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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-24924
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THE ASSOCIATED GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 51-0260858
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
200 Gateway Towers, Pittsburgh, Pennsylvania 15222
(Address of Principal Executive Offices) (Zip Code)
412-281-1907
(Registrant's telephone number, including area code)
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
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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
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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 26, 1999 the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was approximately $1,216,700,000.
The number of shares of the Registrant's classes of Common Stock
outstanding as of March 26, 1999:
Common Stock, Class A 18,765,924
Common Stock, Class B 19,410,120
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 1999 annual
meeting of stockholders are incorporated by reference into Part III as set
forth herein.
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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 (the "Exchange Act"). 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.
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, which at the time
was one of the largest independent cellular telephone system operators in the
U.S. The Company's primary assets and operations currently consist of a
controlling interest in Teligent, Inc.; TruePosition, Inc., a wholly owned
subsidiary with a patented wireless location system in the early stages of
commercialization; a controlling interest in a Mexican cellular telephone
company; radio broadcasting properties; a retail art gallery; and a portfolio of
marketable equity securities.
TELIGENT, INC.
The Company holds a 40.7% 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 is a full-service,
facilities-based communications company that offers small- and medium-sized
business customers local, long distance, high-speed data and dedicated Internet
services over its digital SmartWave(TM) local networks. Teligent's SmartWave(TM)
local networks integrate point-to-point and point-to-multipoint wireless
technologies with traditional broadband wireline technology. By integrating
these technologies, Teligent believes it is able to increase local network
efficiency and significantly lower network costs. Teligent is currently offering
commercial service using its Smart Wave(TM) local networks in 26 markets that
comprise more than 405 cities and towns with a combined population of more than
78 million. Such markets include New York, Los Angeles, Chicago, Baltimore,
Richmond, Houston, Philadelphia, Dallas-Fort Worth, San Francisco-Oakland,
Miami-Fort Lauderdale, Denver, Washington DC, Boston, Atlanta, San Jose, San
Antonio, Orlando, Jacksonville, Tampa, Austin, West Palm Beach, Milwaukee, New
Orleans, San Diego, Sacramento and Wilmington, Delaware.
Teligent serves its customers primarily by placing a small digital
microwave antenna on the roof of the customer's building. When the customer
picks up the telephone, accesses the Internet or activates a videoconference,
the signal travels over the building's inside wiring to Teligent's equipment and
the rooftop antenna. The antenna sends voice, data and video signals to a nearby
Teligent base station, where the signals are communicated to a Teligent
broadband switching center and then on to their final destination.
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Teligent's digital wireless technology provides fiber-like quality and
can transmit information at speeds more than 350 times faster than conventional
copper wire-based networks. Teligent believes that the speed and reliability of
its services responds to the growing marketplace demand from small to
medium-sized businesses for fast and reliable telecommunications services.
Teligent believes this demand results in part from the increased acceptance and
reliance on the Internet by business users as well as the emergence of bandwidth
intensive applications such as videoconferencing and large data file transfers.
Teligent believes it is well positioned to capture revenues in the
estimated $128 billion business communications market. Teligent's focus is on
the estimated $51 billion local exchange market, which is currently one of the
most profitable segments in the communications industry. Local exchange services
have historically been provided by regional monopolies known as incumbent local
exchange carriers or "ILECs." ILECs have typically used older, existing copper
wire-based networks. The ILECs' networks, faced with increasing demand from
businesses for new services, such as Internet access, at reasonable costs, have
created a "last mile bottleneck" between the customer location and the ILEC
network switch. Teligent's market research indicates that the ILECs 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 -
small and medium-sized businesses - is currently dissatisfied with its ILEC
service. The potential revenue opportunity in this market, coupled with changes
in the regulatory environment designed to enhance competition, have created
opportunities for competitive local exchange carriers, or "CLECs," such as
Teligent. Teligent intends to reduce or eliminate this last mile local
bottleneck and gain market share primarily through the use of its SmartWave(TM)
local networks while providing quality customer service and competitive pricing.
Teligent believes that it can provide service throughout major market
areas with lower capital requirements than either fiber-based or exclusively
point-to-point wireless CLECs, enabling Teligent to offer its services to a
broader customer base faster and at a lower cost. Teligent's networks allow both
transmissions between multiple customer antennas and a single base station
antenna (point-to-multipoint) and transmissions between a single customer
antenna and a single base station (point-to-point), thereby allowing Teligent to
share the same radio frequency spectrum among its customers and reducing its
capital expenditures. In some cases, Teligent provides communications services
to its customers using traditional broadband wireline technology which also has
been integrated into its SmartWave(TM) local networks.
Teligent's Corporate History
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 Corp. ("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 totaling
$60 million. Teligent became a publicly traded company on The Nasdaq Stock
Market(R) under the symbol "TGNT" in November 1997 as a result of the completion
of its initial public offering of Teligent Class A Common Stock. Through MSI,
the Company holds 21,436,689 shares of Teligent Series B-1 Common Stock, which
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. In connection with the Teligent IPO,
Teligent became a reporting Person and files periodic reports under the Exchange
Act.
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Teligent's FCC Licenses
Teligent holds 24 GHz fixed wireless digital electronic message service
("DEMS") licenses granted by the Federal Communications Commission ("FCC").
These DEMS licenses cover 74 market areas, comprising more than 750
municipalities in the U.S., including 320-400 MHz of spectrum in 27 of the 35
most populous market areas in the U.S., and at least 80 MHz of spectrum in 47
other major market areas. These licenses, which were previously granted for
operations in the 18 GHz band, were not subject to grant by auction. See
"Business - Teligent - Government Regulation - Federal Regulation - Relocation
of Licenses to 24 GHz." The majority of the 24 GHz licenses were either
transferred or assigned to Teligent pursuant to FCC authority. Teligent also
holds certain common carrier microwave licenses at other frequencies for use in
its business.
Teligent's Network Architecture
Teligent deploys its SmartWave(TM) local networks, which are made up of
fixed wireless point-to-multipoint and point-to-point broadband local networks,
as well as traditional broadband wireline networks, to provide last mile
customer connection in its licensed market areas. Teligent believes that having
these types of integrated networks allows it to accommodate new customers
quickly, as well as expand its customer base.
Teligent uses a combination of wired and wireless facilities to connect
the center to the base stations distributed throughout the market area.
Teligent's base stations transmit to and receive signals from wireless equipment
at a customer premise allowing transmissions between multiple customer antennas
and a single base station antenna. In the case of Teligent's wireless customers,
the customer premise equipment includes two components: (i) a small digital
microwave antenna installed either on the roof, or an exterior wall of the
customer's building and (ii) indoor equipment installed within the building that
is connected to the internal building wiring. The antenna communicates with a
Teligent base station by a microwave signal. Teligent's base stations have an
average coverage area of up to 30 square miles, depending on a number of factors
such as power levels used, customer density, local weather environment and
network design. Teligent provides services to its wireline customers by using
T-1 lines that Teligent has installed at its customer's premises.
Teligent's broadband switching centers house traditional circuit-based
systems as well as more advanced packet and cell-based switching systems. These
switching systems are engineered to interconnect 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's customer premise equipment is shared among all customers in the
building. Similarly, equipment at each node site is shared among all customer
premise equipment served by that node.
In June 1998, Teligent opened a state-of-the-art customer service and
network operations center near its headquarters just outside of Washington, DC.
Teligent's network operations center monitors its networks 24 hours-a-day, seven
days-a-week and provides real-time alarm, status and performance information.
Teligent's network operations center also allows it to provide customers remote
circuit provisioning to ensure service availability, monitor various network
elements to ensure consistent and reliable performance, and plan for and conduct
preventative maintenance activities in order to avoid network outages and to
respond promptly to any network disruption that might occur.
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Key Vendors
The majority of Teligent's network equipment, including switches, base
stations and antennas is currently provided by Northern Telecom, Inc.
("Nortel"), pursuant to a Network Products Purchase Agreement signed in December
1997. Although Nortel is Teligent's primary vendor and systems integrator,
Teligent's strategy is to identify and use additional suppliers to ensure a high
level of quality and reduce the cost of equipment over time. In this regard,
Teligent evaluates different suppliers and has begun testing equipment
manufactured by suppliers other than Nortel.
Teligent's Business Strategy
Teligent's goal is to be a premier facilities-based communications
provider to small and medium-sized businesses. The steps Teligent is taking to
achieve this objective are as follows:
Target Small and Medium-Sized Businesses. Teligent's primary marketing
efforts are focused on small and medium-sized businesses with 5 to 500 telephone
lines. These types of customers are located in more than 750,000 commercial
buildings throughout the United States. Teligent targets these customers through
direct sales efforts, telesales and indirect sales channels. Teligent offers
products like a flat rate service and its on-line "e*magine(service mark)"
billing system. Teligent may also, from time to time, selectively pursue sales
opportunities with larger businesses in certain situations.
End User Focus. Teligent currently offers its services directly to end
users, as opposed to acting as a "carrier's carrier" by offering services on the
wholesale level to others for resale to the end user. By earning the majority of
its revenues from providing services directly to end user customers, Teligent
believes that it (i) is establishing and will be able to maintain a broad base
of its own customers, thereby minimizing the risk of having to rely on a limited
number of customers for the majority of its revenues, (ii) maximize revenues and
profitability by doing business in the higher priced retail market, and (iii)
distinguish itself through high quality service that is responsive to the
customer.
Develop Brand Awareness. Teligent is endeavoring to position itself as
a high quality service operator that provides reliable communications services
and quality customer support at competitive prices. In the fall of 1998,
Teligent launched a nationwide mass media marketing campaign to reflect these
objectives.
Achieve Market Share Via Competitive Pricing. As a new market entrant,
Teligent's strategy is to price its services competitively to gain market share
early. Teligent believes that it prices its services at a significant discount
to existing competing offers. Generally, Teligent averages several
representative bills from a customer's current service providers and deducts up
to 30% from such average to arrive at the customer's new flat rate. Under this
plan, local and Internet services are unlimited. If customers wish to increase
their long distance and international usage over current levels, they can
purchase more Teligent services at attractive prices. Teligent anticipates that
some ILECs may reduce their prices as increased competition begins to erode
their market share, however Teligent expects to remain competitive if market
prices decline. Teligent believes that it will be able to compete economically
because of its lower network costs compared to those of the ILECs.
Rapid Deployment. Teligent intends to take advantage of its ability to
quickly establish service in its market areas because of its lower capital
requirements. Teligent's ability to enter its market areas quickly and establish
service allows it to establish an initial presence in a market, which further
enhances Teligent's relative cost advantage, attracts additional customers and
develops its brand reputation. In the fall of 1998, Teligent announced a plan to
accelerate its 1999 deployment schedule and Teligent currently expects to be in
40 markets by the end of the year.
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Exploit Future Growth Opportunities. Teligent intends to continue
building on the capabilities of its networks to expand its target market and
service offerings. This expansion may include targeting international
opportunities.
Sales and Marketing
Overview. To develop the market potential of its network, Teligent has
organized its operations into five geographic regions. Each region has its own
Regional Vice President in charge of operations, field service, site
acquisition, proactive customer service and sales and marketing. The extent of
sales activity in each market depends upon a number of factors including (i)
number of license areas, (ii) geographic size of license areas, (iii) customer
density within licensed areas, and (iv) the competitive landscape.
Sales Force/Customer Care. Teligent seeks to recruit salespeople with
successful experience in competitive communications businesses, including
individuals with backgrounds in competitive local exchange, competitive long
distance, telecommunications equipment and data services. Teligent's salespeople
have performance incentives through a structure that ties a significant portion
of their compensation to the actual revenue they produce. In addition,
salespeople are encouraged to maximize penetration in buildings in which
Teligent has installed customer premise equipment. Teligent's sales force is
trained to sell its full product line of local, long distance, Internet and data
services.
Marketing. Teligent supplements its direct sales force through various
marketing plans, including direct mail, partnership marketing (in specific
buildings or associated properties), targeted advertising and promotional
efforts in its coverage areas. In addition, Teligent uses alternate or indirect
channels of distribution, including a sales agent program.
Competition in the Telecommunications Industry
Local Telecommunications Market
Competition from ILECs. The local telecommunications market is
intensely competitive for newer entrants and currently is dominated by the
Regional Bell Operating Companies ("RBOCs") and other ILECs. In each market
area in which Teligent is authorized to provide services, Teligent competes or
will compete with several other service providers and technologies. Teligent
expects to compete on the basis of local service features, quality, price,
reliability, customer service and rapid response to customer needs. 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.
The Telecommunications Act of 1996 (the "Telecommunications Act")
reduced barriers to entry into new segments of the industry. Teligent believes
that the requirements of the Telecommunications Act promote greater competition
and have helped 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. Increased price competition
may negatively impact Teligent.
A number of companies, including the ILECs themselves, 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. There can be no assurance that Teligent will able to
compete effectively with these enhancements.
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Competition from New 24 GHz and Other Fixed Wireless Companies.
Teligent faces potential competition from new entrants to the fixed wireless
market as well as IXC's and other CLECs and other leading telecommunications
companies. In addition, the FCC has announced that it will devise rules for the
issuance of 24 GHz licenses for up to five 80 MHz channels in each market except
for those licenses already issued to Teligent and other previous 18 GHz DEMS
licensees. See "Business - Teligent - Government Regulation." Teligent believes
that in the event additional 24 GHz licenses are made available through an
auction, other entities having greater resources than Teligent could acquire
authorizations. See "Business - Teligent - Government Regulation."
Teligent also faces competition from entities that offer or are
licensed to offer other terrestrial fixed wireless services, including
Multichannel Multipoint Distribution Service, 28 GHz Local Multipoint
Distribution Service and 38 GHz wireless communications systems, 2.8 GHz
Wireless Communications Service, FCC Part 15 unlicensed wireless radio devices,
and other services that use existing point-to-point wireless channels on other
frequencies. One such competitor, NextLink Communications, Inc., recently agreed
to acquire WNP Communications, Inc.'s Local Multipoint Distribution System
wireless licenses and announced plans to use the fixed wireless licenses to
build extensions to the local fiber optic networks that it plans to build in
most major U.S. cities. Additionally, other companies have filed applications
for global broadband satellite systems proposed to be used for broadband voice
and data services. If developed, these systems could also present Teligent with
significant competition.
Other Competitors. Teligent also faces local and long distance
competition from AT&T, MCI Worldcom, Sprint, and other IXCs. Teligent may also
face competition from electric utilities (several have secured the necessary
authorizations to provide local telephone service and are in various stages of
perfecting and implementing their business plans), ILECs operating outside their
current local service areas, and other providers. These entities provide
transmission services using technologies that may enjoy a greater degree of
market acceptance than Teligent's wireless broadband technology in the provision
of last mile broadband services. Moreover, the consolidation of
telecommunications companies and the formation of business alliances within the
telecommunications industry, which are expected to accelerate as a result of the
passage of the Telecommunications Act, could give rise to significant new or
stronger competitors. There can be no assurance that Teligent will be able to
compete effectively in any of its markets against such entrants.
