UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A-1
HORIZON TELCOM, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-1449037
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
68 East Main Street
Chillicothe, Ohio 45601-0480
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 772-8200
Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities to be registered pursuant to Section 12(g) of the Act:
CLASS B COMMON STOCK, without par value
(Title of Class)
HORIZON TELCOM, INC.
AND CONSOLIDATED SUBSIDIARIES
FORM 10
TABLE OF CONTENTS
Item Page No.
- ---- --------
ITEM 1. Business...............................................................................................2
ITEM 2. Financial Information.................................................................................53
ITEM 3. Properties............................................................................................73
ITEM 4. Security Ownership Of Certain Beneficial Owners And Management........................................73
ITEM 5. Directors And Executive Officers Of The Company.......................................................75
ITEM 6. Executive Compensation................................................................................77
ITEM 7. Certain Relationships And Related Transactions........................................................81
ITEM 8. Legal Proceedings.....................................................................................84
ITEM 9. Market Price of and Dividends on Common Equity and Related Stockholder Matters........................84
ITEM 10. Recent Sales of Unregistered Securities...............................................................84
ITEM 11. Description of Registrant's Securities to Be Registered..............................................86
ITEM 12. Indemnification of Officers and Directors.............................................................90
ITEM 13. Financial Statements And Supplementary Data...........................................................92
ITEM 14. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.................159
ITEM 15. Financial Statements and Exhibits....................................................................159
Forward-Looking Statements
This report contains forward-looking statements which may differ materially
from actual results. See "Item 1. Business - Forward-Looking Statements".
1
ITEM 1. Business
GENERAL
Horizon Telcom, Inc. is a holding company. Through its operating
subsidiaries, Horizon Telcom is a facilities-based telecommunications carrier
that provides (i) local and long distance telephone, Internet and data services
to residential and business customers located primarily in Ohio, and (ii)
digital wireless service to customers in Ohio, Indiana, Kentucky, Maryland, New
Jersey, New York, North Carolina, Pennsylvania, Tennessee, Virginia and West
Virginia.
We began operations in 1895 as The Home Telephone Company. In 1929 this
company changed its name to The Chillicothe Telephone Company. After a
reorganization in 1996, we became a holding company and Chillicothe Telephone
became a wholly-owned subsidiary. Chillicothe Telephone supplies local area
telephone service through its equipment and facilities to a territory covering
approximately 800 square miles in Ross, Pickaway, Pike, Jackson, Hocking and
Vinton Counties, Ohio as an incumbent local exchange carrier, commonly referred
to as an ILEC. In addition to local telephone service, Chillicothe Telephone
sells telephone equipment to businesses and offers Internet access through
high-speed digital subscriber line (DSL) technology through telephone lines.
Chillicothe Telephone also offers high-speed very high bit rate digital
subscriber line (VDSL) services through telephone lines to residences as an
alternative to cable television services.
Our majority-owned subsidiary, Horizon PCS, Inc., is in the digital
wireless personal communications industry. Horizon PCS is now one of the largest
Sprint PCS affiliates based on the exclusive right to market Sprint PCS products
and services to a total population of over 10.2 million in portions of twelve
contiguous states. A Sprint PCS affiliate is an entity that has agreed to act as
Sprint PCS' exclusive agent to market its services in a particular area. Our
markets are located between Sprint PCS' Chicago, New York and Raleigh/Durham
markets and connect or are adjacent to 15 major Sprint PCS markets that have a
total population of over 59 million. As a Sprint PCS affiliate, we market
digital personal communications services, or PCS, under the Sprint and Sprint
PCS brand names. We offer the same national pricing plans and use the same sales
and marketing strategies and national distribution channels as Sprint PCS.
Through our wholly-owned subsidiary, United Communications, Inc. we offer
Internet and data services and resell long distance services. The Internet and
data services are provided under the "bright.net" brand through United
Communications' contractual arrangement with Comnet, a consortium of small Ohio
telephone companies. United Communications provides long distance services
through a reselling arrangement with a primary long distance carrier. Prior to
December 1, 2000, United Communications also operated a paging business. On
December 1, 2000, United Communications sold the assets of its paging business
to an unrelated third party for $100,000.
We also own 100% of Horizon Services, Inc., which provides administrative
services to our other subsidiaries. Administrative services provided by Horizon
Services generally include such functions as insurance, billing services,
accounting services, computer access and other customer relations, and human
resources.
2
The following chart illustrates our corporate structure:
[GRAPHIC]
- ---------------------
(1) The ownership percentage for Horizon PCS excludes options granted under its
2000 Stock Option Plan, warrants issued to the initial purchasers of
Horizon PCS' senior discount notes and shares subject to Sprint PCS
warrants.
(2) This percentage includes the 48% of Bright PCS which Horizon PCS owns
indirectly through Horizon Personal Communications.
3
The operations of Chillicothe Telephone and Horizon PCS are our primary
business segments. Landline telephone services accounted for approximately 47%,
70%, and 78% of our operating revenues, respectively, in 2000, 1999, and 1998.
Landline telephone services accounted for $13.2, $15.4, and $14.3 million
operating profit for 2000, 1999, and 1998, respectively. Horizon PCS (wireless
communication services) accounted for approximately 39%, 10%, and 2% of our
operating revenues, and most of our operating (loss) of $(40.7), $(12.9), and
$(7.9) million, respectively, for 2000, 1999, and 1998. We expect that landline
telephone services and Horizon PCS services will account for more than 93% of
our revenue, operating earnings and losses in 2001.
Horizon Telcom, Inc. is incorporated under the laws of Ohio and was
organized in 1996 pursuant to the corporate reorganization of Chillicothe
Telephone into a holding company structure. Our principal executive offices are
located at 68 East Main Street, Chillicothe, Ohio 45601-0480 (telephone number:
(740) 772-8200)).
Certain business, financial and competitive information about our
operations is discussed below. For additional information regarding our business
segments, see the Note entitled "Segment Information" in the Notes to
Consolidated Financial Statements at Item 13 below, which information is
incorporated herein by reference, and Management's Discussion and Analysis of
Financial Condition and Results of Operations at Item 2 below, which information
is also included herein by reference.
ILEC SERVICES
General
Chillicothe Telephone offers integrated telecommunications services as an
ILEC to customers served by more than 38,105 telephone lines, known as access
lines, which have access to telephone service through our local exchange
equipment, in Ross, Pickaway, Pike, Jackson, Hocking and Vinton Counties, Ohio.
Chillicothe Telephone network facilities include nearly 223 fiber miles, serving
ten exchanges, including a central office acting as host to nine remote
switches.
The number of access lines increased from 36,832 on December 31, 1999 to
37,824 on December 31, 2000. The following table details access line growth over
the past three years:
YEARS ENDED DECEMBER 31,
---------- -- ---------- -- ----------
2000 1999 1998
---------- ---------- ----------
ACCESS LINES
Residential............. 28,820 28,580 27,811
Business................ 9,004 8,252 8,743
---------- ---------- ----------
TOTAL ILEC.............. 37,824 36,832 36,554
========== ========== ==========
PERCENTAGE OF TOTAL
Residential............ 76% 78% 76%
Business............... 24% 22% 24%
Customer satisfaction remains a top priority, and our efforts are directed
accordingly. Since we serve our home town, it is important to our business
strategy that our employees concentrate on customer service, and training and
orientation programs emphasize that concern.
The Chillicothe Telephone sales team is structured to provide maximum
flexibility for our customers. Residential customers may personally meet with a
sales and service representative in our business office or can alternatively
take advantage of the convenience of calling into our centralized customer care
center. Our sales team provides "one-stop" shopping; each residential customer
service representative is trained in all residential applications, including
Internet and data services, and digital wireless services, and telephone
equipment, and will additionally address any follow-up sales and billing
concerns.
4
Business customers are served by a specialized group trained to manage the
specialized products and services unique to business customers. Customers with
less complex needs are supported by a specialized telephone customer care group,
which develops solutions and schedules service installations. Major business
customers are assigned dedicated account executives that are familiar with their
complex applications and service requirements.
A centralized operations service center provides telephone service and
maintenance for all ILEC customers. In addition to receiving maintenance
requests, this center dispatches field personnel and monitors the status of all
service orders and maintenance requests. To ensure continued customer
satisfaction, the center is measured against targeted time intervals and the
ability to meet customer commitment dates.
Chillicothe Telephone operates a class 4/5 Siemens EWSD digital host as a
main switch, in a network with an additional nine remote switches serving
population clusters throughout Ross County, Ohio. Chillicothe Telephone also has
an extensive fiber optic network, which now serves approximately one-third of
the 37,800 access line base, and covers approximately 223 miles. Chillicothe
Telephone has deployed ISDN, ADSL and VDSL high speed telephone line access
service, which brings broadband service capability to approximately 75% of the
subscriber base. We continue to upgrade our distribution network by moving fiber
and electronics closer to the customer through the use of remote switching
units. The customer care service center operations are supported by a service
order, trouble-ticketing, billing and collection system and automated call
distribution. At the heart of our network is a network operations center that
identifies problems as they occur and diagnoses potential network problems
before customers are impacted.
Chillicothe Telephone recently began offering high speed video (VDSL)
services through its telephone lines under the name "Horizon View." The first
customer was connected on August 15, 2000. This quality digital video service
competes with cable and satellite television providers. It also provides
high-speed always-on Internet access and a voice path for regular telephone
service. In April 2001, we celebrated our 1000th Horizon View customer.
In addition to local telephone service, Chillicothe Telephone sells
telephone equipment to businesses.
Regulation of Chillicothe Telephone's Local Exchange Carrier Business
Chillicothe Telephone is subject to extensive regulation by various
federal, state and local governmental bodies. Federal laws and regulations, and,
specifically, the Telecommunications Act of 1996, which we refer to as the
Telecom Act, have sought to open the local service market to competition.
The Telecom Act has imposed burdensome obligations upon ILECs that are not
exempted as "rural telephone companies." These obligations include the duty:
o to negotiate agreements with competing local service providers for
interconnection of telephone equipment between providers;
o to obtain state commission approval of such agreements;
o to interconnect with competing local carriers at any technically
feasible point;
o to provide nondiscriminatory access to separate portions of the
telephone network at regulated prices;
o to furnish local competitors with local services at wholesale rates
for resale purposes; and
o to allow local competitors to collocate their equipment in ILEC
central offices.
5
Chillicothe Telephone takes the position that it is a "rural telephone
company" within the meaning established by the Telecom Act, and is therefore
presently exempt from these ILEC obligations. It will retain this exemption
unless and until the Public Utilities Commission of Ohio terminates it at the
request of a competing local carrier.
The Telecom Act also imposes obligations upon all local exchange carriers
(ILECs and competitive local exchange carriers, also referred to as CLECs, which
also offer local telephone services utilizing in part the facilities of the
ILEC). These obligations include:
o the payment of reciprocal compensation for the transport and
termination of local calls;
o the ability of customers to change local telephone service carriers
while maintaining the same telephone number, known as "local number
portability" as well as dialing parity;
o affording access by competing local telephone service carriers to
poles, ducts, conduits and rights-of-way.
Small carriers may request suspension or modification by their state
commission of some or all of these requirements, but such suspensions or
modifications are extremely difficult to obtain. Chillicothe Telephone has not
sought or obtained suspension or modification of any of these local exchange
carrier obligations.
As a general matter, federal regulation increases Chillicothe Telephone's
business risks and may have a substantial impact on Chillicothe Telephone's
future operating results. The Federal Communications Commission regulates two
significant sources of Chillicothe Telephone's revenues - namely, interstate
access charges and federal universal service support. Federal Universal Service
Support is a program that provides funding to qualifying ILEC such as
Chillicothe Telephone.
The FCC currently has several proceedings pending that could materially
change the mechanisms for determining interstate access charges and the dollar
revenues received by Chillicothe Telephone from this source. For example, the
FCC is presently considering an interstate access charge reform proposal
submitted by the Multi-Association Group comprised of four national telephone
trade associations. If adopted as submitted, the Multi-Association Group Plan
would increase the monthly federal subscriber line charges paid by Chillicothe
Telephone's business and residential customers, reduce the per-minute access
charges paid by Chillicothe Telephone's interexchange carrier customers, and
establish residual funding mechanisms that could be taken from Chillicothe
Telephone by competitors. The Multi-Association Group Plan has received
substantial opposition from interexchange carriers, state commissions, and
consumer groups, and may be rejected or adopted in significantly modified form
by the FCC.
The FCC also has initiated a proceeding to examine the feasibility of
replacing the current mechanisms of inter-carrier compensation, including the
access charge mechanism, with a "bill-and-keep" approach. Under a bill-and-keep
approach, each carrier is required to recover the costs of termination and
origination from its own end-user customers. Such an approach could result in
increased rates to Chillicothe's business and residential end-user customers.
The FCC recently adopted, in large part, a recommendation by the Rural Task
Force for reform of the federal universal service support mechanism presently
applicable to Chillicothe Telephone. The FCC's order retains the embedded cost
mechanism, a methodology presently used to determine and distribute federal
support to rural telephone companies to enable them to cover the high cost of
specific new telephone network technology. It also recalculates and modifies the
indexed cap that limits federal high-cost telephone service support, establishes
a new mechanism to enable rural telephone companies to obtain some universal
service support for exchanges that they acquire and upgrade, and permits rural
telephone companies facing potential competition to disaggregate their study
areas to discourage competitors from entering rural population centers in order
to seize disproportionate amounts of the universal service support received by
rural ILECs.
6
Chillicothe Telephone is required to contribute to the federal universal
service program. States also have similar assessment mechanisms. At the present
time it is not possible to predict the extent of Chillicothe Telephone's total
federal and state universal service assessments or the amount of dollars it will
receive from federal and state universal service funds.
The FCC and the Federal Bureau of Investigation are responsible for the
implementation of the Communications Assistance for Law Enforcement Act. This
legislation obligates Chillicothe Telephone to upgrade its switching facilities
to give it the capabilities and capacity to install and operate wiretaps, pen
registers and similar surveillance activities in response to properly authorized
requests from federal, state and local law enforcement. The Communications
Assistance for Law Enforcement Act statute and regulations also impose security
and administrative obligations and risks upon carriers such as Chillicothe
Telephone. Some of the more expensive and risky potential Communications
Assistance for Law Enforcement Act obligations - for example, those related to
the interception of packet-switched communications - are still subject to
litigation before the FCC and the courts.
Federal statutes and FCC rules and proceedings regarding the slamming of
local and long distance customers, the use of Customer Proprietary Network
Information and the conservation of telephone number resources can affect the
costs and risks of doing business of Chillicothe Telephone and other local
exchange carriers.
State laws and regulations require us to comply with Ohio pricing
regulations, file periodic reports, pay various fees and comply with rules
governing quality of service, consumer protection and similar matters. Local
regulations require us to obtain municipal franchises and to comply with various
building codes and business license requirements.
Chillicothe Telephone continues to provide local exchange service through
traditional rate base, rate of return regulation. The Public Utilities
Commission of Ohio has proposed alternative rate regulation and, when the
regulation is finalized, Chillicothe Telephone will have the right to elect this
form of regulation. Generally, under the proposed regulations, we would have
greater flexibility to decrease prices, but would have to petition the Public
Utilities Commission of Ohio to increase rates. We have not decided whether to
elect the alternative rate regulation.
Competition
Several factors have resulted in rapid change and increased competition in
the local telephone market over the past 15 years, including:
o growing customer demand for alternative products and services,
o technological advances in transmitting voice, data and video,
o development of fiber optics and digital electronic technology,
o a decline in the level of access charges paid by interexchange
carriers to local telephone companies to access their local networks,
and
o legislation and regulations designed to promote competition.
To date, we have not faced competition for local telephone service in
Chillicothe Telephone service territory from any competitive local exchange
carriers. It is possible, however, that we will face such competition in the
future. We believe that Adelphia Cable is preparing to upgrade its cable
television plant to be in a position to provide local service. Adelphia Cable is
already offering long distance telephone services as a reseller, as well as
high-speed Internet access. No potential competitive local exchange carrier has
asked us to enter into agreements to connect its network with our network. If
competition develops, we may face pressure to match the pricing and service
offerings of these competitors.
7
LONG DISTANCE, INTERNET AND NETWORK SERVICES
Our wholly-owned subsidiary, United Communications, offers long distance
service, Internet and data services and network consulting services to
customers.
Long Distance Service
The long distance market has become significantly more competitive since
1984, when AT&T was required to divest its local telephone system. Since that
time, new competitors have entered the market and prices have declined,
resulting in increased consumer demand and significant market growth. Increased
competition has also led to increased consolidation among long distance service
providers. Major long distance competitors include AT&T, Sprint and MCI
WorldCom, Inc. Furthermore, Verizon obtained approval to provide long distance
services in New York and Massachusetts, and SBC Communications, Inc. has
obtained approval in Texas, Kansas and Oklahoma. These competitors benefit from
established market share and from established trade names through nationwide
advertising. Internet-protocol telephony, a potential competitor for low cost
telephone service, is also developing.
United Communications began offering long distance services as a reseller
in 1996 and now provides that service to approximately 5,050 access lines. We
expect to continue to offer a competitively priced service to those customers
who are looking for a local supplier of long distance services.
Internet Access Service
United Communications provides Internet and data services through our
affiliation with Comnet. Comnet is a consortium of 19 independent local exchange
carriers in Ohio, and one Ohio electric cooperative. We have the right to market
and sell Internet and data services using the "bright.net" brand in 27 counties
in southern Ohio, including Chillicothe Telephone's service territory. Comnet
provides wholesale gateway access, service, support and bandwidth services to
the internet for retail internet service providers primarily in Ohio. Comnet
also provides advanced intelligent networking services to Ohio's rural areas via
special signaling networks. United Communications owns a less than five percent
interest in Comnet. As of December 31, 2000, we had 17,239 subscribers to this
service.
We offer a variety of means to access the Internet through our telephone
network. We also offer a full range of customer premise equipment required to
connect to the Internet. Our access services include:
o Dial-up Access. Our dial-up services provide access to the Internet
through ordinary telephone lines at speeds of up to 56 Kbps and
through digital ISDN lines at speeds of up to 128 Kbps.
o Dedicated Access. We offer a broad line of high-speed dedicated access
utilizing frame relay and dedicated circuits, which provide business
customers with direct access to a full range of Internet applications.
o DSL Access. We began to offer several ILEC customers high-speed
Internet access service using ADSL technology in the first quarter of
2000. ADSL technology permits high speed digital transmission over the
existing copper wiring of regular telephone lines. Our ADSL service is
available at speeds up to 768 Kbps. Our ADSL services are designed for
residential users and small-to-medium sized businesses to provide high
quality Internet access at speeds faster than an integrated services
digital network (ISDN) and at flat-rate prices that are lower than
traditional dedicated access charges. As the local exchange carriers
in other areas of southern Ohio begin offering DSL technology, we will
offer DSL in the rest of our bright.net service territory.
We offer a variety of value-added services, including Web hosting, Web
design, collocation, virtual private networks or intranets, remote access and
security solutions, and video conferencing.
8
We provide software solutions that enable companies to conduct electronic
commerce. We offer electronic data interchange and non-internet based solutions
consisting of software and services that are designed to help businesses connect
to their suppliers and customers. We also provide Internet commerce software to
allow businesses to build Web applications for commerce-enabled Web sites,
intranets and extranets. Common features of this software include the ability to
build electronic catalogs to conduct transactions and to integrate with business
systems, including purchasing, accounting and inventory systems.
Account executives sell Internet and data services directly to business
customers in our service areas. Our technical support staff is available 24
hours a day, seven days a week. Our technicians design, order, configure,
install and maintain all of our equipment to suit the customer's needs. We have
a customer care group dedicated to Internet and data services.
In general, Internet and data services are not regulated at the federal
level. An important regulatory issue currently pending before both the FCC and
federal courts is how Internet traffic will be classified and treated for
purposes of interstate access charges and reciprocal compensation related to
local traffic. Internet service providers currently obtain access services from
local exchange carriers without having to pay the access charges that
interexchange carriers pay for equivalent service. This special exemption may be
withdrawn at any time, in which case Internet services could be subject to
access charges. As we provide Internet services directly to the ILECs' networks,
a change in the treatment of Internet traffic for purposes of reciprocal
compensation would likely have little effect on our operations.
The Internet and data services market is extremely competitive, highly
fragmented and has grown dramatically in recent years. The market is
characterized by the absence of significant barriers to entry and the rapid
growth in Internet usage among customers. Sources of competition are:
o access and content providers, such as AOL, the Microsoft Network and
Prodigy;
o local, regional and national Internet service providers, such as
PSINet and EarthLink;
o the Internet services of regional, national and international
telecommunications companies, such as AT&T, BellSouth, and MCI
WorldCom;
o online services offered by incumbent cable providers, such as Time
Warner; and
o DSL providers, such as COVAD.
The recent merger of AOL/Time Warner creates further, formidable
competitive threats in the Internet and data services markets. The merging
companies announced plans to leverage their combined assets and resources
post-merger to offer a wide variety of Internet and data-related services.
Network Consulting
Our computer solutions division offers network consulting services to
businesses in Chillicothe Telephone service territory.
DIGITAL WIRELESS SERVICES
The information set forth under this heading describes the business of our
subsidiary Horizon PCS, Inc., a Delaware corporation. Horizon Telcom owns 92.0%
of the outstanding class B common stock of Horizon PCS, representing 56.5% of
all classes of capital stock on a fully diluted basis, and 81.5% of the total
voting power of all classes of capital stock of Horizon PCS on a fully diluted
basis. References under this heading to "we," "us" and "our" are to Horizon PCS.
9
Overview
We are one of the largest Sprint PCS affiliates based on our exclusive
right to market Sprint PCS products and services to a total population of over
10.2 million in portions of twelve contiguous states. Our markets are located
between Sprint PCS' Chicago, New York and Raleigh/Durham markets and connect or
are adjacent to 15 major Sprint PCS markets that have a total population of over
59 million. As a Sprint PCS affiliate, we market digital personal communications
services, or PCS, under the Sprint and Sprint PCS brand names.
We became one of the five charter Sprint PCS affiliates in June 1998, when
we were awarded our initial seven markets in Ohio, West Virginia and Kentucky
with a total population of approximately 1.6 million. Since our initial
territory grant, we have substantially expanded the size of our territory, as
follows:
o in August 1999, Sprint PCS granted us additional markets in Virginia,
West Virginia, Kentucky, Maryland, North Carolina and Tennessee with a
total population of approximately 3.3 million;
o in May 2000, Sprint PCS granted us additional markets in Pennsylvania,
New York, Ohio and New Jersey with a total population of approximately
2.9 million; we also agreed to grant Sprint PCS warrants to purchase
2,510,460 shares of our class A common stock, as further described in
"The Sprint PCS Agreements"; and
o in June 2000, we completed the acquisition of Bright PCS, a Sprint PCS
affiliate, adding markets in Indiana, Ohio and Michigan with a total
population of approximately 2.4 million.
Our territory includes significant market coverage in Indiana, Ohio,
Pennsylvania, Tennessee, Virginia and West Virginia and selected markets in
Kentucky, Maryland, Michigan, New Jersey, New York and North Carolina. Our
markets are adjacent to or connect a number of major markets owned and operated
by Sprint PCS, including Buffalo, Chicago, Cincinnati, Cleveland, Columbus,
Detroit, Indianapolis, Knoxville, Lexington, New York, Philadelphia, Pittsburgh,
Raleigh/Durham, Richmond and Washington, DC.
Sprint PCS
Sprint PCS, a wholly-owned subsidiary of Sprint, operates the only 100%
digital, 100% PCS wireless network in the United States. The digital technology
that Sprint PCS uses is code division multiple access technology, referred to as
CDMA. Sprint PCS has licenses to provide PCS service nationwide. Sprint PCS
operates its PCS network in major metropolitan markets throughout the United
States and has entered into agreements with affiliates, such as Horizon PCS, to
build out and manage networks in smaller metropolitan areas and along major
highways.
Statements in this document regarding Sprint Corporation or Sprint PCS are
derived from information contained in the periodic reports and other documents
filed with the Securities and Exchange Commission by Sprint and Sprint PCS, or
press releases issued by Sprint and Sprint PCS.
Business Strategy
We believe that the following elements of our business strategy will enable
us to rapidly complete our network, distinguish our wireless service offerings
from those of our competitors and compete successfully in the wireless
communications marketplace.
Taking Full Advantage of the Benefits of our Affiliation with Sprint PCS.
Our long-term strategic affiliation with Sprint PCS provides us with many
business, operational and marketing advantages including the following:
Exclusive Provider Of Sprint PCS Products And Services. We have the
exclusive right to use the Sprint and Sprint PCS brand names for the sale of
Sprint PCS products and services in our territory. We provide these products and
services exclusively under the Sprint and Sprint PCS brand names.
10
Sprint PCS Licenses And Long-Term Commitments. We have the exclusive right
to use Sprint PCS' licensed spectrum to provide Sprint PCS products and services
in our territory. Sprint PCS has funded the purchase of the licenses covering
our territory at a cost of approximately $57.0 million and has incurred
additional expenses for microwave clearing. As a Sprint PCS affiliate, we did
not have to fund the acquisition of these licenses, thereby reducing our
start-up costs. The Sprint PCS agreements are for a total of 50 years, including
an initial term of 20 years and three 10-year renewal terms. These agreements
will automatically renew for the renewal period unless at least two years prior
to the commencement of any renewal period either party notifies the other party
that it does not wish to renew the agreement.
Sprint PCS' Nationwide Digital PCS Network. As of December 31, 2000, Sprint
PCS, together with its affiliates, operated PCS systems providing service to
more than 4,000 communities and cities within the United States containing
nearly 227 million people nationwide, including all of the 50 largest
metropolitan markets. Our network operates with Sprint PCS' national network and
will extend Sprint PCS' coverage into our markets, which we believe is important
to Sprint PCS' national strategy. We believe our ability to provide our
customers with access to Sprint PCS' national network represents a competitive
advantage over other national and regional providers of wireless services.
Established And Available Distribution Channels. We benefit from immediate
access to major national retailers under Sprint PCS' existing sales and
distribution agreements and other national sales and distribution channels,
including:
o a sales and distribution agreement with RadioShack, which provides us
with access to approximately 188 stores in our territory;
o the sales and distribution agreements with other major national
third-party retailers such as Best Buy, Circuit City and Office Depot,
which collectively provide us with access to approximately 139
additional retail outlets in our territory;
o Sprint PCS' national inbound telemarketing sales force;
o Sprint PCS' national accounts sales team; and
o Sprint PCS' electronic commerce sales platform.
Sprint PCS' National Brand Name Recognition And National Advertising
Support. We benefit from the strength and the reputation of the Sprint and
Sprint PCS brands. Sprint PCS' national advertising campaigns and developed
marketing programs are provided to us at little or no additional cost under our
Sprint PCS agreements. We offer the same strategic pricing plans, promotional
campaigns and handset and accessory promotions as Sprint PCS, and have the
ability to add pricing plans and marketing promotions that target local market
needs.
Better Equipment Availability And Pricing. We are able to acquire our
network equipment, handsets and accessories more quickly and at a significantly
lower cost than we would without our strategic relationship with Sprint PCS. We
purchase our network equipment, handsets and accessories under Sprint PCS'
vendor arrangements that provide for volume discounts. These discounts
significantly reduce the overall capital required to build our network and
significantly reduce our costs of handsets and accessories.
Sprint PCS Wireless Web. Our network supports the Sprint PCS Wireless Web.
The Sprint PCS Wireless Web allows customers with data capable or Web-browser
enabled handsets to connect to the Internet and browse specially designed
text-based Web sites, including AOL, Yahoo!, Amazon.com, Bloomberg.com, CNN
Interactive, MapQuest.com, Fox Sports, Ameritrade, InfoSpace.com and
Weather.com. For more information on the Sprint PCS Wireless Web, see "--
Products and Services -- Access to the Sprint PCS Wireless Web."
11
Sprint PCS' Extensive Research And Development. We benefit from Sprint PCS'
extensive research and development effort, which provides us with ongoing access
to new technological products and enhanced service features without significant
research and development expenditures of our own. We have prompt access to any
developments produced by Sprint PCS for use in our network.
Sprint PCS' Back Office Services. When we initially launched our
independent PCS operations, we provided our own back office services, such as
customer services and billing services. In May 2000, we amended the Sprint PCS
agreements so that Sprint PCS will provide these back office services to us. All
markets we have launched are now under our back office arrangement with Sprint
PCS.
We expect the cost of these services will be at or below the cost of
providing the services ourselves, due to anticipated rate reductions and Sprint
PCS' ability to economically manage the support of new services. We also believe
this arrangement will allow us to more quickly roll out new Sprint PCS products
and services in our markets.
Rapidly Completing The Build-Out And Launch Of Our Network. We plan to
offer coverage to 6.7 million residents, or approximately 66% of the total
population of the markets we are licensed to serve as a Sprint PCS affiliate, by
December 31, 2001. We have successfully developed several key relationships
which we believe will allow us to efficiently launch our markets. For building
the portion of the Sprint PCS network located within our territory, which we
refer to as our build-out, in our Bright PCS markets and for fill-in coverage in
our initial markets, we rely on our build-to-suit arrangements with SBA Towers,
Inc., a wholly-owned subsidiary of SBA Communications Corporation. For markets
with a high concentration of existing towers or zoning challenges, we employ a
co-location strategy. For our Virginia and West Virginia markets, we use our
network services agreement with the West Virginia PCS Alliance and the Virginia
PCS Alliance, which we refer to as the Alliances, to provide us with the use of
and access to key components of their network in most of our markets in Virginia
and West Virginia thereby increasing our coverage to our markets with a total
population of 3.3 million. For our new markets in Pennsylvania, New York, Ohio
and New Jersey, we purchased network assets currently under construction from
Sprint PCS, enabling us to launch many of these markets much earlier than if we
had had to complete the entire build-out of these markets independently
beginning in September 2000.
Deploying A High-Capacity Network. We have built an all-digital PCS network
that we believe is up to date and of high-quality. Our strategy is to provide
service to the largest communities in our markets and the interstates and
primary roads connecting these communities to one another and to the adjacent
major markets owned and operated by Sprint PCS. We believe that our network
design, together with the use of digital CDMA technology, will allow our network
to handle more customers with fewer dropped calls and better clarity than our
competitors. In addition, our network will have sufficient capacity to provide
services beyond traditional voice transmissions.
Executing An Integrated Local Marketing Strategy. Our marketing strategy is
to take full advantage of Sprint's and Sprint PCS' nationwide presence and brand
names while at the same time establishing a strong local presence in each of our
markets. We emphasize the improved clarity and quality, enhanced features and
favorable pricing of Sprint PCS products and services and replicate the
marketing strategies that have resulted in Sprint PCS becoming the fastest
growing wireless service providers in the country. In addition, on the local
level, we are or soon will be:
o establishing 40 Sprint PCS stores within our territory;
o establishing local third-party sales and distribution relationships on
an as-needed basis;
o directing our media efforts at the community level by advertising in
local publications and radio;
o sponsoring local and regional events; and
o using the local telephone offices of Sprint and the former owners of
Bright PCS which are located in our markets to offer our products and
services.
12
Continuing To Explore Opportunities To Expand Our Territory And Provide
Complementary Products And Services. Since the initial grant of our markets, we
have significantly expanded the geographic scope of our territory through three
separate transactions. We expect to continually evaluate ways to strategically
expand our territory. Similarly, we expect to consider offering complementary
products and services. Any transaction we undertake to expand our territory may
require additional financing and would involve a number of risks, as discussed
at "Business-Risk Factors."
Exploiting Our Potential For Significant Roaming Revenue. We receive Sprint
PCS revenue from Sprint PCS subscribers based outside our territory who use our
network. Our territory is adjacent to or connects 15 major markets owned and
operated by Sprint PCS, including Buffalo, Chicago, Cincinnati, Cleveland,
Columbus, Detroit, Indianapolis, Knoxville, Lexington, New York, Philadelphia,
Pittsburgh, Raleigh/ Durham, Richmond and Washington, D.C. These markets include
five of the ten largest metropolitan areas in the United States. Our territory
also contains more than 2,600 interstate miles.
Support From Our Fully Financed Business Plan. We believe that our existing
cash and available borrowings under our new senior secured credit facility will
be adequate to fund our PCS network build-out, tax payments, anticipated
operating losses and working capital requirements until we achieve positive
earnings before interest, taxes, depreciation and amortization, which we expect
to achieve in the third quarter of 2003.
Markets
Our territory covers 54 markets in parts of Indiana, Kentucky, Maryland,
Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee,
Virginia, and West Virginia. Sprint PCS has launched service in 15 major
metropolitan areas that are adjacent to our markets and have a combined total
population of approximately 59 million. We believe that connecting or being
adjacent to existing Sprint PCS markets is important to Sprint PCS' strategy to
provide seamless, nationwide PCS service.
