<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- --------------------------------------------------------------------------------
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- --------------
Commission File Number 0-24924
------------------------------
THE ASSOCIATED GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0260858
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 Gateway Towers, Pittsburgh, Pennsylvania 15222
(Address of principal executive offices) (Zip Code)
412-281-1907
(Registrant's telephone number)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the issuer's classes of
common stock, as of November 10, 1999:
Common Stock, Class A 18,765,924
Common Stock, Class B 19,805,259
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 229,727 $ 418,246
Accounts receivable, less allowance for doubtful accounts
(September 30, 1999--$4,110; December 31, 1998--$2,143) 17,885 5,526
Receivable from related parties 3,312 2,368
Restricted cash and investments 38,200 32,183
Deferred income taxes 1,136 1,136
Other current assets 13,201 6,124
-------------------- ---------------------
Total current assets 303,461 465,583
Property and equipment, net of accumulated depreciation and
amortization (September 30, 1999--$79,616; December 31, 318,786 207,075
1998--$49,720)
Marketable equity securities, at fair value (cost of $6,744
at September 30, 1999 and $6,958 at December 31, 1998) 1,950,678 1,605,368
Notes receivable from related parties 22,039 23,820
Restricted investments 16,754 33,117
Other noncurrent assets 107,527 96,389
-------------------- ---------------------
Total assets $ 2,719,245 $ 2,431,352
==================== =====================
</TABLE>
See notes to consolidated financial statements
<PAGE>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 153,588 $ 138,015
Employee compensation 26,217 14,837
Short-term obligations 176,318 151,186
Current portion of long-term debt 2,082 2,082
Other current liabilities 23,073 8,976
-------------------- -----------------
Total current liabilities 381,278 315,096
Deferred compensation 4,317 3,484
Long-term debt, excluding current portion 803,239 580,220
Deferred income taxes 611,827 508,227
Minority interests 12,219 29,957
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 issued
and outstanding in 1999 and 1998 1,876 1,876
Class B Common Stock, par value $.10 per share;
authorized 50,000,000 shares; 19,804,459 and 19,387,564
issued and outstanding in 1999 and 1998 1,980 1,939
Additional paid-in capital 201,042 152,482
Accumulated deficit (562,091) (200,896)
Accumulated other comprehensive income 1,263,558 1,038,967
-------------------- --------------------
Total stockholders' equity 906,365 994,368
-------------------- --------------------
Total liabilities and stockholders' equity $ 2,719,245 $ 2,431,352
==================== ====================
</TABLE>
See notes to consolidated financial statements
<PAGE>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine months Ended September 30,
1999 1998 1999 1998
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 22,919 $ 8,037 $ 48,760 $ 23,364
Costs and expenses:
Cost of sales and services 63,642 29,270 151,702 61,713
Sales, general and administrative expenses 68,388 46,017 191,454 108,371
Stock-based compensation expense 6,470 6,721 19,589 21,774
Depreciation and amortization expense 14,120 4,636 34,739 10,803
----------------- ---------------- ---------------- ------------------
152,620 86,644 397,484 202,661
----------------- ---------------- ---------------- ------------------
Operating loss (129,701) (78,607) (348,724) (179,297)
Other income (expense):
Gain on sale of marketable equity securities - - 580 1,162
Interest and dividend income 8,980 9,493 27,771 28,507
Interest expense (26,943) (21,681) (71,374) (53,844)
Minority interests (432) 46,348 22,098 103,652
----------------- ---------------- ---------------- ------------------
(18,395) 34,160 (20,925) 79,477
----------------- ---------------- ---------------- ------------------
Loss before income taxes (148,096) (44,447) (369,649) (99,820)
Income tax benefit 2,114 3,882 8,454 9,242
----------------- ---------------- ---------------- ------------------
Net loss $ (145,982) $ (40,565) $ (361,195) $ (90,578)
================= ================ ================ ==================
Net loss per common share $ (3.79) $ (1.06) $ (9.43) $ (2.38)
================= ================ ================ ==================
Weighted average common shares outstanding 38,538,583 38,104,027 38,318,234 37,986,194
</TABLE>
See notes to consolidated financial statements
<PAGE>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months Ended September 30,
1999 1998
-----------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (361,195) $ (90,578)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 34,739 10,803