Internet Services
Teligent's Internet services face significant competition from other
Internet Service Providers ("ISPs") as well as from other ILECs, CLECs and IXCs.
There is a great deal of competition in this industry in the delivery of
Internet service to small and medium-sized businesses, which is Teligent's
target market. Teligent believes its local networks provide a low-cost advantage
in delivering Internet service. However, there can be no assurance that Teligent
can successfully compete with larger and more established companies that already
provide Internet service or have resources to enter the market.
Long Distance Telecommunications Market
The long distance market has relatively insignificant barriers to
entry, numerous entities competing for the same customers and a high average
churn rate as customers frequently change long distance providers in response to
the offering of lower rates or promotional incentives by competitors. Teligent
competes with major carriers such as AT&T, Sprint, and MCI Worldcom, as well as
other national and regional long distance carriers and resellers. Teligent
believes that one or more of the RBOCs may compete in the long distance
telecommunications industry in some states by year-end 1999. See "Business -
Teligent - Government
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Regulation." ISPs also will compete in this market. Teligent believes that the
principal competitive factors affecting its market share will be pricing,
customer service, accurate billing, clear pricing policies and, to a lesser
extent, variety of services. Teligent's ability to compete effectively will
depend on maintaining high quality, market-driven services at prices generally
perceived to be equal to or below those charged by its competitors. To maintain
a competitive posture, Teligent believes that it must be in a position to reduce
prices in order to meet reductions in rates, if any, by others. Any such
reductions could have an adverse impact on Teligent. In addition, ILECs have
been obtaining additional pricing flexibility, which may enable ILECs to gain
volume discounts from larger long distance companies, thus putting Teligent's
long distance business at a disadvantage in competing with these providers.
Government Regulation
Overview
Teligent's fixed wireless broadband services are subject to regulation
by federal, state and local governmental agencies. Teligent has received
authority to offer competitive local telephone services in 39 states and the
District of Columbia, comprising all of its 74 markets. That compares to 27
markets in which authority had been granted at the end of 1997. Teligent has
also successfully negotiated interconnection agreements covering 72 markets with
all of the major local exchange carriers, including Ameritech, Bell Atlantic,
GTE, Pacific Bell, Southwestern Bell, Sprint, BellSouth and US WEST. At the end
of 1997, Teligent had interconnection agreements covering 25 markets.
At the federal level, the FCC has 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 generally 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 is also subject to taxation at the federal and state levels
and may be subject to varying taxes and fees from local jurisdictions.
Federal Legislation
The Telecommunications Act. The Telecommunications Act, enacted on
February 8, 1996, established local exchange competition as a national policy by
removing state regulatory barriers to competition and the preemption of laws
restricting competition in the local exchange market. The Telecommunications Act
mandated that ILECs comply with various requirements designed to foster
competition. In addition, the Telecommunications Act allows RBOCs to provide
in-region inter-LATA services on a state-by-state basis once certain
market-opening requirements are implemented and entry is determined to be in the
public interest. The provisions of the Telecommunications Act are designed to
ensure that RBOCs take affirmative steps to level the playing field for their
competitors so that others can compete effectively before the RBOC secures
in-region long-distance entry. To date, no RBOCs have gained authority to
provide in-region inter-LATA service.
Federal Regulation
The Telecommunications Act Regulations. 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 prescribed by the
Telecommunications Act. The
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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.
Pursuant to the Telecommunications Act, the FCC adopted, in August
1996, new rules implementing the interconnection and resale provisions of the
Telecommunications Act (the "Interconnection Order"). In July 1997, the United
States Court of Appeals for the Eighth Circuit set aside significant portions of
the FCC's Interconnection Order. On January 25, 1999, however, the Supreme Court
reinstated key provisions of the FCC's Interconnection Order including
provisions governing the pricing of local services and elements as well as its
"pick and choose" provision. The Supreme Court vacated the FCC's unbundled
element rule, pursuant to which ILECs are required to make divisible elements of
their networks and services (for example, local loops available for lease by
CLECs). The Supreme Court decision creates the greatest uncertainties for
competitors who largely depend on such elements to compete. Teligent believes
that this decision may be a comparative advantage for Teligent, which does not
rely heavily on ILEC unbundled elements. The FCC is expected to issue a
rulemaking proceeding in the very near future to address this issue.
FCC Licensing. The Communications Act of 1934 (the "Communications
Act") imposes certain requirements relating to licensing, common carrier
obligations, reporting and treatment of competition. Teligent believes that it
is in compliance with all FCC requirements relating to its licenses and common
carrier obligations. Teligent has also obtained a "Section 214" authorization
from the FCC, which authorizes it to provide international facilities-based
telecommunications services between the U.S. and virtually any other country.
Teligent must maintain, and currently does have, tariffs on file with the FCC
governing its provision of domestic interstate and international common carrier
telecommunications services.
Relocation of Licenses to 24 GHz. The FCC issued an Order (the
"Relocation Order") on March 14, 1997, essentially relocating certain DEMS
licensees in the 18 GHz band 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 Teligent's, 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 Teligent'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. 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, Teligent has converted most of its facilities to
24 GHz band operations.
The FCC implemented the relocation to 24 GHz without notice and comment
procedures in order to give effect to NTIA's request to protect national
security satellite operations from harmful interference from 18 GHz licensed
stations. A number of parties filed petitions for reconsideration. The FCC
issued its Reconsideration Order (the "Reconsideration Order") on July 17, 1998
affirming its original Relocation Order in all respects. One party, Webcel
Communication, appealed the FCC's Order to the United States Court of Appeals
for the District of Columbia. Teligent filed a motion to intervene and a motion
to dismiss for lack of standing on December 7, 1998. On February 16, 1999, the
court granted Teligent's motion to intervene but the motion to dismiss is still
pending. There can be no assurance that the FCC will be able to defend any such
litigation successfully. The court has many options. For example, the court may
affirm the Reconsideration Order, vacate and remand the matter to 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 Reconsideration Order could have a negative effect on
Teligent.
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Alien Ownership. On October 30, 1998, the FCC granted Teligent's
petition for a public interest determination that its licensed subsidiaries
could increase indirect foreign ownership up to a 49.9% non-controlling level
through fluctuations in publicly traded shares without obtaining prior FCC
approval. Teligent's foreign ownership is currently below 49.9%.
State Regulation
Many of Teligent's services are 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.
Teligent has received state authorizations to provide facilities-based local and
long distance services in 39 states and the District of Columbia, covering all
74 of its licensed markets. Of the remaining 11 states, Teligent has obtained
long distance only authorization in 6 states and has applications pending for
long distance authority in the other 5.
Local Regulation
Teligent needs to interact with local governments in a variety of ways.
How diverse local governments will exercise traditional functions, including
zoning, permitting and management of rights of ways, and address the expansion
of telecommunications competition and varying means of entry in particular, is
uncertain. The kinds and timing of approvals required to install antennas and
conduct other aspects of Teligent's business varies among local governments and
may also vary with the specific technology or equipment configuration.
While the Telecommunications Act permits local governments to manage
rights of way, the scope of that authority, including the circumstances when
fees can be charged and the amount of such charges, has already been the subject
of numerous disputes between telecommunications carriers and local governments.
In addition, 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 litigation is likely. On
December 12, 1997, Teligent accepted under protest a franchise with the City of
Dallas, which is similar to other Dallas franchises agreed to by other CLECs. On
the same date, Teligent filed a Complaint for Declaratory Judgment against the
City of Dallas in the United States District Court for the Northern District of
Texas alleging that Teligent does not own, construct, install or maintain
facilities located in public rights of way, and that the City of Dallas is
therefore prohibited both by federal and state law from barring Teligent's
competitive entry into the Dallas market unless Teligent first accepts a
franchise. Teligent secured a preliminary injunction providing that it does not
need to comply with the Dallas ordinance. Teligent cannot make assurances as to
the outcome of the litigation. The FCC has recently prevented enforcement of
certain state and local regulations that had the effect of inhibiting local
competition. Any inability or unwillingness by the FCC or the courts to preempt
additional state and local regulations in a timely fashion could adversely
impact Teligent.
TRUEPOSITION, INC.
Overview
TruePosition, Inc. ("TruePosition"), a wholly owned subsidiary of the
Company, intends to be a leading provider in the emerging wireless location
services market. TruePosition has developed and is commercializing
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its TruePosition(R) Wireless Location System(TM) (the "TruePosition System").
The TruePosition System is designed to enable mobile wireless service providers
(e.g., cellular and Personal Communication Services ("PCS") carriers) to
determine the location of any wireless transmitter, including cellular or PCS
telephones. Using patented 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. TruePosition's strategic
objective is to position itself as both an equipment supplier to wireless
carriers that implement its system, as well as an ongoing service provider to
these customers. The Company believes that the TruePosition System enjoys
several key competitive advantages over alternative wireless location systems
and technologies, including its speed to market, patented technology,
value-added enhancement applications and comparative low cost of network
deployment.
An important segment of the wireless location market is location-based
emergency 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 cellular, PCS and Specialized
Mobile Radio providers 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 ("Phase 2 E911"). See "Business -
TruePosition - Government Regulation." TruePosition's initial focus is on the
commercialization of its Phase 2 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 60 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 and more than 100,000
emergency calls per day are made from wireless phones.
Development History of the TruePosition System
The Company began development of the TruePosition System in 1992, and
in July 1994, the Company was granted its first patent for the technology
underlying the TruePosition System. Since 1994, the Company has successfully
demonstrated the TruePosition System in numerous topologies and environments,
including rural, semi-rural and urban environments. In December 1996, in
cooperation with the Greater Harris County 9-1-1 Emergency Network and Houston
Cellular Telephone Company ("Houston Cellular"), TruePosition successfully
demonstrated the 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 Mobile
and other E911 participants, TruePosition successfully demonstrated the first
live demonstration of wireless Phase 2 E911 with location technology (the "New
Jersey Demonstration"), 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 subject
area. During the New Jersey Demonstration, the TruePosition System handled over
3,500 live wireless 911 calls and over 81,000 test calls placed by participants.
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Business Strategy
TruePosition is implementing the following initiatives in support of
its goal to be a premier provider of wireless location systems and related
services:
Target Large and Medium Market Wireless Carriers. TruePosition is
focusing its marketing and sales efforts on the wireless carriers in the top 25
to 30 U.S. markets, as well as medium-sized cellular markets in the U.S. These
large and medium-sized cellular markets are dominated by the top cellular
operators, such as AT&T Wireless, GTE Wireless, SBC Communications, AirTouch/US
West, Bell Atlantic Mobile Systems, Ameritech Cellular , BellSouth Mobility and
Comcast Cellular. TruePosition is currently in discussions with several of these
carriers regarding the implementation of the TruePosition System in selected
markets. In addition, TruePosition has received inquiries from international
wireless carriers regarding implementation of the TruePosition System.
On June 19, 1998, TruePosition signed an agreement (the "GHC Contract")
with the Greater Harris County 9-1-1 Emergency Network ("GHC") for the provision
of wireless Phase 2 E911 location services. See "Business - TruePosition -
Government Regulation - Federal Regulation." The GHC Contract provides for
installation of, and payments by GHC to TruePosition in respect thereof, the
TruePosition system in two phases -- the first phase covering the highest
wireless usage areas of downtown Houston, and the second covering the remainder
of the GHC service area. The first phase installation was fully installed on
Houston Cellular cell sites, and the TruePosition system began locating live
wireless E911 callers, in March 1999. The second phase of the GHC Contract is
anticipated to include multiple wireless systems, including both the analog
(AMPS) and digital (Time Division Multiple Access ("TDMA") and Code Division
Multiple Access ("CDMA")) formats of cellular telephony. TruePosition has
installed, and is maintaining and monitoring the system 24 hours a day from its
Network Operations Center ("NOC") in Norristown, Pennsylvania. In order to
provide TruePosition with access to the necessary telecommunications facilities
to install the TruePosition System, GHC contracted directly with two of the
wireless carriers in the Houston market -- GTE Wireless ("GTE") and Houston
Cellular. In the event of any change in the status of the direct contractual
arrangements between GHC and/or GTE and Houston Cellular, the continued
operation of the TruePosition System installed pursuant to the GHC Contract may
be jeopardized.
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.
On January 28, 1999, TruePosition signed an agreement with Ericsson,
that provides for joint marketing and development of wireless location systems
and products for AMPS and TDMA networks utilizing the TruePosition System and
Ericsson's Mobile Positioning Center technology. Under the agreement, Ericsson
will promote the use of the TruePosition System in the AMPS and TDMA networks of
Ericsson customers in the U.S. and Canada.
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 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
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subscribers, thereby increasing the attractiveness of the TruePosition System in
advance of the deadlines imposed by the Order.
On October 29, 1998, TruePosition signed an agreement with Shell Oil
Products, Inc. to pursue joint development and marketing of the TruePosition
System within the U.S. The agreement creates a framework for the parties to
explore utilizing the TruePosition System to enhance the Shell Motorist Club
roadside assistance program and also to provide additional products and services
such as stolen vehicle prevention, crash notification and enhanced 4-1-1
"concierge" support marketed to customers of Shell Oil and the Shell Motorist
Club.
Continue Development of Support for Digital Formats of Cellular
Telephony. In February, 1999, TruePosition announced the availability of its
series 2 System, which is designed to support the digital (TDMA, CDMA and GSM)
formats of wireless telephony. Software and hardware modules to support TDMA are
already in field trial. The software and hardware modules for CDMA are planned
for field trial in 1999. In addition to the modules for cellular carriers, the
series 2 System is also designed to support hardware modules for PCS carriers,
although these modules have not yet been released.
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. The GHC Contract provides GHC with full turnkey
installation and 24 hour monitoring of the TruePosition System from a NOC
located in Houston, Texas.
On February 3, 1999, TruePosition and Corsair Communications, Inc.,
("Corsair"), a leading provider of fraud prevention products and services to the
wireless industry, entered into a letter of understanding whereby they will
engage in discussions for the provision and cooperation of, among other things,
the joint marketing of network-based wireless transmitter location products and
services to Corsair's installed customer base. Under the letter,
Corsair and TruePosition will work toward a final agreement for the joint
marketing and selling of the TruePosition System whereby Corsair would use its
sales and marketing team to introduce TruePosition to accounts and distribution
partners with which Corsair has established relationships. The letter
contemplates that the two companies would also cooperate to leverage Corsair's
operations and field engineering personnel to support the TruePosition system,
and that Corsair would make certain intellectual property available to
TruePosition and would no longer be involved in the manufacture of its
PhoneTrack(TM) location system.