The following chart identifies our markets:
Sprint PCS MhZ of Estimated Total
Market Grant (1) Spectrum Population(2)
------ --------- -------- -------------
Charleston, WV 1st 20 492,700
Huntington, WV 1st 20 369,700
Zanesville, OH 1st 20 187,200
Parkersburg, WV 1st 20 182,000
Athens, OH 1st 20 132,100
Chillicothe, OH 1st 35(4) 104,700
Portsmouth, OH 1st 20 93,800
Roanoke, VA 2nd 10 645,200
Charlottesville, VA 2nd 30 218,600
Clarksburg, WV 2nd 30 195,600
Danville, VA 2nd 10 168,600
Lynchburg, VA 2nd 10 160,100
Morgantown, WV 2nd 30 107,800
Staunton, VA 2nd 10 107,600
Martinsville, VA 2nd 10 90,400
Fairmont, WV 2nd 30 56,800
Kingsport (Tri-Cities), TN 2nd 20 689,100
Cincinnati, OH (Partial) (3) 2nd 10 127,400
Erie, PA 3rd 10 280,200
Sharon, PA 3rd 10 122,300
Ashtabula, OH 3rd 10 103,500
Meadville, PA 3rd 10 90,000
Fort Wayne, IN Bright 10 689,200
South Bend, IN Bright 10 348,800
Elkhart, IN Bright 10 256,900
Lima, OH Bright 30 251,800
13
Sprint PCS MhZ of Estimated Total
Market Grant (1) Spectrum Population(2)
------ --------- -------- -------------
Kokomo, IN Bright 30 186,000
Benton Harbor, MI Bright 10 160,100
Findlay, OH Bright 30 152,900
Michigan City, IN (Partial) (3) Bright 10 109,900
Marion, IN Bright 30 108,600
Dayton, OH (Partial) (3) Bright 10 41,065
Toledo, OH (Partial) (3) Bright 30 30,066
Kalamazoo, MI (Partial) (3) Bright 30 20,009
Battle Creek, MI (Partial) (3) Bright 30 8,980
Beckley, WV 2nd 20 169,500
Knoxville, TN (Partial) (3) 3rd 10 54,201
Jamestown, NY 3rd 30 180,100
Scranton, PA 3rd 30 664,700
Olean, NY 3rd 30 240,200
Sunbury, PA 3rd 30 194,300
Williamsport, PA 3rd 30 161,200
New York, NY (Partial) (3) 3rd 30 169,673
Pottsville, PA 3rd 30 151,000
State College, PA 3rd 30 134,900
Stroudsburg, PA 3rd 30 128,100
Du Bois, PA 3rd 30 127,900
Oil City, PA 3rd 30 104,500
Allentown, PA (Partial) (3) 3rd 30 59,094
Williamson, WV 2nd 20 183,900
Bluefield, WV 2nd 20 176,200
Cumberland, MD 2nd 10 159,000
Logan, WV 2nd 10 40,900
Canton, OH (Partial) (3) 2nd 10 36,215
-------------
10,225,303
=============
--------------------
(1) Indicates the grant from Sprint PCS in which we received our
respective markets. "Bright" indicates markets granted to Bright PCS
in October 1999. The following summarizes our other grants:
1st: July 1998
2nd: August 1999
3rd: May 2000
(2) Estimated total population is based on January 1, 1999 estimates
compiled by Rand McNally Commercial Atlas & Marketing Guide, 2000
Edition.
(3) The estimated total population in these markets represents the
population of the counties within the market granted to us in the
Sprint PCS agreements, not the total population of that market.
(4) Includes 15 MHz of spectrum owned directly by us.
Network Build-Out Plan
Overview. Our network build-out strategy is to provide service to the
largest communities in our markets and to cover interstates and primary roads
connecting these communities to each other, and to the adjacent major markets
owned and operated by Sprint PCS. Our agreements with Sprint PCS require us to
complete the specified build-out by scheduled dates. If we do not meet those
dates, we may owe Sprint PCS penalties and Sprint PCS maybe able to terminate
our agreements. We believe that our schedule for completing the build-out is
14
achievable based on our prior experience in network build-out, the technology we
will use to build our network and the established standards of Sprint PCS.
Our markets have a total population of approximately 10.2 million and, as
of December 31, 2000, we covered approximately 5.1 million residents, based on
their place of residence, representing coverage of approximately 50% of the
total population of our territory. As of March 31, 2001, we had launched service
covering approximately 5.2 million residents, or approximately 51% of the total
population in our territory, and had 84,681 subscribers. On June 13, 2001,
Horizon PCS announced it had signed its 100,000th subscriber on June 8, 2001.
A market is considered to be covered when we have wireless network
telephone equipment receiving and transmitting locations, known as cell sites,
in operation which make our services available for use by subscribers residing
in that territory. When complete, the build-out of our 54 markets will consist
of approximately 1,230 cell sites. We plan to cover approximately 6.7 million
residents or 66% of the total population of our markets, by December 31, 2001.
The following details the current status of each of our market grant.
First Horizon PCS Grant (June 1998). By January 1999 we covered
approximately 887,000 residents, or 57% of the total population of our initial
seven markets. We are currently extending the coverage in these markets along
connecting highways and to smaller communities. We also expect the Alliances to
fill in coverage in the two initial markets that are being served under our
network services agreement. As of December 31, 2000, we covered approximately
913,000 residents, or 58% of the total population of our initial seven markets,
and we plan to cover approximately 985,000 residents, or 63% by September 30,
2001.
Second Horizon PCS Grant (August 1999). In August 1999, Sprint PCS granted
us 17 additional markets in Virginia, West Virginia, Tennessee, Maryland,
Kentucky and Ohio with a total population of approximately 3.3 million. Within
two months of this second grant, we launched service in nine of these markets,
providing coverage to 1.0 million residents, or 31% of the total population in
these markets through our network services agreement with the Alliances.
In August 2000, we launched service in our Kingsport, Tennessee market,
which has a total population of 689,000. We plan to cover approximately 488,000
residents, or 71% of the total population in this market. By September 30, 2001,
we will launch two additional markets, and the five remaining markets received
in the second grant will be launched by February 28, 2002, at which time we plan
to cover approximately 2.0 million residents, or 61% of the total population in
these 17 markets.
Bright PCS Grant (October 1999). In September 2000 we launched service in
our Bright PCS markets and now offer service in all of the Bright PCS markets,
covering approximately 2.0 million residents, or 85% of the total population of
these 13 markets.
Third Horizon PCS Grant (May 2000). In May 2000, Sprint PCS granted us 17
additional markets in Pennsylvania, New York, Ohio and New Jersey with a total
population of approximately 2.9 million. In conjunction with the grant, we
agreed to purchase from Sprint PCS 154 sites in various stages of construction.
We have completed our engineering design for these markets and the build-out is
expected to consist of approximately 438 sites, including the 154 that were
purchased from Sprint PCS.
The 29 sites that were operational at December 31, 2000 are located in the
Erie, Jamestown, Sharon, Ashtabula and Meadville markets, which have a total
population of approximately 776,000.
The remaining sites purchased from Sprint PCS are located in the Scranton,
Pottsville, Stroudsburg, New York and Allentown markets, which have a total
population of approximately 1.2 million. We expect to launch service in these
markets by the end of 2001.
The remaining markets to be launched are Williamsport, Sunbury, State
College, Oil City, Olean and Du Bois, which have a total population of
approximately 963,000. We expect to launch service in these markets by the end
of 2001. At that time, we plan to cover approximately 1.9 million residents, or
65% of the total population of the 17 markets received in our third grant.
15
Network Build-Out Elements
As part of our network build-out strategy, we entered into outsourcing
relationships with the third parties to described below to assist us in building
out our network. We believe that these relationships result in a more timely,
efficient and cost effective build-out process.
Radio Frequency Design. We have engaged an outside design firm to provide
radio frequency design, engineering and related services for our markets. This
firm assists us in determining the required number of cell sites needed to
operate the network and identifies the general geographic areas in which each of
the required cell sites will be located.
Site Acquisition, Project Management And Construction. We use a combination
of build-to-suit and co-location opportunities in the design and construction of
our network. Build-to-suit arrangements are contractual relationships whereby a
tower company constructs and owns a cell tower at a location which we approve
and leases the cell tower to us for use in our network. Co-location is an
arrangement whereby a wireless service provider, like us, is allowed to use
another party's cell tower as part of its network. Generally we prefer
build-to-suit opportunities because of the favorable development fees and
leasing terms associated with our arrangement with SBA. Under our build-to-suit
agreement, SBA acquires the site, builds the tower and leases it to us. We
consider this arrangement to be preferable to building our own towers.
In situations where we determine that build-to-suit is not appropriate, we
use a co-location strategy. For sites where co-location leases are utilized,
zoning, permitting and surveying approvals and licenses have already been
secured, which minimizes our start-up costs and accelerates access to the
markets.
We expect that approximately 1,230 sites will be required to achieve our
planned coverage of the residents in our territory, including those provided to
us through our network services agreement. Of those sites, we believe that
approximately 345 will be build-to-suit towers.
Microwave Relocation. At the time of the FCC's auction of PCS licenses,
other third parties were using portions of the same frequency bandwidths for the
operation of microwave facilities. The FCC has procedures for PCS licensees to
relocate these existing microwave paths, generally at the PCS licensee's
expense. Sprint PCS relocates the microwave paths that use frequencies owned by
Sprint PCS, and is analyzing these relocations as we continue the build-out of
our network. Sprint PCS is also paying for a portion of the relocation costs.
Sprint PCS has completed necessary relocation for all microwave paths in all of
our markets that are operational or scheduled to be operational before October
31, 2001.
Switching. We currently use one switching center in Chillicothe, Ohio to
provide services to our network. We also utilize the Alliances' two switching
centers under our network services agreement, and are using a Sprint PCS
switching center on an interim basis to more rapidly launch our markets in
western Pennsylvania. A switching center serves several purposes, including
routing calls, managing call handoff, managing access to the public telephone
network and providing access to voice mail. We plan to install additional
switching centers as needed during 2001.
Interconnection. Our network connects to the public telephone network
through local exchange carriers. Through our Sprint PCS agreements, we benefit
from Sprint PCS-negotiated agreements with local exchange carriers, which govern
the terms of the relationship between telephone service carriers which
interconnect in order to provide service between networks.
Long Distance And Back Haul. We use Sprint and other third party providers
for long distance services and for back haul services. Back haul services are
the telecommunications services which other carriers provide to carry our voice
traffic from our cell tower sites to our switching facilities. When we use
Sprint, we receive the same preferred rates made available to Sprint PCS sites.
16
Network Monitoring. We use Sprint PCS' Network Operations Control Center
for continuous network monitoring of all of our markets, other than those served
by the Alliances, which we monitor directly.
SBA Agreement
Prior to August 1999, Horizon Telcom owned the cell site towers we used in
our network. In August 1999, Horizon Telcom sold to SBA the towers we used in
our network, and we subsequently entered into a long-term lease arrangement with
SBA. We now pay a fixed amount per month, per cell site, to SBA for the right to
use their towers in our markets. This fixed fee is subject to an annual
percentage increase for each site beginning on the third anniversary of the date
we began using the site. We believe that the rates we pay under this agreement
are generally more favorable than average co-location rates available in our
markets.
In August 1999, we also entered into a build-to-suit agreement with SBA.
Under this agreement, SBA acquires and develops the sites and installs the
towers at locations approved by us. We receive a site development fee from SBA
for tower sites which SBA constructs on our behalf. We have agreed to lease
space on a number of existing SBA towers for which we pay a fixed amount per
month, per cell site. For some of the leases, we receive a one-year rent
abatement on these sites. Rent expense for the leases which include abatement
will be recognized on a straight-line basis over the life of the lease.
Motorola Product Supply Agreement
In December 1999, we entered into a product supply agreement with Motorola
for the purchase of the telecommunications products and services for our
network. Motorola also provides installation services for our network equipment.
We intend to use Motorola equipment for the build out of our new markets in
Pennsylvania, New York, Ohio and New Jersey and the Bright PCS markets. Since
entering the Sprint PCS agreements in June 1998, we have benefited from Sprint
PCS' volume pricing arrangements with Motorola on our equipment purchases and
expect to continue to benefit going forward.
Alliances Network Services Agreement
The Alliances are two related independent PCS providers offering service
under the NTELOS brand name. The Alliances' network is managed by CFW
Communications. In August 1999, we entered into a network services agreement
with the Alliances for 16 of our markets in Virginia and West Virginia. Under
this agreement, we are entitled to use the Alliances' wireless network and
equipment to provide services to our customers in these markets. The Alliances
are required to maintain their network to Sprint PCS technical standards. We pay
the Alliances a per minute of use charge for use of their network whenever
Sprint PCS subscribers use their network.
We believe this arrangement eliminates or defers capital costs, and reduces
network expenses while permitting a faster launch of service and preserving our
capital for other uses. In addition, this arrangement gives us access to
additional spectrum in markets where Sprint PCS has limited bandwidth and
reduces our risk of technological obsolescence in these markets. Unless we elect
to build our own network in the territory covered by the Alliances, we remain
subject to the risk that the Alliances will not satisfactorily build out,
operate, maintain or upgrade their network, thereby adversely affecting our
customers and potentially limiting the products and services we can offer in
territory covered by the Alliances. If it is necessary to overbuild the
Alliances' network by constructing our own cell sites, we will be required to
make significant capital investments. There can be no assurance any necessary
overbuild will be completed in a timely manner, or will be available to us.
As of December 31, 2000, the Alliances had deployed 393 cell sites within
our markets in West Virginia and Virginia and had complied with their
contractual build-out requirements to date. As of March 31, 2001, the Alliance
has deployed approximately 425 cell sites within our markets. The Alliances have
also committed to build out the Bluefield, Virginia market by September 30,
2001. If the Alliances fail to build out this market by this date, we have at
least 12 additional months to complete the build-out under our Sprint PCS
agreements. The Alliances provided coverage to 56% of the total population of
3.3 million in the markets covered by our network services agreement as of
December 31, 2000, and expect to provide coverage to 61% by February 2002.
17
The three remaining markets, which the Alliances have not yet committed to
build out, are the Williamson and Logan, West Virginia and Cumberland, Maryland
markets. We have the option to either allow the Alliances to build out these
markets, or to build them ourselves. Under the terms of our Sprint PCS
agreements, these markets must be built out by February 2002. If we do not make
adequate coverage available in these markets by February 2002, then Sprint PCS
will be entitled to impose penalties, send a notice of default, and terminate
Horizon PCS' Sprint PCS agreement.
In the event we terminate our agreement with the Alliances because of the
Alliances' breach of the agreement, we have the right to continue to use the
Alliances' network for up to 36 months after the termination at rates which
reflect a significant discount from the standard pricing terms under our
agreement. This is intended to enable us to continue to provide services to our
customers while we build out our own network. In addition, under all
circumstances, we have the right to overbuild the Alliances' markets, on a
market-by-market basis, at any time for any reason, by constructing our own cell
sites.
Products And Services
We will offer established Sprint PCS products and services throughout our
territory. Our products and services mirror the service offerings of Sprint PCS
and are designed to integrate seamlessly with the Sprint PCS nationwide network.
Sprint PCS Wireless Services currently serve the majority of the nation's
metropolitan areas, including more than 4,000 cities and communities, providing
customers with affordable, reliable 100% digital, 100% PCS services. The Sprint
PCS service package we offer includes the following:
100% Digital Wireless Mobility. Our primary service is wireless mobility
coverage. Our PCS network is part of the largest 100% digital, 100% PCS network
in the nation. We offer customers in our territory simple, affordable Sprint PCS
Free and Clear pricing plans. These plans include free long distance and
wireless airtime minutes for use throughout the Sprint PCS network at no
additional charge. Customers using service outside the Sprint PCS network must
pay an additional roaming charge. Our basic wireless service includes voice
mail, caller ID, enhanced call waiting, three-way calling, call forwarding,
distinctive ringing and call blocking.
Nationwide Service. Our customers are able to use Sprint PCS services in
our markets and seamlessly throughout the Sprint PCS network.
Dual-band/dual-mode handsets allow roaming on wireless networks where Sprint PCS
is not available and with which Sprint PCS has roaming agreements. These
handsets are designed to operate on analog and digital cellular networks, as
well as on Sprint PCS' digital PCS networks.
Advanced Handsets. CDMA handsets weighing approximately five to seven
ounces offer up to three to five days of standby time and approximately two to
four hours of talk time. We also offer dual-band/dual- mode handsets that allow
customers to make and receive calls on both PCS and cellular frequency bands and
both digital or analog technology. All handsets are equipped with preprogrammed
features such as speed dial and last number redial, and are sold under the
Sprint and Sprint PCS brand names.
Extended Battery Life. CDMA handsets offer significantly extended battery
life relative to earlier technologies, providing up to three to five days of
standby battery life. Handsets operating on a digital system are capable of
saving battery life while turned on but not in use, improving efficiency and
extending the handset's use.
Improved Voice Quality. We believe the Sprint PCS CDMA technology offers
significantly improved voice quality compared to existing analog and TDMA
networks, more powerful error correction, less susceptibility to call fading and
enhanced interference rejection, all of which result in fewer dropped calls. See
"-- CDMA Technology" for a discussion of the reasons CDMA technology offers
improved voice quality.
Privacy And Security. Sprint PCS provides secure voice transmissions
encoded into a digital format to prevent eavesdropping and unauthorized cloning
of subscriber identification numbers.
Easy Activation. Customers can purchase a Sprint PCS handset off the shelf
at a retail location and activate their service by calling customer service,
which can program the handset over the air. We believe over-the-air activation
reduces the training requirements for salespersons at retail locations.
18
Customer Care. When we initially launched our independent PCS operations,
we provided our own "back office" services, such as customer services and
billing services. In May 2000, we amended our Sprint PCS agreements so that
Sprint PCS will provide the back office services to us. All existing customers
have now been transitioned to these services. By using Sprint PCS' established
back office services, we believe that our operating costs will be reduced. By
using Sprint PCS' services, we expect to more rapidly implement new products and
services offered by Sprint PCS. Sprint PCS offers customer care 24 hours a day,
seven days a week.
Access To The Sprint PCS Wireless Web. We began offering the Sprint PCS
Wireless Web service in most of our markets in the fourth quarter of 2000, and
now offer it throughout our operating network. The Sprint PCS Wireless Web
allows subscribers with data-capable handsets to connect their portable
computers or personal digital assistants to the Internet. Sprint PCS subscribers
with data-capable handsets also have the ability to receive periodic information
updates such as stock prices, airline schedules, sports scores and weather
reports directly on their handsets. Sprint PCS subscribers with Web-browser
enabled handsets have the ability to connect to and browse specially designed
text-based Internet sites on an interactive basis. Sprint PCS has agreements
with Internet providers including AOL, Yahoo!, Amazon.com, Bloomberg.com, CNN
Interactive, MapQuest.com, Fox Sports, Ameritrade, InfoSpace.com and Weather.com
to provide services for the Sprint PCS Wireless Web. Sprint PCS offers Sprint
PCS Wireless Web as an add-on to existing Sprint PCS' Free and Clear pricing
plans.
Other Services. In addition to these services, we may also offer wireless
local loop services in our territory. Wireless local loop refers to the use of a
wireless network to provide a substitute for the portion of traditional
telephone companies' networks which extends from homes and businesses to the
traditional telephone companies' switching facilities. We also believe that new
features and services will be developed on the Sprint PCS nationwide network to
take advantage of CDMA technology. As a leading wireless provider, Sprint PCS
conducts ongoing research and development intended to produce innovative
services that give Sprint PCS a competitive advantage. We intend to offer a
portfolio of products and services developed by Sprint PCS to accommodate the
growth in, and the unique requirements of, high-speed data traffic and demand
for video services. We plan to provide, when available, a number of applications
for wireless data services including facsimile, Internet access, wireless local
area networks and point-of-sale terminal connections.
Marketing Strategy
Our marketing and sales strategy uses Sprint PCS' strategies and developed
national distribution channels that have helped Sprint PCS generate rapid
customer growth. We plan to enhance Sprint PCS' strategies with strategies
tailored to our specific territory.
Use Of Sprint PCS' Brand Equity And Marketing. We will feature exclusively
and prominently the nationally recognized Sprint and Sprint PCS brand names in
our marketing effort. From the customers' point of view, they will use our PCS
network and the Sprint PCS national network seamlessly as a unified national
network. We will build on Sprint PCS' national distribution channels and
advertising programs.
Pricing. We believe that our use of the Sprint PCS pricing strategy will
offer customers in our territory simple, easy-to-understand service plans.
Sprint PCS' consumer pricing plans are typically structured with what we believe
to be competitive monthly recurring charges and large local calling areas,
service features such as voicemail, enhanced caller ID, call waiting and
three-way calling and what we believe to be competitive per-minute rates. Lower
per-minute rates relative to analog cellular providers are possible in part
because the CDMA system that both we and Sprint PCS employ has greater capacity
than current analog cellular systems, which we believe will enable us to market
high usage customer plans at lower prices.
Local Focus. Our local focus enables us to supplement Sprint PCS' marketing
strategies with our own strategies tailored to each of our specific markets.
These include attracting local businesses to enhance our distribution and using
local radio and newspaper advertising to sell our products and services in each
of our launched markets. We have established a local sales force to execute our
marketing strategy through company-owned Sprint PCS stores, and also employ a
direct sales force targeted to business sales. In addition, Sprint PCS' existing
agreements with national retailers provide us with immediate access to over 320
retail locations in our territory. We also expect the former owners of Bright
19
PCS to offer Sprint PCS products in their local telephone offices in
northwestern Ohio. Sprint-owned local exchange carriers provide local telephone
service to approximately 20% of the total population in our territory, which
will provide us with an additional distribution channel through which we can
market to an established base of Sprint customers. Some of the Sprint local
exchange markets have a store for Sprint customers to pay their bills, which we
expect to use to sell Sprint PCS products and services.
Advertising And Promotions. Sprint PCS uses national as well as regional
television, radio, print, outdoor and other advertising campaigns to promote its
products. We benefit from this national advertising in our territory at no
additional cost to us.
Sponsorships. Sprint PCS is a sponsor of numerous selected, broad-based
national and regional events. These sponsorships provide Sprint PCS with brand
name and product recognition in high profile events, provide a forum for sales
and promotional events and enhance our promotional efforts in our territory.
Bundling Of Services. We intend to take advantage of the complete array of
communications services offered by bundling Sprint PCS services with other
Sprint products, such as long distance and Internet access.
Sales And Distribution
Our sales and distribution plan mirrors Sprint PCS' multiple channel sales
and distribution plan. Key elements of our sales and distribution plan consist
of the following:
National And Regional Third Party Retail Stores. Sprint has an arrangement
with RadioShack to offer Sprint PCS through RadioShack stores. RadioShack has
approximately 188 stores in our territory. We also benefit from the distribution
agreements established by Sprint PCS with other national and regional retailers
which currently include Best Buy, Circuit City, Office Depot, The Good Guys,
Dillards, The Sharper Image, Montgomery Ward, OfficeMax, Ritz Camera, Staples,
Cord Camera, The Wiz and certain May Company department stores. At present,
these retailers operate approximately 139 retail stores in our territory. We
also believe that we benefit from stores located in major Sprint PCS markets
near our markets because residents of our territory who buy PCS handsets at
those stores become our subscribers.
Sprint PCS Stores. We currently own and operate 20 Sprint PCS stores. We
plan to have a total of 40 Sprint PCS stores in our territory by the end of
2003. These stores will be located in larger markets within our territory, which
we believe provides us with strong local presence and a high degree of
visibility. Following the Sprint PCS model, these stores will be designed to
facilitate retail sales, bill collection and customer service.
Local Telephone Stores. We also plan to offer Sprint PCS products and
services through the Sprint Local Telephone Division retail centers in our
service area and through at least thirteen local telephone service centers of
the former owners of Bright PCS and their affiliates located in our markets. We
also expect former Bright PCS members and local Sprint service providers to
offer Sprint PCS products and services.
National Accounts And Direct Selling. We participate in Sprint PCS'
national accounts program. Sprint PCS has a national accounts team which focuses
on the corporate headquarters of Fortune 500 companies. Once a representative
reaches an agreement with the corporate headquarters, we service the offices of
that corporation located in our territory. Our direct sales force will target
the employees of these corporations in our territory and cultivate other local
business clients. At present, we employ 31 direct sales representatives, and
plan to hire more as needed over the next 24 months.
Inbound Telemarketing. Sprint PCS provides inbound telemarketing sales when
customers call from our territory. As the exclusive provider of Sprint PCS
products and services in our market, we use the national Sprint 1-800-480-4PCS
number campaigns that generate call-in leads. These leads are then handled by
Sprint PCS' inbound telemarketing group.
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Electronic Commerce. Sprint PCS launched an Internet site in December 1998
which contains information on Sprint PCS products and services. A visitor to
Sprint PCS' Internet site can order and pay for a handset and select a rate
plan. Customers visiting the site can review the status of their account,
including the number of minutes used in the current billing cycle. Customers in
our territory who purchase products and services over the Sprint PCS Internet
site will become our customers.
CDMA Technology
Sprint PCS' Nationwide Network And Its Affiliates' Networks All Use Digital
CDMA Technology. CDMA technology is fundamental to accomplishing our business
objective of providing high-volume, high-quality airtime at a low cost. We
believe that CDMA provides important system performance benefits.
Voice Quality. We believe that CDMA systems offer less interference, more
powerful error correction and less susceptibility to fading than analog systems.
Using enhanced voice coding techniques, CDMA systems achieve voice quality that
is comparable to that of the typical wireline telephone. This CDMA voice coding
technology also filters out annoying background noise more effectively than
existing wireline, analog cellular or other digital PCS phones.
Capacity. CDMA technology allows a greater number of calls within one
specific frequency and reuses the entire frequency spectrum in each cell. CDMA
systems provide capacity gains of up to seven times over current analog systems
and up to three times greater than TDMA and GSM systems. In the first half of
2000, Sprint PCS began to deploy a new voice coding technology for CDMA networks
which is expected to increase the capacity of the system by approximately 100%.
This new voice coding standard, referred to as Enhanced Variable Rate Coding,
will allow the network to support additional capacity while maintaining the high
level of voice quality associated with digital networks. We expect to begin
using the Enhanced Variable Rate Coding technology in our PCS network to
increase its capacity. Additional capacity improvements are expected for CDMA
networks over the next two years as new third generation standards are approved
and implemented that will allow for high-speed data and an even greater increase
in the voice traffic capacity.
CDMA technology is designed to provide flexible or "soft" capacity that
permits networks like ours to temporarily increase the number of telephone calls
that can be handled within a cell. When capacity limitations in analog, TDMA and
GSM systems are reached, additional callers in a given cell must be given a busy
signal. Using CDMA technology, networks like ours can allow a small reduction in
voice quality to provide temporary increases in capacity. This reduces blocked
calls and increases the probability of a successful cell-to-cell hand-off.
Soft Hand-Off. As a subscriber travels from one cell site to another cell
site, the call must be "handed off" to the second site. CDMA systems transfer
calls throughout the network using a technique referred to as a soft hand-off,
which connects a mobile customer's call with a new cell site while maintaining a
connection with the cell site currently in use. CDMA networks monitor the
quality of the transmission received by both cell sites simultaneously to select
a better transmission path and to ensure that the network does not disconnect
the call in one cell until it is clearly established in a new one. As a result,
fewer calls are dropped compared to analog, TDMA and GSM networks which use a
"hard hand-off" and disconnect the call from the current cell site as it
connects with a new one.
Integrated Services. CDMA systems permit us to offer advanced features,
including voice mail, caller ID, enhanced call waiting, three-way calling, call
forwarding and paging and text-messaging. These advanced features may also be
offered by companies utilizing competing technologies.
Privacy And Security. One of the benefits of CDMA technology is that it
combines a constantly changing coding scheme with a low power signal to enhance
security and privacy. Vendors are currently developing additional encryption
capabilities which we believe will further enhance overall network security.
Frequency Planning. Frequency planning is the process used to analyze and
test alternative patterns of frequency use within a wireless network to minimize
interference between one call and another call and to maximize capacity.
Currently, cellular service providers spend considerable money and time on
frequency planning. Because TDMA and GSM based systems have frequency reuse
21
constraints similar to present analog systems, frequency reuse planning for TDMA
and GSM based systems is expected to be comparable to planning for the current
analog systems. With CDMA technology, however, the same group of frequencies can
be reused in every cell, substantially reducing the need for costly frequency
reuse patterning and constant frequency plan management.
Battery Life. Due to their greater efficiency in power consumption, CDMA
handsets will provide up to three to five days of standby time and approximately
two to four hours of talk time availability. We believe this generally exceeds
the battery life of handsets using alternative digital or analog technologies.
Benefits Of Other Technologies. While CDMA has the benefits discussed
above, TDMA networks are generally less expensive when overlaying existing
analog systems. In addition, the GSM technology standard, unlike CDMA, supports
a more robust interoperability standard which more easily allows a network
operator to use equipment from several different vendors in the same network.
This, along with the fact that the GSM technology is currently more widely
deployed throughout the world than CDMA, provides economies of scale for handset
and equipment purchases. A standards process is also underway which will allow
wireless handsets to support analog, TDMA and GSM technologies in a single unit.
Currently, there are no plans to have CDMA handsets that support either the TDMA
or GSM technologies.
Third Generation Technology. In addition, wireless carriers are seeking to
implement a new "third generation," or "3G," technology throughout the industry.
The 3G technology is intended to increase networks' capacity for voice calls and
enable better transmission of high-speed data. To date, this technology has not
been deployed on a commercial basis.
Competition
Given the broad geographic coverage of our territory, the competition that
we face from other wireless providers is fragmented. We compete, to varying
degrees, with regional and national cellular, PCS and other wireless service
providers, although today no competing provider offers complete coverage of our
territory. Currently, we believe that our strongest competition is from cellular
providers, many of which have been operating in our markets and building their
customer base for a number of years. We believe however, that our competition
from other PCS providers is limited. Many are in the preliminary stages of
building their networks and customer bases and currently offer less consistent
coverage than the cellular providers.
Our largest single cellular competitor in terms of licensed markets is
Verizon Wireless, which offers service in markets covering a majority of our
planned covered residents. Verizon was formed by the merger of Bell Atlantic and
GTE, two well established companies with a long history of providing telephone
services. Verizon is a strong competitor, with significant resources. We believe
that Verizon lacks the long-established national brand name. In addition, we
believe that a significant portion of Verizon's network in our markets is
presently analog. The recently formed national cellular alliance between
BellSouth and SBC, now called Cingular, competes with us in a limited number of
our markets. AT&T has licenses to provide service to all markets in our
territory, but we believe that AT&T currently provides service to less than half
of our planned covered residents. ALLTEL is a large regional provider and has
had the most significant competitive impact to date, by offering coverage in
markets we have also launched. Small regional cellular providers, such as US
Cellular and Dobson Cellular, which offers service under the Cellular One brand,
also operate in our territory.
Our primary PCS competition is from PCS providers whose coverage is
regional. VoiceStream is the largest. Other PCS competitors include the
Alliances, which offer service under the NTELOS brand, and SunCom, an AT&T
affiliate. As a Sprint PCS affiliate, we believe we are positioned to
successfully compete with all of these PCS providers due to the strength of the
Sprint PCS brand name, distribution channels, and CDMA network.
Nextel, together with Nextel Partners, which we believe has licenses to
offer service in the vast majority of our markets, currently offers service to
less than half of our planned covered residents. Nextel's coverage in many of
these markets is focused primarily on highway coverage as opposed to community
coverage.
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The following table lists the primary operational competitors known to us
within our various geographic areas:
PRIMARY
OPERATING TYPE OF
GEOGRAPHIC AREA COMPETITORS SERVICE
- --------------- --------------- -------
Ohio markets......................... ALLTEL Cellular
AT&T Cellular
Verizon Wireless Cellular
Nextel ESMR
Indiana markets...................... Centennial Cellular
Century Cellular
Verizon Wireless Cellular
VoiceStream PCS
Nextel EMSR
Pennsylvania and New York markets.... AT&T Cellular
Verizon Wireless Cellular
VoiceStream PCS
Nextel PCS
Virginia and West Virginia markets... ALLTEL Cellular
AT&T Cellular
Verizon Wireless Cellular
NTELOS PCS
Suncom PCS
Tennessee markets.................... ALLTEL Cellular
Verizon Wireless Cellular
Cingular PCS
Suncom PCS
Nextel ESMR
Most of these primary competitors offer a wireless service that is
generally comparable to our PCS service. However, we believe that most do not
offer the full range of products, services and features that we offer. For
instance, we believe that Verizon, Cingular, AT&T, ALLTEL and most regional
cellular providers do not offer 100% digital technology. Similarly, Cingular,
ALLTEL, and regional cellular providers do not offer nationwide service.
Our ability to compete effectively with these other providers will depend
on a number of factors, including the continued success of CDMA technology in
providing better call clarity and quality as compared to analog cellular
systems, Sprint PCS' competitive pricing with various options suiting individual
customer's calling needs, the continued expansion and improvement of the Sprint
PCS nationwide network, our extensive direct and indirect sales channels, our
centralized Sprint PCS customer care systems, and our selection of handset
options.
Some of our competitors have access to more licensed spectrum than the 10
or 20MHz licensed to Sprint PCS in some of our markets. Some of our competitors
also have established infrastructures, marketing programs and brand names. Some
of our competitors may be able to offer coverage in areas not served by our
network, or, because of their calling volumes or their affiliations with, or
ownership of, other wireless providers, may be able to offer roaming rates that
are lower than those offered by Sprint PCS. PCS operators compete with us in
providing some or all of the services available through the Sprint PCS network
and may provide services that we do not. Additionally, we expect that existing
cellular providers will continue to upgrade their systems to provide digital
wireless communication services competitive with Sprint PCS.
