withholding
tax obligation arises, less than or equal to the amount of the total withholding
tax obligation or (2) cash in an amount less than or equal to the amount of the
total withholding tax obligation; or (c) delivering to the Company previously
acquired shares of Stock (none of which shares may be subject to any claim,
lien, security interest, community property right or other right of spouses or
present or former family members, pledge, option, voting agreement or other
restriction or encumbrance of any nature whatsoever) having an aggregate Fair
Market Value, determined as of the date the withholding tax obligation arises,
less than or equal to the amount of the total withholding tax obligation. A
Participant's election to pay his or her withholding tax obligation (in whole or
in part) by the method described in (b)(1) above is irrevocable once it is made,
may be disapproved by the Committee and, if
<PAGE>
made by any director, officer or other person who is subject to Section 16(b) of
the Exchange Act, must be made (x) only during the period beginning on the third
business day following the date of release of the Company's quarterly or annual
summary statement of sales and earnings and ending on the twelfth business day
following the date of such release or (y) not less than six months prior to the
date such Participant's withholding tax obligation arises.
(e) Amendment and Termination of the Plan. The Board or the
Committee may at any time and from time to time alter, amend, suspend, or
terminate the Plan in whole or in part; provided that, no amendment which
requires stockholder approval under applicable Delaware law or in order for the
Plan to continue to comply with Rule 16b-3 under the Exchange Act or Code
Section 162(m) shall be effective unless the same shall be approved by the
requisite vote of the stockholders of AGRP. Notwithstanding the foregoing, no
amendment shall affect adversely any of the rights of any Participant, without
such Participant's consent, under any Award theretofore granted under the Plan.
The power to grant Options under the Plan will automatically terminate at the
end of the 2004 fiscal year. If the Plan is terminated, any unexercised Option
shall continue to be exercisable in accordance with its terms and the terms of
the Plan in effect immediately prior to such termination. If, while any Awards
remain outstanding under the Plan, AGRP determines to register as an investment
company or elects to become a "business development company" as defined in the
Investment Company Act of 1940, as amended (the "ICA"), the Committee will have
the discretion to terminate the Plan, to make any provision it deems appropriate
with respect to any or all outstanding Awards (including without limitation the
cancellation or termination thereof in exchange for a cash payment) or to make
any amendments to the Plan as are necessary or appropriate to comply with the
applicable provisions of the ICA.
(f) Change in Control. Notwithstanding any other provision of
the Plan to the contrary, if, while any Awards remain outstanding under the
Plan, a Change in Control of AGRP (as defined in this Section 10(f)) shall
occur, then, subject to the discretion of the Committee
<PAGE>
(unless otherwise provided in the applicable Award Agreement), (1) all Options,
SARs and LSARs granted under the Plan that are outstanding at the time of such
Change in Control may become immediately exercisable in full and/or may be
cancelled in exchange for a cash payment, without regard to the years that have
elapsed from the date of grant; (2) with respect to Awards of Incentive Units
granted under the Long-Term Incentive Compensation Program and with respect to
Annual Incentive Compensation Awards granted under the Annual Incentive
Compensation Program, all Performance Periods outstanding at the time of such
Change in Control may be deemed to have been completed, the maximum level of
performance set forth under the respective Performance Goals may be deemed to
have been attained and a pro rata portion (based on the number of full and
partial months which have elapsed with respect to each Performance Period) of
each such outstanding Award granted to each Participant for all outstanding
Performance Periods may become payable in cash to each Participant, with the
remainder of each such outstanding award being cancelled for no value; and (3)
all restrictions with respect to shares of Restricted Stock may lapse, and such
shares may be fully vested and nonforfeitable.