Build Nationwide Management, Development and Implementation Team.
TruePosition now employs 78 people in five locations, including a regional
support center in Houston, Texas to support the GHC Contract. In addition,
TruePosition's potential agreement with Corsair may provide TruePosition with
access to Corsair's nationwide network of support and technical personnel.
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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 wireless device, including cellular or PCS telephones. Using
patented 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
measures 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. With the release of AMPS and TDMA modules, the
TruePosition System now supports the technology utilized by over 85% of the
existing U.S. wireless subscriber base, which is estimated at over 60 million
handsets. Due to this large installed base of wireless 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 does not require construction of a separate
terrestrial or satellite 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. TruePosition's new series 2 System is an advanced hardware
architecture which utilizes advanced wideband digital receivers that are capable
of simultaneously listening to all frequencies used by different cellular or PCS
wireless systems. The series 2 System includes control channel and voice channel
location capability, dual-mode analog/digital location processing,
LocationGuard(TM) privacy protection for subscribers, Pathfinder(TM) multipath
mitigation algorithms, a scalable hardware architecture to match different cell
site configurations and new support for low site density installations such as
rural areas. In most cases, the SCS uses existing wireless system omni- or
sectored-antennas and can employ additional receivers for voice channel
tracking.
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. For security and network architecture purposes, the TLP
is typically co-located with a 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 System 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. The NOC 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.
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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 1 of the Order required that the PSAP be provided with the caller's
cellular telephone number and the identity of the nearest cell site, which
required modifications to the wireless carrier's mobile switch and the PSAP
itself. Phase 2 of the Order requires that the wireless carrier also provide
location information to the PSAP. The TruePosition System enables Phase 2
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.
Other Service Offerings
The TruePosition System's design is intended to support many
value-added end-user applications, in addition to E911 services. The Company
believes that these applications will make the TruePosition System more
attractive to wireless carriers and other businesses as the basis for additional
sources of revenue or cost reductions.
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, as it will enable them 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
customize calling plans for subscribers resulting in differing rates for usage
based upon their location.
Vehicle and Fleet Management. The TruePosition System offers 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 AP interfaces that permit end-user applications to access location
data in real time. For example, the mapping and display system could be accessed
and viewed via 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 remains 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
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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 2 patents for the use of TDOA
technologies for the location of wireless telephones and other transmitters,
several companies are developing wireless location systems using variations of
TDOA. The Company believes that its patents present a significant barrier to the
introduction of 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
to extend to existing wireless phones, due to the large installed base of
approximately 60 million wireless handsets 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; however, the Company is
aware that several of its competitors are actively pursuing handset-based
solutions. 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
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levels is a burden that is complicated by cell site sectoring, antenna
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 U.S. While the
regulatory environment of the E911 community currently does not impose direct
obligations upon TruePosition, it may affect the marketability of 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:
The deadline for Phase 1 implementation was April 1, 1998, and required
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 of the mobile phone. The PANI is a unique number that represents the cell
site and sector from which the wireless caller originated.
Phase 2 must be implemented by October 1, 2001, and requires wireless
carriers to provide the location of the wireless 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 Squared ("RMS"). RMS is a 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.
Each of the FCC Phase 1 and Phase 2 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 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.
The FCC has received two petitions for reconsideration and/or
clarification of the rules adopted in the MO&O. Specifically, the CTIA requested
that, among other things, the FCC clarify the Phase 2 implementation
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schedule for handset-based mobile phone location technologies, such as GPS. In
addition, the CTIA and one 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 U.S. House of Representatives
recently adopted a bill that would limit the liability of all mobile wireless
carriers providing E911 services and make "9-1-1" the universal emergency
telephone number for mobile wireless phones; a similar measure is pending in the
U.S. Senate. Although the outcome of these proceedings cannot be determined at
this time, such outcome may affect TruePosition's ability to market its E911
services.
Additionally, on December 24, 1998, the FCC issued a public notice
announcing that it would consider issuing waivers of the Phase 2 obligation to
those mobile wireless carriers that desired to deploy handset-based
technologies, such as GPS-equipped mobile phones, in lieu of strict compliance
with the Phase 2 rules. Such handset-based E911 solutions generally will not
extend wireless location capabilities to mobile phones sold prior to the
availability of specially designed GPS-equipped handsets, which are not
currently expected to be available for at least another two years or more. Since
carriers relying solely on such handset-based solutions would not extend E911
protection to their current and much of their future subscriber base (and
roamers), carriers need a waiver of the Phase 2 rules to rely on such solutions.
Approximately two dozen wireless carriers, including some of the largest
wireless carriers in the U.S., such as AT&T, Sprint and AirTouch, have asked the
FCC for such "handset-based" waivers or, in the alternative, rule changes.
TruePosition has opposed the grant of such waivers because waivers would result
in tens of millions of mobile wireless users whose phones - and therefore
wireless service - would lack Phase 2 E911 protection. Although the outcome of
these or future waiver requests cannot be determined, the grant of such waivers
could materially and adversely 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 also permit wireless
carriers to charge a fee for E911 location services on their bills, just as
wireline carriers charge an E911 access charge to their subscribers.
Nevertheless, the large majority of states have not yet authorized subscriber
fees for wireless Phase 2 E911 location services, and may not authorize such
charges in the near future. Failure to authorize such charges could delay the
deployment of wireless Phase 2 location services by carriers, and therefore have
an adverse effect on acceptance of the TruePosition System.
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Teletrac
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 frequency 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
The Company, through a wholly owned subsidiary, Associated
Communications of Mexico, Inc. ("ACM"), owns 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 "A" band cellular telephone services covering Region 8 of
Mexico. ACM is a party to an Association in Participation ("AP Agreement") and a
related Joint Venture Agreement (together, the "Grupo Documents") along with a
U.S. corporation (the "Grupo Shareholder") and a Mexican national with 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),
has a 31.9% equity interest in Grupo. 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 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, in 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
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<PAGE>
guarantee the remaining debt of Portatel of approximately $6.2 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.
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 1998
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
As of March 26, 1999, the Company's portfolio of marketable equity
securities (the "Portfolio Securities"), with a market value of approximately
$1.8 billion, includes 13,146,182 shares of AT&T common stock, and 11,684,477
and 2,651,944 shares of Liberty Media Group Class A and Class B Common Stock,
respectively (tracking stocks issued by AT&T). AT&T merged with
Tele-Communications, Inc. ("TCI") on March 9, 1999. The Company had previously
held stock in TCI and certain affiliates. On March 12, 1999, the AT&T Board of
Directors declared a three-for-two stock split, effected in the form of a stock
dividend, of the outstanding AT&T common stock, payable on April 15, 1999 to
stockholders of record on March 31, 1999. Post-split, the Company will own
19,719,273 shares of AT&T common stock. AT&T is among the world's communications
leaders, is publicly traded on the New York Stock Exchange under the symbol "T",
and is required to file periodic reports with the SEC under the Exchange Act.
The Company has utilized the Portfolio Securities as a source of funds
for operations and development of its various businesses by pledging a portion
of the securities under short-term borrowing arrangements. In addition, the
Company has 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 1998 and 1997 the Company sold
certain of its marketable securities for proceeds of approximately $1,930,000
and $2,512,000, respectively, and recording pretax gains of $1,162,000 and
$2,485,000, respectively. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations, Liquidity and Capital Resources."
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<PAGE>
RADIO BROADCASTING
The Company, through a wholly owned subsidiary, Associated Radio, Inc.
("ARI"), owns and operates WSTV-AM and WRKY-FM in Steubenville, Ohio and
WOMP-AM/FM, which serves Bellaire, Ohio and the adjacent Wheeling, West Virginia
markets. Since the Bellaire and Wheeling markets are adjacent to the
Steubenville market, these radio operations share certain services.
Additionally, ARI owns and operates WXST-FM (formerly WLYR-FM), serving the
Delaware and Columbus, Ohio markets. ARI's radio stations are authorized to
operate 24 hours a day.
The following table sets forth certain information concerning the
broadcasting stations:
<TABLE>
<CAPTION>
Stations in Market
License (AM & FM
Market Station Expires Format Combined)
- ------ ------- ------- ------ ---------
<S> <C> <C> <C> <C>
Steubenville, OH WSTV-AM 10/1/04 News-Talk-Sports 5
WRKY-FM 10/1/04 Hot Country
Bellaire, OH and WOMP-AM 10/1/04 News-Talk-Sports 12
Wheeling, WV WOMP-FM 10/1/04 Hot Adult Contemporary
Delaware and
Columbus, OH WXST-FM 10/1/04 Greatest Hits of the 1980's 32
</TABLE>
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.
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 held by OCI covers the New York Major Trading
Area, a region with a population of approximately 27 million, including New
York City. Omnipoint Parent is traded on The Nasdaq Stock Market(R) under the
symbol "OMPT." As of March 26, 1999, Omnipoint Parent had an aggregate market
capitalization of approximately $680 million.
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 20 West 57th Street in New York City. The
gallery's 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 maintains 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
20
<PAGE>
artists from Old Masters to Contemporary Masters, and loans works for
exhibitions to major museums, universities, libraries and other institutions
around the country.
OPERATING SEGMENTS
Financial information by operating segment is included in Note 16 to
the Company's financial statements included in Item 14 elsewhere in this Annual
Report on Form 10-K, which information is incorporated herein by reference.
REGULATORY ENVIRONMENT
The Company's 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 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 26, 1999, the Company had a total of 2,197 employees, 78 of
which are employed by TruePosition, 1,821 of which are employed by Teligent, and
202 of which are employed by Grupo.
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 and Norristown, Pennsylvania; Houston,
Texas and Vienna, Virginia. Teligent leases its headquarters office space in
Vienna, Virginia, as well as additional office space in Reston, Virginia and its
NOC in Herndon, Virginia. Teligent also leases office space, transmitter and
antenna sites in certain of its licensed areas throughout the U.S. Grupo leases
sales and administrative offices as well as switching and cell 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 New York City art gallery leases sales and administrative offices.
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<PAGE>
See Note 10 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.
22
<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 Market(R). The table below
sets forth the quarterly high and low sales prices for the Class A Common Stock
and the Class B Common Stock since January 1, 1997, compiled from information
supplied by Nasdaq. Historical prices have been restated to reflect the
Company's two-for-one stock split declared in October 1997.
<TABLE>
<CAPTION>
Class A Class B
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
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 40.13 26.50
1998:
First Quarter..................................... $40.75 $29.00 $39.13 $28.50
Second Quarter.................................... 43.50 32.75 42.25 32.50
Third Quarter..................................... 44.00 23.25 43.00 22.00
Fourth Quarter.................................... 43.00 22.25 42.50 21.50
</TABLE>
On March 26, 1999, the Company's Class A Common Stock and Class B
Common Stock were held by approximately 424 and 408 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.
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<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 period prior to the Spin-Off. Combined financial
data for 1994 includes the accounts of the Company, certain of its subsidiaries,
and certain other assets and liabilities of Associated Communications
Corporation, 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.
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996 (A) 1995 1994
------------------------------------------------------------------------------------------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues $ 32,801 $ 25,835 $ 20,864 $ 4,272 $ 4,664
Cost and expenses (B) 310,061 179,737 53,536 20,938 17,555(C)
Operating loss (277,260) (153,902) (32,672) (16,666) (12,891)
Equity in loss of affiliates -- -- (2,119) (2,912) (2,957)
Other income (expense) (D), (E) 127,779 88,407 9,259 (458) 3,599
Net loss $ (139,109) $ (51,665) $(17,196) $(13,213) $ (9,436)
Net loss per share $(3.66) $(1.38) $(.46) $(.35) $(.25)
Average shares outstanding 38,024 37,573 37,548 37,532 37,532
Balance Sheet Data
Total assets $2,431,352 $1,503,122 $518,934 $574,471 $478,555
Working capital (deficit) 150,487 326,653 (96,274) (34,385) (15,986)
Long-term debt 580,220 306,244 8,326 -- --
</TABLE>
(A)--Reflects consolidation of Grupo Portatel, S.A. de C.V. and subsidiaries as
of January 1, 1996.
(B)--Includes $27,006, $84,042 and $2,778 of non-cash expense for stock-based
compensation in 1998, 1997 and 1996, respectively.
(C)--Includes $4,026 in net transaction expenses relating to the Spin-Off.
(D)--Includes $1,162, $2,485, $3,398 and $2,831 gain on sale of marketable
equity securities in 1998, 1997, 1996 and 1994, respectively.
(E)--Includes $166,404, $80,621 and $7,893 for minority interests in the net
loss of consolidated subsidiaries in 1998, 1997 and 1996, respectively.
1997 also includes $12,177 gain on the sale of a wireless communications
investment.
24
<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 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.
Liquidity and Capital Resources
The Company has funded significant start-up operating and capital costs
for its wireless communications related businesses and interests, primarily
Teligent and TruePosition, during 1998 and 1997. 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 - see
below) are principally being met by i) margin loan facilities and bank demand
loans, and ii) proceeds from the sales of investments. The Company anticipates
that dividends from its holdings of AT&T common stock (see Part 1.
"Business-Marketable Equity Securities") will help fund future cash needs. Based
on the regular first quarter 1999 dividend declared by AT&T and the current
shares of AT&T common stock owned by the Company, annual dividends would be
approximately $17,352,000, although there can be no assurance that AT&T will
maintain its current level of dividend payments into the future. The Company's
bank demand loan and margin loan facilities are currently secured by shares of
AT&T common stock and AT&T's Liberty Media Group tracking stock. Borrowings
under one margin loan facility are limited to 65% of the market value of the
pledged stock, up to a maximum of $200 million. Borrowings under the other
brokerage margin loan facilities are limited to 50% of the market value of the
pledged stock. The Company's borrowings under these credit facilities bear
interest at variable rates based upon the Fed Funds rate plus an applicable
margin. As of December 31, 1998, the weighted average interest rate was 5.8%.
As of March 26, 1999, based on (a) the market value of the 6,503,437
and 3,427,853 shares of AT&T common stock and Liberty Media Group common stock,
respectively, pledged in the aggregate and (b) aggregate outstanding short-term
obligations under these credit facilities of approximately $161,255,000, the
Company's unused borrowing capacity is approximately $128,558,000. A significant
portion of the Company's assets are liquid, and can be pledged as security for
added borrowing capacity. Given the market value on March 26, 1999 of the
remaining shares of the Portfolio Securities that can be pledged as additional
security, the Company estimates that it could secure approximately $701 million
of additional borrowings on similar terms as existing margin loans. The
Company's ability to meet cash needs in the near term for future development
depends in large part on the value of its marketable equity securities. The
Company periodically evaluates its financial position and alternative financing
arrangements.