We also face limited competition from "resellers" which provide wireless
service to customers but do not hold FCC licenses or own facilities. Instead,
the reseller buys blocks of wireless telephone numbers and capacity from a
23
licensed carrier and resells service through its own distribution network to the
public. Thus, a reseller is both a customer of a wireless licensee's services
and also a competitor of that and other licensees. The FCC requires all cellular
and PCS licensees to permit resale of carrier service to resellers. Although
Sprint PCS is required to resell PCS in our markets, currently there is no
reseller of Sprint PCS in our markets. Any reseller of Sprint PCS in our markets
would be required to pay us for the use of our capacity and their use of the
Sprint PCS service marks in our markets would be restricted to describing their
handsets as operational on the Sprint PCS network
In addition, we compete with paging, dispatch and other mobile
telecommunications companies in our markets. Potential users of PCS systems may
find their communications needs satisfied by other current and developing
technologies. One or two-way paging or beeper services that feature voice
messaging and data display as well as tone-only service may be adequate for
potential customers who do not need immediate two-way voice communications.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and wireless cable systems. While few of
these technologies and services are currently operational, others are being
developed or may be developed in the future.
Over the past several years the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
Sprint PCS service. Based upon increased competition, we anticipate that market
prices for two-way wireless services generally will decline in the future. We
will compete to attract and retain customers principally on the basis of:
o the strength of the Sprint and Sprint PCS brand names, services and
features;
o the location of our markets;
o the size of our territory;
o national network coverage and reliability;
o customer care; and
o pricing.
Intellectual Property
"Sprint," the Sprint diamond design logo, "Sprint PCS," "Sprint Personal
Communications Services," "The Clear Alternative to Cellular" and "Experience
the Clear Alternative to Cellular Today" are service marks registered with the
United States Patent and Trademark Office. These service marks are owned by
Sprint. Pursuant to the trademark and service mark license agreements, we have
the right to use, royalty-free, the Sprint and Sprint PCS brand names and the
Sprint diamond design logo and other service marks of Sprint in connection with
marketing, offering and providing licensed services to end-users and resellers,
solely within our territory.
Except in limited instances, Sprint PCS has agreed not to grant to any
other person a right or license to provide or resell, or act as agent for any
person offering, licensed services under the licensed marks in our market areas
except as to Sprint PCS' marketing to national accounts and the limited right of
resellers of Sprint PCS to inform their customers of handset operation on the
Sprint PCS network. In all other instances, Sprint PCS reserves for itself and
its affiliates the right to use the licensed marks in providing its services,
subject to its exclusivity obligations described above, whether within or
without our territory.
The trademark license agreements contain numerous restrictions with respect
to the use and modification of any of the licensed marks. See "The Sprint PCS
Agreements -- The Trademark and Service Mark License Agreements."
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This document includes product names, trade names and trademarks of other
companies. We do not have any rights with respect to these product names, trade
names and trademarks.
The Sprint PCS Agreements
The following is a summary of the material terms and provisions of the
Sprint PCS agreements. The summary applies to the Sprint PCS agreements for
Horizon's wholly-owned subsidiaries, Horizon Personal Communications and Bright
PCS, except where otherwise indicated. We have filed the Sprint PCS agreements
as exhibits to the registration statement of which this is a part and urge you
to review them carefully.
Overview Of Sprint PCS Relationship And Agreements. Under the Sprint PCS
agreements, we exclusively market PCS services under the Sprint and Sprint PCS
brand names in our markets. The Sprint PCS agreements require us to interface
with the Sprint PCS wireless network by building our network to operate on PCS
frequencies licensed to Sprint PCS in the 1900 MHz range. The Sprint PCS
agreements also give us access to Sprint PCS' equipment discounts, roaming
revenue from Sprint PCS customers traveling into our territory, and various
other back office services. The Sprint PCS agreements provide strategic
advantages, including avoiding the need to fund up-front spectrum acquisition
costs and the costs of maintaining billing and other customer services
infrastructure. The Sprint PCS agreements have initial terms of 20 years with
three 10-year renewals which would lengthen the contracts to a total of 50
years. The Sprint PCS agreements will automatically renew for each additional
10-year term unless we or Sprint PCS provide the other with two years' prior
written notice to terminate the Sprint PCS agreements.
We have eight major agreements with Sprint and Sprint PCS (collectively,
the "Sprint PCS agreements"), consisting of one of each of the following for
Horizon Personal Communications and one for Bright PCS:
o the management agreement;
o the services agreement;
o the trademark and service mark license agreement with Sprint; and
o the trademark and service mark license agreement with Sprint PCS.
The Management Agreement. Under our Sprint PCS agreements, we have agreed
to:
o construct and manage a network in our territory in compliance with
Sprint PCS' PCS licenses and the terms of the management agreement;
o distribute, during the term of the management agreement, Sprint PCS
products and services;
o conduct advertising and promotion activities in our territory; and
o manage that portion of Sprint PCS' customer base assigned to our
territory.
Sprint PCS will monitor our network operations and has unconditional access
to our network.
Exclusivity. We are designated as the only person or entity that can manage
or operate a PCS network for Sprint PCS in our territory. Sprint PCS is
permitted under our agreement to make national sales to companies in our
territory, and the customers whose telephone numbers are in our markets are
treated by us and by Sprint PCS as our customers. The FCC also requires Sprint
PCS to permit resale of the Sprint PCS products and services in our territory.
Resellers of Sprint PCS products and services in our territory would be required
to pay us for the use of our capacity. Resellers of Sprint PCS services in our
markets may only use the Sprint PCS name and service marks to describe their
hand sets as operating on the Sprint PCS network.
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Network Build-Out: The management agreement specifies the terms of the
Sprint PCS affiliation, including the required network build-out plan. We have
agreed to operate our network to provide for a seamless handoff of a call
initiated in our territory to a neighboring Sprint PCS network.
Under our Sprint PCS agreements for Horizon Personal Communications, Sprint
PCS can decide to expand the coverage requirements of our territory by providing
us with written notice. We have 90 days after receiving notice from Sprint PCS
to determine whether we will build out the proposed area. If we decline to
exercise our right to build out the proposed area, Sprint PCS may construct the
new area itself or allow a Sprint PCS affiliate or other manager to construct
the new area.
Under our Sprint PCS agreements for Bright PCS, Sprint PCS can decide to
expand the coverage requirements of our Bright PCS territory by providing us
with written notice, provided that Sprint PCS may not give us notice until
October 12, 2001, which is the second anniversary of the signing of our Sprint
PCS agreement. If we decline or fail to comply with Sprint PCS' expanded
coverage requirements, Sprint PCS will have the right to terminate our Sprint
PCS agreement for our Bright PCS markets. We believe it is unlikely that Sprint
PCS will request additional coverage beyond the 85% coverage we have in place
for these markets. There is no cross default provision between our Sprint PCS
agreement for Horizon Personal Communications and the Sprint PCS agreements for
Bright PCS.
As of June 1, 2001 Sprint PCS and Horizon PCS agreed to an amendment to the
Horizon PCS management agreements. This amendment extended the dates by which
Horizon PCS must launch coverage in several markets The amended Horizon PCS
agreement provides for penalties to be paid to Sprint PCS if coverage is not
launched by the specified contract dates. The amounts of the penalties range
from $16,500 to as much as $602,000 for each shortfall depending on the market
and the length of the delay (up to 180 days) in launch, and in some cases,
whether the shortfall relates to an initial launch in the market or completion
of the remaining build-out. The penalties must be paid in cash, or if both
Horizon PCS and Sprint PCS agree, in shares of Horizon PCS capital stock.
Under the terms of our Sprint PCS agreements, we are required to provide
additional coverage in specified markets by the following dates:
Population To Be
Covered Requirement Estimated Total Population Covered
------------------- -------------------------- -------
July 31, 2001 294,980 154,414
August 31, 2001 32,234 16,971
September 30, 2001 64,714 38,752
October 31, 2001 1,244,198 763,689
February 28, 2002 560,000 147,365
We will require additional expenditures of significant funds for the
continued development, construction, testing, deployment and operation of our
network. These activities are expected to place significant demands on our
managerial, operational and financial resources.
Products And Services. The management agreement identifies the products and
services that we can offer in our territory. These services include Sprint PCS
consumer and business products and services available as of the date of the
agreements, or as modified by Sprint PCS. We are allowed to sell wireless
products and services that are not Sprint PCS products and services if those
additional products and services do not otherwise violate the terms of the
agreement, cause distribution channel conflicts, materially impede the
development of the Sprint PCS network, cause consumer confusion with Sprint PCS'
products and services or violate the trademark lease agreements. We may
cross-sell services such as Internet access, customer premise equipment, and
prepaid phone cards with Sprint, Sprint PCS and other Sprint PCS affiliates. If
we decide to use third parties to provide these services, we must give Sprint
PCS an opportunity to provide the services on the same terms and conditions. We
cannot offer wireless local loop services specifically designed for the
competitive local exchange market in areas where Sprint owns the local exchange
carrier unless we name the Sprint owned local exchange carrier as the exclusive
26
distributor or Sprint PCS approves the terms and conditions. Subject to
agreements existing before we became a Sprint PCS affiliate, we are required to
use Sprint's long distance service which we can buy at wholesale rates.
National Sales Programs. We will participate in the Sprint PCS sales
programs for national sales to customers, and will pay the expenses and receive
the compensation from national accounts located in our territory.
Service Pricing. We must offer Sprint PCS subscriber pricing plans
designated for regional or national offerings, including Sprint PCS' Free and
Clear plans. We are permitted to establish our own local price plans for Sprint
PCS' products and services offered only in our territory, subject to the terms
of the agreement, consistency with Sprint PCS' regional and national pricing
plans, regulatory requirements, capability and cost of implementing rate plans
in Sprint PCS systems and Sprint PCS' approval.
Fees. We are entitled to receive from Sprint PCS an amount equal to 92% of
collected revenues under the Sprint PCS agreements. Collected revenues include
revenue from Sprint PCS subscribers based in our territory, excluding outbound
roaming, and inbound non-Sprint PCS roaming. Except in the case of taxes, we are
entitled to 100% of the following revenues that are not considered collected
revenues:
o outbound non-Sprint PCS roaming revenue;
o inbound and outbound Sprint PCS roaming fees;
o proceeds from the sales of handsets and accessories through our
distribution channels;
o proceeds from sales not in the ordinary course of business; and
o amounts collected with respect to taxes.
Roaming. Although many Sprint PCS subscribers purchase bundled pricing
plans that allow roaming anywhere on the Sprint PCS' and affiliates' network
without incremental roaming charges, we earn roaming revenues from every minute
that a Sprint PCS subscriber not based in our territory and any non-Sprint
subscriber uses our network. We earn revenues from Sprint PCS based on an
established per-minute rate for Sprint PCS' or its affiliates' subscribers
roaming in our territory. Similarly, we pay for every minute our own subscribers
use the Sprint PCS nationwide network outside our territory. Recently we agreed
to reduce the per-minute reciprocal roaming rate, as discussed in more detail at
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 2. The analog roaming rate onto a non-Sprint PCS provider's
network is set under Sprint PCS' third-party roaming agreements.
Advertising And Promotions. Sprint PCS is responsible for all national
advertising and promotion of the Sprint PCS products and services. We are
responsible for advertising and promotion in our territory, including the pro
rata cost of any promotion or advertising done by any third-party retailers in
our territory pursuant to a national cooperative advertising agreement with
Sprint.
Program Requirements. We must comply with Sprint PCS' program requirements
for technical standards, customer service standards, national and regional
distribution and national accounts programs to the extent that Sprint PCS meets
these requirements. Sprint PCS can adjust the program requirements from time to
time. We have the right to appeal to Sprint PCS' management adjustments which
could cause an unreasonable increase in cost to us if the adjustment: (1) causes
us to incur a cost exceeding 5% of the sum of our equity plus our outstanding
long-term debt, or (2) causes our long term operating expenses to increase by
more than 5% (10% for Bright PCS) on a net present value basis. If Sprint PCS
denies our appeal, we must then comply with the program adjustment, or Sprint
PCS has the right to exercise the termination rights described below. There is
no cross default provision between the Sprint PCS agreements for Horizon
Personal Communications and the Sprint PCS agreements for Bright PCS.
Non-Competition. We may not offer Sprint PCS products and services outside
our territory without the prior written approval of Sprint PCS. Within our
territory we may offer, market or promote telecommunications products and
27
services only under the Sprint PCS brands, our own brand, brands of related
parties of ours or other products and services approved under the management
agreement, except that no brand of a significant competitor of Sprint PCS or its
related parties may be used for those products and services. To the extent we
have or obtain licenses to provide PCS services outside our territory, we may
not use the spectrum to offer Sprint PCS products and services without prior
written consent from Sprint PCS.
Inability To Use Non-Sprint PCS Brands. We may not market, promote,
advertise, distribute, lease or sell any of the Sprint PCS products and services
on a non-branded, "private label" basis or under any brand, trademark or trade
name other than the Sprint PCS brand, except for sales to resellers or as
otherwise permitted under the trademark and service mark license agreements.
Termination Of Management Agreement. The management agreement can be
terminated as a result of:
o termination of Sprint PCS' PCS licenses;
o an uncured breach under the management agreement;
o bankruptcy of a party to the management agreement;
o the management agreement not complying with any applicable law in any
material respect;
o the termination of either of the trademark and service mark license
agreements; or
o our failure to obtain the financing necessary for the build-out of our
network and for our working capital needs.
The termination or non-renewal of either of the management agreements
triggers our rights and those of Sprint PCS, as described below.
If we have the right to terminate the management agreement because of an
event of termination caused by a Sprint PCS breach under the management
agreement, we may generally:
o require Sprint PCS to purchase all of our operating assets used in
connection with our network for an amount equal to at least 80% of our
Entire Business Value as defined below;
o if Sprint PCS is the licensee for 20MHz or more of the spectrum on the
date the management agreement was executed, require Sprint PCS to sell
to us, subject to governmental approval, up to 10MHz of licensed
spectrum for an amount equal to the greater of (1) the original cost
to Sprint PCS of the license plus any microwave relocation costs paid
by Sprint PCS or (2) 9% of our Entire Business Value; or
o sue Sprint PCS for damages or submit the matter to arbitration and
thereby not terminate the management agreement.
If Sprint PCS has the right to terminate the management agreement because
of an event of termination caused by us, Sprint PCS may generally:
o require us to sell our operating assets to Sprint PCS for an amount
equal to 72% of our Entire Business Value;
o require us to purchase, subject to governmental approval, up to 10MHz
of licensed spectrum for an amount equal to the greater of (1) the
original cost to Sprint PCS of the license plus any microwave
relocation costs paid by Sprint or (2) 10% of our Entire Business
Value;
28
o take any action as Sprint PCS deems necessary to cure our breach of
the management agreement, including assuming responsibility for and
operating our network; or
o sue us for damages or submit the matter to arbitration and thereby not
terminate the management agreement.
Non-Renewal. If Sprint PCS gives us timely notice that it does not intend
to renew the management agreement, we may:
o require Sprint PCS to purchase all of our operating assets used in
connection with our network for an amount equal to 80% of our Entire
Business Value; or
o if Sprint PCS is the licensee for 20MHz or more of the spectrum on the
date the management agreement was executed, require Sprint PCS to sell
to us, subject to governmental approval, up to 10MHz of licensed
spectrum for an amount equal to the greater of (1) the original cost
to Sprint PCS of the license plus any microwave relocation costs paid
by Sprint PCS or (2) 10% of our Entire Business Value.
If we give Sprint PCS timely notice of non-renewal, or we both give notice
of non-renewal, or the management agreement can be terminated for failure to
comply with legal requirements or regulatory considerations, Sprint PCS may:
o purchase all of our operating assets for an amount equal to 80% of our
Entire Business Value; or
o require us to purchase, subject to governmental approval, the licensed
spectrum for an amount equal to the greater of (1) the original cost
to Sprint PCS of the license plus any microwave relocation costs paid
by Sprint PCS or (2) 10% of our Entire Business Value.
Determination Of Entire Business Value. If the Entire Business Value is to
be determined, we and Sprint PCS will each select one independent appraiser and
the two appraisers will select a third appraiser. The three appraisers will
determine the Entire Business Value on a going concern basis using the following
guidelines:
o the Entire Business Value is based on the price a willing buyer would
pay a willing seller for the entire on-going business;
o then-current customary means of valuing a wireless telecommunications
business will be used;
o the business is conducted under the Sprint and Sprint PCS brands and
the Sprint PCS agreements;
o that we own the spectrum and frequencies presently owned by Sprint PCS
that we use and are subject to the Sprint PCS agreements; and
o the valuation will not include any value for businesses not directly
related to the Sprint PCS products and services, and these businesses
will not be included in the sale.
Insurance. We are required to obtain and maintain workers' compensation
insurance, commercial general liability insurance, business automobile
insurance, umbrella excess liability insurance and "all risk" property insurance
with financially reputable insurers.
Indemnification. We have agreed to indemnify Sprint PCS and its directors,
employees and agents, and related parties of Sprint PCS and their directors,
employees and agents against any and all claims against any of these parties
arising from our violation of any law, a breach by us of any representation,
warranty or covenant contained in the management agreement or any other
agreement between us and Sprint PCS, our ownership of the operating assets or
29
the actions or the failure to act of anyone who is employed or hired by us in
the performance of any work under this agreement, except we will not indemnify
Sprint PCS for any claims arising solely from their negligence or willful
misconduct. Sprint PCS has agreed to indemnify us and our directors, employees
and agents against all claims against any of these parties arising from Sprint
PCS' violation of any law, from Sprint PCS' breach of any representation,
warranty or covenant contained in this agreement or any other agreement between
Sprint PCS and us, or the actions or the failure to act of anyone who is
employed or hired by Sprint PCS in the performance of any work under this
agreement except Sprint PCS will not indemnify us for any claims arising solely
from our negligence or willful misconduct.
Sprint PCS Warrants. In connection with Sprint PCS' grant to us of our new
markets in Pennsylvania, New York, Ohio and New Jersey, Horizon PCS agreed to
grant to Sprint PCS warrants to acquire shares of its class A common stock at
the earlier of (i) the date on which the Company closes an initial public
offering (IPO), or (ii) July 31, 2003. These warrants become exercisable on
January 1, 2003 in the case of an IPO. If these warrants are granted on July 31,
2003, they will be immediately exercisable. Under the terms of the warrant
agreement, in the case of an IPO, Sprint PCS is entitled to receive 2,510,460
shares, which number shall be no more than 4.2% and no less than 3.0% of the
Horizon PCS equity securities outstanding immediately after the offering. The
number of shares subject to the warrants will be adjusted, if necessary, to
reflect these limits. The exercise price will be equal to the initial public
offering price per share. If there has not been an IPO on or before July 31,
2003, the number of shares of common stock subject to the warrant will represent
3.0% of the "Private Valuation" of Horizon PCS (as determined by the appraisal
process set forth in the agreement) and the exercise price will be the lower of
the per share private valuation as of July 31, 2003, or the price per share of
the most recent negotiated private placement, if any, of Horizon PCS' equity
securities within the last twelve months. In either case, the exercise price is
subject to anti-dilution adjustments after the issuance of the warrant. Sprint
PCS will have registration rights for the shares subject to the warrants.
The Services Agreements. The services agreements outline back office
services provided by Sprint PCS and available to us at established rates. Sprint
PCS can change any or all of the service rates one time in each twelve month
period. Some of the available services include: billing, customer care,
activation, credit checks, handset logistics, home locator record, voice mail,
prepaid services, directory assistance, operator services, roaming fees, roaming
clearinghouse fees, interconnect fees and inter-service area fees. Sprint PCS
offers three packages of available services. Each package identifies which
services must be purchased from Sprint PCS and which may be purchased from a
vendor or provided in-house. Essentially, services such as billing, activation
and customer care must either all be purchased from Sprint PCS or we may provide
those services ourselves. When we signed our original Sprint PCS agreements, we
elected to provide billing, activation and customer care services on our own. In
connection with the May 2000 grant by Sprint PCS of additional markets to us, we
agreed to change our arrangement under the services agreement, so that Sprint
PCS will provide activation, billing and customer care. For our Bright PCS
markets and our new markets in Pennsylvania, New York and New Jersey, we intend
to launch these markets using Sprint PCS billing and customer care services.
Sprint PCS may contract with third parties to provide expertise and services
identical or similar to those to be made available or provided to us. We have
agreed not to use the services received under the services agreement in
connection with any other business or outside our territory. We may discontinue
use of any service upon three months' prior written notice. Sprint PCS may
discontinue a service provided that Sprint PCS provides us with nine months'
prior notice.
We have agreed with Sprint PCS to indemnify each other as well as officers,
directors, employees and other related parties and their officers, directors and
employees for violations of law or the services agreement except for any
liabilities resulting from the indemnitee's negligence or willful misconduct.
The services agreement also provides that no party to the agreement will be
liable to the other party for special, indirect, incidental, exemplary,
consequential or punitive damages, or loss of profits arising from the
relationship of the parties or the conduct of business under, or breach of, the
services agreement except as may otherwise be required by the indemnification
provisions. The services agreement automatically terminates upon termination of
the management agreement and neither party may terminate the services agreement
for any reason other than the termination of the management agreement.
The Trademark And Service Mark License Agreements. We have
non-transferable, royalty-free licenses to use the Sprint and Sprint PCS brand
names and "diamond" symbol, and several other U.S. trademarks and service marks
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such as "The Clear Alternative to Cellular" and "Clear Across the Nation" on
Sprint PCS products and services. We believe that the Sprint and Sprint PCS
brand names and symbols enjoy a very high degree of awareness, providing us an
immediate benefit in the marketplace. Our use of the licensed marks is subject
to our adherence to quality standards determined by Sprint and Sprint PCS and
use of the licensed marks in a manner which would not reflect adversely on the
image of quality symbolized by the licensed marks. We have agreed to promptly
notify Sprint and Sprint PCS of any infringement of any of the licensed marks
within our territory of which we become aware and to provide assistance to
Sprint and Sprint PCS in connection with Sprint's and Sprint PCS' enforcement of
their respective rights. We have agreed with Sprint and Sprint PCS to indemnify
each other for losses incurred in connection with a material breach of the
trademark license agreements. In addition, we have agreed to indemnify Sprint
and Sprint PCS from any loss suffered by reason of our use of the licensed marks
or marketing, promotion, advertisement, distribution, lease or sale of any
Sprint or Sprint PCS products and services other than losses arising solely out
of our use of the licensed marks in compliance with the contractual guidelines.
Sprint and Sprint PCS can terminate the trademark and service mark license
agreements if we file for bankruptcy, materially breach the agreement or our
management agreement is terminated. We can terminate the trademark and service
mark license agreements upon Sprint's or Sprint PCS' abandonment of the licensed
marks or if Sprint or Sprint PCS files for bankruptcy, or the management
agreement is terminated.
Consent And Agreement For The Benefit Of The Holders Of The Senior Secured
Credit Facility. Sprint PCS entered into a consent and agreement for the benefit
of the holders of the indebtedness under the senior secured credit facility.
This agreement was acknowledged by us, and modified Sprint PCS' rights and
remedies under our Sprint PCS agreements, for the benefit of the existing and
future holders of indebtedness under our senior secured credit facility and any
refinancing of the senior secured credit facility, which was a condition to the
funding of any amounts under our senior secured credit facility.
The senior secured consent principally provides for the following:
o Sprint PCS' consent to the pledge of substantially all of our assets,
including our rights in the Sprint PCS agreements;
o Sprint PCS' consent to the pledge of all our equity interests in
Horizon Personal Communications, Inc. and the pledge by Horizon
Personal Communications, Inc. of all of its equity interests in each
of its subsidiaries;
o for redirection of payments due to us under our Sprint PCS agreements
to the administrative agent during the continuation of our default
under our senior secured credit facility;
o for Sprint PCS to maintain 10 MHz of PCS spectrum in all of our
markets until our senior secured credit facility is satisfied or our
operating assets are sold after our default under our senior secured
credit facility;
o for Sprint PCS and the administrative agent to provide each other with
notices of default by us under the Sprint PCS agreements and the
senior secured credit facility, respectively; and
o the ability to appoint interim replacements, including Sprint PCS or a
designee of the administrative agent, to operate our portion of the
Sprint PCS network under the Sprint PCS agreements after an
acceleration of or event of default under our senior secured credit
facility or an event of termination under the Sprint PCS agreements.
Sprint PCS' right to purchase on acceleration of amounts outstanding under
our senior secured credit facility. Subject to the requirements of applicable
law, so long as our senior secured credit facility remains outstanding, Sprint
PCS has the right to purchase our operating assets or pledged equity of our
operating subsidiaries, upon its receipt of notice of an acceleration of our
senior secured credit facility upon the following terms:
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o Sprint PCS elects to make such a purchase of our operating assets
within a specified period;
o the purchase price of our operating assets is the greater of an amount
equal to 72% of our "entire business value" or the amount we owe under
our senior secured credit facility;
o if Sprint PCS has given notice of its intention to exercise the
purchase right for our operating assets, then the administrative agent
is prohibited from enforcing its security interest for a time period
after the acceleration or until Sprint PCS rescinds its intention to
purchase; and
o if we receive a written offer within a time period after acceleration
that is acceptable to us to purchase our operating assets or pledged
equity of our operating subsidiaries after the acceleration, then
Sprint PCS has the right to purchase our operating assets or pledged
equity of our operating subsidiaries on terms at least as favorable to
us as the offer we receive.
Sale of operating assets to third parties. If Sprint PCS does not purchase
our operating assets after an acceleration of the obligations under our senior
secured credit facility, then the administrative agent will be able to sell the
operating assets, subject to the requirements of applicable law, including the
law relating to foreclosures of security interests. The administrative agent
will have two options:
o to sell the assets to an entity that meets the requirements to be our
successor under the Sprint PCS agreements; or
o to sell the assets to any other third-party (including competitors of
Sprint PCS), principally subject to the condition that Sprint PCS does
not have to accept the third-party as a Sprint PCS affiliate and may
terminate our Sprint PCS agreements.
Regulation Of The Wireless Telecommunications Industry
The FCC regulates the licensing, construction, operation, acquisition and
interconnection arrangements of wireless telecommunications systems in the
United States.
The FCC has adopted, or is in the process of adopting, a series of rules,
regulations and policies to, among other things:
o grant or deny licenses for PCS frequencies;
o grant or deny PCS license renewals;
o rule on assignments and/or transfers of control of PCS licenses;
o govern the interconnection of PCS networks with the networks of other
wireless and wireline carriers;
o possibly facilitate the offering of a "calling party pays" service
which would require that a party who calls a subscriber would pay for
the call;
o establish access and universal service funding provisions in an effort
to raise funds to help defray the cost of providing telecommunications
services to rural and other high-cost areas;
o possibly permit commercial mobile radio service spectrum to be used
for transmission of programming material targeted to a limited
audience;
o impose fines and forfeitures for violations of any of the FCC's rules;
and
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o regulate the technical standards of PCS networks.
The FCC currently prohibits a single entity from having a combined
attributable interest of 20% or greater in broadband PCS, cellular, and
specialized mobile radio service licenses totaling more than 45 MHz in any urban
areas or 55 MHz in rural areas. Interests held by passive institutional
investors, small companies and rural telephone companies are not usually deemed
attributable for purposes of this prohibition if these interests do not exceed
40%.
Transfers And Assignments Of PCS Licenses. The FCC must give prior approval
to the assignment of, or transfers involving, substantial changes in ownership
or control of a PCS license. Non-controlling interests in an entity that holds a
PCS license or operates PCS networks generally may be bought or sold without
prior FCC approval. In addition, a recent FCC order requires only
post-consummation notification of certain pro forma assignments or transfers of
control.
Conditions Of PCS Licenses. All PCS licenses are granted for ten-year terms
conditioned upon timely compliance with the FCC's build-out requirements.
Pursuant to the FCC's build-out requirements, all 30 MHz broadband PCS licensees
must construct facilities that offer coverage to one-third of the population
within five years and to two-thirds of the population within ten years, and all
ten MHz broadband PCS licensees must construct facilities that offer coverage to
at least one-quarter of the population within five years or make a showing of
"substantial service" within that five-year period. Rule violations could result
in license revocations. The FCC also requires licensees to maintain a certain
degree of control over their licenses. The Sprint PCS agreements reflect an
arrangement that the parties believe meets the FCC requirements for licensee
control of licensed spectrum. If the FCC were to determine that our agreements
with Sprint PCS need to be modified to increase the level of licensee control,
the Sprint PCS agreements may be modified to cure any purported deficiency
regarding licensee control of the licensed spectrum.
PCS License Renewal. PCS licensees can renew their licenses for additional
ten-year terms. PCS renewal applications are not subject to auctions. However,
under the FCC's rules, third parties may oppose renewal applications and/or file
competing applications. If one or more competing applications are filed, a
renewal application will be subject to a comparative renewal hearing. The FCC's
rules afford PCS renewal applicants involved in comparative renewal hearings
with a "renewal expectancy." The renewal expectancy is the most important
comparative factor in a comparative renewal hearing and is applicable if the PCS
renewal applicant has: (1) provided "substantial service" during its license
term; and (2) substantially complied with all applicable laws and FCC rules and
policies. The FCC's rules define "substantial service" in this context as
service that is sound, favorable and substantially above the level of mediocre
service that might minimally warrant renewal.
Interconnection. The FCC has the authority to order interconnection between
commercial mobile radio providers and any other common carrier. The FCC has
ordered traditional telephone companies to provide compensation to commercial
mobile radio providers for the termination of traffic. Using these new rules, we
will negotiate interconnection agreements for the Sprint PCS network in our
market area with the major regional Bell operating companies, GTE, Sprint and
several smaller independent local exchange carriers. Interconnection agreements
are negotiated on a state-wide basis. If an agreement cannot be reached, parties
to interconnection negotiations can submit outstanding disputes to state
authorities for arbitration. Negotiated interconnection agreements are subject
to state approval. On July 18, 2000, the FCC adopted an order denying requests
for mandatory interconnection between resellers' switches and commercial mobile
radio providers' networks, and declining to impose general interconnection
obligations between these networks.
Other FCC Requirements. In June 1996, the FCC adopted rules that prohibit
broadband PCS providers from unreasonably restricting or disallowing resale of
their services or unreasonably discriminating against resellers. Resale
obligations will automatically expire on November 24, 2002. The FCC recently
decided that these prohibitions apply to services and not to equipment such as
handsets, whether alone or in bundled packages.
The FCC also adopted rules in June 1996 that require local exchange and
most commercial mobile radio carriers, to program their networks to allow
customers to change service providers without changing telephone numbers, which
is referred to as service provider number portability. The FCC currently
requires most commercial mobile radio carriers to implement nationwide roaming.
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Most commercial mobile radio carriers are required to implement nationwide
roaming by November 24, 2002 as well. The FCC currently requires most commercial
mobile radio providers to be able to deliver calls from their networks to
numbers anywhere in the country, and to contribute to the Local Number
Portability Fund.
The FCC has adopted rules permitting broadband PCS and other commercial
mobile radio providers to provide wireless local loop and other fixed services
that would directly compete with the wireline services of local telephone
companies. In June 1996, the FCC adopted rules requiring broadband PCS and other
commercial mobile radio providers to implement enhanced emergency 911
capabilities within 18 months after the effective date of the FCC's rules. Full
compliance with these rules must occur by October 1, 2001.
On June 10, 1999, the FCC initiated a regulatory proceeding (the
competitive networks proceeding) seeking comment from the public on a number of
issues related to competitive access to multiple-tenant buildings, including the
following:
o the FCC's tentative conclusion that the Communications Act of 1934, as
amended, requires utilities to permit telecommunications carriers
access to rooftop and other rights-of-way in multiple tenant buildings
under just, reasonable and nondiscriminatory rates, terms and
conditions; and
o whether building owners that make access available to a
telecommunications carrier should be required to make access available
to all other telecommunications carriers on a nondiscriminatory basis,
and whether the FCC has the authority to impose such a requirement.
On October 25, 2000, the FCC issued an order that addressed certain of the
issues in the competitive networks proceeding. Notably, the FCC:
o prohibits carriers from entering into contracts that restrict owners
of commercial office buildings from permitting access from competing
carriers;
o clarifies the FCC's rules governing control of in-building wiring;
o concludes that utilities that own conduits or rights-of-way within a
building must give non-discretionary access thereto; and
o concludes that parties with a direct or indirect ownership or
leasehold interest in property, including building tenants, should
have the ability to place antennas one meter or less in diameter used
to receive or transmit any fixed wireless service in certain areas.
This proceeding could affect the availability and pricing of sites for our
antennae and those of our competitors.