For purposes of this paragraph 10(f), a "Change in
Control" of AGRP shall occur upon the happening of the earliest to occur of the
following:
(i) any "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act (other than (1) AGRP, (2) any trustee or
other fiduciary holding securities under an employee benefit plan of AGRP or (3)
any corporation owned, directly or indirectly, by the stockholders of AGRP in
substantially the same proportions as their ownership of Stock (each an
"excluded person")), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of AGRP
(not including in the securities beneficially owned by such person any
securities acquired directly from AGRP or its affiliates) representing 30% or
more of the combined voting power of AGRP's then outstanding voting securities;
(ii) during any period of not more than
<PAGE>
two consecutive years, individuals who at the beginning of such period
constitute the Board, and any new director (other than a director designated by
a person who has entered into an agreement with AGRP to effect a transaction
described in clause (i), (iii) or (iv) of this paragraph (f)) whose election by
the Board or nomination for election by AGRP's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved (other than approval given in
connection with an actual or threatened proxy or election contest), cease for
any reason to constitute at least a 70 percent majority of the Board;
(iii) the stockholders of AGRP approve a merger or
consolidation of AGRP with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of AGRP outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding without conversion or by being converted into voting securities of
the surviving or parent entity) 80% or more of the combined voting power of the
voting securities of AGRP or such surviving or parent entity outstanding
immediately after such merger or consolidation or (B) a merger or consolidation
effected to implement a recapitalization of AGRP (or similar transaction) in
which no "person" (as herein above defined) acquires 30% or more of the combined
voting power of AGRP's then outstanding securities; or
(iv) the stockholders of AGRP approve a plan of
complete liquidation of AGRP or an agreement for the sale or disposition by AGRP
of all or substantially all of AGRP's assets (or any transaction having a
similar effect).
(g) Participant Rights. No Participant shall have any claim to
be granted any Award under the Plan, and there is no obligation for uniformity
of treatment for Participants. Except as provided specifically herein, a
Participant or a transferee of an Award shall have no rights as a stockholder
with respect to any shares of stock covered by any Award until the date of the
issuance of a Stock certificate to him for such shares.
<PAGE>
(h) Unfunded Status of Awards. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of AGRP.
(i) No Fractional Shares. No fractional shares of Stock shall
be issued or delivered pursuant to the Plan or any Award. The Committee shall
determine whether cash, other Awards or other property shall be issued or paid
in lieu of such fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
(j) Governing Law. The Plan and all determinations made and
actions taken pursuant hereto shall be governed by the laws of the State of
Delaware without giving effect to the conflict of laws principles thereof.
(k) Effective Date; Amendments. The Associated Group, Inc.
1994 Stock Option and Incentive Award Plan (the "Original Plan") was originally
adopted by the Board and approved by Associated Communications Corporation, a
Delaware corporation ("ACC"), as sole stockholder of AGRP, on December 14, 1994,
and became effective on December 15, 1994 (the "Effective Date"). As of the
Effective Date, the Board amended and restated the Original Plan to incorporate
certain clarifications and make certain other adjustments to the provisions of
the Original Plan, which amendment and restatement was subsequently amended and
restated as set forth herein as of March 16, 1998.
<PAGE>
(l) Beneficiary. A Participant may file with the Committee a
written designation of a beneficiary on such form as may be prescribed by the
Committee and may, from time to time, amend or revoke such designation. If no
designated beneficiary survives the Participant, the executor or administrator
of the Participant's estate shall be deemed to be the grantee's beneficiary.
(m) Interpretation. The Plan is designed and intended to
comply with Rule 16b-3 promulgated under the Exchange Act and, to the extent
applicable, with Section 162(m) of the Code, and all provisions hereof shall be
construed in a manner to so comply.
<PAGE>
Exhibit 10.10
[letterhead of Goldman Sachs]
March 6, 1998
Mr. Keith C. Hartman
Associated Investments, Inc.
200 Gateway Towers
Pittsburgh, PA 15222
Dear Keith:
As per your request, the following are certain terms that we have agreed to
regarding certain borrowings by Associated Investments, Inc., subject in all
events to the terms of our standard margin agreement.
o Tele-Communications Inc. Series A (29 7/16), Tele-Communications Ventures
Series A (16 1/8) and Liberty Media Group Series A (28 1/8) will be
acceptable collateral to secure margin loans. Potentially, Series B shares
can be used as collateral.
o The account may borrow up to $200,000,000.
o A house call will result if the equity in the account falls below 35%,
o A rate of Fed Funds +70 bps will initially be charged on the debit balance.
We will use our best efforts to give you adequate notice of any proposed
rate changes.
o Fed Funds for each day will be calculated as the sum of the following:
50% of the 09:00 AM Fed Funds Rate
25% of the 10:30 AM Fed Funds Rate
25% of the 12:00 PM Fed Funds Rate
Please call me if you have any questions.
Sincerely,
/s/ Marty
- ---------
Martin A. Packouz
<PAGE>
Exhibit 10.11
[letterhead of PNC Bank]
December 12, 1997
Associated Investments, Inc.