Teligent
In order to develop its business, Teligent will need a significant
amount of money to buy equipment, meet debt obligations, and fund day-to-day
operations. Principal equipment needs include the purchase and
25
<PAGE>
installation of its operating network infrastructure and information systems,
platforms and interfaces. Based on Teligent's current business plan, the Company
anticipates that Teligent's existing cash and investments, together with an
existing Credit Facility (described below) will provide enough money to carry
out its business plan through December 2000. Actual requirements may vary based
upon the timing and success of the roll-out of Teligent's services. Because the
cost of rolling-out its networks and operations, as well as revenues, will
depend on a variety of factors (including the ability to meet roll-out schedules
and to negotiate favorable prices for network equipment, the number of customers
and the services for which they subscribe, the nature and success of new
services offered, and changes in technology and regulatory matters), Teligent's
actual costs and revenues may vary from expected amounts, possibly to a material
degree, and such variations are likely to affect the need for additional
financing. Additional financing may include additional credit facilities or bank
borrowings, or the issuance of debt or equity securities. There can be no
assurance that Teligent will be able to obtain additional financing.
On July 2, 1998, Teligent entered into a credit facility (the "Teligent
Credit Facility") underwritten by The Chase Manhattan Bank, Goldman Sachs, and
Toronto Dominion Bank, providing for borrowings over the next four years up to
an aggregate of $800 million. The Teligent Credit Facility will be used
primarily for Teligent's purchase of network equipment, software and services
and is also available to fund Teligent's working capital and general expenses.
Commitment and other fees totaling $19.9 million were incurred in connection
with the facility. The Teligent Credit Facility bears interest at a variable
rate, tied to the prevailing LIBOR rate, which adjusts based on attainment of
certain key operational and leverage benchmarks. Availability of funds is
subject to certain conditions, and borrowings are secured by substantially all
of Teligent's assets. As of December 31, 1998 no borrowings were outstanding.
The Teligent Credit Facility contains covenants which restrict, among other
things, Teligent's ability to incur additional debt, enter into mergers or
consolidations, dispose of a significant amount of assets, pay dividends, and
change the nature of its business.
Teligent has funded operations to date through equity contributions,
including an initial public offering in November 1997 which raised approximately
$125.7 million of proceeds (net of $10.3 million of offering expenses), a
short-term credit facility which was repaid in November 1997 with $42.5 million
of equity contributions, and two debt offerings. $300 million of 11.5% Senior
Notes due 2007 (the "Senior Notes") were issued in November 1997. Approximately
$93.9 million of the proceeds of this offering was invested in a portfolio of
U.S. Treasury Securities which have been pledged for the payment of interest on
the Senior Notes through December 1, 2000, and are classified as restricted cash
and investments. The Senior Notes bear interest of 11.5% per annum payable
semi-annually on June 1 and December 1. On February 20, 1998, Teligent issued
$440 million of 11.5% Senior Discount Notes due 2008 (the "Senior Discount
Notes"). Proceeds of approximately $243.1 million were received after deductions
for offering expenses of approximately $7.6 million. Under an exchange offer
which was completed in August 1998, all outstanding Senior Discount Notes were
exchanged for 11.5% Series B Discount Notes due 2008, (the "New Discount
Notes") which have been registered under the Securities Act of 1933. The New
Discount Notes are identical in all material respects to the Senior Discount
Notes.
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
26
<PAGE>
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 ACM) 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. In
1997, 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 $6.2 million at December 31, 1998, secured by an approximate 30.7%
equity interest in Portatel.
Grupo and Portatel currently have no external available lines of
credit. 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 1998, 1997 and 1996, the Company's operations used cash of
$196,950,000, $44,837,000 and $25,803,000, respectively. The increase in cash
used in operations of $152,113,000 from 1997 to 1998, and $19,034,000 from 1996
to 1997 was due primarily to the costs associated with Teligent's start-up and
launch of commercial service, as well start-up and development costs for
TruePosition.
In 1998, 1997 and 1996, the Company used cash of $74,108,000,
$105,015,000 and $20,552,000, respectively, in investing activities. 1997 cash
used in investing activities was higher than 1998 and 1996 primarily due to the
funding of $95,075,000 to a restricted account of Teligent for the payment of
interest for the first three years on its Senior Notes. In 1998, $29,775,000 of
these funds were used to pay such interest. Investing cash outlays in 1997 were
offset in part by $23,883,000 of proceeds received from the sale of an
investment in Corporacion Mobilcom, S.A. de C.V. ("Mobilcom"), a Mexican
wireless communications business, and the sale of marketable equity securities.
Investing cash flows in 1998 include $102,549,000 for the purchase of property
and equipment, an increase of $86,506,000 over 1997. These expenditures were
made primarily for Teligent's network operating and administrative
infrastructure.
In 1998, 1997 and 1996, the Company's financing activities provided net
cash of $262,708,000, $573,107,000 and $48,678,000, respectively. The 1997
period includes proceeds from Teligent's $300 million Senior Notes offering,
Teligent's initial public equity offering, and other shareholder investments in
Teligent in 1997. The 1998 period includes $250,703,000 of proceeds from
Teligent's Senior Discount Notes offering.
Operating Results
Revenues were $32,801,000, $25,835,000 and $20,864,000 in 1998, 1997,
and 1996, respectively, an increase of 24% from 1996 to 1997, and 27% from 1997
to 1998. The increase in revenues is principally attributable to the cellular
communications revenues of Grupo Portatel, which have increased by 37% and 34%
in 1998 and 1997, respectively, as a result of the growth of its subscriber
base. Revenues from fixed wireless communications were $960,000 in 1998, as
compared to $1,052,000 in 1997 and $764,000 in 1996. Fixed wireless
communications revenues prior to 1998 were primarily related to agreements
Teligent entered into with an affiliate to provide management and administrative
services. In 1997, FCC licenses allowing Teligent to operate were transferred to
Teligent from its founding members, and in the fourth quarter of 1998 Teligent
launched full commercial service. Revenues from radio broadcasting grew 15% from
$2,688,000 in 1996 to $3,087,000 in 1997, and 9% in 1998 to $3,373,000. The
increase in broadcasting revenues is principally attributable to format changes.
27
<PAGE>
Cost of sales were $95,355,000, $15,102,000, and $11,426,000 in 1998,
1997, and 1996, respectively, which also reflect the increase in costs
associated with Portatel's growing subscriber base, as well as significantly
higher costs incurred in 1998 by the Company's fixed wireless communications
business, Teligent, in connection with the preparation for and launch of
commercial service in 19 markets in the fourth quarter of 1998.
Sales, general and administrative expenses were $158,952,000,
$61,466,000,and $26,714,000 in 1998, 1997, and 1996, respectively. These
expenses have increased significantly primarily due to the continued growth of
Teligent over the last three years , particularly with the launch of commercial
service in 1998.
Stock-based compensation expense of $28,506,000, $84,042,000 and
$2,778,000 was recognized in 1998, 1997, and 1996, respectively. The expense is
principally associated with Teligent equity awards issued to its employees and
directors prior to its initial public offering. The higher 1997 expense is the
result of the increase in the fair value of Teligent, the granting of additional
awards, and the additional vesting of outstanding awards prior to Teligent's
initial public offering. By their terms, these awards were considered to be
"variable awards" and therefore gave rise to compensation expense. At the time
of Teligent's initial public offering in November 1997, the awards were
converted into options to purchase Teligent Class A Common Stock ("Conversion
Options") 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. In accordance with
applicable accounting rules, the intrinsic value of the unvested Conversion
Options was determined as of the time of conversion, and is being amortized
ratably over their remaining vesting period.
Depreciation and amortization increased $7,608,000 in 1998 as compared
to 1997, and $6,670,000 from 1996 to 1997, principally reflecting the increase
in Teligent's property and equipment in connection with its commercialization
and network deployment.
The Company's operating losses were $277,260,000, $153,902,000,
$32,672,000 in 1998, 1997 and 1996, respectively, of which $248,697,000,
$136,060,000, and $14,857,000 are attributable to the fixed wireless
communications segment which has incurred such losses in the start-up of
operations and initial deployment of services. The Mexican cellular
communications segment experienced operating income of $882,000 and $318,000 in
1998 and 1997, respectively, and an operating loss of $2,519,000 in 1996,
reflecting an increasing subscriber base. Operating losses from radio
broadcasting were $561,000, $857,000, and $649,000 in 1998, 1997, and 1996,
respectively. The higher losses in 1997 are primarily the result of costs
incurred for format changes in that year.
The Company's equity in loss of affiliates was $2,119,000 in 1996 which
reflected the Company's share of the results of Teletrac. The Company has
accounted for its investment in Teletrac at cost subsequent to 1996 because of a
decrease in its ownership interest.
The Company recognized gains of $1,162,000, $2,485,000 and $3,398,000
from sales of marketable equity securities in 1998, 1997 and 1996, respectively.
A pretax gain of $12,177,000 was realized 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 $35,922,000, $5,142,000 and
$2,296,000 in 1998, 1997 and 1996, respectively. The increase each year is
primarily the result of earnings realized by Teligent from the investment of
proceeds received from its debt and equity offerings in late 1997 and early
1998. Interest expense was $75,709,000, $12,018,000 and $4,328,000 in 1998, 1997
and 1996, respectively. The increase each year reflects the increase in
outstanding borrowings of Teligent. Minority interests were $166,404,000,
$80,621,000 and $7,893,000 in 1998, 1997, and 1996, respectively. The 1997 and
1998 increases reflect the increase in Teligent's net loss as well as a decrease
in the Company's ownership percentage of Teligent during 1997.
28
<PAGE>
The Company recognized an income tax benefit (net of foreign tax
expense of Grupo Portatel) at an effective rate of approximately 7%, 21%, and
33% in 1998, 1997, and 1996, respectively. The effective rates for 1998 and 1997
are less than the statutory rate primarily because Teligent has not recorded an
income tax benefit from its net operating losses because realization of the
benefit is dependent on the generation of future taxable income. Prior to
November 1997, Teligent was a limited liability company which was treated as a
partnership for federal income taxes. See Note 11 to the financial statements
included elsewhere in this Annual Report. As of December 31, 1998, the Company
has recorded net deferred tax assets of $69,243,000, 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 of disposing of marketable 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 $139,109,000 for 1998 compared to net losses
of $51,665,000 and $17,196,000 in 1997 and 1996, respectively. The increase in
losses in 1997 over 1996 reflects principally the 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 $87,444,000 increase in the net
loss from 1997 to 1998 reflects the costs associated with Teligent's preparation
for and launch of commercial service in 19 markets in the fourth quarter of
1998.
Year 2000 Readiness
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 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
In September 1998, Teligent management presented a report to the
Teligent Board Audit Committee outlining issues and areas that they felt should
be considered in connection with Teligent's preparation of a Year 2000 plan.
Around that same time, a Year 2000 committee was appointed, consisting of senior
executives and other key personnel, and given the responsibility of directing
Teligent's Year 2000 activities, helping to resolve issues, overcome obstacles
and make decisions relating to the Year 2000 effort.
Teligent's Year 2000 efforts are organized into four key phases: i)
identify areas within the Teligent enterprise that may be impacted by the Year
2000 date change, ii) assess the Year 2000 exposure based on available
information and determine risks to business continuity, iii) validate the
assessment, determine remediation approach, and take remediation action if
deemed necessary and appropriate, and iv) implement mitigation and contingency
plans.
29
<PAGE>
Teligent has substantially completed a Year 2000 inventory of its
information technology infrastructure and end user computing functions, and has
made substantial progress in assessing these functions. Remediation and
implementation progress for these functions is in the beginning stages. Teligent
has made substantial progress identifying potential problem areas within its
products and services, suppliers, and facilities and equipment, and they are in
the initial stages of assessing these problem areas. 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.
Generally, Teligent requires key vendors and suppliers to warrant in
writing that they are Year 2000 ready. Discussions with key vendors are
on-going. If a vendor or supplier is not able to provide satisfactory Year 2000
assurances, their progress will be monitored and, if appropriate, an alternate
vendor or supplier who can give such assurances will be selected. Like other
telecommunications providers, Teligent's services are dependent upon other
service and telecommunications providers. For those providers with which its
systems interface and exchange data, Teligent is initiating and continuing
discussions on Year 2000 readiness.
Teligent's contingency plans will include the creation of teams that
will be prepared to respond immediately to critical Year 2000 problems as soon
as they become known. The make up of teams that are assigned to deal with such
problems will vary according to the nature, significance, and location of the
problem.
Further information on Teligent's Year 2000 readiness can be found in
Teligent's current periodic filings with the SEC.
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 in early 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. Testing to measure compliance with the Year 2000 is
expected to be completed in 1999.
Portatel
Portatel 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. Portatel is currently
negotiating with its primary equipment vendor to replace certain of the analog
switching equipment with new digital switching equipment, which is needed for
additional capacity, that will be year 2000 compliant. Additionally, Portatel is
negotiating with the vendor to perform necessary modifications to the remaining
analog equipment. Although the vendor has indicated it will no longer support
such equipment, it has committed to developing a plan of action to ensure that,
when completed, such action will bring the analog equipment into compliance with
the Year 2000 issue. The cost of modifications to the analog equipment, and
other business sytems of Portatel is not expected to be material to the
Company's financial position. In the event that Portatel's efforts to be Year
2000 complaint are not successful,the operations of Portatel would be
significantly affected.
30
<PAGE>
AT&T
The Company's investment in AT&T accounts for a significant portion of
its assets as of March 26, 1999. 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 it is assessing and working to remedy all Year 2000 problems
within its computer systems and operations by June 30, 1999. However the Year
2000 status of the systems recently acquired by AT&T are still being assessed.
More information on the Year 2000 efforts of AT&T can be found in its recent
periodic filings made with the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
Interest Rate Risk
The Company has both variable and fixed rate borrowings. The variable
rate borrowings have carrying values which approximate fair value. A
hypothetical 10% increase in the underlying interest rates of these borrowings
as of December 31, 1998, assuming no other changes, would increase the Company's
loss before income taxes by approximately $900,000. The fair value of the
Company's fixed rate borrowings will be negatively impacted by an increase in
interest rates. Assuming a hypothetical increase in rates of 10%, the fair value
of fixed rate borrowings would decrease by $40,696,000, which would not impact
the Company's financial position because the actual carrying value of the
borrowings and interest expense would not be affected.
Foreign Exchange Risk
Because Grupo Portatel's debt agreements and significant vendor
agreements are denominated in U.S. dollars, changes in the peso exchange rate do
not impact the fair value of these financial instruments. The effect of a
hypothetical 10% devaluation in the peso on the Company's results of operations
and cash flows would not be material.
Equity Price Risk
The Company's marketable equity securities, described in Note 3 to the
financial statements included elsewhere herein, are carried at fair value of
$1,605,368,000 as of December 31, 1998 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
$160,537,000.
31
<PAGE>
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.