Communications Assistance For Law Enforcement Act. The Communications
Assistance for Law Enforcement Act was enacted in 1994 to preserve electronic
surveillance capabilities by law enforcement officials in the face of rapidly
changing telecommunications technology. This act requires telecommunications
carriers, including us, to modify their equipment, facilities, and services to
allow for authorized electronic surveillance based on either industry or FCC
standards. In 1997, industry standard-setting organizations developed interim
standards for wireline, cellular and broadband PCS carriers to comply with the
Communications Assistance for Law Enforcement Act. In August 1999, the FCC
supplemented the interim industry standards with additional standards. For
interim industry standards, the deadline for compliance was June 30, 2000, which
has since been extended to June 30, 2001, and for the additional standards
established by the FCC, the deadline is September 30, 2001. In August 2000, the
District of Columbia Circuit Court remanded the FCC's Communications Assistance
for Law Enforcement Act requirements, which has resulted in some uncertainty as
to the program. Although we will be able to offer traditional electronic
surveillance capabilities to law enforcement agencies, we may not meet the
compliance deadlines of either June 30, 2001 or September 30, 2001, due to
34
required hardware changes that have not yet been developed and implemented by
switch manufacturers. We may be granted extensions for compliance, or we may be
subject to penalties if we fail to comply, including being assessed fines or
having conditions put on our licenses.
Other Federal Regulations. Wireless systems must comply with FCC and FAA
regulations regarding the siting, lighting and construction of transmitter
towers and antennas. In addition, FCC environmental regulations may cause some
cell site locations to become subject to regulation under the National
Environmental Policy Act. The FCC is required to implement this Act by requiring
carriers to meet land use and radio frequency standards.
Review Of Universal Service Requirements. The FCC and the states are
required to establish a universal service program to ensure that affordable,
quality telecommunications services are available to all Americans. Sprint PCS
is required to contribute to the federal universal service program as well as
existing state programs. The FCC has determined that Sprint PCS' contribution to
the federal universal service program is a variable percentage of "end-user
telecommunications revenues." Although many states are likely to adopt a similar
assessment methodology, the states are free to calculate telecommunications
service provider contributions in any manner they choose as long as the process
is not inconsistent with the FCC's rules. At the present time it is not possible
to predict the extent of the Sprint PCS total federal and state universal
service assessments or its ability to recover from the universal service fund.
Wireless Facilities Siting. States and localities are not permitted to
regulate the placement of wireless facilities so as to prohibit the provision of
wireless services or to discriminate among providers of these services. In
addition, so long as a wireless system complies with the FCC's rules, states and
localities are prohibited from using radio frequency health effects as a basis
to regulate the placement, construction or operation of wireless facilities. The
FCC is considering numerous requests for preemption of local actions affecting
wireless facilities siting.
State Regulation Of Wireless Service. Section 332 of the Communications Act
preempts states from regulating the rates and entry of commercial mobile radio
providers, like us. However, states may petition the FCC to regulate these
providers and the FCC may grant a state's petition if the state demonstrates
that (1) market conditions fail to protect subscribers from unjust and
unreasonable rates or rates that are unjustly or unreasonably discriminatory, or
(2) when commercial mobile radio is a replacement for landline telephone service
within the state. To date, the FCC has granted no petition of this type. To the
extent we provide fixed wireless service, we may be subject to additional state
regulation.
Legislative And Regulatory Developments. The telecommunications industry is
subject to federal, state and local regulation. The application of these
regulations to our business segments is discussed above. A more general
description is set forth below.
Federal Regulations. The FCC regulates interstate and international
telecommunications services, which includes using local telephone facilities to
originate and terminate interstate and international calls. The
Telecommunications Act is intended to promote competitive development of new
service offerings, to expand public availability of telecommunications services
and to streamline regulation of the industry. Implementation of its legislative
objectives is the task of the FCC, state public utilities commissions and a
federal-state joint board. The Telecom Act makes all state and local barriers to
competitive entry unlawful, whether they are direct or indirect. The Telecom Act
directs the FCC to hold notice and comment proceedings and to preempt all
inconsistent state and local laws and regulations. Among the numerous pending
FCC proceedings are its Implementation of the Local Competition Provisions of
the Telecom Act proceeding (CC Docket No. 96-98), its Deployment of Wireline
Services Offering Advanced Telecommunications Capability proceeding (CC Docket
No. 98-147), and at least four proceedings relating to universal service and
access charge reform (CC Docket Nos. 94-1, 96-45, 96-262, 99-249).
In addition to opening up local exchange markets, the Telecom Act contains
provisions for:
o updating and expanding telecommunications service guarantees;
o removing certain restrictions relating to former AT&T operating
companies (the Regional Bell Operating Companies) resulting from the
federal court antitrust consent decree issued in 1984;
35
o the entry of telephone companies into video services;
o the entry of cable television operators into other telecommunications
industries;
o changes in the rules for ownership of broadcasting and cable
television operations; and
o changes in the regulations governing cable television.
Each state retains the power to impose "competitively neutral" requirements
that are both consistent with the Telecom Act's universal service provision and
necessary for universal service, public safety and welfare, continued service
quality and consumer rights. Although a state may not impose requirements that
effectively function as barriers to entry or create a competitive disadvantage,
the scope of state authority to maintain existing or adopt new requirements
under this section is not clear. In addition, before it preempts a state or
local requirement as violating the entry barrier prohibition, the FCC must hold
a notice and comment proceeding.
The FCC must forbear from applying any statutory or regulatory provision
that is not necessary to keep telecommunications rates and terms reasonable or
to protect consumers. A state may not apply a statutory or regulatory provision
that the FCC decides to forbear from applying. In addition, the FCC must review
its telecommunications regulations every two years and repeal or modify any that
it deems to be no longer in the public interest.
Although certain interpretive issues under the Telecom Act have not yet
been resolved, it is apparent that the requirements of the Telecom Act have led
to increased competition among providers of local telecommunications services
and have simplified the process of switching from incumbent local exchange
carrier services to those offered by competitive access providers and
competitive local exchange carriers.
The FCC regulates wireless services through its Wireless Telecommunications
Bureau. Providers of wireless mobile radio services are considered "common
carriers" and are subject to the obligations of such carriers, except where
specifically exempted by the FCC. As a result, our wireless operations and
business plans may be impacted by FCC regulatory activity. For example, the FCC
has concluded that commercial mobile radio service providers are entitled to
enter into reciprocal compensation arrangements with local exchange carriers.
The FCC has declined at this time to classify commercial mobile radio service
providers themselves as local exchange carriers subject to the obligations of
the Telecom Act, but could do so at some point in the future. Other regulatory
issues currently facing wireless carriers include issues relating to telephone
number administration. Because they are common carriers, wireless carriers are
subject to FCC and state actions regarding exhaustion, conservation or expansion
of telephone numbers and area codes. Programs to conserve or expand telephone
number and area code resources may possibly have a disproportionate impact on
wireless carriers because such carriers may not have a large reserve of spare
numbers, as wireline carriers may have, and so-called "area code overlay"
programs are sometimes imposed on wireless carriers alone, which forces their
customers to dial more digits for most local calls than wireline callers in the
same area. Within the past year, the FCC has issued an order asserting
jurisdiction over nearly all telephone numbering issues.
A cellular licensee must apply for FCC authority to use additional
frequencies to modify the technical parameters of existing licenses, to expand
its service territory and to provide new services. In addition to regulation by
the FCC, cellular systems are subject to certain Federal Aviation Administration
(FAA) tower height regulations with respect to the siting and construction of
cellular transmitter towers and antennas. The FCC also has a rulemaking
proceeding pending to update the guidelines and methods it uses for evaluating
acceptable levels of radio frequency emissions from radio equipment, including
cellular telephones, which could result in more restrictive standards for such
devices.
State And Local Regulation. We are also regulated by the Public Utilities
Commission of Ohio, which we also refer to as the PUCO, because we provide
intrastate telephone services within Ohio. As a result, we must comply with Ohio
pricing regulations, file periodic reports, pay various fees and comply with
rules governing quality of service, consumer protection and similar matters. The
rules and regulations are designed primarily to promote the public's interest in
36
receiving quality telephone service at reasonable prices. Our networks are
subject to numerous local regulations such as requirements for franchises,
building codes and licensing. Such regulations vary on a city by city and county
by county basis.
EMPLOYEES
At December 31, 2000, we had approximately 655 employees, of which 137 were
represented by a union. As of March 31, 2001 we had approximately 709 employees,
of which 137 were represented by a union We consider relations with our
employees to be good.
RISK FACTORS
You should carefully consider the risks described below in evaluating our
businesses.
Risks Related To Chillicothe Telephone, Long Distance And Internet Businesses
Significant competition in telecommunications services in our markets may
cause us to lose customers.
We face, or will face, significant competition in the markets in which we
currently provide local telephone, long distance, data and Internet services.
Many of our competitors are substantially larger and have greater financial,
technical and marketing resources than we do. In particular, larger competitors
have certain advantages over us, which could cause us to lose customers and
impede our ability to attract new customers, including:
o long-standing relationships and greater name recognition with
customers;
o financial, technical, marketing, personnel and other resources
substantially greater than ours;
o more capital to deploy services; and
o potential to lower prices of competitive services.
These factors place us at a disadvantage when we respond to our
competitors' pricing strategies, technological advances and other initiatives.
Additionally, our competitors may develop services that are superior to ours or
that achieve greater market acceptance.
We face competition from other current and potential market entrants,
including:
o domestic and international long distance providers seeking to enter,
re-enter or expand entry into our local communications marketplace;
o other domestic and international competitive communications providers,
resellers, cable television companies and electric utilities; and
o providers of broadband and Internet services.
A continuing trend toward combinations and strategic alliances in the
communications industry could give rise to significant new competitors. This
could cause us to lose customers and impede our ability to attract new
customers.
We may not be able to successfully integrate new technologies or respond
effectively to customer requirements.
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The communications industry is subject to rapid and significant changes in
technology, frequent new service introductions and evolving industry standards.
We cannot predict the effect of these changes on us or our industry.
Technological developments may reduce the competitiveness of our networks and
require unbudgeted upgrades or the procurement of additional products that could
be expensive and time consuming. If we fail to adapt successfully to
technological changes or obsolescence or fail to obtain access to important new
technologies, we could lose customers and be limited in our ability to attract
new customers.
If our back office and customer care systems are unable to meet the needs
of our customers, we may lose customers.
Sophisticated back office processes and information management systems are
vital to our anticipated growth and our ability to achieve operating
efficiencies. We are dependent on third-party vendors for billing, service and
customer support systems. We cannot assure you that these systems will perform
as expected as we increase our number of customers. If they fail to perform as
expected, we could lose customers. The following could prevent our back office
and customer care systems from meeting the needs of our customers:
o failure of third-party vendors to deliver products and services in a
timely manner at acceptable costs;
o our failure to identify key information and processing needs;
o our failure to integrate products or services effectively;
o our failure to upgrade systems as necessary; or
o our failure to attract and retain qualified systems support personnel.
Furthermore, as our suppliers revise and upgrade their hardware, software
and equipment technology, we could encounter difficulties in integrating this
new technology into our business or find that such new hardware, software and
technology is not appropriate for our business. In addition, our right to use
such hardware, software and technology depends upon license agreements with
third party vendors. Vendors may cancel or elect not to renew some of these
agreements, which may adversely affect our business.
Because we operate in a heavily regulated industry, changes in regulation
could have a significant effect on our revenues and compliance costs.
We are subject to significant regulation that could change in a manner
adverse to us.
We operate in a heavily regulated industry, and the majority of our
revenues generally have been supported by regulations, including in the form of
support for the provision of telephone services in rural areas. Laws and
regulations applicable to us and our competitors may be, and have been,
challenged in the courts, and could be changed by Congress or regulators at any
time. In addition, any of the following have the potential to have a significant
impact on us:
Risk of loss or reduction of network access charge revenues. Approximately
50% of our revenues in 2000 came from network access charges, which are paid to
us by intrastate carriers and interstate long distance carriers for originating
and terminating calls in the regions we serve. The amount of access charge
revenues that we receive is calculated based on guidelines set by federal and
state regulatory bodies, and such guidelines could change at any time. The FCC
continues to reform the federal access charge system. States often mirror these
federal rules in establishing intrastate access charges. It is unknown at this
time how changes to the FCC's access charge regime will affect us. Federal
policies being implemented by the FCC strongly favor access charge reform, and
our revenues from this source could be at risk. Regulatory developments of this
type could adversely affect our business.
Risk of loss or reduction of Universal Service Support. We receive
Universal Service Support Fund, or USSF, revenues to support the high cost of
our operations in rural markets. Such support payments represented 5% of
revenues in 2000. If Chillicothe Telephone were unable to receive support from
the Universal Service Support Fund, or if such support was reduced, Chillicothe
Telephone would be unable to operate as profitably as before such reduction.
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In addition, potential competitors generally cannot, under current laws,
receive the same universal service support enjoyed by Chillicothe Telephone.
Chillicothe Telephone therefore enjoys a significant competitive advantage,
which could, however, be removed by regulators at any time. The Telecom Act
provides that competitors could obtain the same support as we do if the Public
Utilities Commission of Ohio determines that granting such support to
competitors would be in the public interest. If such universal service support
were to become available to potential competitors, we might not be able to
compete as effectively or otherwise continue to operate as profitably in our
Chillicothe Telephone markets. Any shift in universal service regulation could,
therefore, have an adverse effect on our business.
The method for calculating the amount of such support could change in 2001.
It is unclear whether the chosen methodology will accurately reflect the costs
incurred by Chillicothe Telephone, and whether it will provide for the same
amount of universal service support that Chillicothe Telephone enjoyed in the
past. The outcome of any of these proceedings or other legislative or regulatory
changes could affect the amount of universal service support that we receive,
and could have an adverse effect on our business.
Risk of loss of protected status under interconnection rules. Chillicothe
Telephone takes the position that it does not have to comply with the Telecom
Act's more burdensome requirements governing the rights of competitors to
interconnect to our traditional telephone companies' networks due to our status
as a rural telephone company. If state regulators decide that it is in the
public's interest to impose these interconnection requirements on us, more
competitors could enter our traditional telephone markets than are currently
expected and we could incur additional administrative and regulatory expenses as
a result of such newly imposed interconnection requirements.
Risks posed by costs of regulatory compliance. Regulations create
significant compliance costs for us. Our subsidiary that provides intrastate
services is also generally subject to certification, tariff filing and other
ongoing regulatory requirements by state regulators. Challenges to these tariffs
by regulators or third parties could cause us to incur substantial legal and
administrative expenses.
Regulatory changes in the telecommunications industry involve
uncertainties, and the resolution of these uncertainties could adversely affect
our business by facilitating greater competition against us, reducing potential
revenues or raising our costs.
The Telecom Act provides for significant changes in the telecommunications
industry, including the local telecommunications and long distance industries.
This federal statute and the related regulations remain subject to judicial
review and additional rulemakings of the FCC, thus making it difficult to
predict what effect the legislation will have on us, our operations and our
competitors. Several regulatory and judicial proceedings have recently
concluded, are underway or may soon be commenced, that address issues affecting
our operations and those of our competitors, which may cause significant changes
to our industry. We cannot predict the outcome of these developments, nor can we
assure that these changes will not have a material adverse effect on us.
Present And Future Transactions With Horizon PCS May Be On Terms Which Are
Not As Favorable As Could Be Obtained From Third Parties.
In the past, we have entered into transactions with Horizon PCS including
the leasing of towers by Horizon PCS from us and the advancing of cash by us to
finance Horizon PCS' operations. In addition, under our former tax sharing
agreement with Horizon PCS, we used Horizon PCS' net operating losses to offset
our taxes. Under this agreement, we paid Horizon PCS the amount of our tax
savings from our net operating losses used for this purpose. In addition, a
subsidiary of Horizon Telcom provides administrative services to Horizon PCS
including finance functions, billing and collections, accounting services,
computer access, customer relations and human resources. Although these
transactions were and may be on terms that we believe are fair, third-parties or
the marketplace may not perceive them to be fair.
39
Risks Particular To Horizon PCS, Our Wireless Digital Communications Business
The information set forth under this heading describes risk factors
relating to the business of our majority-owned subsidiary Horizon PCS.
References under this heading to "we," "us" and "our" are to Horizon PCS.
We Have Not Had Any Profitable Years In The Past Five Years And We May Not
Achieve Or Sustain Operating Profitability Or Positive Cash Flow From Operating
Activities.
At Horizon PCS, we expect to incur significant operating losses and to
generate significant negative cash flow from operating activities until 2003
while we continue to construct our network and grow our customer base. We have
already incurred a total of approximately $76.9 million in net losses through
December 31, 2000. Our operating profitability will depend upon many factors,
including our ability to market our services, achieve our projected market
penetration and manage customer turnover rates. If we do not achieve and
maintain operating profitability and positive cash flow from operating
activities on a timely basis, we may not be able to meet our debt service
requirements, and Horizon Telcom could lose all or part of its investment in
Horizon PCS.
If We Do Not Successfully Manage our Anticipated Rapid Growth, We May Fail
To Complete The Build-Out Of Our Network, And Sprint PCS May Require Us To Pay
Substantial Penalties And Elect To Terminate The Sprint PCS Agreements. If
Sprint PCS Terminated The Sprint PCS Agreements We Would No Longer Be Able To
Offer Sprint PCS Products And Services From Which We Generate Substantially All
Our Revenues.
Our long-term affiliation agreements with Sprint PCS, which we refer to as
the Sprint PCS agreements, require us to build out and operate the portion of
the Sprint PCS network located in our territory, in accordance with Sprint PCS'
technical and coverage requirements. The agreements also require that we provide
minimum network coverage to the total population within each of the markets
which make up our territory by specified dates. If we fail to do so within
periods specified in the agreements, Sprint PCS may terminate them.
As of June 30, 2000, we had not yet met the minimum covered population
requirements under the Sprint PCS agreements for Roanoke, Fairmont,
Martinsville, Lynchburg, Staunton-Waynesboro, and Danville, Virginia. Sprint PCS
has agreed that the shortfalls were not material and agreed in writing that if
we met our build-out requirement in these markets by December 31, 2000, we would
not be in breach of our management agreement. We extended our coverage to meet
the build-out requirements in these markets by December 31, 2000.
In addition, we did not launch all of our Bright PCS markets by the date
set forth in the Sprint PCS agreements. We were unable to obtain the required
backhaul from local exchange carriers by that date, despite using commercially
reasonable efforts. Sprint PCS agreed in writing that we are in compliance with
the build-out requirements in these markets. We have subsequently obtained the
required backhaul services and launched these markets.
Portions of the Scranton, Pottsville, Stroudsburg and Allentown,
Pennsylvania and New York City area markets were initially required to be
completed by December 31, 2000. As of May, 2001, these markets had not been
fully launched. As of June 1, 2001 Sprint PCS and Horizon PCS agreed to an
amendment to the Horizon PCS management agreements. This amendment extended the
dates by which Horizon PCS must launch coverage in several markets. The amended
Horizon PCS agreement provides for penalties to be paid to Sprint PCS if
coverage is not launched by the specified contract dates. The amounts of the
penalties range from $16,500 to as much as $602,000 for each shortfall depending
on the market and the length of the delay (up to 180 days) in launch, and in
some cases, whether the shortfall relates to an initial launch in the market or
completion of the remaining build-out. The penalties must be paid in cash, or if
both Horizon PCS and Sprint PCS agree, in shares of Horizon PCS capital stock.
Under the terms of our Sprint PCS agreements, we are required to provide
additional coverage in specified markets by the following dates:
40
Population To Be
Covered Requirement Estimated Total Population Covered
------------------- -------------------------- -------
July 31, 2001 294,980 154,414
August 31, 2001 32,234 16,971
September 30, 2001 64,714 38,752
October 31, 2001 1,244,198 763,689
February 28, 2002 560,000 147,365
We will require additional expenditures of significant funds for the
continued development, construction, testing, deployment and operation of our
network. These activities are expected to place significant demands on our
managerial, operational and financial resources.
We Have Substantial Debt Which We May Not Be Able To Service And Which May
Result In Our Lenders Controlling Horizon PCS' Assets In An Event Of Default.
As of December 31, 2000, our total debt outstanding was $185.3 million,
$50.0 million of which was due under our senior secured credit facility and
$135.3 million of which was due under our senior discount notes (total debt
outstanding of $155.2 million less a $19.9 million unrecognized discount
associated with the warrants issued in connection with our senior discount notes
offering).
Our substantial debt will have a number of important consequences for our
operations and our investors, including the following:
o we have to dedicate a substantial portion of any cash flow from
operations to the payment of interest on, and principal of, our debt,
which will reduce funds available for other purposes;
o we may not have sufficient funds to pay interest on, and principal of,
our debt;
o we may not be able to obtain additional financing for currently
unanticipated capital requirements, capital expenditures, working
capital requirements and other corporate purposes;
o some borrowings likely will be at variable rates of interest, which
will result in higher interest expense in the event of increases in
market interest rates; and
o due to the liens on substantially all of our assets and the pledges of
equity ownership of our subsidiaries that secure our senior debt, our
lenders may control our assets upon a default.
If We Fail To Pay Our Debt, Our Lenders May Sell Our Loans To Sprint PCS
Giving Sprint PCS The Rights Of A Creditor To Foreclose On Our Assets.
If the lenders accelerate the amounts due under our new senior secured
credit facility, Sprint PCS has the right to purchase our obligations under this
facility and become a senior lender. To the extent Sprint PCS purchases these
obligations, Sprint PCS' interests as a creditor could conflict with ours.
Sprint PCS' rights as a senior lender would enable it to exercise rights with
respect to our assets and Sprint PCS' continuing relationship in a manner not
otherwise permitted under the Sprint PCS agreements.
If Sprint PCS Terminates The Sprint PCS Agreements, The Buy-Out Provisions
Of Those Agreements May Diminish The Valuation Of Our Company.
Provisions of the Sprint PCS agreements could affect the valuation of
Horizon PCS, and decrease our ability to raise additional capital. If Sprint PCS
terminates these agreements, Sprint PCS may purchase our operating assets or
capital stock for 80% of the entire business value. If the termination is due to
our breach of the Sprint PCS agreements, the percent is reduced to 72% instead
of 80%. Under our Sprint PCS agreements, the entire business value is generally
41
the fair market value of our wireless business valued on a going concern basis
as determined by an independent appraiser. In addition, Sprint PCS must approve
any change of control of our ownership and consent to any assignment of the
Sprint PCS agreements. Sprint PCS also has a right of first refusal if we decide
to sell our operating assets in our Bright PCS markets. We are also subject to a
number of restrictions on the transfer of our business including a prohibition
on selling our company or our operating assets to a number of identified and as
yet to be identified competitors of Sprint PCS or Sprint. These and other
restrictions in the Sprint PCS agreements may limit the marketability of and
reduce the value a buyer may be willing to pay for our company or its business
and may operate to reduce the entire business value of our company.
The Termination Of Our Strategic Affiliation With Sprint PCS Or Sprint PCS'
Failure To Perform Its Obligations Under The Sprint PCS Agreements Would
Severely Restrict Our Ability To Conduct Our Business.
Because we own only a single license to operate a wireless PCS network of
our own, our ability to offer Sprint PCS products and services on our network is
dependent on the Sprint PCS agreements remaining in effect and not being
terminated. Sprint PCS may terminate the Sprint PCS agreements for breach of any
material terms. We also depend on Sprint PCS' ability to perform its obligations
under the Sprint PCS agreements. The termination of the Sprint PCS agreements or
the failure of Sprint PCS to perform its obligations under the Sprint PCS
agreements would severely restrict our ability to conduct the wireless digital
communications business.
If Sprint PCS Does Not Complete The Construction Of Its Nationwide PCS
Network, We May Not Be Able To Attract And Retain Customers, Which Would
Adversely Affect Our Revenues.
Sprint PCS' network may not provide nationwide coverage to the same extent
as its competitors, which could adversely affect our ability to attract and
retain customers. Sprint PCS is creating a nationwide PCS network through its
own construction efforts and those of its affiliates. Today, neither Sprint PCS
nor any other PCS provider offers service in every area of the United States.
Sprint PCS has entered into, and anticipates entering into, affiliation
agreements similar to ours with companies in other territories pursuant to its
nationwide PCS build-out strategy. Our business and results of operations depend
on Sprint PCS' national network and, to a lesser extent, on the networks of its
other affiliates. Sprint PCS and its affiliate program are subject, to varying
degrees, to the economic, administrative, logistical, regulatory and other risks
described in this registration statement. Sprint PCS' and its other affiliates'
PCS operations may not be successful.
We are Dependent Upon Sprint PCS' Back Office Services And Third Party
Vendors' Back Office Systems, Problems with the Systems, or Termination of This
Arrangement Could Disrupt Our Business and Possibly Increase Our Costs.
Sprint PCS now provides our back office systems. Our operations could be
disrupted if Sprint PCS is unable to maintain and expand its back office
services, or to efficiently outsource those services and systems through third
party vendors. The rapid expansion of Sprint PCS' business will continue to pose
a significant challenge to its internal support systems. Additionally, Sprint
PCS has relied on third-party vendors for a significant number of important
functions and components of its internal support systems and may continue to
rely on these vendors in the future. We depend on Sprint PCS' willingness to
continue to offer these services to us and to provide these services at
competitive costs. The Sprint PCS agreements provide that, upon nine months'
prior written notice, Sprint PCS may elect to terminate any of these services.
If Sprint PCS terminates a service for which we have not developed a
cost-effective alternative, our operating costs may increase beyond our
expectations and restrict our ability to operate successfully.
We Depend On Other Telecommunications Companies For Some Services Which, If
Delayed, Could Delay Our Planned Network Build-Out And Delay Our Expected
Increases In Customers And Revenues.
We depend on other telecommunications companies to provide facilities and
transport to interconnect portions of our network and to connect our network
with the landline telephone system. American Electric Power, Ameritech, AT&T,
Verizon and GTE are our primary suppliers of facilities and transport. Without
these services, we could not offer Sprint PCS services to our customers in some
areas. From time to time, we have experienced delays in obtaining facilities and
transport from these companies, and in obtaining local telephone numbers for use
42
by our customers, which are sometimes in short supply, and we may continue to
experience delays and interruptions in the future. Delays in obtaining
facilities and transport could delay our build-out plans and our business may
suffer. Delays could also result in a breach of our Sprint PCS agreements,
subjecting these agreements to potential termination by Sprint PCS.
If We Do Not Meet All Of The Conditions Under The Horizon PCS Senior
Secured Credit Facility, We May Not Be Able To Draw Down All Of The Funds Under
The Facility And, As A Result, We May Not Be Able To Complete The Build-Out Of
Our Network, Which May Result In The Termination Of The Sprint PCS Agreements.
Our senior secured credit facility provides for aggregate borrowings of
$250.0 million of which $50.0 million was borrowed on September 26, 2000.
Availability of future borrowings will be subject to customary credit conditions
at each funding date, including the following:
o the absence of any default or event of default;
o the continuing accuracy of all representations and warranties; and
o no material adverse change.
If we do not meet these conditions at each funding date, our senior secured
lenders may choose not to lend any or all of the remaining amounts, and if other
sources of funds are not available, we may not be in a position to complete the
build-out of our network. If we do not have sufficient funds to complete our
network build-out, we may be in breach of the Sprint PCS agreements and in
default under our senior secured credit facility.
Material restrictions in our debt facilities may make it difficult to
obtain additional financing or take other needed actions to react to changes in
our business.
The indenture governing our senior discount notes and the senior secured
credit agreement both impose material operating and financial restrictions on
us. These restrictions, subject to ordinary course of business exceptions, may
limit our ability to engage in some transactions, including the following:
o designated types of mergers or consolidations;
o paying dividends or other distributions to our stockholders;
o making investments;
o selling assets;
o repurchasing our common stock;
o changing lines of business;
o borrowing additional money; and
o transactions with affiliates.
These restrictions could limit our ability to obtain debt financing,
repurchase stock, refinance or pay principal or interest on our outstanding
debt, consummate acquisitions for cash or debt or react to changes in our
operating environment.
An event of default under the senior secured credit facility may prohibit
us and the guarantors of our senior discount notes from paying the senior
discount notes or the guarantees of the senior discount notes.
43
The Terms Of The Convertible Preferred Stock May Affect Our Financial
Results.
If we do not complete an initial public offering of common stock that
yields gross proceeds of at least $65.0 million with a per share price for the
Horizon PCS common stock that exceeds $10.29 or consummate a business
combination with another Sprint PCS affiliate that meets specified criteria, our
convertible preferred stock will not convert into common stock. The terms of the
convertible preferred stock give the holders of the preferred stock the
following principal rights:
o to initially designate two members of our board of directors, subject
to reduction based on future percentage ownership;
o to approve or disapprove fundamental corporate actions and
transactions;
o to receive dividends in the form of additional shares of our
convertible preferred stock, which may increase and accelerate upon a
change in control; and
o to require us to redeem the convertible preferred stock.
If we become subject to the repurchase right or change of control
redemption requirements under the convertible preferred stock while our senior
debt or senior discount notes are outstanding, we will be required to seek the
consent of the holders of our senior debt and the holders of the senior discount
notes to repurchase or redeem the convertible preferred stock, or attempt to
refinance the debt and the senior discount notes. If we fail to obtain these
consents, there will be an event of default under the terms governing our senior
debt. In addition, if we do not repurchase or redeem the convertible preferred
stock and the holders of the convertible preferred stock obtain a judgment
against us, any judgment in excess of $5.0 million would constitute an event of
default under the indenture governing the senior discount notes.
If We Breach Our Agreement With SBA, Or It Otherwise Terminates Its
Agreement With Us, Our Right To Provide Wireless Service From Some Of Our Cell
Sites Will Be Lost.
We lease cell sites from SBA. We rely on our contract with SBA to provide
us with access to most of our cell sites and to the towers located on these
sites. If SBA were to lose its underlying rights to these sites, our ability to
provide wireless service from these sites would end, subject to our right to
cure defaults by SBA. If SBA terminates our agreement as a result of our breach,
we will lose our right to provide wireless services from most of our current
cell sites.
We May Have Difficulty In Obtaining Infrastructure Equipment And Handsets,
Which Are At Times In Short Supply, Which Could Result In Delays In Our Network
Build-Out, Disruption Of Service Or Loss Of Customers.
If we cannot acquire the equipment required to build our network in a
timely manner, we may be unable to provide wireless communications services
comparable to those of our competitors or to meet the requirements of the Sprint
PCS agreements. The demand for the equipment required to construct our network
is considerable, and manufacturers of this equipment could have substantial
order backlogs. Accordingly, the lead time for the delivery of this equipment
may be longer than anticipated. In addition, the demand for specific types of
handsets is strong and the manufacturers of those handsets may have to
distribute their limited supply of products among their numerous customers. Some
of our competitors purchase large quantities of communications equipment and may
have established relationships with the manufacturers of this equipment.
Consequently, they may receive priority in the delivery of this equipment. If we
do not obtain equipment or handsets in a timely manner, we could suffer delays
in the build-out of our network, disruptions in service and a reduction in
customers.
44
If The Alliances Fail To Provide Their Network To Us In Their Markets, Or
If Our Network Services Agreement With The Alliances Is Otherwise Terminated, We
Will Lose The Ability To Use The Alliances' Networks.
Under our network services agreement, the Alliances provide us with the use
of and access to key components of their network in most of our markets in
Virginia and West Virginia. We directly compete with the Alliances in some of
our other markets where we don't use their network. If the Alliances fail to
maintain the standards for their network as set forth in our network services
agreement with them or otherwise fail to provide their network for our use, our
ability to provide wireless services in these markets may be adversely affected,
and we may not be able to provide seamless service for our customers. If we
breach our obligations to the Alliances, or if the Alliances otherwise terminate
the network services agreement, we will lose our right to use the Alliances'
network to provide service in these markets. In that event, it is likely that we
will be required to build our own network in those markets and incur the costs
associated with doing so.
Sprint PCS' Vendor Discounts May Be Discontinued, Which Could Increase Our
Equipment Costs And Require More Capital Than We Project To Build Out Our
Network.
We intend to continue to purchase our infrastructure equipment under Sprint
PCS' vendor agreements that include significant volume discounts. If Sprint PCS
were unable to continue to obtain vendor discounts for its affiliates, the loss
of vendor discounts could increase our equipment costs for our new markets.
Conflicts With Sprint PCS May Not Be Resolved In Our Favor Which Could
Restrict Our Ability To Manage Our Business And Provide Sprint PCS Products And
Services, Adversely Affect Our Relationships With Our Customers, Increase Our
Expenses And Decrease Our Revenues.
Under the Sprint PCS agreements, Sprint PCS has a substantial amount of
control over the conduct of our business. Conflicts between us may arise, and as
Sprint PCS owes us no duties except as set forth in the Sprint PCS agreements,
these conflicts may not be resolved in our favor. The conflicts and their
resolution may harm our business. For example:
o Sprint PCS could price its national plans based on its own objectives
and could set price levels that may not be economically sufficient for
our business;
o Sprint PCS could decide not to renew the Sprint PCS agreements on the
following renewal dates, which would not be in our best interest or
that of our stockholders:
o the Sprint PCS agreements for Horizon Personal Communications
will come up for renewal on June 8, 2018;
o the Sprint PCS agreements for Bright PCS will come up for renewal
on October 13, 2019;
o Sprint PCS could increase the prices we pay for our back office
services;
o Subject to limitations under the Sprint PCS agreements, Sprint PCS may
alter its network and technical requirements or request that we
build-out additional areas within our markets, which could result in
increased equipment and build-out costs or in Sprint PCS building out
that area itself or assigning it to another affiliate; and
o Sprint or Sprint PCS could make decisions which could adversely affect
the Sprint and Sprint PCS brand names, products or services.