300 Delaware Avenue, Suite 564
Wilmington, Delaware 19801-1612
Attention: Mr. Keith C. Hartman, Comptroller
Ladies and Gentlemen:
Reference is hereby made to that certain letter agreement dated November 14,
1996, between PNC Bank, National Association (the "Bank") and Associated
Investments, Inc., a Delaware corporation (the "Borrower"), pursuant to which
the Bank made available to the Borrower a discretionary line of credit in the
principal amount of $100,000,000 (the "Discretionary Line"). The Bank has
determined to terminate and by execution of this letter the Borrower confirms
and acknowledges its agreement to the termination of, the Discretionary Line,
and the Bank and Borrower have agreed to the substitution therefor of a
$19,000,000 demand loan, on the following terms:
The Bank has approved a $19,000,000 demand loan to the Borrower (the "Demand
Loan"). The Demand Loan shall be used by the Borrower to refinance amounts
currently outstanding under the Discretionary Line, The Demand Loan shall be due
and payable on demand; provided, however, that Bank shall provide the Borrower
four (4) business days prior written notice of demand, except in the event of
(i) commencement of a bankruptcy, insolvency or similar proceeding by or against
Borrower or against The Associated Group, Inc., its parent (the "Parent"), or
(ii) acceleration of any other indebtedness of Borrower for borrowed money, in
which event no such notice is required. The Demand Loan will bear interest and
be subject to the terms and conditions set forth herein and in an amended and
restated demand note (the "Restated Note"), in form and content satisfactory to
the Bank.
The Demand Loan shall continue to be secured by a first priority perfected lien
on shares of common stock of Tele-Communications, Inc. (or such other publicly
traded stock acceptable to the Bank in its sole discretion) owned by the
Borrower and held by PNC Bank, Delaware, as bailee for the Bank (the
"Collateral"), having a market value equal to at least 154% of the amount
<PAGE>
Associated Investments, Inc.
December 12, 1997
Page 2
of the Demand Loan, and pledged as collateral, pursuant to an Amended and
Restated Pledge Agreement dated November 15, 1996 (the "Pledge Agreement"), the
terms of which by execution of this letter are hereby ratified and confirmed.
The Bank's willingness to make the Demand Loan is subject to Borrower's ongoing
agreement to:
(a) furnish the Bank with audited annual financial statements of the Parent
within 90 days after the end of the Parent's fiscal year, unaudited
quarterly financial statements of the Parent within 45 days after the end
of each of the March 31, June 30 and September 30 fiscal quarters and such
other financial information as the Bank may reasonably request from time
to time, promptly after receipt of each request;
(b) furnish the Bank with Borrower's unaudited quarterly financial statements,
within 45 days after the end of each of the first three (3) fiscal
quarters, and furnish the bank with Borrower's unaudited annual financial
statements within ninety (90) days after the end of the Borrower's fiscal
year;
(c) notify the Bank as soon as practicable following the occurrence of any
default (or event which, with the passage of time or giving of notice or
both, would become a default) under any direct or contingent obligation of
Borrower;
(d) upon the Bank's request, promptly furnish copies of any covenant
compliance certificates prepared in connection with any such obligations;
and
(e) upon the Bank's request, promptly furnish the Bank with a report detailing
the market value of the Collateral as of the date of the report.
This letter is governed by the laws of the Commonwealth of Pennsylvania.
Enclosed for execution by Borrower is the Amended and Restated Demand Note
evidencing this facility, together with Federal Reserve Form U-1. Please
indicate the Borrower's agreement to the terms and conditions of this letter by
having the enclosed copy of this letter executed where indicated and returning
it to me. Prior to making the Demand Loan hereunder, the Borrower must deliver
to the Bank a duly executed original of (i) the Restated Note, (ii) an
acknowledgment by PNC Bank, Delaware, in form and substance acceptable to the
Bank that it holds the Collateral as bailee for the Bank, (iii) stock powers for
each share certificate evidencing the Collateral, duly endorsed to the Bank,
(iv) Federal Reserve Form U-1, (v) a certified copy of resolutions adopted
<PAGE>
Associated Investments, Inc.
December 12, 1997
Page 3
by Borrower's Board of Directors authorizing the transactions contemplated by
this letter, and (vi) an incumbency certificate.
We are pleased to offer support for your banking needs and look forward to
working with you.