Amortization of debt discount and issue costs 27,196 17,657
Provision for losses on accounts receivable 2,095 829
Gain on sale of investments (580) (1,162)
Stock-based compensation 19,589 20,274
Minority interests (22,098) (103,652)
Provision for deferred income taxes (8,770) (9,572)
Other 3,674 4,235
Change in assets and liabilities, net of acquisitions:
Accounts receivable (12,750) (2,820)
Other current assets (8,545) 190
Accounts payable (excluding capital assets) (25,045) 21,744
Employee compensation 11,380 12,200
Other current liabilities 12,879 9,129
Deferred compensation 833 770
----------------- -----------------
Net Cash Used In Operating Activities (326,598) (109,953)
Cash Flows From Investing Activities
Purchases of property and equipment (103,331) (71,256)
Proceeds from sale of investments 794 1,930
Restricted cash and investments 10,347 13,481
Cash paid for acquisitions, net of cash acquired (2,498) -
Increase in receivable from related parties (629) (1,955)
Other investing activities, net (438) (613)
----------------- -----------------
Net Cash Used In Investing Activities (95,755) (58,413)
Cash Flows From Financing Activities
Proceeds from short-term obligations, net 25,132 30,999
Proceeds from long-term debt 200,000 250,703
Repayment of long-term debt (1,211) (1,213)
Payment of debt issue costs (689) (27,539)
Proceeds from exercise of stock options 10,602 1,030
----------------- -----------------
Net Cash Provided By Financing Activities 233,834 253,980
----------------- -----------------
Net (Decrease) Increase In Cash And Cash Equivalents (188,519) 85,614
Cash And Cash Equivalents At Beginning Of Period 418,246 426,596
----------------- -----------------
Cash And Cash Equivalents At End Of Period $ 229,727 $ 512,210
================= =================
</TABLE>
See notes to consolidated financial statements
<PAGE>
THE ASSOCIATED GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Associated
Group, Inc. ("Associated") and Subsidiaries (the "Company," as used herein,
includes all consolidated subsidiaries, unless the context otherwise indicates)
have been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30, 1999, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
Certain amounts in the financial statements for the 1998 periods have been
reclassified to conform to the financial statement presentation for the current
period. These reclassifications have no effect on the net losses.
Consolidated subsidiaries include Teligent, Inc. ("Teligent"), a company founded
in 1996, which offers full service, facilities-based local and long distance
telecommunications, high-speed data and dedicated Internet services to small-
and medium-sized businesses over its Smartwave(TM) local networks; and Grupo
Portatel, S.A. de C.V. and subsidiaries ("Grupo"), a cellular telephone service
provider in southeastern Mexico.
2. MERGER AGREEMENT
On June 1, 1999, the Company announced that it had signed a definitive merger
agreement with AT&T Corp. and Liberty Media Corporation pursuant to which AT&T
will acquire the business of the Company in an all-stock transaction, and the
Company will become part of AT&T's Liberty Media Group (see Note 5). The
transaction is subject to the approval of the Company's stockholders at a
special meeting of stockholders to be held on December 9, 1999 and various
governmental authorities, and is expected to be completed in the first quarter
of 2000.
3. ACQUISITIONS
During the third quarter of 1999, Teligent acquired two communications companies
which were accounted for as purchases. Consideration for these acquisitions
included 230,627 shares of Teligent common stock valued at $13.2 million, cash
payments of $2.6 million, and earnout provisions which could result in the
issuance of up to an additional 285,562 shares of Teligent common stock over the
next three years. The majority of the purchase price will be assigned to
goodwill and amortized over 5 years. Proforma information has not been presented
because these acquisitions were not material to the Company's financial position
or results of operations.
4. NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1999, the Company has adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1") and Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-1 requires certain internal
and external costs incurred to develop internal-use computer software during the
application development stage, as well as costs to develop or obtain software
that allows for access or conversion of old data by new systems, to be
capitalized. SOP 98-5 requires that the costs of start-up activities be expensed
as incurred, including presenting the cumulative effect of a change in
accounting principle. The effect of the adoption of these new accounting
pronouncements was not material to the Company's financial condition or results
of operations.