32
<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 1999 annual
meeting of stockholders scheduled to be held on June 3, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the Company's definitive proxy statement for the 1999 annual
meeting of stockholders scheduled to be held on June 3, 1999.
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 1999 annual
meeting of stockholders scheduled to be held on June 3, 1999.
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 1999 annual
meeting of stockholders scheduled to be held on June 3, 1999.
33
<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
Number
- -------
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 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 Amendment No. 1 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.
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, filed as Exhibit 10.2 to Annual
Report on Form 10-K for the fiscal year ended December 31, 1997
and incorporated herein by reference.
10.3 Amended and Restated TruePosition, Inc. 1995 Stock Incentive
Plan, filed herewith.
10.4 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>
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 Letter Agreement, dated as of March 6, 1998 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, 1997 and incorporated herein by reference.
10.10 Letter Agreement, dated as of December 12, 1997, by and between
Associated Investments, Inc. and PNC Bank, National Association,
filed as Exhibit 10.11 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated by
reference herein.
10.11 Amended and Restated Demand Note by and between Associated
Investments, Inc. and PNC Bank, National Association, dated as
of February 16, 1999, filed herewith.
10.12 Form of Amended and Restated Pledge Agreement by Associated
Investments, Inc. in favor of PNC Bank, National Association,
filed as Exhibit 10.13 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated by
reference herein.
10.13 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.
<PAGE>
10.14 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.
10.15 Registration Rights Agreement, dated as of March 6, 1998, by and
between Teligent, Inc. and Microwave Services, Inc., filed as
Exhibit 6 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, filed herewith.
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, 1998 (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 1998.
<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.
<TABLE>
<S> <C>
THE ASSOCIATED GROUP, INC.
(Registrant)
Date: March 26, 1999 By: /s/ Myles P. Berkman
---------------------------------------
Myles P. Berkman
Chairman, President and Chief
Executive Officer
</TABLE>
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.
<TABLE>
<S> <C>
Date: March 26, 1999 By: /s/ Myles P. Berkman
---------------------------------------
Myles P. Berkman
Chairman, President and Chief
Executive Officer
(Principal Financial and
Accounting Officer)
Date: March 26, 1999 By: /s/ David J. Berkman
---------------------------------------
David J. Berkman
Director and Executive
Vice President
Date: March 26, 1999 By: /s/ Donald H. Jones
---------------------------------------
Donald H. Jones
Director
Date: March 26, 1999 By: /s/ Joseph A. Katarincic
---------------------------------------
Joseph A. Katarincic
Director
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number
------
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 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 Amendment No. 1 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.*
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, filed as Exhibit 10.2 to Annual
Report on Form 10-K for the fiscal year ended December 31, 1997
and incorporated herein by reference.*
10.3 Amended and Restated TruePosition, Inc. 1995 Stock Incentive
Plan, filed herewith.
10.4 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.*
10.5 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.*
<PAGE>
Exhibit
Number
------
10.6 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.*
10.7 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.*
10.8 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.*
10.9 Letter Agreement, dated as of March 6, 1998 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, 1997 and incorporated herein by reference.*
10.10 Letter Agreement, dated as of December 12, 1997, by and between
Associated Investments, Inc. and PNC Bank, National Association,
filed as Exhibit 10.11 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated by
reference herein.*
10.11 Amended and Restated Demand Note by and between Associated
Investments, Inc. and PNC Bank, National Association, dated as
of February 16, 1999, filed herewith.
10.12 Form of Amended and Restated Pledge Agreement by Associated
Investments, Inc. in favor of PNC Bank, National Association,
filed as Exhibit 10.13 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated by
reference herein.*
10.13 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.*
<PAGE>
Exhibit
Number
------
10.14 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.*
10.15 Registration Rights Agreement, dated as of March 6, 1998, by and
between Teligent, Inc. and Microwave Services, Inc., filed as
Exhibit 6 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, filed herewith.
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, 1998 (filed only
electronically with the Securities and Exchange Commission).
- --------------------
* Previously filed and incorporated by reference
<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, 1998
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, 1998 and 1997
Statements of Operations--Years ended December 31, 1998, 1997, and 1996
Statements of Stockholders' Equity--Years ended December 31, 1998,
1997, and 1996
Statements of Cash Flows--Years ended December 31, 1998, 1997, and 1996
Notes to Financial Statements--December 31, 1998
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, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. 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. Grupo's statements
reflect total assets of $26,106,000 and $26,966,000 at December 31, 1998 and
1997, and total revenues of $27,863,000 and $20,398,000, respectively, for the
years then ended. 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, 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 26, 1999, except for Note 3,
as to which the date is March 17, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Grupo Portatel, S.A. de C.V.:
We have audited the accompanying consolidated balance sheets of Grupo Portatel,
S.A. de C.V. and Subsidiaries as of December 31, 1998 and 1997 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, 1998. 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, 1998 and 1997, and the results of their
operations, stockholders' equity and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles in the United States.
KPMG CARDENAS DOSAL, S.C.
Felipe Lopez Villegas
Merida, Yuc., Mexico
February 22, 1999
F-2
<PAGE>
The Associated Group, Inc. and Subsidiaries
Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
--------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 418,246 $ 426,596
Accounts receivable, less allowance for doubtful accounts
(1998--$2,143; 1997--$2,495) 5,526 3,188
Receivable from related parties 2,368 3,977
Inventory held for resale 2,329 2,175
Prepaid expenses and other assets 3,795 2,485
Restricted cash and investments 32,183 30,373
Deferred income taxes 1,136 1,523
--------------------------------------
Total current assets 465,583 470,317
Property and equipment--net of accumulated depreciation and
amortization 207,075 33,837
Marketable equity securities, at fair value (cost: 1998--
$6,958; 1997--$7,726) 1,605,368 841,311
Notes receivable from related parties 23,820 20,558
Restricted investments 33,117 64,702
Other noncurrent assets 96,389 72,397
--------------------------------------
Total assets $2,431,352 $1,503,122
======================================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
December 31
1998 1997
--------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 138,015 $ 18,083
Employee compensation 14,837 2,748
Short-term obligations 151,186 110,991
Current portion of long-term debt 2,082 2,082
Other current liabilities 8,976 9,760
--------------------------------------
Total current liabilities 315,096 143,664
Long-term debt, excluding current portion 580,220 306,244
Deferred compensation 3,484 2,417
Deferred income taxes 508,227 257,689
Minority interests 29,957 174,588
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 shares issued and
outstanding in 1998 and 1997 1,876 1,876
Class B Common Stock, par value $.10 per share; authorized
50,000,000 shares; 19,387,564 and 18,854,760 shares
issued and outstanding in 1998 and 1997, respectively 1,939 1,885
Additional paid-in capital 152,482 134,716
Accumulated deficit (200,896) (61,787)
Accumulated other comprehensive income 1,038,967 541,830
--------------------------------------
Total stockholders' equity 994,368 618,520
--------------------------------------
Total liabilities and stockholders' equity $2,431,352 $1,503,122
======================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
The Associated Group, Inc. and Subsidiaries
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Revenues $ 32,801 $ 25,835 $ 20,864
Cost and expenses:
Cost of sales and services 95,355 15,102 11,426
Direct research and development expenses 7,914 7,401 7,562
Sales, general and administrative expenses 158,952 61,466 26,714
Stock-based compensation expense 28,506 84,042 2,778
Depreciation and amortization expense 19,334 11,726 5,056
------------------------------------------------------
310,061 179,737 53,536
------------------------------------------------------
Operating loss (277,260) (153,902) (32,672)
Equity in loss of affiliates - - (2,119)
Other income (expense):
Gain on sale of marketable equity securities 1,162 2,485 3,398
Gain on sale of wireless communications
investment - 12,177 -
Interest and dividend income 35,922 5,142 2,296
Interest expense (75,709) (12,018) (4,328)
Minority interests 166,404 80,621 7,893
------------------------------------------------------
127,779 88,407 9,259
------------------------------------------------------
Loss before income taxes (149,481) (65,495) (25,532)
Income tax benefit (10,372) (13,830) (8,336)
------------------------------------------------------
Net loss $(139,109) $(51,665) $(17,196)
======================================================
Net loss per common share $ (3.66) $ (1.38) $ (.46)
======================================================
Weighted average common shares outstanding 38,024 37,573 37,548
</TABLE>
See accompanying notes.
F-5
<PAGE>
The Associated Group, Inc. and Subsidiaries
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
Class A Class B
-------------------------------------------------------------
Shares Amount Shares Amount
-------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance, January 1, 1996 9,382,962 $ 938 9,382,985 $ 938
Comprehensive income (loss):
Net loss
Change in unrealized gain on marketable
equity securities, net of income
taxes of $39,960
Total comprehensive income (loss)
Stock options exercised 14,925 2
-------------------------------------------------------------
Balance, December 31, 1996 9,382,962 938 9,397,910 940
Stock dividend 9,382,962 938 9,397,910 940
Comprehensive income:
Net loss
Change in unrealized gain on marketable
equity securities, net of income
taxes of $145,100
Total comprehensive income
Stock options exercised 58,940 5
Increase in paid-in capital attributable
to subsidiary stock-based compensation
(net of minority interest)
Stock issuance of consolidated subsidiaries
-------------------------------------------------------------
Balance, December 31, 1997 18,765,924 1,876 18,854,760 1,885
Comprehensive income (loss):
Net loss
Change in unrealized gain on marketable
equity securities, net of income
taxes of $267,689
Total comprehensive income
Stock options exercised (including tax
benefit of $6,025) 532,804 54
Increase in paid-in capital attributable
to subsidiary stock-based compensation
(net of minority interest)
-------------------------------------------------------------
Balance, December 31, 1998 18,765,924 $1,876 19,387,564 $1,939
=============================================================
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Retained Other Total
Paid-in Earnings Comprehensive Stockholders'
Capital (Deficit) Income Equity
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $ - $ 8,952 $ 346,570 $357,398
Comprehensive income (loss):
Net loss (17,196)
Change in unrealized gain on marketable
equity securities, net of income
taxes of $39,960 (74,211)
Total comprehensive income (loss) (91,407)
Stock options exercised 12 14
-------------------------------------------------------------------
Balance, December 31, 1996 12 (8,244) 272,359 266,005
Stock dividend (1,878) -
Comprehensive income:
Net loss (51,665)
Change in unrealized gain on marketable
equity securities, net of income
taxes of $145,100 269,471
Total comprehensive income 217,806
Stock options exercised 58 63
Increase in paid-in capital attributable 35,395 35,395
to subsidiary stock-based compensation
(net of minority interest)
Stock issuance of consolidated subsidiaries 99,251 99,251
-------------------------------------------------------------------
Balance, December 31, 1997 134,716 (61,787) 541,830 618,520
Comprehensive income (loss):
Net loss (139,109)
Change in unrealized gain on marketable
equity securities, net of income
taxes of $267,689 497,137
Total comprehensive income 358,028
Stock options exercised (including tax
benefit of $6,025) 6,951 7,005
Increase in paid-in capital attributable
to subsidiary stock-based compensation
(net of minority interest) 10,815 10,815
-------------------------------------------------------------------
Balance, December 31, 1998 $152,482 $(200,896) $1,038,967 $994,368
===================================================================
</TABLE>
See accompanying notes. F-6
<PAGE>
The Associated Group, Inc. and Subsidiaries
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(139,109) $ (51,665) $(17,196)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 15,136 10,113 4,205
Amortization 4,198 1,613 851
Provision for losses on accounts receivable 1,243 1,058 1,275
Equity in loss of affiliates - - 2,119
Gain on sale of investments (1,162) (14,662) (3,398)
Amortization of debt discount and issue costs 27,880 59 -
Stock-based compensation 27,006 84,042 2,778
Minority interests (166,404) (80,621) (7,893)
Provision for deferred income taxes (10,752) (14,256) (8,743)
Other 3,664 1,191 738
Change in assets and liabilities:
Accounts receivable (3,581) (195) (2,221)
Inventory held for resale (154) (553) (76)
Prepaid expenses and other assets (1,310) (1,834) 571
Accounts payable (excluding capital assets) 34,023 10,367 189
Employee compensation 12,089 773 996
Other current liabilities (784) 8,756 (174)
Deferred compensation 1,067 977 176
-----------------------------------------------------
Net cash used in operating activities (196,950) (44,837) (25,803)
Cash flows from investing activities
Cash and cash equivalents from consolidation of
affiliate - - 751
Purchases of property and equipment, net (102,549) (16,043) (4,435)
Proceeds from sale of investments 1,930 23,883 3,414
Purchase of marketable equity securities - (871) -
Restricted cash and investments 29,775 (95,075) -
Increase in notes receivable from related
parties (1,992) (5,249) (11,117)
Investments in and acquisitions of affiliates - (11,116) (8,172)
Other investing activities, net (1,272) (544) (993)
-----------------------------------------------------
Net cash used in investing activities (74,108) (105,015) (20,552)
</TABLE>
F-7
<PAGE>
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from short-term obligations $ 41,144 $ 100,938 $44,056
Repayment of short-term obligations (932) (67,491) -
Proceeds from long-term debt 250,703 300,000 -
Repayment of long-term debt (2,082) (2,082) (2,082)
Payment of debt and equity issue costs (27,476) (21,675) -
Investment by minority interests - 263,302 6,235
Other financing activities, net 1,351 115 469
----------------------------------------------------
Net cash provided by financing activities 262,708 573,107 48,678
----------------------------------------------------
Net (decrease) increase in cash and cash equivalents (8,350) 423,255 2,323
Cash and cash equivalents at beginning of year 426,596 3,341 1,018
----------------------------------------------------
Cash and cash equivalents at end of year $418,246 $ 426,596 $ 3,341
=============f=======================================
Supplemental disclosure of noncash financing activities
Contribution by minority interests of notes receivable
from related parties $ 4,112 $ - $ 7,162
====================================================
Long-term debt assumed by cellular equipment vendor, as
guarantor $ - $ - $ 2,845
====================================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
The Associated Group, Inc. and Subsidiaries
Notes to Financial Statements
December 31, 1998
(Dollars in Thousands, Except Per Share and Per Option Amounts)
1. Significant Accounting Policies
Business
The Associated Group, Inc. ("Associated") and its subsidiaries (collectively,
the "Company") 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. On
March 9, 1999, the Company's cable holdings were converted into holdings of AT&T
Corp. ("AT&T") and Liberty Media Group, a separate tracking stock of AT&T, as a
result of the merger of AT&T and Tele-Communications, Inc. ("TCI") (see Note 3).
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. Companies 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 such
companies' assets and operations are also consolidated. Consolidated
subsidiaries include Teligent, Inc. ("Teligent"), a company founded in 1996
which currently offers high-quality, low-cost local and long distance
telecommunications, high-speed data and dedicated Internet services to small and
medium-sized businesses in 19 of the 74 major 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
Revenues from communications services 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
$1,032 and $1,097 at December 31, 1998 and 1997, respectively, and cellular
telephones and related equipment of $1,297 and $1,078 at December 31, 1998 and
1997, 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 at December 31, 1998 and 1997. 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, and
therefore, their cost is not included in inventory.