Very truly yours,
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Thomas A. Coates
Thomas A. Coates
Vice President
Communications Banking Division
With the intent to be legally bound, the above terms are hereby agreed to and
accepted as of this 12th, day of December, 1997:
[CORPORATE SEAL) ASSOCIATED INVESTMENTS, INC.
Attest: /s/ Brent H. Gray By: /s/ Keith C. Hartman
----------------------------- ---------------------------------
Print Name: Brent H. Gray Print Name: Keith C. Hartman
Title: Ass't General Counsel Title: Controller
Ass't Secretary
<PAGE>
Amended and Restated Demand Note [PNC Bank LOGO]
$19,000,000 December 15, 1997
FOR VALUE RECEIVED, ASSOCIATED INVESTMENTS, INC., a Delaware corporation (the
"Borrower"), with an address at 300 Delaware Avenue, Suite 564, Wilmington,
Delaware 19801, promises to pay ON DEMAND to the order of PNC BANK, NATIONAL
ASSOCIATION (the "Bank"), in lawful money of the United States of America in
immediately available funds at its offices located at 1600 Market Street,
Philadelphia, Pennsylvania 19103, or at such other location as the Bank may
designate from time to time, the principal sum of NINETEEN MILLION AND 00/100
DOLLARS ($19,000,000) (the "Facility"), together with interest accruing on the
outstanding principal balance from the date hereof, as provided below:
1. Rate of Interest. Amounts outstanding under this Note will bear interest at a
rate per annum which is at all times equal to the Federal Funds Rate plus
seventy (70) basis points (.70%). "Federal Funds Rate" shall mean, for any day,
(i) the interest rate per annum (rounded upward, if necessary, to the nearest
1/100 of 1%) determined by the Bank (such determination to be conclusive absent
manifest error) to be equal to the weighted average of rates on federal funds
transactions among members of the Federal Reserve System arranged by Federal
funds brokers at or about 9:00 a.m. (Philadelphia, Pennsylvania time) on such
day; provided however, that if such day is not a business day, the Federal Funds
Rate for such day shall be such rates for such transactions on the immediately
preceding business day, or (ii) if no such rates shall be quoted by Federal
funds brokers at such time, such other rate (not to exceed one-half of one
percentage point below the Prime Rate, as defined below) as determined by the
Bank in accordance with its usual procedures (such determination to be
conclusive absent manifest error). Interest will be calculated on the basis of
a year of 360 days for the actual number of days in each interest period. In no
event will the rate of interest hereunder exceed the maximum rate allowed
by law.
2. Payment Terms. The outstanding principal balance and accrued but unpaid
interest shall be due and payable ON DEMAND; provided, however, that Bank shall
provide the Borrower four (4) business days prior written notice of demand,
except in the event of (i) commencement of a bankruptcy, insolvency or similar
proceeding by or against Borrower or against The Associated Group, Inc.
(Borrower's parent), or (ii) acceleration of any other indebtedness for borrowed
money of Borrower, in which event no such notice is required and Bank may make
immediate demand for repayment hereunder. Accrued interest will be due and
payable in the absence of demand on the last day of each fiscal quarter. THE
BORROWER ACKNOWLEDGES AND AGREES THAT THE BANK MAY AT ANY TIME AND IN ITS SOLE
DISCRETION DEMAND PAYMENT OF ALL AMOUNTS OUTSTANDING UNDER THIS NOTE SUBJECT TO
THE PRIOR NOTIFICATION PROVISIONS SET FORTH IN THE FIRST SENTENCE OF THIS
PARAGRAPH.
Any payment of principal or interest under this Note must be received by the
Bank by 2:00 p.m. prevailing Eastern Time on a business day in order to be
credited on such date. If any payment under this Note shall become due on a
Saturday, Sunday or public holiday under the laws of the Commonwealth of
Pennsylvania, such payment shall be made on the next succeeding business day and
such extension of time shall be included in computing interest in connection
with such payment. The Borrower hereby authorizes the Bank to charge the
Borrower's deposit account at the Bank for any payment when due hereunder.
Payments received will be applied to charges, fees and expenses (including
reasonable attorneys' fees), accrued interest and principal in any order the
Bank may choose, in its sole discretion.