<PAGE>
5. MARKETABLE EQUITY SECURITIES
The cost and market value of marketable equity securities classified as
available for sale at September 30, 1999, are as follows:
<TABLE>
<CAPTION>
Name of Issuer and Number of
Title of Each Issue Shares Cost Market Value
- ---------------------------------------------------------- ---------------- -------------------- --------------------
<S> <C> <C> <C>
AT&T Corp.:
AT&T Common Stock 19,719,274 $3,748 $ 857,788
Liberty Media Group Class A Common Stock 23,368,954 2,285 871,954
Liberty Media Group Class B Common Stock 5,303,888 273 210,830
Others Various 438 10,106
-------------------- --------------------
$6,744 $1,950,678
==================== ====================
</TABLE>
On March 9, 1999, AT&T Corp. merged with Tele-Communications, Inc.
("TCI"), resulting in the conversion of the Company's shares of
Tele-Communications, Inc. Series A TCI Group Common Stock and
Tele-Communications, Inc. Series B TCI Group Common Stock into shares of AT&T
common stock.
Concurrent with the AT&T merger, TCI's Liberty Media Group and TCI Ventures
Group were combined to form a new Liberty Media Group, and the Company's
holdings in Liberty Media Group and TCI Ventures Group were converted into
Liberty Media Group Class A and Class B Common Stock, which are separate
tracking stocks of AT&T.
Shares owned by the Company as of September 30, 1999 reflect a three-for-two
stock split of AT&T common stock paid April 15, 1999, and a two-for-one stock
split of the Liberty Media Group Class A and Class B Common Stock paid June 11,
1999, each effected in the form of a stock dividend.
Currently, an aggregate of 8,739,639 shares of AT&T common stock and 6,895,704
shares of Liberty Media Group Class A Common Stock are pledged as collateral
under the Company's short-term credit facilities.
During the first six months of 1999 and 1998, the Company sold certain
marketable securities for proceeds of approximately $794 and $1,930,
respectively. These sales resulted in pretax gains of $580 and $1,162 in 1999
and 1998, respectively.
6. LONG-TERM DEBT
The Company's long-term debt, excluding current portion, consists of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- ----------------
<S> <C> <C>
Teligent 11.5% Senior Notes due 2007 $300,000 $300,000
Teligent 11.5% Senior Discount Notes due 2008 300,287 276,058
Teligent Credit Facility 200,000 -
Grupo loans 2,952 4,162
----------------- ----------------
$803,239 $580,220
================= ================
</TABLE>
Borrowings under the Teligent credit facility incur interest based on a floating
rate tied to the prevailing London Interbank Offered Rate ("LIBOR") or an
alternative base rate, which adjusts based on the attainment of certain key
revenue and leverage benchmarks for Teligent.
<PAGE>
7. MINORITY INTEREST
The minority interest liability and related income reflect the outside ownership
of consolidated subsidiaries, including Teligent. However, because Teligent's
stockholders' equity became a deficit during the first quarter of 1999, the
Company did not record $204,107 of minority interest income for the nine months
ended September 30, 1999 that would have otherwise been recorded if Teligent's
stockholders' equity was not a deficit. If such minority interests had been
recognized, the Company's losses would have been $(55,653), or $(1.44) per
share, and $(157,088), or $(4.10) per share for the three and nine months ended
September 30, 1999, respectively.
8. CAPITAL STOCK AND PER SHARE DATA
During the nine months ended September 30, 1999, shares outstanding of the
Company's Class B Common Stock increased by 416,895 shares as a result of stock
option exercises.
Loss per common share data is presented in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, and is calculated using the
weighted average number of common shares outstanding. Fully diluted net loss per
share including stock options is not presented since the effect of including the
stock options would be antidilutive.
9. COMPREHENSIVE INCOME
The Company's total comprehensive loss was $(136,604) for the nine months ended
September 30, 1999. For the nine months ended September 30, 1998, total
comprehensive income was $149,047. Other comprehensive income represents
unrealized gains on the Company's marketable equity securities. Total unrealized
gains are reflected in stockholders' equity as accumulated other comprehensive
income, net of related deferred taxes of $680,377 and $755,584, as of September
30, 1999 and December 31, 1998, respectively.
10. INCOME TAXES
The Company's financial statements reflect the income tax effects of the
consolidated income tax return of Associated as well as the separate income tax
returns of Grupo and Teligent. Teligent has recorded a valuation allowance to
offset the income tax benefit generated in the respective nine-month periods
ended September 30, 1999 and 1998, resulting in a reduction in the Company's
consolidated effective tax rate as compared to the statutory rate.