45
We May Not Be Able To Compete With Larger, More Established Wireless
Providers Who Have Resources To Competitively Price Their Products And Services,
Which Could Impair Our Ability To Attract And Retain Customers.
Our ability to compete will depend in part on our ability to anticipate and
respond to various competitive factors affecting the telecommunications
industry, including new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors. In each market, we compete with two cellular
providers which have had their infrastructure in place and have been operational
for a number of years. They have significantly greater financial and technical
resources than we do, could offer attractive pricing options and may have a
wider variety of handset options. We expect that existing cellular providers
will continue to upgrade their systems and provide expanded, digital services to
compete with the Sprint PCS products and services that we offer. Many of these
wireless providers generally require their customers to enter into long-term
contracts, which may make it more difficult for us to attract customers away
from them. Sprint PCS generally does not require its customers to enter into
long-term contracts, which may make it easier for other wireless providers to
attract Sprint PCS customers away from Sprint PCS. We will also compete with
several PCS providers and other existing communications companies in our
markets, and expect to compete with new entrants as the FCC licenses additional
spectrum to mobile services providers. A number of our cellular, PCS and other
wireless competitors have access to more licensed spectrum than the amount
licensed to Sprint PCS in most of our territory and therefore will be able to
provide greater network call volume capacity than our network to the extent that
network usage begins to reach or exceed the capacity of our licensed spectrum.
Our inability to accommodate increases in call volume could result in more
dropped or disconnected calls. In addition, any competitive difficulties that
Sprint PCS may experience could also harm our competitive position and success.
For further information on the Sprint PCS licensed spectrum in our markets, see
"Business - Digital Wireless Communications Services - Markets."
There Is No Uniform Signal Transmission Technology And If We Decide To Use
Other Technologies In The Future, This Decision Could Substantially Increase Our
Equipment Expenditures To Replace The Technology Used On Our Network.
The wireless telecommunications industry is experiencing evolving industry
standards. We have employed code division multiple access, known as CDMA
technology, which is the digital wireless communications technology selected by
Sprint PCS for its network. CDMA is a relatively new technology and may not
provide the advantages expected by us and by Sprint PCS. In addition to CDMA,
there are two other principal signal transmission technologies, time division
multiple access, or TDMA, and global systems for mobile communications, or GSM.
These three signal transmission technologies are not compatible with each other.
If one of these technologies or another technology becomes the preferred
industry standard, we may be at a competitive disadvantage and competitive
pressures may require Sprint PCS to change its digital technology which, in
turn, may require us to make changes at substantially increased costs.
We May Not Receive As Much Sprint PCS Roaming Revenue As We Anticipate And
Our Non-Sprint PCS Roaming Revenue Is Likely To Be Low.
We are paid a fee from Sprint PCS or a Sprint PCS affiliate for every
minute that a Sprint PCS subscriber based outside of our territory uses our
network. Similarly, we pay a fee to Sprint PCS or a Sprint PCS affiliate for
every minute that our customers use the Sprint PCS network outside our
territory. Our customers may use the Sprint PCS network outside our territory
more frequently than we anticipate, and Sprint PCS subscribers based outside our
territory may use our network less frequently than we anticipate. The fee for
each Sprint PCS roaming minute used is being changed from $0.20 per minute to
$0.15 per minute on June 1, 2001, $0.12 per minute on October 1, 2001, and to "a
fair and reasonable return," expected to be approximately $0.10 per minute, in
2002, and for the remainder of the term of the Sprint PCS agreements. The 2002
change has not yet been fully documented, and may not represent the final
arrangements. As a result, we may receive less Sprint PCS roaming revenue than
we anticipate or we may have to pay more Sprint PCS roaming fees than we
anticipate. Furthermore, we do not expect to receive substantial non-Sprint PCS
roaming revenue.
46
If Sprint PCS Customers Are Not Able To Roam Instantaneously Or Efficiently
Onto Other Wireless Networks, We May Suffer A Reduction In Our Revenues And
Number Of Customers.
The Sprint PCS network operates at a different frequency and uses or may
use a different signal transmission technology than many analog cellular and
other digital systems. To access another provider's analog cellular, TDMA or GSM
digital system when outside the territory served by the Sprint PCS network, a
Sprint PCS customer is required to utilize a dual-band/dual-mode handset
compatible with that provider's system. Generally, because dual-band/dual-mode
handsets incorporate two radios rather than one, they are more expensive, larger
and heavier than single-band/single-mode handsets. The Sprint PCS network does
not allow for call hand-off between the Sprint PCS network and another wireless
network, so a customer must end a call in progress on the Sprint PCS network and
initiate a new call when outside the territory served by the Sprint PCS network.
In addition, the quality of the service provided by a network provider during a
roaming call may not approximate the quality of the service provided by Sprint
PCS. The price of a roaming call may not be competitive with prices of other
wireless companies for roaming calls, and Sprint PCS customers may not be able
to use Sprint PCS advanced features, such as voicemail notification, while
roaming.
Parts Of Our Territories Have Limited Licensed Spectrum, And This May
Affect The Quality Of Our Service, Which Could Impair Our Ability To Attract Or
Retain Customers.
In the majority of our markets, Sprint PCS has licenses covering 20 or 30
MHz of spectrum. However, Sprint PCS has licenses covering only 10 MHz in parts
of our territory covering approximately 3.8 million residents out of a total
population of over 10.2 million residents, including our Fort Wayne and South
Bend, Indiana, markets. In the future, as our customers in those areas increase
in number, this limited licensed spectrum may not be able to accommodate
increases in call volume and may lead to increased dropped calls and may limit
our ability to offer enhanced services.
Non-Renewal Or Revocation By The FCC Of The Sprint PCS Licenses Would
Significantly Harm Our Business Because We Would No Longer Have The Right To
Offer Wireless Service Through Our Network.
We are dependent on Sprint PCS' licenses, which are subject to renewal and
revocation by the FCC. Sprint PCS' licenses in many of our territories will
expire as early as 2005 but may be renewed for additional ten year terms. There
may be opposition to renewal of Sprint PCS' licenses upon their expiration and
the Sprint PCS licenses may not be renewed. The FCC has adopted specific
standards to apply to PCS license renewals. For example, if Sprint PCS does not
demonstrate to the FCC that Sprint PCS has met the five-year construction
requirements for each of its PCS licenses, it can lose those licenses. Failure
to comply with these standards in our territory could cause revocation or
forfeiture of the Sprint PCS licenses for our territory or the imposition of
fines on Sprint PCS by the FCC.
We May Need More Capital Than We Currently Project To Complete The
Build-Out Of Our Network And A Delay Or Failure To Obtain Additional Capital
Could Adversely Affect Our Revenues.
The completion of our network build-out will require substantial capital.
Additional funds would be required in the event of:
o significant departures from our current business plan;
o unforeseen delays, cost overruns, unanticipated expenses; or
o regulatory, engineering design and other technological changes.
For example, it is possible that we will need substantial funds if we elect
to overbuild the territory currently served through our arrangements with the
Alliances. Due to our highly leveraged capital structure, additional financing
may not be available or, if available, may not be obtained on a timely basis and
on terms acceptable to us or within limitations permitted under our existing
debt covenants. Failure to obtain additional financing, should the need for it
47
develop, could result in the delay or abandonment of our development and
expansion plans, and we may be unable to fund our ongoing operations.
Unauthorized Use Of Our Network And Other Types Of Fraud Could Disrupt Our
Business And Increase Our Costs.
We will likely incur costs associated with the unauthorized use of our
network, including administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraud impacts interconnection
costs, capacity costs, administrative costs, fraud prevention costs and payments
to other carriers for unbillable fraudulent roaming. Although we believe that we
have a plan in place to implement appropriate controls to minimize the effect to
us of fraudulent usage, we cannot assure you that we will be successful.
Expanding Our Territory May Have A Material Adverse Effect On Our Business
And Reduce The Market Value Of Our Common Stock.
As part of our business strategy, we may expand our territory through the
grant of additional markets from Sprint PCS or through acquisitions of other
Sprint PCS affiliates. We will evaluate strategic acquisitions and alliances
principally relating to our current operations. These transactions may require
the approval of Sprint PCS and commonly involve a number of risks, including:
o difficulty assimilating acquired operations and personnel;
o diversion of management attention;
o disruption of ongoing business;
o inability to retain key personnel;
o inability to successfully incorporate acquired assets and rights into
our service offerings;
o inability to maintain uniform standards, controls, procedures and
policies; and
o impairment of relationships with employees, customers or vendors.
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business. In connection
with these transactions, we may also issue additional equity securities, incur
additional debt or incur significant amortization expenses related to goodwill
and other intangible assets.
If The Sprint PCS Agreements Do Not Comply With FCC Requirements, Sprint
PCS May Terminate The Sprint PCS Agreements, Which Could Result In Our Inability
To Provide Service.
The FCC requires that licensees like Sprint PCS maintain control of their
licensed spectrum and not delegate control to third-party operators or managers
like us. Although the Sprint PCS agreements reflect an arrangement that the
parties believe meets the FCC requirements for licensee control of licensed
spectrum, we cannot assure you that the FCC will agree with us. If the FCC were
to determine that the Sprint PCS agreements need to be modified to increase the
level of licensee control, we have agreed with Sprint PCS to use our best
efforts to modify the Sprint PCS agreements to comply with applicable law. If we
cannot agree with Sprint PCS to modify the Sprint PCS agreements, they may be
terminated. If the Sprint PCS agreements are terminated, we would no longer be a
part of the Sprint PCS network and we would have extreme difficulty in
conducting our business.
48
The Sprint PCS Agreements And Our Horizon PCS Certificate Of Incorporation
Include Provisions That May Discourage, Delay And Restrict Any Sale Of Horizon
PCS' Operating Assets Or Common Stock To The Possible Detriment Of Horizon
Telcom.
The Sprint PCS agreements restrict our ability to sell our operating assets
and common stock. Generally, Sprint PCS must approve a change of control of our
ownership and consent to any assignment of the Sprint PCS agreements. The Sprint
PCS agreements also give Sprint PCS a right of first refusal if we decide to
sell the operating assets of our Bright PCS markets to a third party. In
addition, provisions of our certificate of incorporation could also operate to
discourage, delay or make more difficult a change in control of our company. For
example, our Horizon PCS certificate of incorporation provides for:
o two classes of common stock, with our class B common stock having ten
votes per share;
o the issuance of preferred stock without stockholder approval; and
o a classified board, with each board member serving a three-year term.
The restrictions in the Sprint PCS agreements and the provisions of our
Horizon PCS certificate of incorporation could discourage any sale of Horizon
PCS' operating assets or common stock. This could have a material adverse effect
on the value of Horizon Telcom common stock.
Horizon PCS will Not Be Able To Receive The Tax Benefit Of Future Losses
Until Horizon PCS Begins To Generate Taxable Income.
From our inception until September 2000, we were included in the
consolidated federal income tax return of Horizon Telcom. Under the tax-sharing
agreement with Horizon Telcom, Horizon Telcom filed a consolidated tax return
and paid Horizon PCS an amount equal to the tax savings realized by Horizon
Telcom as a result of our taxable operating losses being used to offset
consolidated taxable income. As a result of the sale of convertible preferred
stock in September 2000, we are no longer included in Horizon Telcom's
consolidated tax return and, as a result, will no longer be able to recognize
any tax benefits from Horizon PCS' operating losses until Horizon PCS starts to
generate taxable income. In addition, as a result of this change in our tax
status, we recognized a tax liability of approximately $7.6 million. This
liability was paid by Horizon PCS.
We May Experience A High Rate Of Customer Turnover Which Would Increase Our
Costs Of Operations And Reduce Our Revenue And Prospects For Growth.
Our strategy to minimize customer turnover, commonly known as churn, may
not be successful. Our average monthly churn for 2000 was less than 2.6%. From
January 1 to May 31, 2001, our average monthly churn was approximately 2.3%. As
a result of customer turnover, we lose the revenue attributable to these
customers and increase the costs of establishing and growing our customer base.
The PCS industry has experienced a higher rate of customer turnover as compared
to cellular industry averages. The rate of customer turnover is affected by the
following factors, several of which are not within our ability to address:
o extent of network coverage;
o reliability issues such as blocked calls, dropped calls and handset
problems;
o non-use of phones;
o change of employment;
o the decision not to require our customers to sign contracts, unlike
most cellular providers that do require contracts;
49
o a lack of affordability;
o price competition;
o customer care concerns; and
o other competitive factors.
A high rate of customer turnover could adversely affect our competitive
position, results of operations and our costs of, or losses incurred in,
obtaining new customers, especially because we subsidize some of the cost of
initial purchases of handsets by our customers.
Because The Wireless Industry Has Experienced Higher Customer Additions And
Handset Sales In The Fourth Calendar Quarter As Compared To The Other Three
Calendar Quarters, A Failure By Us To Acquire Significantly More Customers In
This Quarter Could Have A Disproportionate Negative Effect On Our Results Of
Operations.
The wireless industry is historically dependent on fourth calendar quarter
results. Our overall results of operations could be significantly reduced if we
have a worse than expected fourth calendar quarter for any reason, including the
following:
o our inability to match or beat pricing plans offered by competitors;
o our failure to adequately promote Sprint PCS' products, services and
pricing plans;
o our inability to obtain an adequate supply or selection of handsets;
o a downturn in the economy of some or all of the markets in our
territory; or
o a poor holiday shopping season.
Wireless Providers Offering Services Based On Lower Cost Structures Or
Alternative Technologies And Current Uncertainties In The Wireless Market May
Reduce Demand For PCS.
Other wireless providers enjoy economies of scale that can result in a
lower cost structure for providing wireless services. Rapid technological
changes and improvements in the telecommunications market could lower other
wireless providers' cost structures in the future. These factors could reduce
demand for PCS because of competitors' ability to provide wireless services at a
lower price. There is also uncertainty as to the extent of customer demand as
well as the extent to which airtime and monthly recurring charges may continue
to decline. As a result, our future prospects, those of our industry, and the
success of PCS and other competitive services, remain uncertain.
Technological advances and industry changes could cause the technology used
on our network to become obsolete. We may not be able to respond to these
changes and implement new technology on a timely basis, or at an acceptable
cost.
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades in
existing analog wireless systems, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements and changes in end-user
requirements and preferences.
If we are unable to keep pace with these technological changes or changes
in the telecommunications market based on the effects of consolidation from the
Telecom Act or from the uncertainty of future government regulation, the
technology used on our network or our current business strategy may become
obsolete. In addition, wireless carriers are seeking to implement a new "third
50
generation," or "3G," technology throughout the industry. To date, this
technology has not been deployed on a commercial basis. If wireless carriers
adopt the 3G technology, we could come under competitive pressure to convert our
network. In addition, if Sprint adopts the 3G technology, it could require us to
convert our network after a specified phase-in period. The implementation of the
3G technology for our network could create significant costs. There can be no
assurance that we can implement the new 3G technology successfully on a
cost-effective basis. See "Business -- CDMA Technology."
Regulation By Government Agencies May Increase Our Costs Of Providing
Service Or Require Us To Change Our Services, Which Could Impair Our Financial
Performance.
The licensing, construction, use, operation, sale and interconnection
arrangements of wireless telecommunications systems are regulated to varying
degrees by the FCC, the FAA, and, depending on the jurisdiction, state and local
regulatory agencies and legislative bodies. Adverse decisions regarding these
regulatory requirements could negatively impact our operations and our cost of
doing business.
Use Of Hand-Held Phones May Pose Health Risks, Real or Perceived, Which
Could Result In The Reduced Use Of Our Services Or Liability For Personal Injury
Claims.
Media reports have suggested that radio frequency emissions from wireless
handsets may be linked to various health problems, including cancer, and may
interfere with various electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may discourage use of
wireless handsets or expose us to potential litigation. Any resulting decrease
in demand for our services, or costs of litigation and damage awards, could
impair our ability to profitably operate our business.
Forward-Looking Statements
This report contains certain "forward-looking statements," as defined in
Section 21E of the Securities Exchange Act of 1934, that are based on the
beliefs of our management, as well as assumptions made by, and information
currently available to, our management. We have based these forward-looking
statements on our current expectations and projections about future events and
trends affecting the financial condition of our business. These forward-looking
statements may differ materially and significantly from actual results because
they involve estimates, assumptions and uncertainties. In making these
forward-looking statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
All forward-looking statements should be viewed with caution.
These forward-looking statements are subject to risks, uncertainties and
assumptions about us, several of which are identified in this "Item 1.
Business-Risk Factors," and which include, among other things:
o changes in industry conditions created by the federal
Telecommunications Act of 1996 and related state and federal
legislation and regulations;
o recovery of the substantial costs which will result from the
implementation and expansion of our new businesses;
o retention of our existing customer base and our ability to attract new
customers;
o rapid changes in technology; and
o actions of our competitors.
These forward-looking statements are principally contained in the following
sections of this report:
o Item 1. Business; and
51
o Item 2. Financial Information - Management's Discussion and Analysis
of Financial Condition and Results of Operations.
In addition, in those and other portions of this report, the words and
phrases such as "expects," "estimates," "intends," "plans," "believes,"
"projection," "will continue" and "is anticipated" are intended to identify
forward-looking statements.
52
ITEM 2. Financial Information
Selected Financial Data
The following table sets forth our selected historical consolidated
financial and other data. We derived the financial data as of and for the five
years ended December 31, 2000, 1999, 1998, 1997 and 1996 from our audited
consolidated financial statements and the financial data as of March 31, 2001
and the three months ended March 31, 2001 and 2000 from our unaudited interim
financial statements. This data should be read in conjunction with our audited
consolidated financial statements and related notes for the years ended December
31, 2000, 1999 and 1998 and our interim financial statements as of March 31,
2001 and related notes included at Item 13 of this Form 10, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below.
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------------- ------------------------
2000 1999 1998 1997 1996 2001 2000
---- ---- ---- ---- ---- ---- ----
Financial Data
Operating Revenues $ 73,999,642 $ 49,406,480 $ 41,518,407 $ 37,493,461 $ 38,596,489 $ 30,633,418 $ 15,303,799
Operating Income (Loss) (37,142,923) (4,504,463) 2,038,267 3,372,840 4,720,357 (13,660,091) (3,180,626)
Net Income (Loss) (44,673,246) (4,481,098) (1,207,083) 1,853,184 9,356,782 (19,750,599)
(3,917,340)
Earnings (Loss) Per Share
of Common Stock (1) (129.03) (11.23) (3.03) 4.65 23.46 $ (55.62) (11.31)
Cash Dividends on Common
Stock 1,793,038 1,815,014 1,815,014 1,815,014 1,815,014 408,342 458,740
Dividends Per Share On
Common Stock (1) 4.60 4.55 4.55 4.55 4.55 1.15 1.15
MARCH 31,
DECEMBER 31, 2001
------------------------------------------------------------------------- ------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Financial Data
Property, Plant and
Equipment $170,960,204 $111,297,730 $112,026,207 $ 85,048,600 $ 67,222,082 $200,620,130
Total Assets $466,065,379 $101,713,365 $106,102,379 $107,433,495 $ 79,244,261 $447,859,741
Long Term Debt $205,283,104 $45,557,965 $53,180,442 $ 26,711,248 $ 20,315,618 $210,823.365
Convertible Preferred
Stock of Subsidiary $134,421,881 -- -- -- -- $137,054,862
Capital Expenditures $101,491,729 $17,799,773 15,984,218 $39,794,525 $ 9,295,251 $36,023,484
Other Data
Total Access Lines 37,824 36,832 36,554 34,918 33,546 38,105
Total Horizon PCS
Subscribers 66,447 13,749 2,091 346 NA 84,681
Total bright.net
Subscribers 17,239 14,544 11,760 7,022 NA 17,265
- ----------------
(1) Earnings (loss) and dividends per share have been adjusted to reflect the
change in number of shares caused by the three-for-one stock split in the
form of a stock dividend.
(2) Includes $16.55 Gain on Sale of SmarTView.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This discussion reflects the operations of Horizon Telcom, Inc. and its
subsidiaries, The Chillicothe Telephone Company, Horizon PCS, Inc., Horizon
Services, Inc., and United Communications, Inc. This discussion and analysis
should be read in conjunction with the consolidated financial statements and the
related notes.
Horizon Telcom operates primarily within two operating segments: landline
telephone services and personal communications services. See Note 3 of "Notes to
Consolidated Financial Statements" and Note 5 of "Notes to Interim Condensed
Consolidated Financial Statements" for additional financial information
regarding Horizon Telcom's operating segments.
At December 31, 2000, Chillicothe Telephone serviced 37,824 access lines in
Chillicothe, Ohio and the surrounding area. United Communications provided
Internet service to 17,239 customers through its bright.net Internet service.
At December 31, 2000, Horizon PCS had launched service in 38 markets
covering approximately 4.9 million residents, or approximately 48% of the total
population in its territory, and had 66,447 customers. As of March 31, 2001,
Horizon PCS had launched service covering 5.2 million residents, or
approximately 51% of the total population in its territory, and had 84,681
customers. On June 13, 2001, Horizon PCS announced it had signed its 100,000th
subscriber on June 8, 2001. We expect to launch all of our markets and be
offering service to approximately 6.7 million residents, or 66% of the total
population in our territory, by the end of 2001, at which time our planned
network build-out will be substantially complete in terms of he amount of
population covered. We anticipate that we will complete the last portion of our
required build-out under the Sprint PCS agreement in early 2002.
Sprint PCS has invested approximately $57.0 million to purchase the PCS
licenses in our territory and has incurred additional expenses for microwave
clearing. Under the Sprint PCS agreements, we manage our network on Sprint PCS'
licensed spectrum and have the right to use the Sprint and Sprint PCS brand
names.
HISTORY AND BACKGROUND
Horizon Telcom is a holding company which, in addition to its 92% (56.5% on
a fully diluted basis) ownership interest in Horizon PCS, owns 100% of
Chillicothe Telephone, a local telephone company in service for 105 years.
Horizon Telcom also owns 100% of Horizon Services, which provides administrative
services to Horizon PCS and other Horizon Telcom affiliates, and 100% of United
Communications, a separate long distance and Internet services business. Prior
to providing PCS service, one of the Horizon PCS subsidiaries operated a DirecTV
affiliate. We sold that business in 1996. We also launched our Internet services
business in 1995, which we transferred from Horizon PCS to United Communications
in April 2000.
Horizon Telcom is a facilities-based telecommunications carrier that
provides a variety of voice and data services to commercial, residential/small
business and local market segments. Horizon Telcom provides landline telephone
service, VDSL cable television service, and Internet access services to the
southern Ohio region, principally in and surrounding Chillicothe, Ohio. Horizon
Telcom also provides PCS operations to a twelve-state region in the Midwest,
including Ohio, Indiana, Virginia, and West Virginia, as an affiliate of Sprint
PCS.
The following are key milestones in Horizon PCS' business:
o In November 1996, we acquired PCS licenses in the FCC's C Block
auction giving us the right to provide service to five markets in
Ohio, West Virginia and Kentucky with a total population of
approximately 1.0 million.
54
o In June 1998, we returned all of our FCC licenses except for a portion
of the license covering our Chillicothe, Ohio market, and agreed to
become one of five charter Sprint PCS affiliates. Our initial grant of
markets from Sprint PCS consisted of seven markets in Ohio, West
Virginia and Kentucky with a total population of approximately 1.6
million. This grant included the five markets for which we originally
held licenses. We continued to use Horizon Personal Communications as
the primary brand for marketing our PCS service.
o In August 1999, Sprint PCS granted us 17 additional markets in
Virginia, West Virginia, Tennessee, Maryland, Kentucky and Ohio with a
total population of approximately 3.3 million. In conjunction with
this second grant, we also entered into a network services agreement
with the West Virginia PCS Alliance and Virginia PCS Alliance, which
we refer to as the Alliances. The Alliances are two related
independent PCS providers offering services under the NTELOS brand,
and whose network is managed by CFW Communications. Under this
agreement, we obtained the right to use their wireless network to
provide Sprint PCS services to our customers in most of these new
markets.
o In September 1999, Horizon Telcom, sold its interest in the towers it
owned to SBA for $15.7 million and invested the net proceeds in
Horizon PCS. Prior to the sale, Horizon PCS had been leasing the
towers from Horizon Telcom. Horizon PCS now leases those towers from
SBA. Horizon PCS also has a build-to-suit agreement with SBA for the
construction of new towers as part of the network build-out. Horizon
PCS receives site development fees and reduced lease rates for
specified towers constructed by SBA and leased by Horizon PCS as an
anchor tenant of SBA.
o In September 1999, an Horizon PCS subsidiary became one of the
founders of Bright PCS, receiving a 26% equity stake in exchange for
approximately $3.1 million. Bright PCS became the exclusive Sprint PCS
affiliate for 13 markets in Indiana, Ohio and Michigan, with a total
population of approximately 2.4 million. We launched service in
substantially all of the Bright PCS markets in October 2000.
o In December 1999, we completed a two-month transition from a
co-branded marketing strategy to marketing and selling all of our
products and services exclusively under the "Sprint PCS" brand name,
which gave us full access to Sprint PCS' major national retailers.
Since that transition, we have experienced an accelerated growth in
our customer base.
o In May 2000, Sprint PCS granted us an additional 17 markets in
Pennsylvania, New York, Ohio and New Jersey with a total population of
approximately 2.9 million. In September 2000, we substantially
completed the purchase from Sprint PCS of the assets related to our
new markets.
o In June 2000, we acquired the remaining 74% of Bright PCS equity that
we did not already own. As consideration, we exchanged 4.7 million
shares of Horizon PCS' class B common stock equal to 8% of its
outstanding shares of all classes of its common stock prior to the
acquisition and 31,912 shares of Horizon Telcom common stock equal to
8% of the outstanding shares of Horizon Telcom, which Horizon PCS
acquired in February 2000.
o On September 26, 2000, an investor group led by Apollo Management
purchased $126.5 million of Horizon PCS convertible preferred stock in
a private placement. Concurrently, holders of Horizon PCS' $14.1
million short-term convertible note (including accrued interest of
$1.1 million) converted it into the same convertible preferred stock
purchased by the investor group. Concurrently, Horizon PCS received
$149.7 million from the issuance of $295.0 million of senior discount
notes due 2010 and $50.0 million of term loans from its $225.0 million
senior secured credit facility (later increased to a $250.0 million
facility).
55
RESULTS OF OPERATIONS
The landline telephone services operating segment consists of basic local
and long-distance service and network access services.
IntraLATA, i.e., the area of southern Ohio, including Columbus originally
covered by area code 614, and basic local exchange long-distance service revenue
consists of flat rate services and measured services billed to customers
utilizing Chillicothe Telephone's telephone network. Long distance
intraLATA/interstate revenue consists of message services that terminate beyond
the basic service area of the originating wire center.
Network access revenue consists of revenue derived from the provision of
exchange access services to an interexchange carrier or to an end user beyond
the exchange carrier's network.
The personal communications services operating segment consists primarily
of PCS subscriber revenues, Sprint PCS roaming revenues, non-Sprint PCS roaming
revenues and PCS equipment sales. PCS subscriber revenues consist primarily of
monthly service fees and other charges billed to our customers for Sprint PCS
service in our territory under a variety of service plans. Roaming revenues
consist of Sprint PCS roaming and travel and non-Sprint PCS roaming and travel.
We receive Sprint PCS roaming revenues at a per minute rate from Sprint PCS or
another Sprint PCS affiliate when Sprint PCS subscribers based outside of our
territory use our portion of the Sprint PCS network. Non-Sprint PCS roaming
revenues include payments from wireless service providers, other than Sprint
PCS, when those providers' subscribers roam on our network.
We record 100% of PCS subscriber revenues from our customers, Sprint PCS
roaming revenues from Sprint PCS subscribers based outside our markets and
non-Sprint PCS roaming revenues. Sprint PCS retains 8% of all collected service
revenue as a management fee. Collected service revenues include PCS subscriber
revenues and non-Sprint PCS roaming revenues, but exclude Sprint PCS roaming
revenues and revenues from sales of equipment. We report the amounts retained by
Sprint PCS as selling, general and administrative expenses.
PCS equipment sales consist of digital handsets and accessories sold to our
customers. Certain of our equipment sales are made through independent
distributors under agreements allowing rights of return on merchandise unsold by
the distributors. We defer recognition of such sales until the merchandise is
sold by the distributors.
Other revenues include Internet access services, equipment systems sales,
information services and paging services.
Internet access revenues for our bright.net services are monthly service
fees and other charges billed to our bright.net customers. Service fees
primarily consist of monthly recurring charges billed to customers.
Equipment system sales, information services, paging and other revenues
consist of sales made by Chillicothe Telephone to various businesses or other
residential customers for equipment used on the telephone system. Each year a
telephone directory is published which provides a source of revenue from yellow
page advertising. Revenue also consists of operator services, local directory
assistance, and paging services, the latter provided by United Communications
until its divestiture of that business in December, 2000.
56
The following tables set forth a breakdown of operating revenues by
segment.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2000 1999 1998
------------- -------- -------------- ------ ------------- -------
AMOUNT % AMOUNT % AMOUNT %
(Dollars in thousands, except PCS ARPU)
Landline telephone services $ 34,819 47% $ 34,612 70% $ 32,387 78%
Personal communication equipment and
services 29,171 39% 4,920 10% 780 2%
Other revenues 10,010 14% 9,874 20% 8,351 20%
--- --------- --- --------- -- ----------
Total revenues $ 74,000 $ 49,406 $ 41,518
=== ========= === ========= == ==========
PCS ARPU (including roaming) (1) $ 75 $ 64 $ 46
PCS ARPU (excluding roaming) (1) 51 55 44
Three months ended March 31,
---------------------------------------
2001 2000
---------------- -------------------
AMOUNT % AMOUNT %
(Dollars in thousands, except PCS ARPU)
---------------------------------------
Landline telephone services $ 9,223 30% $ 9,279 60%
Personal communication equipment and
services 19,212 63% 3,611 24%
Other revenues 2,198 7% 2,414 16%
------------- -------------
Total revenues $ 30,633 $ 15,304
============= =============
PCS ARPU (including roaming) (1) $ 80 $ 60
PCS ARPU (excluding roaming) (1) 53 48
- ---------------
(1) ARPU, average revenue per unit, is an industry term that measures total PCS
service revenues per month from our subscribers divided by the average
number of digital subscriber units for that month. ARPU, including roaming,
is ARPU with Sprint PCS roaming and travel and non-Sprint PCS roaming and
travel. ARPU excluding roaming excludes Sprint PCS roaming and travel and
non-Sprint PCS roaming and travel.
57
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Operating Revenues
Landline Telephone Services
2001 2000 $ change % change
---- ---- -------- --------
(Dollars in thousands)
----------------------
Basic local and long-distance service $4,194 $4,450 $(256) (6%)
Network access 5,029 4,829 200 4%
Basic local and long-distance service revenue as well as network access
revenues were essentially flat to the comparable prior year period.
Long-distance service revenue decreased for the three months ended March 31,
2001 as the company continues to see lower usage for long distance service. We
expect this trend to continue for the foreseeable future, as more customers use
wireless devices where long distance is included for one monthly fee.
Personal Communication Equipment And Services
2001 2000 $ change % change
---- ---- -------- --------
(Dollars in thousands)
----------------------
PCS service revenue $18,136 $2,992 $15,144 506%
PCS equipment revenue 1,076 619 457 74%
The growth in PCS service revenues is the result of the growth in our
customer base as well as an increase in travel and roaming revenue. Subscriber
revenues increased $9.5 million for the three months ended March 31, 2001. We
had 84,681 customers at March 31, 2001, compared to 19,838 at March 31, 2000. We
believe our customer base has grown because we have launched additional markets.
Roaming revenues increased $5.6 million in the first quarter of 2001
compared to the same period in 2000. This increase primarily resulted from the
continued build out of our network, including highways covering northwest Ohio,
northern Indiana and western Pennsylvania. We expect continued volume increases
in Sprint PCS roaming revenues as we complete the remainder of our network
build-out, including completing other portions of our network covering
additional heavily traveled highways.
On April 27, 2001, Sprint PCS and its affiliates agreed on a new travel
rate structure, decreasing the per minute receivable and payable for travel
usage from its pervious amount of $0.20 per minute to $0.15 per minute on June
1, 2001, $0.12 per minute on October 1, 2001, and a cost return basis
(approximately $0.10 per minute) on January 1, 2002. We expect this decrease in
the rate to reduce our overall revenue and expense per minute. We anticipate
this rate reduction to be offset by volume increases resulting in greater
overall travel revenue and expense in the future.
PCS ARPU excluding roaming and travel increased for the three months ended
March 31, 2001 compared to the three months ended March 31, 2000 to $53 from $48
primarily as a result of the mix of the packages our customers have selected.
Our subscribers have selected packages with higher monthly recurring charges.
PCS equipment revenues consist of handsets and accessories sold to
customers. Equipment revenues for the three months ended March 31, 2001 were
$1.1 million, compared to $600,000 for the three months ended March 31, 2000, an
increase of $500,000. The increase in equipment revenues is the result of our
increase in customers. We added 18,234 customers in the first quarter of 2001
compared to 6,089 in the first quarter of 2000.