3. Default Rate. From and after four (4) business days following written notice
of demand, this Note shall bear interest at a rate per annum (based on a year of
360 days and actual days elapsed) equal to two (2) percentage points above the
Prime Rate but not more than the maximum rate allowed by law (the "Default
Rate"). As used herein, "Prime Rate" shall mean the rate publicly announced by
the Bank from time to time as its prime rate. The Prime Rate is determined from
time to time by the Bank as a means of pricing some loans to its borrowers. The
Prime Rate is not tied to any external rate of interest or index, and does not
necessarily reflect the lowest rate of interest actually charged by the Bank to
any particular class or category of customers. If and when the Prime Rate
changes, the rate of interest on this Note will change automatically without
notice to the Borrower, effective on the date of any such change. The Default
Rate shall continue to apply whether or not judgment shall be entered on this
Note.
4. Prepayment. The indebtedness evidenced by this Note may be prepaid in whole
or in part at any time without penalty.
5. Other Loan Documents. This Note is issued in connection with (i) the Letter
Agreement between the Bank and the Borrower, dated as of December 12, 1997, (ii)
the Amended and Restated Pledge Agreement executed by the Borrower in favor of
the Bank, dated as of November 15, 1996, as amended, and (iii) the other
documents referred to in the Letter Agreement, the terms of which are
incorporated herein by reference (as such documents may be amended, modified,
renewed or restated from time to time, the "Loan Documents"), and is secured by
the property described in the Loan Documents.
6. Right of Setoff. In addition to all liens upon and rights of setoff against
the money, securities or other property of the borrower given to the Bank by
law, the Bank shall have, with respect to the Borrower's obligations to the Bank
under this Note and to the extent permitted by law, a contractual possessory
security interest in and a contractual right of setoff against, and the Borrower
hereby assigns, conveys, delivers, pledges and transfers to the Bank all of the
Borrower's right, title and interest in and to, all deposits, moneys, securities
and other property of the Borrower now or hereafter in the possession of or on
deposit with, or in transit to, the Bank whether held in a general or special
account or deposit, whether held jointly with someone else, or whether held for
safekeeping or otherwise, excluding, however, (a) all IRA, Keogh, and trust
accounts, and (b) any of Borrower's custody accounts with PNC Bank Delaware
(other than the custody account containing the collateral pledged to the Bank as
security for this Note). Every such security interest and right of setoff may be
exercised without demand upon or notice to the Borrower. Every such right of
setoff shall be deemed to have been exercised hereunder without any action of
the Bank, although the Bank may enter such setoff on its books and records at a
later time.
7. Miscellaneous. No delay or omission of the Bank to exercise any right or
power arising hereunder shall impair any such right or power or be considered to
be a waiver of any such right or power, nor shall the Bank's action or inaction
impair any such right or power. The Borrower agrees to pay on demand, to the
extent permitted by law, all costs and expenses incurred by the Bank in the
enforcement of its rights in this Note and in any security therefor, including
without limitation reasonable fees and expenses of the Bank's counsel. If any
provision of this Note is found to be invalid by a court, all the other
provisions of this Note will remain in full force and effect. The Borrower and
all other makers and indorsers of this Note hereby forever waive presentment,
protest, notice of dishonor and notice of non-payment. The Borrower also waives
all defenses based on suretyship or impairment of collateral. This Note shall
bind the Borrower and its heirs, executors, administrators, successors and
assigns, and the benefits hereof shall inure to the benefit of the Bank and its
successors and assigns.
This Note has been delivered to and accepted by the Bank and will be deemed to
be made in the Commonwealth of Pennsylvania. THIS NOTE WILL BE INTERPRETED AND
THE RIGHTS AND LIABILITIES OF THE BANK AND THE BORROWER DETERMINED IN ACCORDANCE
WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA, EXCLUDING ITS CONFLICT OF
LAWS RULES. The Borrower hereby irrevocably consents to the exclusive
jurisdiction of any state or federal court for the county or judicial district
where the Bank's office indicated above is located, and consents that all
service of process be sent by nationally recognized overnight courier service
directed to the Borrower at the Borrower's address set forth herein and service
so made will be deemed to be completed on the business day after deposit with
such courier; provided
1
<PAGE>
that nothing contained in this Note will prevent the Bank from bringing any
action, enforcing any award or judgment or exercising any rights against the
Borrower individually, against any security or against any property of the
Borrower within any other county, state or other foreign or domestic
jurisdiction. The Borrower acknowledges and agrees that the venue provided above
is the most convenient forum for both the Bank and the Borrower. The Borrower
waives any objection to venue and any objection based on a more convenient forum
in any action instituted under this Note.