11. FOREIGN CURRENCY TRANSLATION
The financial statements of Grupo are translated from Mexican pesos to U.S.
dollars in accordance with SFAS No. 52, "Foreign Currency Translation." Since
its inception in 1990, Grupo has used the U.S. dollar as its functional
currency, based upon its economic dependence on its U.S. shareholders, U.S.
dollar denominated debt obligations, the level of U.S. suppliers, as well as
the inflationary environment in Mexico. As of January 1, 1999, Mexico is no
longer considered to be a "hyper-inflationary" economy under SFAS No. 52,
however, Grupo will continue to use the U.S. dollar as its functional currency
due to the significance of the other factors noted.
<PAGE>
12. OPERATING SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Mexican cellular communications $10,882 $6,789 $27,887 $20,106
Fixed microwave communications 10,321 239 15,805 480
Radio broadcasting 1,300 952 3,444 2,356
All other 416 57 1,624 422
---------------- --------------- ------------- -----------------
$22,919 $8,037 $48,760 $23,364
================ =============== ============= =================
Operating profit (loss):
Mexican cellular communications $ 828 $ (95) $ 1,645 $ (18)
Fixed microwave communications (123,925) (67,326) (325,057) (153,431)
Radio broadcasting 200 (1) (9) (566)
All other (6,804) (11,185) (25,303) (25,282)
---------------- --------------- ------------- -----------------
$(129,701) $(78,607) $(348,724) $(179,297)
================ =============== ============= =================
</TABLE>
The operating loss for fixed microwave communications includes noncash
stock-based compensation expense of $6,470 and $6,721 for the three months ended
September 30, 1999 and 1998, respectively, and $19,589 and $20,274 for the nine
months ended September 30, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Segment assets:
Mexican cellular communications $ 43,132 $ 38,260
Fixed microwave communications 689,342 761,200
Radio broadcasting 3,171 3,217
All other 1,983,600 1,628,675
----------------- -----------------
$2,719,245 $2,431,352
================= =================
</TABLE>
Assets other than those of reportable segments includes assets of segments below
the quantitative thresholds, intercompany eliminations, and corporate assets,
primarily marketable equity securities of $1,950,678 and $1,605,368 in 1999 and
1998, respectively.
13. SUBSEQUENT EVENTS
Teligent entered into a stock purchase agreement, dated November 4, 1999, to
issue 500,000 shares of convertible preferred stock to certain investors,
including Microsoft Corporation and Hicks, Muse, Tate & Furst Incorporated, for
gross proceeds of $500 million. The preferred stock is convertible into common
stock, is callable by Teligent after 5 years, and is subject to mandatory
redemption in 2014 at $57.50 per share if still outstanding. The preferred stock
has an annual dividend rate of 7.75%, payable quarterly in additional preferred
stock for the initial 5 years outstanding, and in either cash or additional
preferred stock, at the option of Teligent, thereafter. Closing under the stock
purchase agreement is subject certain closing conditions, and is expected to
occur in the fourth quarter of 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains 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 ("SEC").
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.
FINANCIAL CONDITION
The Company has funded significant start-up operating and capital costs
for its wireless communications related businesses and interests, primarily
Teligent and its wireless location business TruePosition, Inc. ("TruePosition"),
during 1999 and 1998. The Company expects to continue to incur substantial costs
developing its businesses and technologies.
Currently, the Company's cash requirements, other than those of
Teligent (see below), are principally being met by i) borrowings under two
margin loan facilities and a bank demand loan, and ii) proceeds from the sale of
investments. The Company's bank demand loan and margin loan facilities are
secured by shares of AT&T common stock and AT&T's Liberty Media Group common
stock. Borrowings under one margin loan facility are limited to 65% of the
market value of the pledged stock, up to a maximum borrowing capacity of $200
million. Borrowings under the other brokerage margin loan facility are limited
to 50% of the market value of the pledged stock. Borrowings under the bank
demand loan and margin loan facilities bear interest at variable rates based
upon the Fed Funds rate plus an applicable margin.
As of November 10, 1999, based on (a) the market value of the AT&T
common stock and Liberty Media Group common stock pledged in the aggregate and
(b) aggregate outstanding short-term obligations under the credit facilities
described above of approximately $178.6 million, the Company's unused borrowing
capacity was approximately $217.4 million. A significant portion of the
Company's assets are liquid, and can be pledged as security for added borrowing
capacity. Given the market value on November 10, 1999 of the remaining shares of
the Company's marketable equity securities portfolio that can be pledged as
additional security, the Company estimates that it could secure approximately
$697.6 million of additional borrowings on similar terms as existing margin
facilities. 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.