58
Other Revenues
2001 2000 $ change % change
---- ---- -------- --------
(Dollars in thousands)
----------------------
Internet access services $ 765 $ 958 $(193) (20%)
Equipment systems sale, information
services, and other revenues 1,433 1,457 (24) (2%)
Other revenues were essentially flat for the three months ending March 31,
2001 compared to the same period in 2000, as increased directory advertising
revenue was offset by lower internet access revenue.
Operating Expenses
Cost of goods sold. Cost of goods sold primarily includes the costs of
handsets and accessories sold to customers. Cost of goods sold also includes, to
a lesser extent, the cost of business system sales incurred by Chillicothe
Telephone. Cost of goods sold for the three months ended March 31, 2001 was $2.3
million, compared to $1.8 million for the three months ended March 31, 2000, an
increase of $500,000. The increase in the cost of goods sold is the result of
the growth in our wireless customers partially offset by the decreasing unit
cost of the handsets. We added 18,234 customers in the first quarter of 2001
compared to 6,089 in the first quarter of 2000. For competitive and marketing
reasons, we have sold handsets to our customers below our cost and expect to
continue to sell handsets at a price below our cost for the foreseeable future.
Cost of services. Cost of services for Chillicothe Telephone and United
includes the support, switching, access, and circuitry expenses utilized for
maintaining telephone service. Cost of services also includes expenses related
to the startup of Chillicothe Telephone's VDSL television service. Cost of
services for Horizon PCS includes site rent, utilities, maintenance, engineering
and network personnel, interconnection expenses, Sprint PCS roaming fees,
non-Sprint roaming fees, and other expenses related to operations. Horizon PCS
pays Sprint PCS roaming fees to Sprint PCS when Horizon PCS' customers use
Sprint PCS' network outside of our territory. Horizon PCS pays non-Sprint PCS
roaming fees to other wireless service providers when our customers use their
networks. Also included in cost of services are costs incurred under Horizon
PCS' network services agreement with the Alliances. Horizon PCS pays the
Alliances a per minute use charge whenever our customers or Sprint PCS
subscribers use their network.
Under Horizon PCS' build-to-suit agreement with SBA, Horizon PCS receives
site development fees for towers SBA constructs and leases to Horizon PCS. Each
site development fee received is recorded as a deferred credit and is amortized
over the term of the lease, thereby effectively reducing our tower lease
expense. During the three months ended March 31, 2001, Horizon PCS recorded
approximately $200,000 as a reduction to lease expense. As of March 31, 2001,
Horizon PCS has received but not recognized site development fees totaling $7.4
million.
Cost of services for the three months ended March 31, 2001 was $19.3
million, compared to $5.9 million for the three months ended March 31, 2000, an
increase of $13.4 million. Chillicothe Telephone and United cost of services
increased $500,000 from the three months ended March 31, 2000 to the three
months ended March 31, 2001. This increase was a result of increased web design,
Bright.net, network access and the startup of the VDSL product.
Horizon PCS' increase ($12.9 million) in cost of services reflects the
increase in roaming fees of $3.3 million, an increase in costs incurred under
our network services agreement with the Alliances of $3.2 million, the increase
in network operations, including tower lease expense, of $3.1 million, network
payroll expense of $1.1 million, and an increase in other variable expenses,
including long distance toll charges, of $2.2 million. We anticipate the travel
rate reduction to be offset by volume increases resulting in greater overall
travel expense in the future.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist of sales and marketing expenses and general and
administrative costs. Sales and marketing expenses relate to salaries and
59
commissions paid to our sales representatives and sales support personnel,
commissions paid to national and local third party distribution channels,
operating costs associated with our retail stores, costs associated with
distribution channels, handset subsidies on units sold by third parties for
which we do not record revenue, and marketing and advertising programs. General
and administrative costs relate to corporate personnel, including executives and
customer care, as well as certain back office services, including customer
activation, billing and customer care, performed by Sprint PCS. The transition
to Sprint PCS back office services was completed in June 2001. The 8% of
collected service revenues retained by Sprint PCS is also included in selling,
general and administrative costs.
Selling, general and administrative expenses rose to $17.5 million for the
three months ended March 31, 2001, compared to $8.0 million for the same period
in 2000, an increase of $9.5 million. Horizon PCS' increase was $10.0 million,
while the decrease at Chillicothe Telephone and United was $500,000 for the
three months ended March 31, 2001 compared to the same period in the prior year.
Chillicothe Telephone and United's decrease was a result of lower costs of
services provided by Horizon Services and less outside service expenses.
The Horizon PCS increase reflects the 8% fee paid to Sprint PCS on our
increased collected service revenues (an increase of $800,000), the costs of
servicing an increased coverage area including 17 storefronts at March 31, 2001
compared to 3 at March 31, 2000 and the related marketing of the increased
service area (increase of $3.7 million), additional customer support personnel
and associated activities (an increase of $1.3 million), commissions paid to
national and local third party distribution channels (an increase of $800,000),
increased subsidies paid to third party vendors for handsets sold (an increase
of $1.2 million), increased headcount and professional services at Horizon
Services needed to support our growth (an increase of $800,000) and the increase
in other general expenses (an increase of $1.4 million). We expect selling,
general and administrative expenses to increase in the aggregate as we expand
our coverage and add customers, but to decrease as a percentage of revenues.
Non-cash compensation expense. For the three months ended March 31, 2001
and 2000, we recorded stock-based compensation expense of approximately $110,000
and $263,000, respectively, for certain stock options granted in November 1999.
Stock-based compensation expense will continue to be recognized through the
conclusion of the vesting period for these options in 2005. The annual non-cash
compensation expense expected to be recognized is approximately $441,000 in
2001, $413,000 in 2002, $389,000 in 2003, $193,000 in 2004, and $71,000 in 2005.
In addition, in the second quarter of 2001, Horizon PCS will record $725,000 of
non-cash compensation expense for the Horizon Telcom stock distributed to
employees in April 2001.
Depreciation and amortization expense. Depreciation and amortization
expenses increased by $2.6 million to a total of $5.1 million in 2001. The
increase reflects the continuing construction of our PCS network as well as
capital additions for VDSL and other telephone services. Because our acquisition
of Bright PCS was accounted for as a purchase transaction, amortization will
increase as a result of amortizing the intangible assets.
At September 30, 2000, Horizon PCS recorded an intangible asset of $13.4
million for the value of warrants we agreed to grant to Sprint. These warrants
will be amortized over the remaining term of the Sprint PCS management
agreement, resulting in $752,000 of amortization expense per year. Amortization
expense for the three months ended March 31, 2001 was approximately $188,000.
The warrants will be issued to Sprint at the earlier of an initial public
offering of Horizon PCS' common stock or July 31, 2003. If the warrants are
issued in conjunction with an initial public offering of Horizon PCS' common
stock, the exercise price will be equal to the initial public offering price per
share. If there is not an initial public offering, the exercise price will be
the lower of a per share private valuation as of July 31, 2003 or the price per
share of the most recent negotiated private placement of Horizon PCS' equity
securities.
Subsidiaries preferred stock dividend. Horizon PCS convertible preferred
stock pays a stock dividend at the rate of 7.5% per annum, payable semi-annually
commencing April 30, 2001. For the three months ended March 31, 2001, we accrued
a stock dividend of $2.6 million. On May 1, 2001, Horizon PCS issued an
additional 116,386 shares of preferred stock in payment of the stock dividends
through April 30, 2001.
Interest income and other, net. Interest income and other for the three
months ended March 31, 2001 was $3.0 million and consisted primarily of interest
income of approximately $2.7 million and other miscellaneous income of
approximately $300,000. Interest income was generated from cash proceeds from
Horizon PCS' private equity sales, senior subordinated discount notes and
60
drawings under the senior secured credit facility, all completed on September
26, 2000. The proceeds were invested in short-term accounts waiting to be
deployed. As capital expenditures are made to complete the build-out of our
network, decreasing cash balances will result in lower daily interest income in
the future.
Interest expense, net. Aggregate interest expense for the three months
ended March 31, 2001 was $6.8 million, compared to $1.2 million in 2000, and
consisted of interest on debt. The increase in interest expense is the result of
our additional debt outstanding during the three months ended March 31, 2001
compared to the same period in 2000.
Chillicothe Telephone's line of credit resulted in additional interest
expense of $300,000 in 2001. Chillicothe Telephone's line of credit accrues
interest on the outstanding balance at a fluctuating rate tied to the LIBOR rate
(6.6% as of March 31, 2001) and is due and payable monthly. The outstanding
balance at March 31, 2001 was $14.0 million.
Horizon PCS interest expense for the three months ended March 31, 2001 was
$6.2 million, and consisted of interest on debt. Interest on Horizon PCS' senior
secured credit facility accrues at LIBOR plus our specified margin
(approximately 9.1% at March 31, 2001). Horizon PCS accrues interest at a rate
of 14% per annum on the senior subordinated discount notes through October 1,
2005 and will pay interest semi-annually in cash thereafter. Non-cash interest
expense also included the amortized amount of deferred financing fees related to
the senior secured credit facility, senior subordinated discount notes, and the
amortization of the related warrants. Total non-cash interest expense for the
three months ended March 31, 2001 was $5.7 million. We expect our interest
expense to increase in the future as we borrow under the senior credit facility
to fund the network build out and operating losses. We are currently negotiating
several changes in the senior credit facility. If they are agreed upon, they
will be accompanied by a 0.25% increase in the annual interest rate.
In the first quarter of 2001, Horizon PCS entered into a two year interest
rate swap effectively fixing $25.0 million of a term loan at a rate of 9.4%.
Horizon PCS does not expect the effects of the swap to have a material impact to
interest expense for the remainder of 2001. Other comprehensive income may
fluctuate based on changes in the fair value of the swap instrument. An other
comprehensive loss of $299,000 was recorded as of March 31, 2001.
Income tax expense (benefit). Income tax expense was approximately $678,000
for the three months ended March 31, 2001 compared to a benefit of approximately
$100,000 for the three months ended March 31, 2000. As a result of the sale of
Horizon PCS convertible preferred stock in September 2000, Horizon PCS will not
be able to participate in the tax sharing agreement with its parent nor will
Horizon Telcom be able to recognize any net operating loss benefits from Horizon
PCS. We expect to continue to record income tax expense as a result of this tax
deconsolidation.
Minority interest in loss. As part of the acquisition of Bright Personal
Communication Services, LLC (Bright), the former members of Bright have a 7.974%
ownership in Horizon PCS, excluding the impact of the possible conversion of
convertible preferred stock and exercise of options and warrants. Horizon Telcom
accounts for this ownership by recording the portion of net income (loss)
attributable to the minority shareholders as minority interest in earnings
(loss) in the accompanying consolidated statement of operations. For the three
months ended March 31, 2001, approximately $1.0 million of the net loss for the
year was allocated to the minority interest, reducing the minority interest
balance to zero. There will not be any further allocations to minority interests
until such time as Horizon PCS becomes profitable and any unallocated losses to
minority interests are offset with income in future periods.
61
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Operating Revenues
Landline telephone services 2000 1999 $ change % change
---- ---- -------- --------
(Dollars in thousands)
----------------------
Basic local and long-distance service $17,543 $17,103 $440 3%
Network access 17,276 17,509 (233) (1%)
Basic local and long-distance service revenue increased from $17.1 million
in 1999 to $17.5 million in 2000, an increase of $400,000 or 3%. This increase
was primarily caused by the increase in the number of access lines, from 36,832
at December 31, 1999 to 37,824 at December 31, 2000, as well as increased
enhanced services.
Network access revenues were essentially flat to the comparable prior year
period, decreasing from $17.5 million in 1999 to $17.3 million in 2000, a
$200,000 decrease or 1%. This decrease is attributable to a decrease in access
rates.
Personal Communication Equipment and Services
2000 1999 $ change % change
---- ---- -------- --------
(Dollars in thousands)
PCS service revenue $26,110 $4,320 $21,790 505%
PCS equipment revenue 3,061 600 2,461 410%
PCS service revenues for the year ended December 31, 2000 were $26.1
million, compared to $4.3 million for the year ended December 31, 1999, an
increase of $21.8 million. The growth in revenues is the result of the growth in
our customer base as well as an increase in travel and roaming revenue.
Subscriber revenues increased $14.0 million for the year ended 2000. We had
66,447 customers at December 31, 2000, compared to 13,749 at December 31, 1999.
We believe our customer base has grown because we have launched additional
markets, increased our sales force and are now marketing under the Sprint PCS
brand rather than our own.
Roaming revenues increased $7.8 million in 2000 compared to 1999. This
increase primarily resulted from the launch of portions of our network covering
two heavily traveled interstate highways in western Virginia in the fourth
quarter of 1999, as well as our launch of our northwest Ohio and northern
Indiana markets in the fourth quarter of 2000. We expect continued increases in
Sprint PCS roaming revenues attributable to volume as we complete the remainder
of our network build-out, including completing other portions of our network
covering additional heavily traveled highways. These volume-based increases in
roaming revenues may be offset in large measure over the next two years by the
expected reduction in the per minute Sprint PCS roaming rate.
PCS ARPU excluding roaming decreased from the year ended December 31, 1999
to the year ended December 31, 2000 primarily as a result of the change in the
mix of the packages our subscribers have selected. During 2000, our subscribers
selected packages with lower monthly recurring charges made available to our
subscribers as a result of our seasonal promotions. The decrease caused by the
change in the mix of packages was partially offset by the increase in the
charges to our subscribers for minute sensitive usage (long distance and
overage) and the growth in our Sprint PCS roaming revenues. PCS ARPU including
roaming increased in the year ended December 31, 2000 as compared to the same
period in 1999, as a result of the increase in roaming revenue from customers
other than our own on our network. We expect PCS ARPU including roaming to
decrease due to the reduction in the Sprint PCS roaming rate.
PCS equipment revenues consist of handsets and accessories sold to
customers. Equipment revenues for the year ended December 31, 2000 were $3.1
million, compared to $600,000 for the year ended December 31, 1999, an increase
of $2.5 million. The increase in equipment revenues is the result of our
increase in customers.
62
Other Revenues
2000 1999 $ change % change
---- ---- -------- --------
(Dollars in thousands)
----------------------
Internet access services $3,621 $3,141 $480 15%
Equipment systems sale, information
services and other revenues 6,388 6,733 (345) (5%)
Internet access services increased from $3.1 million in 1999 to $3.6
million in 2000, an increase of $500,000 or 15%. The number of bright.net
customers increased by 2,695, from 14,544 at December 31, 1999 to 17,239 at
December 31, 2000, accounting for the increase in revenue.
Other revenue decreased from 1999 to 2000 from $6.7 million to $6.4
million, a $300,000 decrease or 5%. Chillicothe Telephone business system sales
decreased approximately $200,000 due to four large account sales in 1999 that
did not recur in 2000. In addition, Chillicothe Telephone's maintenance contract
revenue decreased by approximately $100,000 during 2000. Management expects the
sale of its paging business to have a minimal impact on revenues and earnings.
Operating Expenses
Cost of goods sold. Cost of goods sold primarily includes the costs of
handsets and accessories sold to customers. Cost of goods sold also includes, to
a lesser extent, the cost of business system sales incurred by Chillicothe
Telephone. Cost of goods sold for the year ended December 31, 2000 was $10.5
million, compared to $3.5 million for the year ended December 31, 1999, an
increase of $7.0 million. The increase in the cost of goods sold is the result
of the growth in our wireless customers (13,749 customers at December 31, 1999
compared to 66,447 at December 31, 2000), partially offset by the decreasing
unit cost of the handsets. For competitive and marketing reasons, we have sold
handsets to our customers below our cost and expect to continue to sell handsets
at a price below our cost for the foreseeable future.
Chillicothe Telephone experienced reduced revenue for business system
sales, resulting in a lower cost of goods sold. This resulted in a reduction to
2000 cost of goods sold of $300,000. The increase in PCS handset cost of goods
sold accounted for $7.3 million of the total cost of goods sold increase. This
was partially offset by the reduction in cost of goods sold for the Chillicothe
Telephone business system sales.
Cost of services. Cost of services for Chillicothe Telephone and United
Communications includes the support, switching, access, and circuitry expenses
utilized for maintaining telephone service. Cost of services also includes
expenses related to the startup and installation of Chillicothe Telephone's VDSL
television service and United Communications' computer solutions consulting
business. Cost of services for Horizon PCS includes site rent, utilities,
maintenance, engineering and network personnel, interconnection expenses, Sprint
PCS roaming fees, non-Sprint roaming fees, and other expenses related to
operations. Horizon PCS pays Sprint PCS roaming fees to Sprint PCS when Horizon
PCS' customers use Sprint PCS' network outside of our territory. Horizon PCS
pays non-Sprint PCS roaming fees to other wireless service providers when our
customers use their networks. Also included in cost of services are costs
incurred under Horizon PCS' network services agreement with the Alliances.
Horizon PCS pays the Alliances a per minute use charge whenever our customers or
Sprint PCS subscribers use their network.
Under Horizon PCS' build-to-suit agreement with SBA, Horizon PCS receives
site development fees for towers SBA constructs and leases to Horizon PCS. Each
site development fee received is recorded as a deferred credit and is amortized
over the term of the lease, thereby effectively reducing our tower lease
expense. During 2000, Horizon PCS recorded $320,000 as a reduction to lease
expense. As of December 31, 2000, Horizon PCS has received but not recognized
site development fees totaling $6.9 million.
Cost of services for the year ended December 31, 2000 was $35.3 million,
compared to $15.1 million for the year ended December 31, 1999, an increase of
$20.2 million. Chillicothe Telephone and United Communications cost of services
increased $3.6 million from the year ended December 31, 1999 to the year ended
63
December 31, 2000. This increase was a result of increased telephone and network
costs of $700,000, additional expenses at United Communications related to
startup services for its consulting business, including Web design, of $600,000,
VDSL expenses of $800,000 resulting from the installation and startup of the
VDSL product, $500,000 from increased access line fees for bright.net Internet
service, and other miscellaneous expenses, including operator service fees,
maintenance and labor, regular telephone installation, and other expenses, which
increased in aggregate by $1.0 million for the year ended 2000.
Horizon PCS' increase ($16.6 million) in cost of services reflects the
increase in roaming fees of $5.8 million, an increase in costs incurred under
our network services agreement with the Alliances of $6.7 million, $1.5 million
of additional costs for rent expense for the additional towers leased and $2.6
million of network operational and payroll expenses. Cost of services for
Horizon PCS has declined as a percentage of revenues, and we believe that these
costs will continue to decline as a percentage of revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist of sales and marketing expenses and general and
administrative costs. Sales and marketing expenses relate to salaries and
commissions paid to our sales representatives and sales support personnel,
commissions paid to national and local third party distribution channels,
operating costs associated with our retail stores, costs associated with
distribution channels, handset subsidies on units sold by third parties for
which we do not record revenue, and marketing and advertising programs. General
and administrative costs relate to corporate personnel, including executives and
customer care. The 8% of collected service revenues retained by Sprint PCS is
included in selling, general and administrative costs.
In May 2000, Horizon PCS agreed to begin purchasing certain back office
services, including customer activation, billing and customer care, directly
from Sprint PCS. Previously, we provided these services ourselves. We will
purchase these services from Sprint PCS at rates which reflect Sprint PCS'
economies of scale. We expect that the total cost of these services will be at
or below the total cost of providing the services ourselves due to anticipated
rate reductions and Sprint PCS' ability to economically manage the support of
new services. We also believe this arrangement will allow us to more quickly
roll out new Sprint PCS products and services in our markets. During the third
quarter of 2000, we launched new markets using Sprint PCS back office services.
We also began to transition our existing customers to Sprint PCS' back office
services in the third quarter of 2000. The transition to Sprint PCS' back office
services should be completed by the end of 2001. At December 31, 2000, more than
half of our customers were serviced via Sprint PCS back office services.
Selling, general and administrative expenses rose to $51.5 million for the
year ended December 31, 2000, compared to $25.7 million for the same period in
1999, an increase of $25.8 million. Chillicothe Telephone and United
Communications incurred a decrease in selling, general and administrative
expenses of $300,000 for the year ended December 31, 2000 compared to the same
period in the prior year. This decrease was a result of less consulting fees in
2000 versus 1999, as well as lower allocations of Horizon Services expenses to
Chillicothe Telephone.
Horizon PCS' increase was $26.1 million. The Horizon PCS increase reflects
the 8% fee paid to Sprint PCS on our increased collected service revenues (an
increase of $1.2 million), the costs of servicing an increased coverage area
including 16 storefronts at December 31, 2000 compared to 3 at December 31, 1999
and the related marketing of the increased service area (increase of $7.6
million), additional customer support personnel and associated activities (an
increase of $1.8 million), commissions paid to national and local third party
distribution channels (an increase of $2.8 million), increased subsidy paid to
third party vendors for handsets sold (an increase of $4.0 million) increased
headcount and professional services at Horizon Services needed to support our
growth (an increase of $3.6 million), the increase in building and maintenance
expenses ($1.4 million), the increase in consulting, legal and bank fees
($900,000), Sprint PCS support charges ($900,000), an increase in uncollectible
accounts receivable ($1.4 million) and an increase in management payroll and
benefits at Horizon Telcom needed to support our growth (increase of $500,000).
We expect selling, general and administrative expenses to increase in the
aggregate as we expand our coverage and add customers, but to decrease as a
percentage of revenues.
Non-cash compensation expense. For the years ended December 31, 2000 and
1999, we recorded stock-based compensation expense of $852,718 and $2,671,
respectively, for certain stock options granted in November 1999. Stock-based
64
compensation expense will continue to be recognized through the conclusion of
the vesting period for these options in 2005. The annual non-cash compensation
expense expected to be recognized is approximately $441,000 in 2001, $413,000 in
2002, $389,000 in 2003, $193,000 in 2004, and $71,000 in 2005.
Depreciation and amortization expense. Depreciation and amortization
expenses increased by $3.5 million to a total of $13.1 million in 2000. The
increase reflects the continuing construction of our PCS network as well as
capital additions for VDSL and other telephone services. Because our acquisition
of Bright PCS was accounted for as a purchase transaction, amortization will
increase as a result of amortizing the intangible assets. Our sale of towers to
SBA reduced the amount of depreciation expense, but that decrease is more than
offset by the overall increase in our depreciable assets.
At September 30, 2000, Horizon PCS recorded an intangible asset of $13.4
million for the value of warrants we agreed to grant to Sprint. These warrants
will be amortized over the remaining term of the Sprint PCS management
agreement, resulting in $752,000 of amortization expense per year. Amortization
expense for the year ended December 31, 2000 was approximately $188,000.
Subsidiaries preferred stock dividend. Horizon PCS convertible preferred
stock pays a stock dividend at the rate of 7.5% per annum, payable semi-annually
commencing April 30. For the year ended December 31, 2000, we recorded the
accrual of a stock dividend payable in additional stock of $2.8 million.
Interest income and other, net. Interest income and other in 2000 was $4.7
million and consisted primarily of interest income of approximately $4.2 million
and other miscellaneous income of approximately $500,000. Interest income was
generated from cash proceeds from Horizon PCS' private equity sales, senior
subordinated discount notes and drawings under the senior secured credit
facility, all completed on September 26, 2000. The proceeds were invested in
short-term accounts waiting to be deployed. As capital expenditures are made to
complete the build-out of our network, decreasing cash balances may result in
lower daily interest income in the future.
Interest expense, net. Aggregate interest expense for the year ended
December 31, 2000 was $12.2 million, compared to $3.6 million in 1999, and
consisted of interest on debt. The increase in interest expense is the result of
our additional debt outstanding during the year ended December 31, 2000 compared
to the same period in 1999. We expect our interest expense to increase in the
future as we borrow under our senior credit facility to fund our network build
out and operating losses.
Chillicothe Telephone's line of credit resulted in additional interest
expense of $100,000 in 2000. Chillicothe Telephone's line of credit accrues
interest on the outstanding balance at a fluctuating rate tied to the LIBOR rate
(8.3% as of December 31, 2000) and is due and payable monthly. The outstanding
balance at December 31, 2000 was $12.8 million.
Horizon PCS incurred approximately $2.0 million from the senior secured
credit facility entered into in September, 2000. Interest on the Horizon PCS
senior credit facility accrues at LIBOR plus a specified margin (approximately
10.6% at December 31, 2000). Horizon PCS accrues interest at a rate of 14% per
annum on our senior subordinated discount notes through October 1, 2005 and will
pay interest semi-annually in cash thereafter. Non-cash interest expense also
included the amortized amount of deferred financing fees related to the Horizon
PCS senior secured credit facility, the Horizon PCS senior subordinated discount
notes, and the accretion of Horizon PCS warrants related to the Horizon PCS
senior subordinated discount notes. Total non-cash interest expense for the year
ended December 31, 2000 was $6.5 million compared to $4,700 for the same period
in 1999. In addition, the $13.0 million short-term convertible note issued to
obtain funds used to purchase common stock of Horizon Telcom resulted in an
increase in interest expense of $1.1 million. This convertible note was
converted into Horizon PCS preferred stock in September 2000.
Income tax benefit. We recorded an income tax benefit from continuing
operations of $900,000 for the year. This benefit was primarily the result of
the Company's net operating loss offset by our recognition of an excess loss
account related to the deconsolidation of Horizon PCS from the Horizon Telcom
affiliated group and an increase in the valuation allowance. A valuation
65
allowance of $2.6 million was recorded in 2000 to the extent that Horizon PCS'
deferred tax assets exceeded its deferred tax liabilities at December 31, 2000.
In connection with Horizon PCS' acquisition of Bright PCS, a tax of $3.7
million was generated based on the excess of the fair value of the Company's
stock over Horizon PCS' cost basis in the stock. The tax on the exchange of the
stock was charged directly to equity and not recorded as income tax expense.
We generated a tax of $4.6 million on a stock dividend of 10% of Horizon
Telcom stock held by Horizon PCS to Horizon Telcom. The tax on the stock
dividend was charged directly to equity and not recorded as an income tax
expense.
Until September 26, 2000 Horizon PCS was included in the consolidated
federal income tax return of Horizon Telcom. Horizon PCS provided for federal
income taxes on a pro-rata basis, consistent with a consolidated tax-sharing
agreement. As a result of the sale of the convertible preferred stock on
September 26, 2000, Horizon PCS will not be able to participate in the tax
sharing agreement nor will Horizon Telcom be able to recognize any net operating
loss benefits from Horizon PCS.
Minority interest in loss. As part of the acquisition of Bright Personal
Communication Services, LLC (Bright), the former members of Bright have a 7.974%
ownership in Horizon PCS, excluding the impact of the possible conversion of
convertible preferred stock and exercise of options and warrants. Horizon Telcom
accounts for this ownership by recording the portion of net income (loss)
attributable to the minority shareholders as minority interest in earnings
(loss) in the accompanying consolidated statement of operations. For the year
ended December 31, 2000, approximately $2.3 million of the net loss for the year
was allocated to for the minority interest. As of December 31, 2000, the
minority interest in Horizon PCS was approximately $900,000. Horizon Telcom will
continue to allocate a portion of net losses to minority interest is reduced to
zero. There would be no further allocations to minority interests until such
time as Horizon PCS becomes profitable and any unallocated losses to minority
interests are offset with income in future periods.
Loss before extraordinary items. Our loss before extraordinary items for
the year ended December 31, 2000 was $44.2 million compared to $4.5 million for
the year ended December 31, 1999. The increase in our loss reflects the
continued expenses related to launching Horizon PCS' markets and building our
customer base.
Extraordinary loss. As a result of the September 26, 2000 financings
described earlier, we retired long term debt payable to financial institutions.
As a result of this debt extinguishment, we expensed the unamortized portion of
the related financing costs as well as fees associated with the debt
extinguishments. These fees and expenses amounted to $748,000 and are shown on
the statement of operations net of a tax benefit of $262,000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Operating Revenues
Landline telephone services 1999 1998 $ change % change
---- ---- -------- --------
(Dollars in thousands)
----------------------
Basic local and long-distance service $17,103 $16,760 $ 343 2%
Network access 17,509 15,627 1,882 12%
Basic local and long-distance service revenue was essentially flat at $17.1
million in 1999 and $16.8 million in 1998. The number of access lines remained
steady, from 36,554 at December 31, 1998 to 36,832 at December 31, 1999.
Network access revenues increased from $15.6 million in 1998 to $17.5
million in 1999, an increase of $1.9 million or 12%. This increase was primarily
attributable to increased long distance usage, which results in increased
revenue from interexchange carriers for using Chillicothe Telephone's network.
In addition, increased local telephone network costs incurred by Chillicothe
66
Telephone resulted in increased support revenues from the Universal Service
Fund.
Personal Communication Equipment and
Services 1999 1998 $ change % change
---- ---- -------- --------
(Dollars in thousands)
----------------------
PCS service revenue $4,320 $471 $3,849 817%
PCS equipment revenue 600 309 291 94%
PCS service revenues for the year ended December 31, 1999 were $4.3 million
compared to $471,000 for the year ended December 31, 1998, an increase of $3.8
million. The growth in revenues is the result of the growth in our customer base
as well as an increase in travel and roaming revenue. We had 13,749 customers at
December 31, 1999, compared to 2,091 at December 31, 1998, resulting in an
increase in revenue of $3.2 million. We have experienced increased growth in our
customer base at the end of 1999 as a result of full branding with Sprint PCS in
October 1999 and as a result of utilization of Sprint PCS' national third-party
distribution channels. Roaming revenues increased $624,000 in 1999 compared to
1998. This was the first year we recognized significant roaming revenue. This
increase primarily resulted from the launch of portions of our network covering
two heavily traveled interstate highways in western Virginia.
PCS ARPU also increased from the year ended December 31, 1998 to the year
ended December 31, 1999. In 1998 we had substantial promotions for our
subscribers, which were phased out in 1999. In addition, in 1999 we experienced
a significant growth in the charges to our customers for minute sensitive usage
(long distance and overage).
PCS equipment revenues for the year ended December 31, 1999 were $600,000
compared to $309,000 for the year ended December 31, 1998, an increase of
$291,000. The increase in equipment revenues is the result of our increase in
customers.
Other revenues 1999 1998 $ change % change
---- ---- -------- --------
(Dollars in thousands)
----------------------
Internet access services $3,141 $2,084 $1,057 51%
Equipment systems sale, information
services, and other revenues 6,733 6,267 466 7%
Internet access services increased from $2.1 million in 1998 to $3.1
million in 1999, an increase of $1.0 million or 51%. The number of bright.net
customers increased by 2,784, from 11,760 at December 31, 1998 to 14,544 at
December 31, 1999, accounting for the increase in revenue. In addition, in 1998,
service discounts were offered as enticements to add subscribers, resulting in
lower revenue in 1998.
Other revenue increased from 1998 to 1999 from $6.3 million to $6.7
million, a $400,000 increase or 7%. Chillicothe Telephone business system sales
increased approximately $400,000 due to four large account sales in 1999 that
did not occur in 1998.
Operating Expenses
Cost of goods sold. Cost of goods sold primarily includes the costs of
handsets and accessories sold to customers. Cost of goods sold also includes, to
a lesser extent, the cost of business system sales incurred by Chillicothe
Telephone. Cost of goods sold for the year ended December 31, 1999 was $3.5
million compared to $1.7 million for the year ended December 31, 1998, an
increase of $1.8 million. The increase in the cost of goods sold is primarily
the result of the growth in our customer base at Horizon PCS, accounting for
$1.4 million of the increase. For competitive and marketing reasons, we have
sold handsets to our customers below our cost and expect to continue to sell
handsets at a price below our cost for the foreseeable future. The remaining
$400,000 increase in cost of goods sold is a result of the increased equipment
system sales at Chillicothe Telephone.
67
Cost of services. Cost of services for the year ended December 31, 1999 was
$15.1 million, compared to $11.4 million for the year ended December 31, 1998,
an increase of $3.7 million. Horizon PCS' increase ($3.1 million) reflects the
increase in network costs to service the growing customer base. Chillicothe
Telephone and United Communications' cost of services increased $600,000 from
the year ended December 31, 1998 to the year ended December 31, 1999. This
increase was a result of increased telephone and network costs to service the
telephone customers as well as increased access line fees for the growing number
of bright.net Internet service customers.
Selling, general and administrative expenses. Selling, general and
administrative expenses rose to $25.7 million for the year ended December 31,
1999, compared to $18.4 million for the same period in 1998, an increase of $7.3
million. Chillicothe Telephone and United Communications incurred an increase of
$2.5 million for the year ended December 31, 1999 compared to the same period in
the prior year. This increase was a result of additional marketing expenses,
increased customer service representatives, additional computer related expenses
and information technology consulting.
Horizon PCS' increase reflects the 8% fee paid to Sprint PCS on our
increased collected service revenues (an increase of $130,000), the costs of
additional sales and marketing personnel and associated activities (an increase
of $1.7 million), additional customer support personnel (an increase of
$602,000) and increased headcount and professional services at Horizon Services
needed to support our growth (an increase of $536,000), and an increase in
uncollectible accounts receivable (increase of $400,000).