8. Amendment and Restatement. This Note amends and restates, and is in
substitution for, that certain Amended and Restated Discretionary Line of Credit
Note in the principal amount of $100,000,000, payable to the order of the Bank
and dated November 15, 1996 (the "Original Note"), and does not constitute a
novation of the Original Note.
9. Waiver of Jury Trial. THE BORROWER IRREVOCABLY WAIVES ANY AND ALL RIGHTS THE
BORROWER MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY
NATURE RELATING TO THE NOTE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS NOTE
OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE BORROWER
ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
The Borrower acknowledges that it has read and understood all the provisions of
this Note, including the waiver of jury trial, and has been advised by counsel
as necessary or appropriate.
WITNESS the due execution hereof as a document under seal, as of the date first
written above, with the intent to be legally bound hereby.
[CORPORATE SEAL] ASSOCIATED INVESTMENTS, INC.
Attest: /s/ Brent H. Gray By: /s/Keith C. Hartman
------------------------ -----------------------------
Print Name: Brent H. Gray Print Name: Keith C. Hartman
-------------------- ---------------------------
Title: Ass't General Counsel Title: Controller
------------------------ --------------------------
Ass't Secretary
2
<PAGE>
Exhibit 10.15
[letterhead of PNCBANK]
December 12, 1997
PNC Bank, Delaware Associated Investments, Inc.
222 Delaware Avenue 300 Delaware Avenue, Suite 564
Wilmington, DE 19899 Wilmington, DE 19801-1612
Attention: A. David Vande Poele Attention: Keith C. Hartman
Re: CUSTODY AGREEMENT REGARDING PLEDGE OF STOCK
Gentlemen,
PNC Bank, National Association (the "Bank") has agreed to continue to extend
credit to Associated Investments, Inc. ("AII") pursuant to that certain Letter
Agreement dated as of December 12, 1997 (the "Letter Agreement") and that
certain Amended and Restated Demand Note dated as of December 15, 1997 in the
principal amount of $19,000,000 (the "Note"). As security for the indebtedness
due the Bank under the Letter Agreement and the Note, AII has agreed to
continue to pledge to the Bank, pursuant to the Amended and Restated Pledge
Agreement attached hereto (together with any amendments, renewals, supplements
or other modifications thereto from time to time, the "Pledge Agreement"),
shares of common stock of Tele-Communications, Inc. (or other publicly traded
stock acceptable to the Bank in its discretion) (the "TCI Stock") having a
current market value at all times of at least 154% of all of the obligations
of AII to the Bank, including without limitation the amount outstanding under
the Letter Agreement and the Note,
At the request of AII, the Bank has agreed to continue to permit the Pledged
Shares (as defined below) to be held by PNC Bank, Delaware, an affiliate of the
Bank acting as agent for the Bank, in Delaware. By executing the duplicate
original of this letter, PNC Bank, Delaware accepts and AII acknowledges the
appointment of PNC Bank, Delaware as agent for the Bank. It is AGREED that PNC
Bank, Delaware, as agent for the Bank, shall act in accordance with the
following:
1. The Bank hereby directs PNC Bank, Delaware to hold for the use and benefit
of the Bank (i) all of the TCI Stock pledged to the Bank pursuant to the
Pledge Agreement and delivered to PNC Bank, Delaware, (ii) all TCI Stock
and other securities which may from time to time be delivered to PNC Bank,
Delaware, whether by substitution or otherwise, under the Pledge
Agreement, (iii) all proceeds from any of the foregoing (collectively, the
"Pledged Shares"), and (iv) all stock powers provided by AII in connection
with the Pledged Shares.
2. PNC Bank, Delaware shall be the exclusive agent of the Bank and no other
person with respect to the Pledged Shares.
3. The Bank shall have control over the use and disposition, whether by
itself or through its agent, of the Pledged Shares to the extent provided
in the Pledge Agreement.
<PAGE>
PNC Bank, Delaware
Associated Investments, Inc.
December 12, 1997
Page 2
4. AII shall not be permitted to withdraw and PNC Bank, Delaware shall not be
permitted to deliver to AII any of the Pledged Shares without the prior
written instruction of the Bank.