Teligent launched full commercial service in the fourth quarter of
1998, and currently provides service in 34 of the nation's largest markets.
Teligent has incurred significant losses and negative operating cash flow to
date, which are expected to continue until it develops a customer base that will
generate sufficient revenues to fund operating expenses. In 1999 and 1998,
Teligent's cash requirements have been met through its equity and debt offerings
which were completed in the second half of 1997 and first quarter of 1998, and a
credit facility providing up to $800 million, of which $200 million has been
borrowed as of September 30, 1999. In addition, Teligent has entered into a
stock purchase agreement dated November 4, 1999, pursuant to which it expects to
issue 500,000 shares of convertible preferred stock to certain investors,
including Microsoft Corporation and Hicks, Muse, Tate & Furst Incorporated, for
gross proceeds of $500 million. The preferred stock is convertible into common
stock, is callable by Teligent after 5 years, and is subject to mandatory
redemption in 2014 at $57.50 per share if still outstanding. Teligent has also
filed a Universal Shelf Registration Statement ("Registration Statement"), with
the SEC to raise up to $1 billion by offering securities that may be comprised
of a combination of common stock, preferred stock, debt securities or
depositary shares. The Registration Statement, which was declared effective on
July 22, 1999, permits Teligent to periodically offer such securities in
amounts, prices, and terms to be determined
<PAGE>
when the securities are issued. After initiating service in most of its
markets, Teligent expects to have positive operating margins over time by
increasing the number of customers and selling additional services without
significantly increasing related capital expenditures and operating costs.
Historical Cash Flows
Net cash used in operating activities was $326,598,000 and $109,953,000
for the nine months ended September 30, 1999 and 1998, respectively. The
Company's operating cash needs increased in the 1999 period primarily for
operating expenses of Teligent which launched full commercial service in October
1998 and continues to expand its service offerings to new markets. Net cash used
in investing activities was $95,755,000 and $58,413,000 in the nine months ended
September 30, 1999 and 1998, respectively. The change between periods was
primarily due to approximately $32 million of additional property and equipment
purchases in the 1999 period as compared to the 1998 period, primarily for the
build-out of Teligent's network. Net cash provided by financing activities in
the 1999 and 1998 periods was $233,834,000 and $253,980,000, respectively. The
1999 period includes $200,000,000 borrowed by Teligent under a credit facility,
and the 1998 period includes $243,145,000 of net proceeds from Teligent's 11.5%
Senior Discount Notes issued in February 1998. Proceeds from these borrowings
are being used to fund the operating and capital requirements of Teligent.
OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues increased $14,882,000 in the 1999 period compared to the 1998
period. The increase is primarily attributable to Teligent, which launched
commercial service in October 1998 and has expanded to provide service in 34 of
the largest U.S. markets currently. Growth in Grupo's subscriber base has also
led to a 60% increase in revenues in the Company's Mexican cellular
communications segment in the 1999 period as compared to the same period of
1998. Radio broadcasting revenues also increase by 37% in 1999 as compared to
1998 as a result of format changes which have enhanced performance. Cost of
sales and services increased $34,372,000, principally due to higher operating
costs incurred by Teligent in connection with the expansion of its service
offerings.
Sales, general and administrative expenses were $68,388,000 and
$46,017,000 in the 1999 and 1998 periods, respectively. The increase of
$22,371,000 was principally the result of expenditures relating to the growth of
Teligent's operations. Depreciation and amortization expense increased from
$4,636,000 in the three months ended September 30, 1998, to $14,120,000 in the
same period of 1999, principally due to the increase in Teligent's property and
equipment.
Interest and dividend income was $8,980,000 and $9,493,000 in the 1999
and 1998 periods, respectively. The change between periods is principally the
result of a $4,338,000 dividend from AT&T recorded in September 1999, offset by
a decrease in Teligent's investment earnings in the 1999 period as compared to
1998, as a result of the utilization of funds for operations and debt service.
Interest expense was $26,943,000 and $21,681,000 in the 1999 and 1998 periods,
respectively, reflecting an increase principally due to an increase in
Teligent's borrowing level and amortization of debt discount and credit facility
fees.