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. Realized gains
and losses are determined based on average cost.
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, 1998, 1997, and 1996 the
translation loss of Grupo consolidated in the statement of operations was $701,
$5, and $178 respectively.
F-10
<PAGE>
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.
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 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS No. 123, the Company accounts 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.
Teligent recognizes certain stock-based compensation costs in additional paid-in
capital (see Note 14). The amount recognized, net of minority interest, is
included in the Company's additional paid-in capital.
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 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.
F-11
<PAGE>
Loss Per Share
Loss per share amounts have been presented in accordance SFAS No. 128, "Earnings
Per Share" which was adopted in 1997. 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.
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established new rules for the reporting and
display of comprehensive income and its components; however the adoption of this
statement had no impact on the Company's net loss or stockholders' equity. SFAS
No. 130 requires that the Company report unrealized gains on marketable
securities as other comprehensive income and disclose total comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
The Company's other comprehensive income arises from the unrealized gains of its
marketable securities portfolio. The change in unrealized gains for the year
ended December 31, 1998 is net of a reclassification adjustment for gains on
sales included in net loss for the year of $609, net of taxes of $328.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires
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 98-1 is effective for fiscal years beginning after December 15,
1998. The Company does not believe that its effect will be material to the
Company's financial condition or results of operations.
In April, 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). This statement requires that the
costs of start-up activities be expensed as incurred, including presenting the
cumulative effect of a change in accounting principle upon adoption of SOP 98-5.
The Company does not believe that the adoption of SOP 98-5 will be material to
the Company's financial condition or results of operations.
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.
F-12
<PAGE>
2. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
December 31 Useful
1998 1997 Life-Years
----------------------------------------------------
<S> <C> <S>
Land $ 572 $ 577
Buildings and leasehold improvements 10,553 5,833 3-20
Operating equipment 138,111 42,073 4-10
Office furniture and equipment 54,524 11,551 3-10
Construction in progress 53,035 8,630
----------------------------------
256,795 68,664
Less accumulated depreciation and amortization (49,720) (34,827)
----------------------------------
$ 207,075 $ 33,837
==================================
</TABLE>
3. Marketable Equity Securities
The cost and market value of the Company's marketable equity securities
classified as available for sale, at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Name of Issuer and Number of
Title of Each Issue Shares Cost Market Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tele-Communications, Inc.:
Series A TCI Group Common Stock 9,111,202 $2,559 $ 503,963
Series B TCI Group Common Stock 7,123,167 1,178 434,513
Series A TCI Ventures Group Common Stock 6,737,548 946 158,754
Series A Liberty Media Group Common Stock 8,180,954 1,339 376,835
Series B Liberty Media Group Common Stock 2,651,944 273 125,967
Others various 663 5,336
-------------------- --------------------
$6,958 $1,605,368
==================== ====================
</TABLE>
On March 9, 1999, AT&T merged with TCI. Concurrent with the AT&T merger, Liberty
Media Group and TCI Ventures Group were combined to form a new Liberty Media
Group whose shareholders will be issued separate tracking stock by AT&T (the
"Liberty Media Common Stock"). On March 17, 1999, the Board of Directors of AT&T
declared a 3-for-2 stock split, payable on April 15, 1999 to stockholders of
record on March 31, 1999. As a result of the merger and stock split, the
Company's holdings in TCI will be converted into 19,718,631 shares of AT&T,
11,684,477 shares of Class A Liberty Media Group Common Stock, and 2,651,944
shares of Class B Liberty Media Group Common Stock. The aggregate market value
of the Company's equity interest in AT&T, Liberty Media Group, and its other
marketable equity securities was $1,882,225 on March 17, 1999.
F-13
<PAGE>
On January 8, 1998, the Board of Directors of TCI declared a two-for-one stock
split, effected in the form of a stock dividend, of Series A TCI Ventures Group
Common Stock, and a three-for-two stock split, effected in the form of a stock
dividend, of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock. Also in January 1998, the Company received 51,315
shares of Series B TCI Group Common Stock awarded in connection with the
settlement of class action litigation involving the merger of TCI and Liberty
Media Corporation in 1994.
During 1998, 1997, and 1996, the Company sold certain marketable securities for
proceeds of approximately $1,930, $2,512, and $3,414 respectively. These sales
resulted in pretax gains of $1,162 and $2,485, $3,398 in 1998, 1997, and 1996,
respectively.
4. Notes Receivable from Related Parties
Included in noncurrent notes receivable from related parties at December 31,
1998 and 1997 are amounts and accrued interest due from certain Mexican
stockholders of Grupo of $15,529 and $14,238, 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 are notes due
from the Chairman and Chief Executive Officer (the "Executive") of Teligent.
Under the terms of the Executive's employment agreement, Teligent's founders,
Microwave Services, Inc. ("MSI") (a wholly owned subsidiary of Associated) and
Digital Services Corporation ("DSC") provided loans to the Executive in the
amount of $8,250 and $6,750, respectively. In 1998, these notes were assigned
from MSI and DSC to Teligent, and as a result the outstanding amount reflected
has increased to include the DSC note. The loans are subject to partial
forgiveness on certain employment anniversaries, and are fully forgiven as of
the fifth anniversary of the Executive's 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 on the
note will become immediately due and payable. The Company is expensing the
accrued interest and principal over five years, the term of the employment
agreement. The unamortized balance is $8,000 and $6,050 as of December 31, 1998
and 1997, respectively.
5. Investments in Wireless Communications Affiliates
Teletrac, Inc. ("Teletrac")
As of December 31, 1998, 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 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 December 1996,
F-14
<PAGE>
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, and has recognized a pretax gain on the sale of
approximately $12,177.
Personal Communications Services ("PCS")
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"). 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(R) under the symbol "OMPT."
6. 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. (the predecessor to Teligent) 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. Accumulated
amortization as of December 31, 1998 was approximately $3,469.
In 1996, the Company purchased the assets of radio broadcasting station WXST-FM
(formerly known as WLYR-FM) located in Delaware, Ohio for consideration of
$3,250, including amounts for noncompete and consulting agreements. Intangible
assets of $2,584 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. Accumulated amortization as of December 31, 1998 was approximately
$902.
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 been presented.
F-15
<PAGE>
7. Short-Term Obligations
The Company's short-term borrowings as of December 31 were as follows:
1998 1997
------------------------------------
Bank borrowing $ 30,000 $ 19,000
Brokerage margin loan facilities 121,186 91,991
------------------------------------
$ 151,186 $ 110,991
====================================
Weighted average interest rate 5.8% 6.4%
The Company's bank borrowing is a demand note secured by a pledge of marketable
equity securities, and bears interest at a variable rate which is tied to the
Federal Funds rate. At the Company's request, the bank has extended additional
credit by replacing the existing demand note with a new demand note reflecting
an increased principal amount under the same terms and conditions.
The Company also has brokerage margin loan facilities. Borrowings under one
brokerage margin loan facility are limited to 65% of the market value of the
pledged, up to a maximum of $200 million. Under the other facilities, borrowings
are limited to 50% of the market value of the marketable equity securities
pledged. 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, 1998, 8,383,962 shares of Series A TCI Group Common Stock and
6,592,028 shares of Series A TCI Ventures Group Common Stock were pledged as
security under the bank borrowing and brokerage margin loan facilities. After
taking into effect the merger of TCI and AT&T, and the subsequent stock split
declared by AT&T (See Note 3) the pledged shares will consist of 9,755,156
shares of AT&T and 3,427,853 shares of Class A Liberty Media Group Common Stock.
8. Long-Term Debt
The Company's long-term debt as of December 31 consists of the following:
1998 1997
----------------------------
Teligent 11.5% Senior Notes due 2007 $300,000 $300,000
Teligent 11.5% Senior Discount Notes due 2008 276,058 -
Portatel loans 4,162 6,244
----------------------------
$580,220 $306,244
============================
F-16
<PAGE>
Maturities of long-term debt for the next five years and thereafter are as
follows (in thousands):
1999 $ 2,082
2000 2,081
2001 2,081
2002 -
2003 -
Thereafter 576,058
-----------------
Total 582,302
Less current portion (2,082)
-----------------
Total long-term debt $580,220
=================
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 control payment date. Teligent capitalized $11,344 of costs incurred for the
offering which is being amortized to interest expense over ten years, the term
of the related debt.
Teligent 11.5% Senior Discount Notes due 2008
On February 20, 1998, Teligent completed an offering of $440 million 11.5%
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 11.5%, payable March 1 and September 1 through March 1, 2008.
Teligent received proceeds of approximately $243,145 from the offering, net of
offering costs. Under an exchange offer, Discount Notes originally issued were
exchanged for Discount Notes which have been registered under the Securities Act
of 1933, the terms of which are identical in all material respects to the
original Discount Notes.
F-17
<PAGE>
Teligent capitalized $7,558 of costs incurred for the offering which is being
amortized to interest expense over ten years, the term of the related debt.
On or after March 1, 2003, the Discount 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
---- ----------
2003 105.750%
2004 103.833
2005 101.917
2006 and thereafter 100.000
Upon the occurrence of a change in control, as defined in the Discount Notes
agreement, each holder of the Discount 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 control payment date.
Additional Teligent Credit Facility
On July 2, 1998, Teligent entered into a credit agreement providing for
borrowings up to an aggregate of $800 million (the "Credit Agreement"), to be
used for working capital and general corporate purposes, including the purchase
of telecommunications equipment, software, and services. Borrowings under the
Credit Agreement are subject to certain conditions, and are secured by
substantially all of the assets of Teligent. As of December 31, 1998, no
borrowings were made under the Credit Agreement.
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 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.
F-18
<PAGE>
The amounts outstanding under the Portatel Credit Agreements at December 31,
1998 are as follows:
<TABLE>
<CAPTION>T
Tranche I Tranche II Total
--------------------------------------------------------
<S> <C> <C> <C>
Current $ 1,742 $ 340 $ 2,082
Long-term 3,480 682 4,162
--------------------------------------------------------
$ 5,222 $ 1,022 $ 6,244
========================================================
Weighted average interest rate at year-end 8.3% 12.3%
</TABLE>
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. Grupo, Portatel and certain
shareholders of Grupo (including the Company) entered into a Contribution
Agreement with the Guarantor to convert the payments made by the Guarantor on
behalf of Portatel into capital stock of Grupo. In 1997, under the terms of the
Contribution Agreement 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, 1998.
Cash paid for interest on both short-term and long-term debt obligations
amounted to approximately $48,161, $5,017, and $2,211 for the years ended
December 31, 1998, 1997, and 1996, respectively.
9. 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 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 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, 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.
F-19
<PAGE>
10. Leases
The Company and its subsidiaries lease office space, as well as cell site,
transmitter and antenna sites, under operating lease agreements. Total rent
expense was approximately $13,041, $4,142, and $2,424 for the years ended
December 31, 1998, 1997, and 1996, respectively.
Approximate future minimum lease payments, by year and in the aggregate, are as
follows at December 31, 1998:
1999 $ 20,294
2000 18,910
2001 17,682
2002 16,105
2003 14,387
Thereafter 51,910
--------------
$139,288
==============
11. Income Taxes
The Company's income tax provision includes the income taxes for the
consolidated income tax return of Associated as well as the separate income tax
returns of Grupo and Teligent. As a result of the merger of Teligent, L.L.C.
into Teligent on November 26, 1997, the Company's pro-rata share of Teligent's
losses for the period prior to the merger were included in Associated's tax
returns; however, subsequent to the merger Teligent files separate income tax
returns.
F-20
<PAGE>
The tax effects of temporary differences that give rise to the net deferred tax
liability, are as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss and asset tax credit carryforwards:
United States $ 130,958 $ 26,921
Mexican 6,409 6,526
Stock-based compensation 38,905 29,519
Excess of tax basis over book basis of investments in affiliates 8,946 9,165
Original issue discount 8,651 -
Deferred compensation 3,740 1,661
Other 6,138 4,207
------------------------------------
Total deferred tax assets 203,747 77,999
Valuation allowances (134,504) (29,304)
------------------------------------
Net deferred tax assets 69,243 48,695
Deferred tax liabilities:
Unrealized gain on marketable equity securities (559,444) (291,754)
Intangible assets (14,305) (13,107)
Other (2,585) -
------------------------------------
Total deferred tax liabilities (576,334) (304,861)
------------------------------------
Net deferred tax liability $(507,091) $(256,166)
====================================
The changes in the valuation allowances, which are related to Grupo and
Teligent, were as follows:
<CAPTION>
Year ended December 31,
1998 1997
------------------------------------
<S> <C> <C>
Beginning balance $ 29,304 $ 6,512
Provision 106,440 22,975
Foreign currency translation gain (1,240) (183)
------------------------------------
Ending balance $134,504 $29,304
====================================
</TABLE>
Mexican tax law provides for an alternative minimum tax ("asset tax"). The asset
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 asset
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, 1998, 1997, and 1996 was approximately $428, $440, and $553
respectively.
F-21
<PAGE>
The income tax benefit for the three years ended December 31, 1998, consists of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Current:
Mexican $ 380 $ 426 $ 407
Deferred:
United States (11,510) (14,270) (8,967)
Mexican 758 14 224
-----------------------------------------------------------
Total deferred (10,752) (14,256) (8,743)
-----------------------------------------------------------
$(10,372) $(13,830) $(8,336)
===========================================================
</TABLE>
At December 31, 1998, the Company's federal net operating loss ("NOL")
carryforwards and Mexican NOL and asset tax credit carryforward of Grupo were as
follows:
<TABLE>
<CAPTION>
Federal Mexican Mexican Asset Tax
NOL NOL Credit
-----------------------------------------------------------------
<S> <C> <C> <C>
Expiration date:
2002 $ - $ 60 $ -
2003 - 262 281
2004 - 2,730 271
2005 - 4,517 317
2006 - 1,749 310
2007 - 1,467 340
2008 - 2,442 346
2013 1,003 - -
2014 980 - -
2015 18,872 - -
2016 19,613 - -
2017 30,500 - -
2018 48,991 - -
-----------------------------------------------------------------
$119,959 $13,227 $1,865
=================================================================
</TABLE>
Certain subsidiaries of Grupo realized taxable income for the years ended
December 31, 1998 and 1997. Net operating losses of $332 and $1,493 were
utilized in 1998 and 1997 to offset the liability for current Mexican tax
expense.