AII hereby agrees to indemnify and hold harmless PNC Bank, Delaware from any
loss incurred by PNC Bank, Delaware, including but not limited to reasonable
attorneys' fees, incurred in connection with such loss, which may arise out of
or result from PNC Bank, Delaware acting as agent for the Bank with respect to
the Pledged Shares or complying with the terms hereof. Notwithstanding the
foregoing, AII shall not be required to indemnify PNC Bank, Delaware for any
loss which was a result of the gross negligence or wilful misconduct of PNC
Bank, Delaware or any of its officers, agents or employees.
This letter may be executed in one or more counterparts, each of which when
executed by the parties hereto shall be regarded as an original, but all of
which together shall constitute one and the same letter.
If the foregoing accurately reflects the understanding of the parties please
execute the duplicate original of this letter and return the same to me.
Very truly yours,
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Thomas A. Coates
--------------------------------
Thomas A. Coates, Vice President
Accepted and Agreed to this Accepted and Agreed to this
__ day of December, 1997 12th day of December, 1997
PNC BANK, DELAWARE ASSOCIATED INVESTMENTS, INC.
By: By: /s/ Keith C. Hartman
------------------------------ ------------------------------
Name: Name: Keith C. Hartman
---------------------------- ----------------------------
Title: Title: Controller
--------------------------- ---------------------------
<PAGE>
SIGNIFICANT SUBSIDIARIES OF THE ASSOCIATED GROUP, INC.
EXHIBIT 21
STATE OF
INCORPORATION
---------------
Associated Communications of Mexico, Inc. Delaware
Associated Investments, Inc. Delaware
Associated PCN Holding Corporation Delaware
Associated Radio, Inc. Delaware
Microwave Services, Inc. Delaware
TruePosition, Inc. Delaware
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-88041) pertaining to the 1994 Stock Option and Incentive Award
Plan of The Associated Group, Inc. of our report dated February 27, 1998, with
respect to the consolidated financial statements and schedule of The Associated
Group, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
ERNST & YOUNG LLP
Pittsburgh, PA
March 27, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Grupo Portatel, S.A. de C.V.:
We consent to the incorporation by reference in the registration statement
(No. 33-880841) on Form S-8 of The Associated Group, Inc. of our report dated
February 20, 1998, relating to the consolidated balance sheets of Grupo
Portatel, S.A. de C.V. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997 (not presented separately herein), which report appears in this Form 10-K
of the Associated Group, Inc.
KPMG CARDENAS DOSAL, S.C.
Felipe Lopez Villegas
Merida, Yuc., Mexico
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of The Associated Group, Inc. as of and for
the year ended December 31, 1997 included in Form 10-K for the year ending
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 426,596
<SECURITIES> 0<F1>
<RECEIVABLES> 5,683
<ALLOWANCES> 2,495
<INVENTORY> 2,175
<CURRENT-ASSETS> 470,317
<PP&E> 68,664
<DEPRECIATION> 34,827
<TOTAL-ASSETS> 1,503,122
<CURRENT-LIABILITIES> 143,664
<BONDS> 306,244
0
0
<COMMON> 3,761<F2>
<OTHER-SE> 614,759
<TOTAL-LIABILITY-AND-EQUITY> 1,503,122
<SALES> 763
<TOTAL-REVENUES> 25,835
<CGS> 587
<TOTAL-COSTS> 15,102
<OTHER-EXPENSES> 19,127
<LOSS-PROVISION> 1,058
<INTEREST-EXPENSE> 12,018
<INCOME-PRETAX> (65,495)
<INCOME-TAX> (13,830)
<INCOME-CONTINUING> (51,665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,665)
<EPS-PRIMARY> (1.38)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Does not include $841,311 of noncurrent marketable equity securities and
$95,075 restricted cash and investments.
<F2>Reflects a two-for-one stock split of The Associated Group, Inc. Class A
Common Stock and Class B Common Stock effected in the form of a stock dividend
of one share of Class A Common Stock and one share of Class B Common Stock for
each outstanding share of Class A Common Stock and Class B Common Stock,
respectively, held by stockholders of record on October 17, 1997. All per
share amounts and the weighted average number of shares outstanding in the
consolidated financial statements included in Form 10-K for the year ended
December 31, 1997 have been adjusted to reflect the stock dividend. Previously
filed Financial Data Schedules have not been restated to reflect the stock
dividend.
</FN>
</TABLE>