Minority interest expense was $432,000 in the 1999 period, compared to
income of $46,348,000 in the 1998 period. Since Teligent's accumulated losses
through the end of the first quarter of 1999 exceeded its capital, minority
interests for the three months ended September 30, 1999 do not reflect an income
effect of $90,329,000 representing Teligent's loss for the period attributable
to Teligent's outside ownership interests. For financial reporting purposes, the
Company must recognize 100% of any additional losses incurred in excess of
Teligent's capital.
The Company recognized an income tax benefit (net of foreign tax
expense of Grupo) at an effective rate of approximately 1.4% and 8.7% in the
1999 and 1998 periods, respectively. The principal differences between the
effective tax rate and the statutory rate in 1999 are the accounting for
minority interests and valuation allowances recorded by Teligent which files
separate tax returns. For 1998, the principal difference was the valuation
allowances recorded by Teligent.
<PAGE>
The Company's net loss was $145,982,000 for the three months ended
September 30, 1999, compared to a net loss of $40,565,000 for the three months
ended September 30, 1998. The higher loss in the 1999 period resulted primarily
from increased operating and administrative costs from the growth of Teligent,
and an increase in the portion of Teligent's loss recognized by the Company as a
result of Teligent's negative equity position.
OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues increased $25,396,000 in the 1999 period compared to the 1998
period. The increase is primarily attributable to Teligent, which launched
commercial service in October 1998 and has expanded to provide service in 34 of
the largest U.S. markets currently. Growth in Grupo's subscriber base has also
led to a 39% increase in revenues in the Company's Mexican cellular
communications segment in the 1999 period as compared to the same period of
1998. Radio broadcasting revenues also increased by 46% in 1999 as compared to
1998 as a result of format changes which have enhanced performance. Cost of
sales and services increased $89,989,000, principally due to higher operating
costs incurred by Teligent in connection with the expansion of its service
offerings.
Sales, general and administrative expenses were $191,454,000 and
$108,371,000 in the 1999 and 1998 periods, respectively. The increase of
$83,083,000 was principally the result of expenditures relating to the growth of
Teligent's operations. Stock-based compensation expense decreased from
$21,774,000 in the 1998 period to $19,589,000 in the 1999 period, primarily due
to a one-time charge of $1,500,000 in the 1998 period. Depreciation and
amortization expense increased from $10,803,000 in the nine months ended
September 30, 1998, to $34,739,000 in the same period of 1999, principally due
to the increase in Teligent's property and equipment.
Pretax gains of $580,000 and $1,162,000 were recognized in the nine
months ended September 30, 1999 and 1998, respectively, from the sale of certain
marketable securities. Interest and dividend income was $27,771,000 and
$28,507,000 in the 1999 and 1998 periods, respectively. The change between
periods is principally the result of $13,015,000 in AT&T dividends recorded in
1999, offset by a decrease in Teligent's investment earnings in the 1999 period
as compared to 1998, reflecting a decrease in investments as a result of the
utilization of funds for operations and debt service. Interest expense was
$71,374,000 and $53,844,000 in the 1999 and 1998 periods, respectively,
reflecting an increase due to an increase in the level of outstanding borrowings
and an increase in Teligent's amortization of debt discount and issue costs.
Minority interests were $22,098,000 in the 1999 period, compared to
$103,652,000 in 1998. Since Teligent's accumulated losses through the end of the
first quarter of 1999 exceeded its capital, minority interests for the nine
months ended September 30, 1999 do not reflect an income effect of $204,107,000
representing Teligent's loss for the period attributable to Teligent's outside
ownership interests. For financial reporting purposes, the Company must
recognize 100% of any additional losses incurred in excess of Teligent's
capital.
The Company recognized an income tax benefit (net of foreign tax
expense of Grupo) at an effective rate of approximately 2.3% and 9.3% in the
1999 and 1998 periods, respectively. The principal differences between the
effective tax rate and the statutory rate in 1999 are the accounting for
minority interests and valuation allowances recorded by Teligent which files
separate tax returns. For 1998, the principal difference was the valuation
allowances recorded by Teligent.
The Company's net loss was $361,195,000 for nine months ended September
30, 1999, compared to a net loss of $90,578,000 for the nine months ended
September 30, 1998. The higher loss in the 1999 period resulted primarily from
increased operating and administrative costs from the growth of Teligent, and an
increase in the portion of Teligent's loss recognized by the Company as a result
of Teligent's negative equity position.