Non-cash compensation expense. For the year ended December 31, 1999, we
recorded stock-based compensation expense of $2,671 associated with certain
stock options granted in November 1999.
Depreciation and amortization. Depreciation and amortization increased by
$1.6 million to a total of $9.6 million for the year ended December 31, 1999.
The increase reflects the continuing construction of our PCS network and
increased capital expenditures related to the telephone network infrastructure.
Gain on sale of PCS assets. During 1999, in connection with entering the
network services agreement with the Alliances, we sold certain PCS ancillary and
base station equipment to the Alliances. The sale resulted in a gain of
approximately $1.4 million, representing the excess of cash proceeds over the
historical net book value of the assets sold.
Interest income and other, net. Interest income and other for the years
ended December 31, 1999 and 1998 of $75,000 and $30,000, respectively, consists
primarily of interest income.
Interest expense, net. Interest expense for the year ended December 31,
1999 was $3.6 million compared to $2.4 million for the year ended December 31,
1998, and consisted of interest on debt in excess of the amount capitalized for
the purpose of the network build-out. The increase in interest expense is the
result of increased borrowings on our former Rural Telephone Finance Cooperative
financing to finance the build-out of our network. This financing was paid off
in September 2000.
Income tax benefit. For the year ended December 31, 1999, we recorded an
income tax benefit of $2.2 million. A valuation allowance of $238,000 was
recorded in 1999 for the amount of the deferred tax assets that exceeded the
deferred tax liabilities at December 31, 1999.
Loss before extraordinary items. Our loss before extraordinary items for
the year ended December 31, 1999 was $4.5 million compared to $1.2 million for
the year ended December 31, 1998. The increase in our loss reflects the
continued expenses relative to launching our PCS markets and building our PCS
customer base.
68
LIQUIDITY AND CAPITAL RESOURCES
Overview
In 1996, Horizon Telcom was formed as part of a reorganization of
Chillicothe Telephone and several of its affiliates. Since that time, Horizon
Telcom has met its needs for capital primarily by borrowing, by selling selected
businesses and assets, and by funds generated from operations. In 2000, Horizon
Telcom also formed Horizon PCS, to which it transferred its subsidiary Horizon
Personal Communications. In June 2000, Horizon PCS acquired the remaining 74% of
Bright PCS. Horizon PCS also entered into several major financing transactions
in September 2000.
Three Months Ended March 31, 2001
The net cash used in operating activities of $15.3 million for the three
months ended March 31, 2001 was primarily the result of the $19.8 million net
loss.
Net cash used in investing activities was $65.1 million for the three
months ended March 31, 2001. Our capital expenditures were $36.0 million in
2001, reflecting the continuing build out of our PCS network as well as the
deployment of capital necessary to offer VDSL service. Net cash used for
investing activities also consists of $32.0 million of short-term investments
from our excess cash balances. As we continue to build our customer base and
complete our network build-out, we expect our borrowings will increase,
decreasing our cash and investment balances.
Net cash provided by financing activities for the three months ended March
31, 2001 was $751,000 consisting primarily of borrowings of $1.2 million under
Chillicothe Telephone's line of credit less dividends paid of $408,000.
For 2001, we anticipate our annual funding needs will be approximately
$215.0 million, of which $138.0 million will be used for capital expenditures,
and the remainder will be used to fund working capital and operating losses. The
terms of their respective credit agreements prohibit or severely restrict the
ability of Chillicothe Telephone and Horizon PCS to provide funds to their
affiliates in the event the affiliate experiences a shortfall. However, we
anticipate that our cash and borrowings under existing financing agreements will
be adequate to fund our capital expenditures, anticipated operating losses and
working capital requirements over the next twelve months. The actual funds
required to build out the network and to fund operating losses, working capital
needs and other capital needs may vary materially from our estimates and
additional funds may be required because of an expansion of our territory,
unforeseen delays, cost overruns, unanticipated expenses, regulatory changes,
engineering design changes and required technological upgrades and other
technological risks. If we are unable to obtain any necessary additional funding
and we are unable to complete our network build-out, this may result in a
termination of Horizon PCS' Sprint PCS agreement. We will no longer be able to
offer Sprint PCS products and services. Additionally, Sprint PCS may purchase
Horizon PCS' operating assets or capital stock for 72% of the entire business
value.
Year Ended December 31, 2000
The net cash used in operating activities of $480,000 for the year ended
December 31, 2000 was primarily the result of Horizon Telcom's $44.7 million net
loss and an increase in accounts receivable of $8.4 million, being offset by
non-cash charges for depreciation, amortization and interest of $18.7 million,
increases in accounts payable of $10.5 million, increases in accrued liabilities
of $18.1 million and an increase in deferred income of $6.9 million.
Net cash used in investing activities was $96.8 million for the year ended
December 31, 2000. Our capital expenditures were $17.8 million in 1999 and
$101.5 million in 2000. This reflects the continuing build out of our PCS
network as well as the deployment of capital necessary to offer VDSL service.
Other investing activities were related to the cash acquired in the acquisition
of Bright PCS of $4.9 million.
Net cash provided by financing activities for the year ended December 31,
2000 was $285.5 million consisting primarily of borrowings under senior discount
notes of Horizon PCS ($149.7 million), Horizon PCS' senior secured credit
69
facility ($50.0 million), the sale of Horizon PCS convertible preferred stock
($126.5 million), less related fees, and borrowings of $12.8 million under
Chillicothe Telephone's line of credit. During the year ended December 31, 2000,
Horizon PCS borrowed $13.0 million in the form of a short-term convertible note
to purchase 19.78% of the outstanding capital stock of Horizon Telcom. The $13.0
million short-term convertible note, including accrued interest, was converted
into shares of Horizon PCS preferred stock on September 26, 2000. Horizon Telcom
paid $1.8 million in dividends during 2000.
During 2000, Chillicothe Telephone entered into an agreement with a bank
for a line-of-credit that provides maximum borrowings of $15.0 million, payable
on demand. The line was extended in March 2001 to provide for maximum borrowings
of $30.0 million.
On September 26, 2000, an investor group purchased $126.5 million of
Horizon PCS' convertible preferred stock in a private placement. Concurrent with
the closing, holders of Horizon PCS' $14.1 million short-term convertible note
(including accrued interest of $1.1 million) converted it into the same
convertible preferred stock purchased by the investor group. On September 26,
2000, Horizon PCS received $149.7 million from the issuance of $295 million of
Senior Discount Notes due 2010. Also on September 26, 2000, Horizon PCS received
$50.0 million as part of a $225.0 million senior secured credit facility. The
amount of the senior secured credit facility was increased to $250.0 million in
November, 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not engage in commodity futures trading activities and do not enter
into derivative financial instruments for trading or other speculative purposes.
We also do not engage in transactions in foreign currencies that would expose us
to market risk.
We will be subject to interest rate risk on Horizon PCS's senior secured
credit facility and any future floating rate financing requirements.
The following table presents the estimated future outstanding long-term
debt at the end of each year and future required annual principal payments for
each year then ended associated with our financing based on our projected level
of long-term indebtedness:
Years Ending December 31,
--------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter
---- ---- ---- ---- ---- ----------
Horizon PCS: (Dollars in millions)
- ------------ ---------------------
Senior secured credit facility. $150.0 $150.0 $150.0 $150.0 $150.0 -
Variable interest rate (1) 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%
Principal payments........ - - - - - $150.0
Senior discount notes.......... $162.3 $184.9 $210.8 $240.0 $283.7 -
Fixed interest rate (2)... 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
Principal payments........ - - - - - $295.0
70
Years Ending December 31,
--------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter
---- ---- ---- ---- ---- ----------
Chillicothe Telephone: (Dollars in millions)
- ---------------------- ---------------------
1998 Senior notes $12.0 $12.0 $12.0 $12.0 $12.0 -
Fixed interest rate 6.62% 6.62% 6.62% 6.62% 6.62% 6.62%
Principal payments........ - - - - - $12.0
1993 Senior notes $10.0 $8.0 $6.0 $4.0 $2.0 -
Fixed interest rate ...... 6.72% 6.72% 6.72% 6.72% 6.72% 6.72%
Principal payments........ $2.0 $2.0 $2.0 $2.0 $2.0 -
________________________
(1) Interest rate on the senior secured credit facility equals the London
Interbank Offered Rate ("LIBOR") plus a margin that varies from 3.5% to
4.0%. The interest rate is assumed to equal 10.55 for all periods
presented.
(2) Assumed interest rate for senior discount notes, which will be paid in full
in 2010.
Our primary market risk exposure relates to:
o the interest rate risk on long-term and short-term borrowings, and
o the impact of interest rate movements on our ability to meet interest
expense requirements and meet financial covenants.
In the normal course of business, our operations are exposed to interest
rate risk on our senior secured credit facility. Our primary interest rate risk
exposures relate to 1) the interest rate on our financing, 2) our ability to
refinance our senior subordinated discount notes at maturity at market rates,
and 3) the impact of interest rate movements on our ability to meet interest
expense requirements and meet financial covenants under our debt instruments.
Based on our outstanding balances at March 31, 2001, an increase of 1% in
the base lending rate would result in a decrease in annual earnings of
approximately $2.5 million.
We manage the interest rate risk on Horizon PCS' outstanding long-term debt
through the use of fixed and variable rate debt and interest rate swaps. In the
first quarter of 2001, we entered into an interest rate swap effectively fixing
$25.0 million of our term debt at a rate of 9.4%. While we cannot predict our
ability to refinance existing debt or the impact interest rate movements will
have on our existing debt, we continue to evaluate our interest rate risk on an
ongoing basis. During the quarter ended March 31, 2001, the net unrealized loss
on this derivative was $298,905.
The carrying value of the financial instruments approximate fair value.
REGULATORY DEVELOPMENTS
See "Item 1. Business - ILEC Services - Regulation of Chillicothe
Telephone's Local Exchange Carrier Business" and "Item 1. Business - Digital
Wireless Services - Regulation of the Wireless Telecommunications Industry" for
discussions of regulatory developments that could have a future impact on us.
SEASONALITY
Our local and long-distance telephone, internet and data services
businesses are not subject to seasonal influences. Our wireless telephone
business is subject to seasonality because the wireless industry is heavily
dependent on calendar fourth quarter results. Among other things, that industry
relies on significantly higher customer additions and handset sales in the
71
calendar fourth quarter as compared to the other three calendar quarters. A
number of factors contribute to this trend, including:
o The increasing use of retail distribution, which is more dependent
upon the year-end holiday shopping season;
o The timing of new product and service announcements and introductions;
o Competitive pricing pressures; and
o Aggressive marketing and promotions.
INFLATION
We believe that inflation has not had, and will not have, a natural adverse
effect on our results of operations.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging
Activities, as amended in June 2000 by Statement of Financial Accounting
Standards No. 138 (SFAS 138), Accounting for Certain Derivative Instruments and
Certain Hedging Activities, which requires companies to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
such instruments at fair value. As amended by Statement of Financial Accounting
Standards No. 137 (SFAS 137), Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, the
provisions of SFAS 133 required adoption to all fiscal quarters of all fiscal
years beginning after June 15, 2000. The adoption did not have a material effect
on Horizon Telcom's consolidated results of operations, financial position, or
cash flows.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" which required adoption
during the first quarter of fiscal 2000. The adoption did not have a material
effect on Horizon Telcom's consolidated results of operations.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ significantly and
materially from the results anticipated in these forward-looking statements.
Risks and uncertainties that may affect our business include the risk that (i)
we may not be able to compete effectively; (ii) we may not be able to
successfully integrate new technologies or respond effectively to customer
requirements; (iii) system failure could cause delays or interruptions in
service; (iv) our back office and customer care systems may be unable to meet
the needs of our customers; (v) the market for our services may not continue to
grow; (vi) our business is subject to significant regulatory risks; (vii)
Horizon PCS has not had any profitable years in the past five years and may not
achieve or sustain operating profitability or positive cash flow from operating
activities; (viii) Sprint PCS may terminate the Sprint PCS agreements, as for
example, if Horizon PCS fails to complete its required network build-out; (ix)
Horizon PCS has substantial debt which it may not be able to service, resulting
in a default; (x) we may not be able to manage our anticipated rapid growth;
(xi) Sprint PCS may have difficulty obtaining infrastructure equipment or
handsets; (xii) the Alliances may fail to provide their network to Horizon PCS
affecting our service to markets in Virginia and West Virginia or we may incur
significant expense to overbuild those markets; (xiii) Horizon PCS may not
receive as much Sprint PCS roaming revenue as anticipated; (xiv) we may need
more capital than we currently project; and (xv) use of hand-held PCS phones may
pose health risks. See "Item 1. Business-Risk Factors" for further information.
72
ITEM 3. Properties
Management believes that its property, plant and equipment are adequate for
its business at Chillicothe Telephone, United Communications and Services,
although additional property, plant and equipment is being added. United
Communications is building a new 22,000 square foot operations and training
facility, which is due to be completed in the summer of 2001. Our properties
consist of land, buildings, central office equipment, exchange and toll
switches, data transmission equipment, underground conduits and cable, aerial
cable, poles, wires, telephone instruments and other equipment. Our principal
operations are conducted in a group of buildings we own on East Main Street,
Chillicothe, Ohio. These headquarters buildings have approximately 40,000 square
feet of floor space.
Chillicothe Telephone occupies several properties and buildings comprising
approximately 51,000 square feet in the aggregate, used for telephone switches,
warehouse and office space. Chillicothe Telephone installed new plant record,
mapping and billing software in 2000. Chillicothe Telephone also maintains over
100 vehicles used in servicing customers and maintaining the telephone
infrastructure for residential customers and business services. In addition,
Chillicothe Telephone has easements it uses in deploying its wireline network.
Horizon PCS' properties consist of network assets used in the deployment of
wireless services, which are mainly switching equipment, base stations and
ancillary equipment placed at tower sites. At December 31, 2000 Horizon PCS
leased over 300 tower sites for deployment of its network assets. Horizon PCS
leases 16 retail store sites for sale of wireless handsets and related services.
Horizon PCS also leases warehouse and office space from Chillicothe Telephone.
In addition, Horizon PCS owns more than 60 vehicles used mainly in its retail
and network build-out operations. Horizon PCS continues its network build-out,
which is expected to be substantially complete by the end of the third quarter
of 2001.
ITEM 4. Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth information regarding the beneficial
ownership of our voting securities, as of March 31, 2001 by:
o each person who, to our knowledge, is the beneficial owner of 5% or
more of a class of our outstanding common stock;
o each of our directors;
o each of the executive officers; and
o all executive officers and directors as a group.
Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act. A person is deemed to be the beneficial owner of any
shares of common stock if that person has or shares voting power or investment
power with respect to the common stock, or has the right to acquire beneficial
ownership at any time within 60 days of the date of the table. "Voting power" is
the power to vote or direct the voting of shares and "investment power" is the
power to dispose or direct the disposition of shares.
73
CLASS A COMMON STOCK (1) CLASS B COMMON STOCK (1)
------------------------ ------------------------
Name and Address (2) Number Percent Number Percent
- -------------------- ------ ------- ------ -------
Robert McKell 2,079 2.3% 4,463 1.7%
Thomas McKell (3) 7,638 8.6% 20,620 7.7%
Peter M. Holland 290 * 875 *
Jack E. Thompson (4) 423 * 1,340 *
William A. McKell (5) 1,274 1.4% 3,800 1.4%
Phoebe H. McKell (6) 2,625 3.0% 7,941 3.0%
Joseph S. McKell (7) 8,993 10.1% 26,979 10.1%
David McKell (8) 9,294 10.5% 27,882 10.5%
Helen M. Sproat (9) 6,135 6.9% 17,735 6.7%
John E. Herrnstein (10) 105 * 381 *
Joseph G. Kear (11) 230 * 756 *
All Executive Officers and
Directors as a Group
(11 persons) (12) 39,086 44.1% 112,772 42.3%
- ---------------------
* Less than one percent.
(1) Holders of class A common stock are entitled to one vote per share. Holders
of class B common stock do not have voting rights, except as otherwise
required by law.
(2) The address for Horizon Telcom, Inc. and each executive officer and
director is 68 E. Main Street, Chillicothe, Ohio 45601-0480.
(3) Includes 6,623 shares of class A common stock and 17,575 shares of class B
common stock held by a trust. Mr. McKell shares voting and investment power
over these shares. A separate trust owns 1,015 shares of class A common
stock and 3,045 shares of class B common stock. Mr. McKell's wife shares
voting and investment power over these shares. Mr. McKell disclaims
beneficial ownership of the shares owned by his wife.
(4) Includes 213 shares of class A common stock and 639 shares of class B
common stock owned by Mr. Thompson's spouse. Mr. Thompson disclaims
beneficial ownership of these shares. Includes 29 shares of class B common
stock issuable upon exercise of stock options that are presently
exercisable or exercisable within 60 days of the date hereof.
(5) Includes 400 shares of class A common stock and 1,200 shares of class B
common stock held by Mr. McKell's spouse and their children. Mr. McKell
disclaims beneficial ownership of those shares.
(6) Includes 80 shares of class A common stock and 240 shares of class B common
stock held by Ms. McKell's spouse. Ms. McKell disclaims beneficial
ownership of these shares. Includes 29 shares of class B common stock
issuable upon exercise of stock options that are presently exercisable or
exercisable within 60 days of the date hereof.
(7) Includes 415 shares of class A common stock and 1,245 shares of class B
common stock owned by Dr. McKell's spouse. Dr. McKell disclaims beneficial
ownership of these shares.
(8) These shares are owned by a Trust. Mr. McKell shares voting and investment
powers over these shares. Mr. McKell disclaims beneficial ownership of
these shares.
74
(9) Includes 385 shares of class A common stock and 115 shares of class B
common stock held by Ms. Sproat's spouse. Ms. Sproat disclaims beneficial
ownership of these shares.
(10) Includes 66 shares of class B common stock issuable upon exercise of stock
options that are presently exercisable or exercisable within 60 days of the
date hereof.
(11) Includes 29 shares of class B common stock issuable upon exercise of stock
options that are presently exercisable or exercisable within 60 days of the
date hereof.
(12) Includes 153 shares of class B common stock issuable upon exercise of stock
options that are presently exercisable or exercisable within 60 days of the
date hereof.
ITEM 5. Directors And Executive Officers Of The Company
DIRECTORS AND EXECUTIVE OFFICERS
The following are our directors and executive officers as of the date
hereof.
NAME AGE POSITION
- ---- --- --------
Robert McKell 77 Chairman of the Board, Director
Thomas McKell 65 President, Director; President of
Chillicothe Telephone
Peter M. Holland 35 Vice President of Finance and Treasurer;
Chief Financial Officer of Horizon PCS
Jack E. Thompson 68 Secretary, Director
William A. McKell 40 Chairman of the Board, President and Chief
Executive Officer of Horizon PCS
Phoebe H. McKell 54 President of Horizon Services
Joseph S. McKell 75 Director
David McKell 73 Director
Helen M. Sproat 68 Director
John E. Herrnstein 63 Director
Joseph G. Kear 77 Director
ROBERT MCKELL has served as Chairman of the Board of Directors of Horizon
Telcom since its inception in 1996 and of Chillicothe Telephone since 1988. Mr.
McKell has 54 years of telecommunications experience.
THOMAS MCKELL has served as the President and a Director of Horizon Telcom
since its inception in 1996 and of Chillicothe Telephone since 1988. Mr. McKell
has 45 years of telecommunications experience.
PETER M. HOLLAND has served as Vice President of Finance and Treasurer of
Horizon Telcom since November 1999. He has also served as the Chief Financial
Officer of Horizon PCS since its inception in April 2000 and has served as the
Chief Financial Officer and a director of Horizon Telcom's other subsidiaries
since November 1999. Mr. Holland has nearly 13 years of telecommunications
experience. From May 1996 to December 1999, Mr. Holland was a principal and
owner of The Pinnacle Group, which provides consulting services to independent
wireless and wireline companies, including Horizon PCS. Prior to joining
Pinnacle in May 1996, Mr. Holland was a manager in Nextel Communications
Business Development and Corporate Strategy groups. Mr. Holland started his
career in telecommunications with Ernst & Young's telecommunications consulting
group and is a Certified Public Accountant.
JACK E. THOMPSON has been Secretary and Director of Horizon Telcom since
its inception in 1996 and of Chillicothe Telephone since May 1982. He served as
chief financial officer of Horizon Telcom from its inception to May 2000, and
75
was treasurer of Chillicothe Telephone from May 1982 until May 2000. Mr.
Thompson has 34 years of telecommunications experience.
WILLIAM A. MCKELL has served as Chairman of the Board, President and Chief
Executive Officer of Horizon PCS since its inception in April 2000 and has
served as President, Chief Executive Officer and Chairman of the Board of
Horizon Personal Communications since May 1996 and as President of Bright PCS
since its formation in September 1999. Mr. McKell has 13 years of
telecommunications experience. Mr. McKell served as Vice President of Network
Services from January 1996 to April 1996 and Director of Network Services from
August 1994 to December 1995 for Chillicothe Telephone.
PHOEBE H. MCKELL has served as the President of Horizon Services since its
inception in 1996. Ms. McKell has 22 years of telecommunications experience.
From 1989 to 1996, she was Director of Administration for Chillicothe Telephone.
JOSEPH S. MCKELL has been a director of Horizon Telcom since its inception
in 1996 and a director of Chillicothe Telephone since 1983. Mr. McKell, a
physician, has practiced medicine in Chillicothe, Ohio for more than forty
years.
DAVID MCKELL has been a director of Horizon Telcom since its inception in
1996 and a director of Chillicothe Telephone for 35 years. He is now retired.
HELEN M. SPROAT has been a director of Horizon Telcom since its inception
in 1996 and a director of Chillicothe Telephone since (1988). She has owned and
managed Hidden Hill Gallery, Springboro, Ohio, for more than five years.
JOHN E. HERRNSTEIN has been a director of Horizon Telcom since its
inception in 1996, and a director of Chillicothe Telcom since 1981. He has been
a registered representative and financial consultant for AG Edwards & Sons, Inc.
a securities brokerage firm for more than five years.
JOSEPH G. KEAR has been a director of Horizon Telcom since its inception in
1996, and of Chillicothe Telephone for 35 years. Mr. Kear, an attorney, has
practiced law in Chillicothe, Ohio for the past 52 years. He is now a partner at
Kear-Motes law firm, a firm which was organized in January 2001. Prior to that
time, he practiced law as a sole practitioner.
Robert McKell, Thomas McKell, David McKell and Joseph McKell are brothers.
Helen Sproat is their sister. Phoebe McKell is the daughter of Robert McKell.
William McKell is the son of Thomas McKell.
BOARD OF DIRECTORS
There are presently eight members of the board of directors. Following
election, directors serve for a term of one year, or until their successors have
been elected and qualified, and are compensated at the discretion of the board
of directors. Executive officers are ordinarily elected annually and serve at
the discretion of the board of directors.
DIRECTOR COMPENSATION
Directors who are not otherwise employed by Horizon Telcom or its
subsidiaries receive $2,200 per quarter as director compensation. Robert McKell,
Thomas McKell, and Jack Thompson receive $50 per quarter.
BOARD COMMITTEES
There are no committees of the Board of Directors at present.
76
ITEM 6. Executive Compensation
EXECUTIVE COMPENSATION
The following table presents summary information with respect to the
compensation paid to our Chief Executive Officer and each of our other executive
officers whose salary and bonus exceeded $100,000 during the year ended December
31, 2000:
Long-Term
AnnualCompensation Compensation
-------------------------- Securities Underlying All Other
Name and Principal Position Salary ($) Bonus ($) Options (#) Compensation ($)
- --------------------------- ---------- --------- ----------- ----------------
Thomas McKell 207,312 -- -- 8,789 (1)
President; President of
Chillicothe Telephone
William A. McKell 154,167 26,815 -- 12,497 (2)
Chairman of the Board, President
and Chief Executive Officer of
Horizon PCS
Peter M. Holland 150,000 20,625 -- 11,971 (3)
Vice President of Finance and
Treasurer, Chief Financial
Officer; Chief Financial Officer
of Horizon PCS
Jack E. Thompson 154,807 -- -- 10,676 (4)
Vice President, Finance, and
Secretary (5)
Phoebe McKell 117,856 -- -- 8,202 (6)
President of Horizon Services
- ------------------------
(1) Includes a yearly car allowance of $7,189 and a 401(k) contribution of
$1,600.
(2) Includes a yearly car allowance of $7,784 and a 401(k) contribution of
$4,713.
(3) Includes yearly car allowance of $7,578 and a 401(k) contribution of
$4,393.
(4) Includes yearly car allowance of $9,076 and a 401(k) contribution of
$1,600.
(5) During 2001, Mr. Thompson elected to work part-time, for a reduced salary.
(6) Includes yearly car allowance of $6,960 and a 401(k) contribution of
$1,242.
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None of the named executive officers received stock options from Horizon
Telcom or Horizon PCS in 2000.
The following table sets forth information concerning the number and value
of unexercised options held by each of our named executive officers on December
31, 2000. There was no public market for our common stock as of December 31,
2000. Accordingly, the fair market value on December 31, 2000 is based on an
average assumed value of $100.00 per share for Horizon Telcom stock and $5.39
per share for Horizon PCS stock. This valuation at December 31, 2000 does not
necessarily represent the actual value of our stock at December 31, 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR AND OPTION/SAR VALUES
Shares Number of Securities Underlying Value of Unexercised
Acquired Value Unexercised Options at Year End (#) In-The-Money Options at Year
on Realized ---------------------------------- --------------------------------
Exercise ($) Exercisable / Unexercisable Exercisable / Unexercisable
---------- --------- --------------- -------------- ------------- -- ---------------
Thomas McKell -- -- -- -- -- / --
William A. McKell -- -- 371,263* / 1,242,923* 1,956,256* / 6,549,206*
Peter M. Holland -- -- 371,263* 1,242,923* 1,956,256* / 6,549,206*
Jack Thompson 37 1,480 .5 / 112.5 20 / 4,500
Phoebe McKell 37 1,480 .5 112.5 20 / 4,500
- --------------
* These options represent options to purchase Horizon PCS class A common stock.
(1) Based on an assumed value of $100.00 per share for Horizon Telcom stock and
$5.39 per share for Horizon PCS stock.
EMPLOYMENT AGREEMENTS
Horizon PCS entered into employment agreements with William McKell and
Peter Holland, its Chief Executive Officer and Chief Financial Officer,
respectively. The employment agreements provide for an annual base salary of
$200,000 to Mr. McKell and $175,000 to Mr. Holland. In addition to their base
salary, Mr. McKell and Mr. Holland are eligible to receive an annual bonus up to
40% of their base salary. In addition, Mr. McKell and Mr. Holland are eligible
to participate in all of Horizon PCS' employee benefit plans and policies.
The employment agreements provide that Mr. McKell or Mr. Holland's
employment may be terminated with or without cause, as defined in the agreement.
If either Mr. McKell or Mr. Holland is terminated without cause, he is entitled
to receive 24 months base salary, the vesting of all of his stock options on the
date of termination, and 24 months of health and dental benefits. Under the
employment agreements, both Mr. McKell and Mr. Holland have agreed to a
restriction on their present and future employment. They have agreed not to
compete in the business of wireless telecommunications either directly or
indirectly within our markets while employed by us and for a period of twelve
months after termination of employment.
HORIZON TELCOM 1999 STOCK OPTION PLAN
The 1999 Stock Option Plan has been adopted by our board of directors and
stockholders. The option plan permits the granting of both incentive stock
options and nonqualified stock options to employees. The aggregate number of
shares of common stock that may be issued pursuant to options granted under the
option plan is 10,000 shares, including both shares of class A common stock and
shares of class B common stock, subject to adjustments in the event of certain
changes in the outstanding shares of common stock. In 1999, we granted options
to purchase 950 shares of class B common stock at an exercise price of $60.00
per share. No additional options were granted in 2000.
78
The option plan will be administered by our board of directors or by a
compensation committee appointed by our board of directors, which will be
authorized, subject to the provisions of the option plan, to grant options and
establish rules and regulations as it deems necessary for the proper
administration of the option plan and to make whatever determinations and
interpretations it deems necessary or advisable.
An incentive option may not have an exercise price less than the fair
market value of the common stock on the date of grant or an exercise period that
exceeds ten years from the date of grant. In the case of option holders that own
more than 10% of Horizon Telcom's stock, the exercise price for an incentive
option cannot be less than 110% of the fair market value of the common stock on
the date of grant and the exercise period cannot exceed five years from the date
of grant. Incentive options are also subject to other limitations which allow
the option holder to qualify for favorable tax treatment. Nonqualified options
may have an exercise price of less than, equal to or greater than the fair
market value of the underlying common stock on the date of grant but are limited
to an exercise period of no longer than ten years.
The board of directors or the compensation committee will determine the
persons to whom options will be granted and the terms, provisions, limitations
and performance requirements of each option granted, and the exercise price of
an option.
An option will not be not transferable except by will or by the laws of
descent or distribution or unless determined otherwise by our board of directors
or the compensation committee.
The plan provides that all stock issued under the plan will be subject to a
right of first refusal in favor of Horizon Telcom. Under the right of first
refusal, each holder of stock issued under the plan must offer the stock to
Horizon Telcom prior to selling it to a third party. If Horizon Telcom declines
to purchase the stock, the stockholder may sell the stock to the third party,
but the stock will remain subject to the Horizon Telcom right of first refusal.
The right of first refusal shall cease to apply upon the completion of an
underwritten initial public offering of Horizon Telcom's capital stock
registered under the Securities Act of 1933, as amended.
The plan contains provisions that give the compensation committee or our
board of directors or the acquiring entity's board of directors discretion to
take specified actions if Horizon Telcom is acquired, unless the individual
option grants provide otherwise. Those actions can include the authorization to
purchase option grants from plan participants, or make adjustments or
modifications to outstanding options granted to protect and maintain the rights
and interests of the plan participants or, upon notice to optionees, require
that all options must be exercised within a specified number of days and
thereafter the option will terminate. The board may provide for acceleration of
options upon the occurrence of events specified in the option agreement. To
date, all individual option grants have provided that the options will
accelerate and become fully exercisable upon an acquisition of Horizon Telcom.
HORIZON PCS 2000 STOCK OPTION PLAN
The Horizon PCS Stock Option Plan has been adopted by Horizon PCS' board of
directors and stockholders. That option plan permits the granting of both
incentive stock options and nonqualified stock options to employees. The
aggregate number of shares of common stock that may be issued pursuant to
options granted under the option plan is 7,500,000 shares of Horizon PCS class A
common stock and 4,196,884 shares of Horizon PCS class B common stock, subject
to adjustments in the event of certain changes in the outstanding shares of
common stock. On December 1, 1999, Horizon PCS' subsidiary, Horizon Personal
Communications, granted options to purchase 3,588,000 shares of its class B
common stock with an exercise price of $0.1414 per share to 13 individuals under
its 1999 Stock Option Plan. After Horizon PCS was incorporated, it issued
options to replace those initial options, on the same economic terms adjusted
for the fact that Horizon Personal Communications was a subsidiary. After taking
into account the adjustment, Horizon PCS issued 4,196,884 substituted options at
an exercise price of $0.1209. In November 2000, Horizon PCS granted options to
purchase an additional 116,970 shares at an exercise price of $5.88 per share.
79
The Horizon PCS option plan is administered by our board of directors or a
compensation committee appointed by its board of directors, which will be
authorized, subject to the provisions of the option plan, to grant options and
establish rules and regulations as it deems necessary for the proper
administration of the option plan and to make whatever determinations and
interpretations it deems necessary or advisable.
An incentive option may not have an exercise price less than the fair
market value of the common stock on the date of grant or an exercise period that
exceeds ten years from the date of grant. In the case of option holders that own
more than 10% of Horizon PCS' stock, the exercise price for an incentive option
cannot be less than 110% of the fair market value of the common stock on the
date of grant and the exercise period cannot exceed five years from the date of
grant. Incentive options are also subject to other limitations which allow the
option holder to qualify for favorable tax treatment. Nonqualified options may
have an exercise price of less than, equal to or greater than the fair market
value of the underlying common stock on the date of grant but are limited to an
exercise period of no loner than ten years. However, we will not grant
non-qualified options with an exercise price less than 85% of fair market value
of the common stock on the date of the grant.
An option will not be not transferable except by will or by the laws of
descent or distribution or unless determined otherwise by our board of directors
or the compensation committee.
Unless previously exercised, a vested option granted under the Horizon PCS
option plan will terminate automatically:
o twelve months after the employee's termination of employment by reason
of disability or death; and
o three months after an employee's termination of employment for reasons
other than disability or death.
The plan contains provisions that give the Horizon PCS compensation
committee or board of directors of the acquiring entity's board of directors
discretion to take specified actions if Horizon PCS is acquired, unless the
individual option grants provide otherwise. Those actions can include the
authorization to purchase option grants from plan participants, or make
adjustments or modifications to outstanding options granted to protect and
maintain the rights and interests of the plan participant or accelerate the
vesting of outstanding options. To date, all individual option grants have
provided that the options will accelerate and become fully exercisable upon an
acquisition of Horizon PCS.