F-22
<PAGE>
A reconciliation between income taxes computed using the statutory federal
income tax rate (34%) and the effective rate, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Federal income tax (credit) at statutory rate $ (50,824) $(22,268) $(8,681)
State taxes, net of federal (11,259) - -
Effects of minority interests and consolidation (58,738) (39,118) 214
Valuation allowance 106,697 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 (146) (478) 856
Other 3,898 217 (800)
-----------------------------------------------------------
$ (10,372) $(13,830) $(8,336)
===========================================================
</TABLE>
12. 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 23,374,774 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,
F-23
<PAGE>
cash, property, or other securities of the Company) having a value equal to two
times the Purchase Price.
13. Additional Paid-in Capital
As of December 31, 1998, the Company's additional paid-in capital includes
approximately $99,251 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.
Additional paid-in capital as of December 31, 1998 also includes $46,210 for the
recognition in 1997 and 1998 of stock-based compensation expense of Teligent
(see Note 14), net of minority interests.
14. 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 4,608,804 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.
The Company also maintained a stock option plan (the "MSI Plan") under which
options were granted to purchase shares of common stock of MSI. In 1996 options
were granted under the MSI Plan at an option price no less than the grant date
fair value of the stock covered by the option, for an option period of ten
years. In 1998, options outstanding under the MSI Plan were converted into
options to purchase Class B Common Stock under the 1994 Plan. The number of
options and exercise price after conversion maintained the existing intrinsic
value of the cancelled MSI options, and the original vesting period and terms
were not changed.
F-24
<PAGE>
Activity of the 1994 Plan is summarized below:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
------------------------------------
<S> <C> <C>
Options outstanding, January 1, 1996 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
Converted from MSI Plan 1,727,438 $ 2.70
Granted 20,000 $29.94
Exercised (532,804) $ 1.84
Canceled and returned to plan (7,000) $10.93
-------------------
Options outstanding, December 31, 1998 3,567,210 $ 5.02
===================
</TABLE>
Options outstanding and exercisable by price range as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------- -----------------------------------------
Average
Range of Remaining Weighted- Weighted-
Exercise Number Contractual Average Number Average
Prices of Options Life (years) Exercise Price of Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.45 489,680 1.6 $ 0.45 489,680 $ 0.45
2.00-4.00 1,678,414 7.3 2.70 1,302,400 2.69
8.00-15.00 1,285,116 6.5 8.40 1,086,516 8.36
16.00-20.00 74,000 8.3 16.51 17,800 17.05
25.00-30.00 30,000 9.2 26.50 4,000 27.00
31.00-35.00 10,000 9.4 34.38 - -
----------------------------------------------------------------------------------------------------------------
3,567,210 6.3 $ 5.02 2,900,396 $ 4.56
================================================================================================================
</TABLE>
F-25
<PAGE>
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 of the CAR, as
adjusted. The CARs vested over a period of six years.
Also in 1996, Teligent, L.L.C. adopted a Long-Term Incentive Compensation Plan
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 13) 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 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 $27,006 and $84,042 in
1998 and 1997, respectively. The conversion created a measurement date whereby
the variable Equity Awards were converted to nonvariable stock options. Upon
conversion, the related liability was reclassified 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, 1998, 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.
F-26
<PAGE>
Additional information with respect to the Teligent Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
----------------------------------------
<S> <C> <C>
Options outstanding, January 1, 1997 -
Converted from appreciation units 6,471,047 $ 7.07
Converted from CARs 6,009,732 $ 12.41
Granted 380,450 $ 22.18
Canceled and returned to plan (50,544) $ 12.94
----------------------
Options outstanding, December 31, 1997 12,810,685 $ 10.00
Granted 2,084,714 $ 28.43
Exercised (49,982) $ 7.44
Canceled and returned to plan (194,631) $ 20.52
----------------------
Options outstanding, December 31, 1998 14,650,786 $ 12.32
======================
</TABLE>
Options outstanding and exercisable by price range as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------- -----------------------------------
Average
Range of Remaining Weighted- Weighted-
Exercise Number Contractual Average Number Average
Prices of Options Life (years) Exercise Price of Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.35- 5.00 2,003,244 7.7 $ 3.77 2,003,244 $ 3.77
5.01-10.00 8,905,015 8.0 6.69 1,599,216 6.54
10.01-15.00 402,649 8.5 13.38 82,329 13.38
20.01-25.00 809,390 9.0 21.98 138,710 21.81
25.01-30.00 1,031,660 9.5 27.48 820 25.51
30.01-35.00 497,206 9.4 31.72 - -
45.01-50.00 1,001,622 7.7 46.00 - -
---------------------------------------------------------------------------------------------------
14,650,786 8.1 $ 12.32 3,824,319 $ 5.79
===================================================================================================
</TABLE>
F-27
<PAGE>
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 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.
Activity of the TruePosition Plan is summarized below:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
--------------------------------------
<S> <C> <C>
Options outstanding, January 1, 1996 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
Granted 11,800 $ 42.00
Exercised -
Canceled and returned to plan (1,295) $ 42.00
---------------------
Options outstanding, December 31, 1998 193,105 $ 32.48
=====================
As of December 31, 1998:
Range of exercise prices $21.00-$42.00
Weighted average remaining contractual life 7.5 years
Options exercisable 99,990 $ 26.62
</TABLE>
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, 1998, 1997 and 1996 would
have been $(158,023) or $(4.16) per share, $(62,738) or $(1.67) per share, and
$(20,888) 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>
MSI
1994 Plan Teligent Plan TruePosition Plan Plan
Grants in 1998 1997 1996 1998 1997 1996 1998 1997 1996 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average fair value $20.44 $11.84 $6.37 $21.66 $18.57 $14.04 $28.37 $26.15 $24.35 $14.99
Weighted average assumptions:
Risk-free interest rate 5.3% 6.6% 6.5% 5.0% 6.6% 7.0% 5.3% 6.5% 6.0% 6.7%
Expected life (years) 10 10 10 10 10 10 10 10 10 10
Expected volatility 50% 39% 34% 65% 50% 34% 50% 39% 34% 34%
Expected dividends 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 %
</TABLE>
15. 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.
Short-Term Obligations
The carrying amount of the Company's short-term borrowings approximates fair
value.
Long-Term Debt
The fair value of long-term debt is based on quoted market prices for similar
types of borrowing arrangements.
F-29
<PAGE>
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. The carrying amounts and fair values of
the Company's financial instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 418,246 $ 418,246 $426,596 $426,596
Restricted cash and investments 65,300 65,300 95,075 95,075
Marketable equity securities 1,605,368 1,605,368 841,311 841,311
Receivables from related parties 26,188 26,188 24,535 24,535
Short-term obligations 151,186 151,186 110,991 110,991
Long-term debt, including current portion 582,302 503,500 308,326 309,916
</TABLE>
Based upon the information reasonably available to it, including the information
set forth in Note 5, the Company believes that the fair market value of its
investments in Teletrac and PCS are in excess of carrying value.
16. Segment Information
The Company has three reportable segments described below:
Fixed Microwave Communications. The fixed microwave communications segment
represents the operations of Teligent and MSI, which provide local, long
distance, high-speed data, and Internet communications services primarily to
small and medium sized businesses in major cities throughout the United States.
Mexican Cellular Communications. Grupo and the Company's wholly owned
subsidiary which has an interest in Grupo comprise the Mexican cellular
communications segment. Grupo provides cellular telephone service in
southeastern Mexico.
Radio Broadcasting. The Company has two AM and three FM radio stations in
Ohio which constitute the radio broadcasting segment.
F-30
<PAGE>
The Company's reportable segments each provide a different product or service
and are managed and evaluated separately. Because of the start-up nature of much
of its operations, the Company's evaluation of performance and its resource
allocation decisions are based on many factors outside of historical operating
results. However operating income or loss, excluding corporate expense
allocations, presented consistently with the consolidated financial statements
which excludes non-operating gains and losses, corporate expense allocations,
interest, and income taxes is the primary information used in evaluating the
past performance of its operating segments. Segment information reported is
consistent with generally accepted accounting principles. There are no material
transactions between segments.
Segment information, is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Revenues:
Mexican cellular communications $27,863 $20,398 $15,175
Fixed microwave communications 960 1,052 764
Radio broadcasting 3,373 3,087 2,688
All other 605 1,298 2,237
----------------------------------------------------
Total revenues $32,801 $25,835 $20,864
====================================================
</TABLE>
Revenue from segments below the quantitative thresholds are attributable to a
microwave communications business in Los Angeles which was merged with Teligent
in February 1998, and an art gallery in New York City.
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Operating profit (loss):
Mexican cellular communications $ 882 $ 318 $ (2,519)
Fixed microwave communications (248,697) (136,060) (14,857)
Radio broadcasting (561) (857) (649)
All other (28,884) (17,303) (14,647)
----------------------------------------------------
Total operating loss $(277,260) $(153,902) $(32,672)
====================================================
</TABLE>
The operating loss for fixed microwave communications includes noncash
stock-based compensation expense of $27,006, $84,042, and $2,778 in 1998, 1997,
and 1996 respectively.
<TABLE>
<CAPTION>
December 31
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Segment assets:
Mexican cellular communications $ 38,260 $ 41,582 $ 51,151
Fixed microwave communications 761,200 602,152 23,079
Radio broadcasting 3,217 3,411 3,738
All other 1,628,675 855,977 440,966
----------------------------------------------------
$2,431,352 $1,503,122 $518,934
====================================================
</TABLE>
F-31
<PAGE>
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 $1,605,368, $841,311, and $425,895 in
1998, 1997, and 1996 respectively.
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Depreciation and amortization:
Mexican cellular communications $ 4,254 $ 4,218 $ 3,731
Fixed microwave communications 13,893 6,429 164
Radio broadcasting 536 489 330
All other 651 590 831
---------------------------------------------------------
$ 19,334 $11,726 $ 5,056
=========================================================
Capital expenditures:
Mexican cellular communications $ 2,343 $ 586 $ 211
Fixed microwave communications 183,099 10,355 3,709
Radio broadcasting 94 347 179
All other 2,922 5,218 353
---------------------------------------------------------
$188,458 $16,506 $ 4,452
=========================================================
</TABLE>
Geographic segment information
All businesses other than the Mexican cellular communications segment operate
and provide their products and services in the United States. The net book value
of capital assets located in Mexico was $16,695 and $18,064 as of December 31,
1998 and 1997, respectively. Approximately 77% and 80% of the Company's accounts
receivable at December 31, 1998 and 1997, respectively, are for Mexican cellular
customers. As part of its business of rendering cellular telephone services in
the southeastern 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, any adverse change in those factors
could affect the Company's estimates for bad debts.
17. Related Party Transactions
The Company has transactions with related parties for operating equipment
purchases, and technical and administrative services. 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.
F-32
<PAGE>
Total expenses for services provided by related parties was approximately $1,874
and $257 on a net equity basis in 1998 and 1997, respectively. Accounts payable
at December 31, 1998 and 1997 includes approximately $704 and $333,
respectively, for balances due to related parties.
Receivable from related parties at December 31, 1998 and 1997 includes amounts
due from related parties for technical and administrative services provided by
the Company, as well as loans granted to certain executives.
18. Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Revenues $ 7,380 $ 7,947 $ 8,037 $ 9,437
Operating loss (40,757) (59,634) (78,171) (98,698)
Net loss (20,184) (29,829) (40,565) (48,531)
Net loss per common share $ (.53) $ (.78) $ (1.06) $ (1.29)
<CAPTION>
Quarter
----------------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------------
<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)
Net income (loss) (9,106) (39,018) (18,628) 15,087
Net income (loss) per common share $ (.24) $ (1.04) $ (.50) $ .40
</TABLE>
F-33
<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, 1998:
Deducted from assets:
Allowance for doubtful accounts
(deducted from accounts receivable) $ 2,495 $ 1,243 $ - $1,595 (A) $ 2,143
============================================================================
Inventory market valuation reserve
(deducted from inventory) $ 1,570 $ - $ - $ - $ 1,570
============================================================================
Deferred tax asset valuation
allowance (deducted from deferred
taxes) $29,304 $106,440 $ - $1,240 (B) $134,504
============================================================================
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
============================================================================
</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-34
<PAGE>
Exhibit 10.3
TRUEPOSITION, INC.
AMENDED AND RESTATED
1995 STOCK INCENTIVE PLAN
1. Purpose.
The purpose of the TruePosition, Inc. Amended and Restated
1995 Stock Incentive Plan (the "Plan") is to align the interests of officers,
other employees, consultants and non-employee directors of TruePosition, Inc., a
Delaware corporation ("TruePosition") and its subsidiaries, now held or
hereafter acquired (collectively with TruePosition, the "Company") or of The
Associated Group, Inc., a Delaware corporation and the Company's parent
corporation ("Associated"), with those of the stockholder(s) of TruePosition; 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 TruePosition; to compensate TruePosition's non-employee
directors; 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) "Associated" shall have the meaning set forth in Section 1
hereof.
(b) "Award" shall mean any Option or Restricted Stock granted
pursuant to the Plan.
(c) "Award Agreement" shall mean any written agreement, contract
or other instrument or document between TruePosition and a
Participant evidencing an Award.
(d) "Board" shall mean the Board of Directors of TruePosition.
<PAGE>
(e) "Cause" shall mean (i) the engaging by the Participant in
willful misconduct that is materially injurious to the Company
or Associated, (ii) the embezzlement or misappropriation of
funds or property of the Company or Associated by the
Participant or the conviction of the Participant of a felony
or the entrance of a plea of guilty or nolo contendere by the
Participant to a felony, or (iii) the willful failure or
refusal by the Participant to substantially perform his duties
or responsibilities that continues after being brought to the
attention of the Participant (other than any such failure
resulting from the Participant's incapacity due to
disability). For purposes of this paragraph, no act, or
failure to act, on the Participant's part shall be considered
"willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or
omission was in the best interest of the Company.
Determination of Cause shall be made by the Committee in its
sole discretion. Any such determination shall be final and
binding on a Participant.
(f) "Change in Control" shall have the meaning set forth in
Section 9(f) hereof.
(g) "Common Stock" shall mean the Common Stock, par value
$.000556 per share of TruePosition.
(h) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(i) "Committee" shall mean the committee of the Board comprised of
Non-Employee Directors which administers the Plan as provided
herein.
(j) "Company" shall have the meaning set forth in Section 1
hereof.
(k) "Effective Date" shall have the meaning set forth in Section
9(k) hereof.
2
<PAGE>
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
(m) "Fair Market Value" of a share of Common Stock on any date
shall be the fair market value of such Common Stock as
determined by the Committee in its sole discretion; provided
that (A) if the Common Stock is admitted to trading on a
national securities exchange, Fair Market Value on any date
shall be the last sale price reported for the Common Stock on
such exchange on such date or, if none, the next earlier date
on which a sale was reported, (B) if the Common Stock is
admitted to quotation on the Nasdaq National Market or other
comparable quotation system, Fair Market Value on any date
shall be the last sale price reported for the Common Stock on
such system on such date or, if none, the next earlier date on
which a sale was reported, or (C) if prices for the Common
Stock are otherwise quoted on the Nasdaq System, Fair Market
Value on any date shall be the average of the highest bid and
lowest asked prices of the Common Stock on such system on such
date or, if none, the next earlier date on which a sale was
reported.