YEAR 2000
The Company continues to assess its exposure to problems which may
arise from the inability of certain computer programs to properly recognize
dates in the year 2000. The Company's exposure to the "Year 2000" problem arises
from potential problems within its internal information and operating systems,
as well as the impact of the Year 2000 on the Company's significant vendors,
suppliers, and investees. Based on information gathered to
<PAGE>
date, many of the Company's information and operating systems are currently
Year 2000 compliant. Management expects that, based on representations from the
vendors of these systems, necessary modifications to non-compliant systems will
be in place by the end of 1999. However, the Company cannot ensure the
performance and Year 2000 readiness of its outside vendors and suppliers, and
in the event any Year 2000 problems are not resolved, the Company may
experience some interruption or failure of important business operations. The
following summarizes the Year 2000 status of operating subsidiaries and
investees that the Company believes may be material to its operations and
financial condition.
Teligent
Teligent has appointed a Year 2000 committee to lead its efforts to
assess the risks and ensure its computer applications will function properly.
Teligent has made substantial progress identifying potential problem
areas within its products and services, suppliers, and facilities and equipment,
and they are assessing and addressing these problem areas, including the
development of contingency plans. Teligent believes that its "mission-critical"
operations, those that are vital to the provision of voice, video and data
switching, processing and transport services to its customers, are Year 2000
ready, although they are dependent on outside service and telecommunications
providers. Given the continued growth and complexity of Teligent's network,
efforts will continue, including additional testing, monitoring, and planning.
Although actual costs have not yet been determined, Teligent believes that the
cost to bring its systems into compliance with the Year 2000 will be less than
$5 million.
Further information on Teligent's Year 2000 readiness can be found in
Teligent's current periodic filings with the SEC and on its web site
(www.teligent.com).
TruePosition
TruePosition has completed its assessment of the Year 2000 issue and
believes that its wireless location system will be Year 2000 compliant with the
purchase of certain software upgrades which are currently available without
significant cost. Full compliance is expected to be achieved and tested by the
end of 1999. Certain components of the system are manufactured by third parties
and Year 2000 compliance is currently dependent on the representations made by
and performance of those third parties.
Grupo
Grupo has assessed the risks associated with the Year 2000 issue on its
operating and financial accounting systems, its fixed assets, its inventories,
and its customer and supplier relationships. Grupo has replaced or made
necessary modifications to the majority of its operating network in order to
ensure that the equipment is Year 2000 compatible. Any additional modifications
required are expected to be completed by the end of 1999. Grupo believes that
all other critical systems of the company are Year 2000 compliant. The cost of
modifications to its network, and other business systems of Grupo is not
expected to be material to the Company's financial position.
AT&T
The Company's investment in AT&T (including Liberty Media Group)
accounts for a significant portion of its assets. A significant decline in the
value of the AT&T investment resulting from any adverse effects of the Year 2000
problem could have a significant impact on the Company's financial condition.
AT&T has indicated that as of September 30, 1999, its network services,
excluding recent acquisitions, is Year 2000 compliant. Further testing and
contingency planning is on-going. The Year 2000 status of the systems recently
acquired by AT&T are still being assessed and addressed. Complete information on
the Year 2000 efforts of AT&T can be found in its recent periodic filings made
with the SEC and on its web site (www.att.com/year2000).
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company is exposed to market risk, the risk of changes in the
values of its assets and liabilities which are impacted by fluctuations in
interest rates, foreign exchange rates, and equity prices. The Company's
marketable equity securities, described in Note 5 to the financial statements
included elsewhere herein, are carried at fair value of $1,950,678,000 as of
September 30, 1999 and are subject to fluctuations in the market prices of the
securities held. The estimated potential loss in the fair value resulting from a
hypothetical 10% decline in equity prices is approximately $195,068,000. The
Company's market risk as of September 30, 1999 associated with its exposures to
the Mexican peso foreign exchange rate and interest rates applicable to its
borrowings have not changed significantly from those reported in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
<PAGE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are filed as part of this Form
10-Q:
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of May 28,
1999, among AT&T Corp., A-Group Merger Corp.,
Liberty Media Corporation, and The Associated Group,
Inc., filed as Exhibit 2.1 to Current Report on Form
8-K filed on June 2, 1999 and incorporated herein by
reference.
2.2 Amended and Restated Agreement and Plan of Merger,
dated October 28, 1999, among AT&T Corp., A-Group
Merger Corp., Liberty Media Corporation, and The
Associated Group, Inc., filed as Appendix A to the
Company's Definitive Proxy Statement filed on
October 29, 1999 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 March
25, 1999 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 14, 1994, by
and between the Company and Mellon Bank, N.A., filed
as Exhibit 4.2 to Registration Statement on Form
10/A dated March 25, 1999 and incorporated herein by
reference.
4.3 First Amendment to Rights Agreement, dated as of
March 17, 1999, between the Company and ChaseMellon
Shareholder Services, L.L.C. (successor to Mellon
Bank, N.A.), filed as Exhibit 4.3 to Registration
Statement on Form 10/A dated March 25, 1999 and
incorporated herein by reference.
4.4 Second Amendment to Rights Agreement, dated as of
May 28, 1999, between the Company and ChaseMellon
Shareholder Services, L.L.C, filed as Exhibit 4.1 to
Current Report on Form 8-K filed on June 2, 1999 and
incorporated herein by reference.
27 Article 5 Financial Data Schedule for Quarterly
Report on Form 10-Q for the nine months ended
September 30, 1999 (filed only electronically with
the Securities and Exchange Commission).
(b) REPORTS ON FORM 8-K. The Company did not file any reports on Form
8-K during the three months ended September 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ASSOCIATED GROUP, INC.
(Registrant)
Date: November 10, 1999 By: /s/ Myles P. Berkman
--------------------
Myles P. Berkman
Chairman, President, Chief Executive Officer
and Treasurer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Where
Found or
Exhibit Incorporated
Number by Reference
------------ -----------------
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of May 28, 1999, among AT&T Corp., *
A-Group Merger Corp., Liberty Media Corporation, and The Associated Group,
Inc., filed as Exhibit 2.1 to Current Report on Form 8-K filed on June 2,
1999 and incorporated herein by reference.
2.2 Amended and Restated Agreement and Plan of Merger, dated October 28, 1999, *
among AT&T Corp., A-Group Merger Corp., Liberty Media Corporation, and The
Associated Group, Inc., filed as Appendix A to the Company's Definitive
Proxy Statement filed on October 29, 1999 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 March 25, 1999 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 14, 1994, by and between *
the Company and Mellon Bank, N.A., filed as Exhibit 4.2 to
Registration Statement on Form 10/A dated March 25, 1999 and
incorporated herein by reference.
4.3 First Amendment to Rights Agreement, dated as of March 17, 1999, between *
the Company and ChaseMellon Shareholder Services, L.L.C. (successor to
Mellon Bank, N.A.), filed as Exhibit 4.3 to Registration Statement on Form
10/A dated March 25, 1999 and incorporated herein by reference.
4.4 Second Amendment to Rights Agreement, dated as of May 28, 1999, *
between the Company and ChaseMellon Shareholder Services, L.L.C,
filed as Exhibit 4.1 to Current Report on Form 8-K filed on June
2, 1999 and incorporated herein by reference.
27 Article 5 Financial Data Schedule for Quarterly Report on Form **
10-Q for the nine months ended September 30, 1999 (filed only
electronically with the Securities and Exchange Commission).
</TABLE>
- ------------------
* Previously filed and incorporated herein by reference
** Filed only electronically with the Securities and Exchange Commission
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated financial statements of The Associated Group, Inc. included in
Form 10-Q for the nine months ending September 30, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 229,727
<SECURITIES> 0<F1>
<RECEIVABLES> 21,995
<ALLOWANCES> 4,110
<INVENTORY> 2,686
<CURRENT-ASSETS> 303,461
<PP&E> 398,402
<DEPRECIATION> 79,616
<TOTAL-ASSETS> 2,719,245
<CURRENT-LIABILITIES> 381,278
<BONDS> 803,239
0
0
<COMMON> 3,856
<OTHER-SE> 902,509
<TOTAL-LIABILITY-AND-EQUITY> 2,719,245
<SALES> 530
<TOTAL-REVENUES> 48,760
<CGS> 342
<TOTAL-COSTS> 151,702
<OTHER-EXPENSES> 19,589
<LOSS-PROVISION> 2,095
<INTEREST-EXPENSE> 71,374
<INCOME-PRETAX> (369,649)
<INCOME-TAX> (8,454)
<INCOME-CONTINUING> (361,195)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (361,195)
<EPS-BASIC> (9.43)
<EPS-DILUTED> 0
<FN>
<F1>
Does not include $1,950,678 of noncurrent marketable equity securities
and $54,954 restricted cash and investments.
</FN>
</TABLE>