(n) "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.
(o) "Initial Director" shall mean a Non-Employee Director of
TruePosition who is a member of the Board at the date of
approval of the Plan by the stockholder(s) of TruePosition.
(p) "Non-Employee Director" shall mean a member of the Board who
is not also an employee of the Company.
(q) "Nonqualified Stock Option" shall mean an Option other than
an Incentive Stock Option.
3
<PAGE>
(r) "Option" shall mean the right, granted pursuant to the Plan,
of a holder to purchase shares of Common Stock 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).
(s) "Participant" shall mean an officer, other employee or
consultant of the Company or of Associated 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.
(t) "Plan" shall have the meaning set forth in Section 1 hereof.
(u) "Plan Year" shall mean TruePosition's fiscal year.
(v) "Restricted Stock" shall mean any shares of Common Stock
issued to a Participant, without payment to TruePosition,
pursuant to Section 8 of the Plan.
(w) "Subsequent Director" shall mean a Non-Employee Director of
TruePosition 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
approval of the Plan by the Stockholder(s) of TruePosition.
(x) "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.
(y) "TruePosition" shall have the meaning set forth in Section 1
hereof.
4
<PAGE>
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 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
Common 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, adjusted, 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 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.
4. Eligibility.
Awards may be granted to officers, other employees and
consultants of the Company and Associated 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.
5
<PAGE>
5. Stock Subject to the Plan.
(a) Number of Shares.The maximum number of shares of Common
Stock reserved for issuance pursuant to the Plan shall be 2,500,000. All such
shares of Common 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 Common 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.
(b) Equitable Adjustment. In the event that an extraordinary
transaction or other event or circumstance affecting TruePosition or Associated
is proposed or shall occur, including, but not limited to, any dividend or other
distribution (whether in the form of cash, stock or other property),
recapitalization, stock split, reverse stock split, reorganization, tender
offer, merger, consolidation, spin-off, combination, repurchase, share exchange,
sale of assets or other similar transaction or event, and the Committee
determines, in its sole discretion, that a change or adjustment in the terms of
any Award is appropriate, then the Committee may, in its sole discretion, make
such equitable changes or adjustments or take any other actions that it deems
necessary or appropriate (which shall be effective at such time as the Committee
in its sole discretion determines), including, but not limited to (A)causing
changes or adjustments to any or all of (i) the number and kind of shares of
stock or other securities or property which may there-after be issued in
connection with Awards, (ii) the number and kind of shares of stock or other
securities or property issued or issuable in respect of outstanding Awards, and
(iii) the exercise price relating to any Award, and (B) cancelling outstanding
Awards in exchange for replacement awards or cash, it being understood that the
Committee shall have the authority to cause different changes or adjustments to
be made to any Awards held by
6
<PAGE>
Participants even if such Awards are identical and such Participants are
similarly situated; further, provided, however, that with respect to Options
which are intended by the Committee to remain Incentive Stock Options subsequent
to any such adjustment, such adjustment shall be made in accordance with Section
424 of the Code.
6. Stock Options.
Each Option 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 Common 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 Exercise Price. Each Award Agreement
shall state the Option exercise price, which, except as provided in Section
6(a)(7)(B) below, shall not be less than one hundred percent (100%) of the Fair
Market Value of the shares of Common Stock covered by the Option on the date of
grant. The Option exercise 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 exercise
price shall be paid in full, at the time of exercise, in cash (which may include
cash received from the Company as compensation or cash borrowed from the
Company), in shares of Common Stock having a Fair Market Value equal to such
Option exercise price, in a
7
<PAGE>
combination of cash and Common Stock (or other consideration deemed acceptable
by the Committee) 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, 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 full shares of Common Stock as to which the Option has become
exercisable, by written notice delivered in person or by mail to the Secretary
of TruePosition, specifying the number of shares of Common Stock with respect to
which the Option is being exercised, together with payment in full of the Option
exercise price. For purposes of the preceding sentence, the date of exercise
will be deemed to be the date upon which the Secretary of TruePosition receives
both the notification and such 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
exercised after such termination; however, in no event will an Option continue
to be exercisable beyond the expiration date of such Option.
(7) 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
8
<PAGE>
Common 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 exercise price shall not be less than one hundred ten percent
(110%) of the Fair Market Value of the shares of Common 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.
7. Non-Employee Directors Formula Stock Options.
The provisions of this Section 7 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 and regulations promulgated thereunder.
(a) General. Non-Employee Directors shall receive Nonqualified Stock
Options under the Plan. The exercise price per share of Common Stock purchasable
under Options granted to Non-Employee Directors shall be the Fair Market Value
of a share of Common 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 9(f)
hereof.
(b) Initial Grants to Initial Directors. Upon the Effective Date, each
Initial Director shall be granted automatically an Option to purchase 5,000
shares of Common 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 50,000 shares of Common Stock.
9
<PAGE>
(d) Method and Time of Payment. The Option exercise 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 Common
Stock having a Fair Market Value equal to such Option exercise price, in a
combination of cash and Common Stock or through a cashless exercise procedure.
(e) Term and Exercisability. Each Option granted under this Section 7
shall be exercisable as to 100 percent of the shares of Common Stock covered
thereby on the first anniversary of the date the Option is granted. 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.
(f) 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 which are exercisable at the time of such termination
shall remain exercisable for a period of one year following the date of such
termination (and, subject to Section 9 (f), all Options which are not
exercisable at such time will automatically terminate), but in no event may the
term of an Option be extended beyond its expiration date.
8. Restricted Stock.
Restricted Stock 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. The Committee shall determine the number of shares of Restricted Stock
granted pursuant to the Award, the applicable restrictions on vesting, and the
performance criteria, if any, which must be attained as a condition of the
restrictions on such shares lapsing.
10
<PAGE>
(a) Restrictions. Until all restrictions on Restricted Stock
lapse (including the attainment of performance criteria, if applicable) and such
shares become vested, such shares may not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of by the Participant. Certificates
for shares of Common 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 Common Stock in contravention of such restrictions
shall be null and void and without effect. Until all restrictions on shares of
Restricted Stock lapse (including the attainment of performance criteria, if
applicable), the Common Stock certificates shall be held in escrow by an escrow
agent appointed by the Committee.
(b) 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 lapsing of all restrictions
on shares of Restricted Stock (including the attainment of performance criteria,
if applicable) any shares of Restricted Stock remaining subject to restrictions
or performance criteria shall thereupon be forfeited by the Participant and
transferred to, and reacquired by, TruePosition at no cost thereto.
(c) Ownership. Except to the extent otherwise set forth in the
Award Agreement, and subject to the provisions of the Plan, so long as any
restrictions remain on shares of Restricted Stock (including the attainment of
performance criteria, if any) the Participant shall possess all incidents of
ownership of such shares, including the right to receive dividends with respect
to such shares and to vote such shares.
9. 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 authority or agency as may be
required. The Com-
11
<PAGE>
pany, in its discretion, may postpone the issuance or delivery of Common 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 Common Stock
in compliance with applicable laws, rules and regulations.
(b) Nontransferability. Awards shall not be transferable by a
Participant other than 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 Associated or to be entitled to any renumeration or
benefits not set forth in the Plan or such Award Agreement or other agreement or
to interfere with or limit in any way the right of the Company or Associated to
terminate such Participant's employment.
(d) Withholding Taxes. Where a Participant or other person is
entitled to receive shares of Common Stock pursuant to the exercise of an Option
or is otherwise entitled to receive shares of Common 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 Common Stock acquired
pursuant to the exercise of an Incentive Stock Option, the Company shall have
the right to require the
12
<PAGE>
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 Common 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 Common 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 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 that 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 shall be
effective unless the same shall be approved by the requisite vote of the
13
<PAGE>
stockholder(s) of TruePosition. Notwithstanding the foregoing, subject to the
other provisions of the Plan, 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,
either TruePosition or Associated 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"), then notwithstanding
anything contained herein to the contrary, 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, it being understood that the Committee shall
have the authority to treat differently any Awards held by any Participants,
even if such Awards are identical and such Participants are similarly situated.
(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 (as defined below) of either TruePosition or
Associated shall occur, then the Committee may, in its sole discretion (but
shall not be required to), cause any one or more of the following to occur upon,
immediately prior to, or after such Change in Control: (1) all Options granted
under the Plan that are outstanding at the time of such Change in Control may
become immediately exercisable in full, without regard to the years that have
elapsed from the date of grant, and/or may be cancelled in exchange for a cash
payment or a replacement award of equivalent value; and (2) all restrictions
(including performance criteria, if any) with respect to shares of Restricted
Stock that are outstanding at the time of such
14
<PAGE>
Change in Control shall lapse, and such shares shall be fully vested and
nonforfeitable.
For purposes of this paragraph 9(f), a "Change in Control" of
TruePosition or Associated (either entity being referred to herein as a
"Corporation") 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) a Corporation, (2)
any trustee or other fiduciary holding securities under an employee
benefit plan of a Corporation or (3) any corporation owned, directly or
indirectly, by the stockholders of a Corporation in substantially the
same proportions as their ownership of the common stock of such
Corporation (each an "excluded person")), is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act),directly or
indirect- ly, of securities of a Corporation (not including in the
securities beneficially owned by such person any securities acquired
directly from such Corporation or its affiliates) representing 30% or
more of the combined voting power of such Corporation's then
outstanding voting securities;
(ii) during any period of not more than two
consecutive years, individuals who at the beginning of such period
constitute either the Board or the Board of Directors of Associated
(either such board of directors being referred to herein as a
"Corporation Board"), and any new director (other than a director
designated by a person who has entered into an agreement with a
Corporation to effect a transaction described in clause (i), (iii) or
(iv) of this paragraph (f)) whose election by a Corporation Board or
nomination for election by the applicable Corporation'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),
15
<PAGE>
cease for any reason to constitute at least a 70% majority of such
Corporation Board;
(iii) the stockholders of a Corporation approve a
merger or consolidation of such Corporation with any other corporation,
other than (A) a merger or consolidation which would result in the
voting securities of such Corporation 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 such Corporation 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 a Corporation (or similar transaction) in which no "person" (as
here- inabove defined) acquires 30% or more of the combined voting
power of such Corporation's then outstanding securities; or
(iv) the stockholders of a Corporation approve a plan
of complete liquidation of such Corporation or an agreement for the
sale or disposition by such Corporation of all or substantially all of
such Corporation's assets (or any transaction having a similar effect).
(g) Restrictions on Transferability and Repurchase Rights. An
Award Agreement may provide that the shares of Common Stock issued to a
Participant pursuant to an Award be subject to repurchase by the Company and/or
be subject to restrictions on transferability, as well as any other terms and
conditions which the Board or the Committee deems necessary or appropriate. The
foregoing may be reflected in a shareholders or similar agreement which the
Participant is required to execute or in the form of a legend on the shares of
Common Stock.
(h) 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 here-
16
<PAGE>
in, 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 certificate to him for such shares.
(i) 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 TruePosition.
(j) No Fractional Shares. No fractional shares of Common 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.
(k) 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.
(l) Effective Date. The Plan has been adopted by the Board and
approved by Associated, as sole stockholder of TruePosition. The Plan shall
become effective on October 16, 1995, which shall be the Effective Date.
(m) 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.
(n) Interpretation. The Plan is designed and intended to
comply with Rule 16b-3 promulgated under the Exchange Act, and all provisions
hereof shall be construed in a manner to so comply.
<PAGE>
Exhibit 10.11
Amended and Restated Demand Note
[GRAPHIC OMITTED]
$ 34,000,000.00 February 16, 1999
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 THIRTY-FOUR MILLION AND 00/100
DOLLARS $34,000,000.00) 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 rate 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). If and when the Federal Funds 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. 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 that certain
Amended and Restated Pledge Agreement executed by the Borrower in favor of the
Bank, dated as of November 15, 1996, and the other documents referred to
therein, 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-
<PAGE>
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 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 Demand Note in the principal
amount of $32,000,000.00, payable to the order of the Bank and dated January 06,
1999 (the "Existing Note"). However, without duplication, this Note shall in no
way extinguish, cancel or satisfy Borrower's unconditional obligation to repay
all indebtedness evidenced by the Existing Note or constitute a novation of the
Existing Note. Nothing herein is intended to extinguish, cancel or impair the
lien priority or effect of any security agreement, pledge agreement or mortgage
with respect to the Borrower's obligations hereunder and under any other
document relating hereto.
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 THIS 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:_______________________________ By: ________________________________
Print Name:___________________________ Print Name:___________________________
Title:________________________________ Title:________________________________
<PAGE>
Exhibit 21
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>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-56185) pertaining to the Amended and Restated 1994 Stock Option and
Incentive Award Plan of The Associated Group, Inc. of our report dated February
26, 1999 (except for Note 3, as to which the date is March 17, 1999), with
respect to the consolidated financial statements and schedule of The Associated
Group, Inc. included in the Annual Report on Form 10-K for the year ended
December 31, 1998.
ERNST & YOUNG LLP
Pittsburgh, PA
March 26, 1999
<PAGE>
Exhibit 23.2
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.
333-56185) on Form S-8 of The Associated Group, Inc. of our report dated
February 22, 1999, relating to the consolidated balance sheets of Grupo
Portatel, S.A. de C.V. and subsidiaries as of December 31, 1998 and 1997, 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, 1998
(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 26, 1999
<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, 1998 included in Form 10-K for the year ending
December 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 418,246
<SECURITIES> 0<F1>
<RECEIVABLES> 7,669
<ALLOWANCES> 2,143
<INVENTORY> 2,329
<CURRENT-ASSETS> 465,583
<PP&E> 256,795
<DEPRECIATION> 49,720
<TOTAL-ASSETS> 2,431,352
<CURRENT-LIABILITIES> 315,096
<BONDS> 580,220
0
0
<COMMON> 3,815
<OTHER-SE> 990,553
<TOTAL-LIABILITY-AND-EQUITY> 2,431,352
<SALES> 4,782
<TOTAL-REVENUES> 32,801
<CGS> 6,336
<TOTAL-COSTS> 95,355
<OTHER-EXPENSES> 27,248
<LOSS-PROVISION> 1,243
<INTEREST-EXPENSE> 75,709
<INCOME-PRETAX> (149,481)
<INCOME-TAX> (10,372)
<INCOME-CONTINUING> (139,109)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (139,109)
<EPS-PRIMARY> (3.66)
<EPS-DILUTED> 0
<FN>
<F1>
Does not include $1,605,368 of noncurrent marketable equity securities and
$65,300 restricted cash and investments.
</FN>
</TABLE>