The Horizon PCS board of directors has adopted a policy to the effect that,
for at least one year from March 27, 2001, 3,000,000 of the shares authorized to
be issued under the plan are subject to the condition that they must either be
issued to non-promoter employees (as defined in the North American Securities
Administration Association's statement of policy on options and warrants) or at
an exercise price no less than $5.88 per share. The Horizon PCS board also has
undertaken not to grant options (other than under the Horizon PCS 2000 Stock
Option Plan) with a term of longer than 5 years until the class A common stock
is listed on either the New York Stock Exchange, the American Stock Exchange, or
the Nasdaq National Market.
PENSION PLAN
Pension Plan Table
This table shows the estimated annual benefits payable upon retirement at
age 65 in the September 1, 2000 plan year under The Chillicothe Telephone
Company Salaried Employees' Pension Plan and Trust Agreement, a non-contributory
qualified defined benefit plan. Benefits from the plan are payable upon
retirement in monthly installments for the life of the participant.
80
---------------------------------------------------------------
Years of Service
---------------------------------------------------------------
Remuneration 15 20 25 30 35
$125,000 18,750 25,000 31,250 37,500 43,750
150,000 22,500 30,000 37,500 45,000 52,500
175,000 25,500 34,000 42,500 51,000 59,500
200,000 25,500 34,000 42,500 51,000 59,500
225,000 25,500 34,000 42,500 51,000 59,500
250,000 25,500 34,000 42,500 51,000 59,500
300,000 25,500 34,000 42,500 51,000 59,500
400,000 25,500 34,000 42,500 51,000 59,500
450,000 25,500 34,000 42,500 51,000 59,500
500,000 25,500 34,000 42,500 51,000 59,500
The remuneration shown above is the annual equivalent of an average of
monthly rates of pay. The benefits shown above are based on the sum of the
highest five consecutive monthly rates of pay in effect on each July 1 during
the final ten plan years divided by five. The benefit stated in the table will
not be reduced by Social Security or other amounts received by a participant.
The benefits in the table would be paid in the form of a joint and 50% survivor
annuity.
For the September 1, 2000 plan year, the July 1, 2000 monthly rate of pay
is limited to $14,167, which is equivalent to an annual pay of $170,000.
Compensation in excess of this amount will not be taken into account for benefit
calculation purposes. Along these lines, years of benefit service in excess of
40 years will not be taken into account for benefit calculation purposes.
The pension plan was amended on November 11, 2000. This amendment increased
the minimum benefit from $32.00 per month times years of benefit service to
$35.00 per month times years of benefit service. This minimum does not apply for
any of the benefits listed in the table above.
The number of years of credited service certain executive officers have
accrued under the pension plan as of the most recent fiscal year end are:
Name Years of Service
---- ----------------
Thomas McKell 44.5
William A. McKell 13.3
Jack E. Thompson 32.7
Phoebe McKell 22.3
Thomas McKell is an active employee, but he is currently eligible to
retire. Mr. Thompson is retired and receives retirement benefits under the
pension plan. Horizon PCS employees do not now participate in this plan,
although several current employees of Horizon PCS who formerly were employees
eligible to participate, including William McKell, have vested pension benefits
under this plan.
ITEM 7. Certain Relationships And Related Transactions
SERVICE AGREEMENTS WITH HORIZON TELCOM SUBSIDIARIES
Horizon Personal Communications and Bright PCS, wholly-owned subsidiaries
of our majority-owned subsidiary Horizon PCS, have entered into service
agreements with Horizon Services, Inc. and a separate services agreement with
United Communications, Inc. Horizon Services and United Communications are both
wholly-owned subsidiaries of Horizon Telcom.
81
Under the agreement with Horizon Services, Horizon Services provides
services to Horizon Personal Communications and Bright PCS including insurance
functions, billing services, accounting services, computer access and other
customer relations, human resources, and other administrative services that
Horizon Personal Communications and Bright PCS would otherwise be required to
undertake on their own. These agreements have a term of three years, with the
right to renew the agreement for additional one-year terms each year thereafter.
Horizon PCS has the right to terminate each agreement during its term by
providing 90 days written notice to Horizon Services. Horizon Services may
terminate the agreement prior to its expiration date only in the event that
Horizon PCS breaches its obligations under the services agreement and the breach
is not cured within 90 days after Horizon PCS receives written notice of breach
from Horizon Services. Horizon Services is entitled to the following
compensation from Horizon Personal Communications for services provided:
o direct labor charges at cost; and
o expenses and costs which are directly attributable to the activities
covered by the agreement on a direct allocation basis.
The agreement provides that Horizon Services' obligations do not relieve
Horizon Personal Communications of any of its rights and obligations to their
customers and to regulatory authorities having jurisdiction over them.
Additionally, Horizon Services, upon request, is required to provide Horizon
Personal Communications with access to Horizon Services' records with respect to
the provision of services, and Horizon Services is also required to provide
regular reports to Horizon Personal Communications, as it may request. Horizon
Services received compensation from Horizon Personal Communications of
approximately $330,000 in 1998, $960,000 in 1999, and $4.4 million in 2000. The
amount due to Horizon Services for these services as of December 31, 1999 was
$499,000. As of December 31, 2000, Horizon Personal Communications had a prepaid
balance with Horizon Services of $10,000 for these services. Horizon Services
also provides administrative services to Bright PCS.
Horizon Personal Communications, a subsidiary of Horizon PCS, also has a
services agreement with United Communications, Inc., a wholly-owned subsidiary
of Horizon Telcom. Under the services agreement, Horizon Personal Communications
provides services to United Communications including customer activation and
deactivation, customer care support and other administrative services that
United Communications would otherwise be required to undertake on its own. This
arrangement has a term of one year, with the right to renew the agreement for
additional terms of three months thereafter. Either party has the right to
terminate the agreement during its term by providing 30 days written notice to
the other party. Horizon Personal Communications is entitled to the following
compensation from United Communications for services provided:
o direct labor charges at cost; and
o expenses and costs which are directly attributable to the activities
covered by the agreement on a direct allocations basis.
In addition, United Communications must pay Horizon Personal Communications
$4,000 each month of the term of the services agreement. Horizon Personal
Communications, upon request, is required to provide United Communications with
access to Horizon Personal Communications' records with respect to the provision
of services, and Horizon Personal Communications must provide regular reports to
United Communications, as it may request.
CONSULTING AGREEMENT
Peter M. Holland, the Chief Financial Officer of Horizon PCS, was a
principal and 50% owner of The Pinnacle Group which provided strategic, business
planning and regulatory consulting services to Horizon personal Communications.
Pinnacle received consulting fees of approximately $204,000 in 1998 and $267,000
in 1999. Mr. Holland joined Horizon PCS in November 1999 and terminated his
relationship with Pinnacle. Horizon PCS believes that the consulting fees paid
to Pinnacle were on terms no less favorable to Horizon PCS than would have been
obtained from a non-affiliate.
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SALE OF ASSETS TO AFFILIATE
On April 1, 2000, Horizon PCS transferred the assets and contractual rights
that made up its Internet, long distance and other businesses unrelated to the
wireless operations to United Communications, a subsidiary of Horizon Telcom,
for a purchase price of approximately $708,000. United Communications paid the
purchase price by delivering a promissory note with an interest rate equal to
the applicable federal rate, which was 6.0%. Subsequent to year-end, this note
was sold by Horizon PCS to Services.
OFFICE LEASE
Horizon PCS leases its principal office space, the space for one of its
retail locations and the space for certain equipment from The Chillicothe
Telephone Company, a wholly owned subsidiary of Horizon Telcom. The monthly
rental payments under the lease are $10,000. Prior to signing the lease
agreement in May 2000, Horizon PCS rented the office space from The Chillicothe
Telephone Company under a month-to-month rental arrangement. Under this lease,
Horizon PCS paid The Chillicothe Telephone Company $22,300, $22,300 and $97,500
in 1998, 1999, and 2000, respectively. We believe that the lease was made on
terms no less favorable to Horizon PCS than would have been obtained from a
non-affiliated third party. The lease term expires in May 2005. Horizon PCS has
the option to renew the lease for an additional two year period. It is the
expectation of management that the lease will be renewed.
LEASE OF CELL SITES
Prior to October 1999, Horizon PCS leased most of its cell sites from
Horizon Telcom. In 1998 and 1999, Horizon PCS paid $1.3 million and $2.0
million, respectively, to Horizon Telcom under this lease. The lease was
terminated in October 1999 when the leased assets were sold by Horizon Telcom to
SBA Communications.
STOCK GRANT
In 2001, Horizon PCS distributed the remaining 2% of the Horizon Telcom
stock that it owned to a group of its officers and key employees in the form of
a bonus. Recipients included William McKell, who received 259 shares of class A
common stock and 750 shares of class B common stock, and Peter Holland, who
received 259 shares of class A common stock and 750 shares of class B common
stock. None of the other named executive officers of Horizon Telcom received
stock grants.
TAX SHARING AGREEMENT
In 1997, Horizon Telcom entered into a tax-sharing agreement with its
subsidiaries, including Horizon Personal Communications (now a subsidiary of
Horizon PCS). This agreement provides that Horizon Telcom and its subsidiaries
will file a consolidated tax return as long as they are eligible to do so, and
that subsidiaries will be paid for the amount of their taxable net operating
losses used by Horizon Telcom to offset taxable income.
Due to the sale by Horizon PCS of convertible preferred stock in September
2000, Horizon PCS will no longer be included in the consolidated tax return of
Horizon Telcom. This change in its tax status is referred to as a tax
deconsolidation. The tax-sharing agreement provides that Horizon Telcom will
indemnify Horizon PCS to the extent of any aggregate tax liability in excess of
$11.5 million related to the tax deconsolidation and the dividend of the Horizon
Telcom stock. For the year ended December 31, 2000, Horizon PCS paid $5.2
million to Horizon Telcom for taxes. As of December 31, 2000 Horizon PCS had a
payable to Horizon Telcom of approximately $340,000 for federal income taxes
attributable primarily to the tax liability for the tax deconsolidation and the
dividend of the Horizon Telcom stock offset by the utilization of net operating
losses.
83
PAYABLE TO HORIZON TELCOM
At December 31, 1999, Horizon PCS had a payable to Horizon Telcom relating
to cash advances received from Horizon Telcom's line of credit and the
associated interest. The cash advances related to this payable were used to
finance operations. The outstanding balance as of December 31, 1999 was $4.4
million. In June 2000, this balance was repaid by Horizon PCS with proceeds from
a new financing from an unrelated lender.
ITEM 8. Legal Proceedings
We currently and from time to time are involved in litigation incidental to
the conduct of our business, but we are not a party to any lawsuit which, in our
opinion, is likely to have a material adverse effect on us.
ITEM 9. Market Price of and Dividends on Common Equity and Related Stockholder
Matters
To date, both our class A common stock and our Class B Nonvoting Common
Stock have traded principally in local transactions without the benefit of an
established public trading market, or an organized system for reporting prices
paid.
We paid the following cash dividends per share during the past two calendar
years:
DIVIDENDS*
Year Ended December 31, 1999
First Quarter.......................... $1.14
Second Quarter......................... $1.14
Third Quarter.......................... $1.14
Fourth Quarter......................... $1.14
Total.............................. $4.55
Year Ended December 31, 2000
First Quarter.......................... $1.15
Second Quarter......................... $1.15
Third Quarter.......................... $1.15
Fourth Quarter......................... $1.15
Total.............................. $4.60
-------------
*Dividends are adjusted to reflect the stock split in 2000.
Dividends are paid only as and when declared by our board of directors, in
its sole discretion, based on our financial condition, results of operations,
market conditions and such other factors as it may deem appropriate.
There were 348 holders of record of our class A common stock as of April 9,
2001. There were 684 holders of record of our class B common stock as of April
9, 2001. This number does not include beneficial owners of Common Stock whose
shares are held in the name of various dealers, depositories, banks, brokers or
other fiduciaries.
ITEM 10. Recent Sales of Unregistered Securities
(1) On November 17, 1999, the Registrant granted stock options to purchase
a total of 950 shares of the class B common stock of the Registrant at an
exercise price of $60.00 per share.
(2) On June 27, 2000, in connection with the acquisition of Bright PCS,
Horizon PCS issued an aggregate of 4,678,800 shares of its class B common stock
and distributed 31,912 shares of Horizon Telcom common stock (7,978 shares of
class A common stock and 23,934 shares of class B common stock) to the former
non-Horizon members of Bright PCS in return for the contribution by the former
members of approximately 70% of their ownership interest in Bright PCS.
84
(3) On June 27, 2000, Horizon PCS granted incentive stock options to
purchase 3,874,047 shares of Horizon PCS' class B common stock at an exercise
price of $0.1209 per share, and nonqualified options to purchase 322,837 shares
of its class B common stock, at an exercise price of $0.1209 per share. These
options were granted in replacement of stock options which had been granted by
Horizon Personal Communications, Inc. on November 16, 1999, prior to the
incorporation of Horizon PCS as a holding company for Horizon Personal
Communications, Inc. and Bright PCS.
(4) In connection with Sprint PCS' grant of Horizon PCS' new markets on May
19, 2000, Horizon PCS agreed to grant a warrant to Sprint PCS to acquire
2,510,460 shares of Horizon PCS' class A common stock at an exercise price equal
to the initial public offering price per share. The warrant will expire on the
3rd anniversary of the completion of this offering.
(5) On February 15, 2000, Horizon PCS borrowed $13 million from First Union
Investors, Inc. in connection with Horizon PCS' purchase of shares of common
stock of Horizon Telcom. In connection with the loan transaction, Horizon PCS
and First Union Investors, Inc., agreed that, upon the completion of an initial
public offering, the outstanding principal amount, and accrued interest thereon,
under the note to First Union Investors, Inc. would be converted into shares of
Horizon PCS' class A common stock at a conversion price equal to the initial
public offering price per share. The note was converted by First Union on
September 26, 2000.
(6) On September 8, 2000, Horizon PCS effected a 1.1697 for 1 stock
dividend of its issued and outstanding class B common stock and made
corresponding adjustments to the outstanding options and warrants.
(7) On September 26, 2000, Horizon PCS issued 26,087,237 shares of its
convertible preferred stock at a weighted average purchase price of $5.39 per
share (consisting of 10,252,239 shares of Series A Preferred Stock at $5.88 per
share and 15,834,998 shares of Series A-1 Preferred Stock at $5.07 per share).
The purchasers of the preferred stock and the amount purchased are listed in the
table below.
NAME OF PURCHASER NUMBER OF SHARES
Series A Series A-1
-------- ----------
Apollo Investment Fund IV, L.P............. 7,854,719 12,132,161
Apollo Overseas Partners IV, L.P........... 436,097 673,582
Ares Leveraged Investment Fund, L.P........ 467,687 722,375
Ares Leveraged Investment Fund II, L.P..... 467,687 722,375
First Union Capital Partners, L.P.......... 1,026,049 1,584,505
(8) On September 26, 2000, Horizon PCS issued 295,000 units (Units)
consisting of $295,000,000 principal amount of 14% Senior Discount Notes due
2010 and warrants to purchase 3,805,500 shares of class A common stock at an
exercise price of $5.88 per share. The initial purchasers of the Units and the
amount purchased are listed in the table below.
INITIAL PURCHASERS NUMBER OF UNITS
------------------ ---------------
Donaldson, Lufkin & Jenrette Securities Corporation ...... 206,500
First Union Securities, Inc............................... 88,500
----------------
Total................................... 295,000
=================
(9) Three persons holding options to acquire Horizon Telcom class B common
stock each exercised the vested portions of the options (37 shares each at $60
per share). One option was exercised in July 2000, and the other two were
exercised in August 2000. Each optionee was an executive officer or director.
See Item 6.
85
(10) In February 2001, Horizon PCS decided to distribute a total of 7,249
shares of Horizon Telcom common stock (1,819 shares of class A common stock and
5,430 shares of class B common stock) to a group of Horizon PCS' officers and
employees in the form of a bonus.
Exemption from the registration provisions of the Securities Act for the
transaction described in paragraphs 6 and 10 above was claimed on the basis that
such transactions did not constitute an "offer," "offer to sell," "sale," or
"offer to buy" under Section 5 of the Securities Act. Exemption from the
registration provisions of the Securities Act for the other transactions
described above was claimed under Section 4(2) of the Securities Act and the
rules and regulations promulgated thereunder on the basis that such transactions
did not involve any public offering, the purchasers were sophisticated with
access to the kind of information registration would provide and that such
purchasers acquired such securities without a view towards distribution thereof.
In addition, exemption from the registration provisions of the Securities Act
for the transactions described in paragraphs 1 and 9 was claimed under Section
3(b) of the Securities Act on the basis that such securities were sold pursuant
to a written compensatory benefit plan or pursuant to a written contract
relating to compensation and not for capital raising purposes under Rule 701 of
the Securities Act, and exemption from the registration provisions of the
Securities Act for the transactions described in paragraphs 7 and 8 above was
claimed under Rule 144A of the Securities Act.
ITEM 11. Description of Registrant's Securities to Be Registered
GENERAL
The authorized capital stock of Horizon Telcom consists of 200,000 shares
of class A common stock, without par value, and 500,000 shares of class B common
stock, without par value. As of December 31, 2000, there were 99,726 shares of
class A common stock and 299,301 shares of class B common stock issued and
outstanding. The following description summarizes the material terms of our
capital stock. Your rights as a shareholder of Horizon Telcom will be governed
by the provisions of our Articles of Incorporation and Code of Regulations and
by the provisions of Ohio law, including the Ohio General Corporation Law (OGCL)
and other provisions contained in the Ohio Revised Code.
COMMON STOCK
The common stock will be entitled to share in any dividends that the Board
of Directors, in its discretion, validly declares from funds legally available.
In the event of liquidation, each outstanding share of common stock entitles its
holder to participate ratably in the assets remaining after payment of
liabilities. There are no redemption or sinking fund provisions with regard to
Horizon Telcom common stock. All outstanding shares of common stock will be
fully paid, validly issued and nonassessable. Except with respect to voting
rights and preemptive rights as described below, the shares of class A common
stock and the shares of class B common stock shall have identical terms and
shall be deemed a single class of capital stock for all purposes. The following
terms apply with respect to voting and preemptive rights of the class A common
stock and the class B common stock.
Class A Common Stock
Class A common stock is entitled to one vote for each share held of record
on all matters submitted to a vote of shareholders. Holders of class A common
stock have the right to cumulate votes in the election of directors upon
fulfillment of the conditions prescribed in Section 1701.55 of the Ohio Revised
Code. That Section provides for cumulative rights if notice in writing is given
by any shareholder to the president, a vice-president, or the secretary of a
corporation, not less than forty-eight hours before the time fixed for holding a
meeting of the shareholders for the purpose of electing directors if notice of
the meeting has been given at least ten days before the meeting, and, if the ten
days' notice has not been given, not less than twenty-four hours before such
meeting time, that he desires that the voting at such election shall be
cumulative, provided that an announcement of the giving of such notice is made
upon the convening of the meeting by the chairman or secretary or by or on
behalf of the shareholder giving such notice. If the cumulative rights apply,
each shareholder has the right to cumulate the voting power he possesses and to
give one candidate as many votes as the number of directors to be elected
multiplied by the number of his votes equals, or to distribute his votes on the
same principle among two or more candidates, as he sees fit.
86
Holders of class A common stock have preemptive rights to purchase class A
common stock but have no preemptive or other rights to subscribe for or purchase
additional shares of any other class of stock or any other securities of Horizon
Telcom. Under Section 1701.15 of the OCGL, if Horizon Telcom offers or sells any
class A common stock, current holders of class A common stock have the right,
during a reasonable time and on reasonable terms fixed by the directors, to
purchase the offered shares in proportion to their respective holdings of shares
of the same class, at a price fixed as provided under the OCGL, unless the
shares offered or sold are in any of the following categories:
(1) Treasury shares;
(2) Issued as a share dividend or distribution;
(3) Issued or agreed to be issued for considerations other than money;
(4) Issued or agreed to be issued upon exercise of options granted and
authorized in accordance with Section 1701.16 of the Revised Code;
(5) Issued or agreed to be issued upon conversion of convertible shares
authorized in the articles, or upon exercise of conversion rights
conferred and authorized in accordance with Section 1701.22 of the
Revised Code;
(6) Offered to shareholders in satisfaction of their pre-emptive rights
and not purchased by such shareholders, and thereupon issued or agreed
to be issued for a consideration not less than that at which the
shares were so offered to such shareholders, less reasonable expenses,
compensation, or discount paid or allowed for the sale, underwriting,
or purchase of the shares, unless by the affirmative vote or written
order of the holders of two-thirds of the shares otherwise entitled to
the pre-emptive rights, the pre-emptive rights are restored as to any
of the shares not previously issued or agreed to be issued;
(7) Released from pre-emptive rights by the affirmative vote or written
consent of the holders of two-thirds of the shares entitled to the
pre-emptive rights. Any such vote or consent shall be entered in the
records of the corporation and shall be binding on all shareholders
and their transferees for the time specified in the vote or consent up
to but not exceeding one year, and shall protect all persons who
within the time acquire the shares or options on or conversion or
other rights with respect to the shares so released;
(8) Released from pre-emptive rights by the affirmative vote or written
consent of the holders of a majority of the shares entitled to the
pre-emptive rights, for offering and sale, or the grant of options
with respect thereto, to any or all employees of the corporation or of
subsidiary corporations or to a trustee on their behalf, under a plan
adopted or to be adopted by the directors for that purpose.
The vote of holders of a majority of all outstanding shares of class A
common stock is required to amend the company's Articles and to approve mergers,
reorganizations and similar transactions.
Class B Common Stock
The holders of shares of class B common stock do not have any voting
rights, except as required by law. No holder of shares of class B common stock
shall, as such holder, have any preemptive or preferential right to purchase or
subscribe to any shares of any class of Horizon Telcom, whether now or hereafter
authorized, whether unissued or in the treasury, or to purchase any obligations
convertible into shares of any class of Horizon Telcom, which at any time may be
proposed to be issued by Horizon Telcom or subjected to rights or options to
purchase granted by Horizon Telcom.
87
CERTAIN PROVISIONS OF OHIO LAW
Section 1701.59 of the Ohio Revised Code provides, with certain limited
exceptions, that a director shall be held liable in damages for any action he
takes or fails to take as a director only if it is proved by clear and
convincing evidence that the director's action or failure to act involved an act
or omission undertaken with deliberate intent to cause injury to the corporation
or with reckless disregard for its best interest. In addition, Section 1701.59
of the Ohio Revised Code provides that a director of an Ohio corporation, in
determining what the director reasonably believes to be in the best interests of
the corporation, shall consider the interests of the corporation's shareholders
and may consider, in the director's discretion, any of the following: (i) the
interests of the corporation's employees, suppliers, creditors and customers;
(ii) the economy of the State of Ohio and the nation; (iii) community and
societal considerations; and (iv) the long-term as well as short-term interests
of the corporation and its shareholders, including the possibility that these
interests may be best served by the continued independence of the corporation.
The Ohio Revised Code also authorizes Ohio corporations to indemnify
officers and directors from liability if the officer or director acted in good
faith and in a manner reasonably believed by the officer or director to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal actions, if the officer or director had no reason to believe his action
was unlawful. In the case of an action by or on behalf of a corporation,
indemnification may not be made (i) if the person seeking indemnification is
adjudged liable for negligence or misconduct, unless the court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnification or (ii) if liability asserted against such person concerns
certain unlawful distributions. The indemnification provisions of the Ohio
Revised Code require indemnification if a director or officer has been
successful on the merits or otherwise in defense of any action, suit or
proceeding that he was a party to by reason of the fact that he is or was a
director or officer of the corporation. The indemnification authorized under
Ohio law is not exclusive and is in addition to any other rights granted to
officers and directors under the articles of incorporation or code of
regulations of the corporation or any agreement between officers and director
and the corporation. A corporation may purchase and maintain insurance or
furnish similar protection on behalf of any officer or director against any
liability asserted against the officer or director and incurred by the officer
or director in his capacity, or arising out of the status, as an officer or
director, whether or not the corporation would have the power to indemnify the
officer or director against such liability under the Ohio Revised Code.
Section 1707.041 of the Ohio Revised Code regulates control bids for
corporations in Ohio having certain concentrations of Ohio shareholders and
permits the Ohio Division of Securities to suspend a control bid if certain
information is not provided to offerees. A control bid includes the purchase or
offer to purchase any equity security of the Company from a resident of Ohio if,
after the purchase of that security, the offeror would be directly or indirectly
the beneficial owner of more than 10% of any class of issued and outstanding
equity securities of the Company. Section 1707.043 of the Ohio Revised Code, the
so-called "green mail disgorgement" statute, provides an Ohio corporation, or in
certain circumstances the shareholders of an Ohio corporation, the right to
recover profits realized under certain circumstances by persons who dispose of
securities of a corporation within 18 months of proposing to acquire such
corporation.
Chapter 1704 of the Ohio Revised Code may be viewed as having an
anti-takeover effect. This statute, in general, prohibits an "issuing public
corporation," the definition of which will include Horizon Telcom, from entering
into a "Chapter 1704 Transaction" with the beneficial owner of 10% or more of
the outstanding shares of the corporation (an "interested shareholder") for at
least three years after the date on which the interested shareholder attains a
10% ownership, unless the board of directors of the corporation approves, prior
to the person becoming an interested shareholder, either the transaction or the
acquisition of shares resulting in a 10% ownership position.
88
A "Chapter 1704 Transaction" includes, among other things, a merger or
consolidation with, a sale of substantial assets to, or the receipt of a loan,
guaranty or other financial benefit which is not proportionately received by all
shareholders, from the interested shareholder. After the three-year period, a
Chapter 1704 Transaction with the interested shareholder is permitted only if
either the transaction is approved by the holders of at least two-thirds of the
voting power of the corporation (or such different proportion as is required by
the corporation's articles of incorporation), including a majority of the shares
not owned by the interested shareholder, or the business combination results in
the shareholders other than the interested shareholder receiving a prescribed
"fair price" for their shares. One significant effect of Chapter 1704 is to
encourage a person to negotiate with the board of directors of a corporation
prior to becoming an interested shareholder.
In addition, Section 1707.043 of the Ohio Revised Code requires a person or
entity that makes a proposal to acquire the control of a corporation to repay to
that corporation any profits made from trades in the corporation's stock within
18 months after making the control proposal.
Section 1701.831 of the OGCL, Ohio's "Control Share Acquisition Statute,"
requires shareholder approval of any proposed "control share acquisition" of an
Ohio corporation. A "control share acquisition" is the acquisition, directly or
indirectly, by any person of shares of a corporation that, when added to all
other shares of the corporation that may be voted, directly or indirectly, by
the acquiring person, would entitle such person to exercise or direct the
exercise of
(a) 20% or more, but less than 33 1/3%, of the voting power of the
corporation in the election of directors, or
(b) 33 1/3% or more, but less than a majority, of such voting power, or
(c) a majority or more of such voting power.
The control share acquisition must be approved in advance by the holders of
a majority of the outstanding voting shares represented at a meeting at which a
quorum is present and by the holders of a majority of the portion of the
outstanding voting shares represented at the meeting excluding the voting shares
owned by the acquiring shareholder and certain "interested shares," including
shares owned by officers elected or appointed by the directors of the
corporation and by directors of the corporation who are also employees of the
corporation.
The purpose of the Control Share Acquisition Statute is to give
shareholders of Ohio corporations a reasonable opportunity to express their
views on a proposed shift in control, thereby reducing the coercion inherent in
an unfriendly takeover. The provisions of the Control Share Acquisition Statute
are intended to give shareholders of Horizon Telcom assurance that they will
have adequate time to evaluate the proposal of an acquiring person, that they
will be permitted to vote on the issue of authorizing the acquiring person's
purchase program to go forward in the same manner and with the same proxy
information that would be available to them if a proposed merger of the company
were before them and, most importantly, that the interests of all shareholders
will be taken into account and the probability will be increased that they will
be treated equally regarding the price to be offered for their common shares if
the proposal is approved.
The Control Share Acquisition Statute applies not only to traditional
offers but also to open market purchases, privately negotiated transactions and
original issuances by an Ohio corporation, whether friendly or unfriendly. The
procedural requirements of the Control Share Acquisition Statute could render
approval of any control share acquisition difficult in that the transaction must
be authorized at a special meeting of shareholders, at which a quorum is
present, by the affirmative vote of the majority of the voting power represented
and by a majority of the portion of that voting power excluding interested
shares. Any corporate defense against persons seeking to acquire control may
have the effect of discouraging or preventing offers which some shareholders
might find financially attractive.
Although we believe that these provisions are in Horizon Telcom's best
interests, you should be aware that the provisions could be disadvantageous to
you because the overall effect of these statutes may be to render more difficult
or discourage the removal of incumbent management or the assumption of effective
control by other persons. It is possible that the foregoing provisions will
discourage other persons from making a tender offer for or acquisition of
substantial amounts of the Company's common shares, or may delay changes in
control or management of the Company.
89
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for Horizon Telcom common stock is
National City Bank of Cleveland, Ohio.
ITEM 12. Indemnification of Officers and Directors
HORIZON TELCOM
The regulations of Horizon Telcom provide for indemnification of officers
and directors, as described below:
Actions Not by the Company. Horizon Telcom shall indemnify any person who
was or is a party, or is threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of the
Company, by reason of the fact that he is or was a director or officer of
Horizon Telcom or is or was serving at the request of Horizon Telcom as a
director, officer, partner, or trustee of another corporation, domestic or
foreign, nonprofit or for profit, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit, or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, and with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
Actions by the Company. Horizon Telcom shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of Horizon Telcom to procure a
judgment in its favor by reason of the fact that he is or was a director or
officer of the Company, or is or was serving at the request of Horizon Telcom as
a director, officer, partner, or trustee of another corporation, domestic or
foreign, nonprofit or for profit, partnership, joint venture, trust, or other
enterprise against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company, except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to Horizon Telcom unless, and only to
the extent that, the court of common pleas, or the court in which such action or
suit was brought, shall determine upon application that, despite the
adjudication of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses as
the court of common pleas or such other court shall deem proper.
Indemnification for Expenses. To the extent that a person indemnified by
right or at the option of Horizon Telcom under the above bylaw provisions has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in said sections, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection therewith.
Determination of Indemnification. Any indemnification under these bylaw
provisions, unless ordered by a court, shall be made by Horizon Telcom only as
authorized in the specific case upon a determination that indemnification of the
indemnified person is proper in the circumstances because he has met the
applicable standard of conduct set forth in the bylaws. Such determination shall
be made (a) by a majority vote of a quorum consisting of directors of Horizon
Telcom who were not and are not parties to or threatened with any such action,
suit, or proceeding, or (b) if such a quorum is not obtainable or if a majority
vote of a quorum of disinterested directors so directs, in a written opinion by
independent legal counsel, other than an attorney or a firm having associated
with it an attorney who has been retained by or who has performed services for
Horizon Telcom or any person to be indemnified, within the past five years, or
(c) by the shareholders, or (d) by the court of common pleas or the court in
which such action, suit, or proceeding was brought. Any determination made by
90
the disinterested directors under clause (a) or by independent legal counsel
under clause (b) shall be promptly communicated to the person who threatened or
brought the action or suit by or in the right of the Company, and within ten
days after receipt of such notification, such person shall have the right to
petition the court of common pleas or the court in which such action or suit was
brought to review the reasonableness of such determination.
Advances of Expenses. Expenses, including attorneys' fees, incurred in
defending any action, suit, or proceeding referred to in the above bylaw
provisions may be paid by Horizon Telcom in advance of the final disposition of
such action, suit, or proceeding as authorized by the board of directors in the
specific case upon receipt of an undertaking by or on behalf of the indemnified
person to repay such amount, unless it shall ultimately be determined that he is
entitled to be indemnified by Horizon Telcom as authorized in the above bylaw
provisions. No holder shall have the right to question such expenses paid so
long as the board of directors has authorized such payment and the
aforementioned undertaking has been received by the Company; provided that the
restriction contained in this sentence shall not be construed to restrict a
shareholder's right to question the reasonableness of the ultimate determination
of indemnification as described above under "--Determination of
Indemnification."
Indemnification Not Exclusive. The indemnification provided by the bylaws
shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under the articles, or any agreement, vote of
shareholders or disinterested directors, statute (as now existing or as
hereafter enacted or amended), or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office and
shall continue as to a person who has ceased to be a director, officer, partner,
trustee, or other indemnified capacity and shall inure to the benefit of the
heirs, executors, and administrators of such a person.
Insurance. Horizon Telcom is authorized under the bylaws to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
trustee, employee, or agent of the Company, or is or was serving at the request
of Horizon Telcom as a director, officer, partner, trustee, employee, or agent
of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not Horizon Telcom has the obligation or power to
indemnify him against such liability under the bylaws. Horizon Telcom has
purchased such insurance covering the officers and directors.
Definitions. As used in the bylaws, references to "Company" includes all
constituent corporations in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director or officer of such a
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, partner, trustee, or other indemnified
capacity of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, shall stand in the same
position under this section with respect to the new or surviving corporation as
he would if he had served the new or surviving corporation in the same capacity.
Horizon PCS
Horizon PCS' certificate of incorporation limits the liability of Horizon
PCS directors to the maximum extent permitted by Delaware law. Horizon PCS'
certificate of incorporation provides that Horizon PCS shall indemnify our
directors and executive officers and may indemnify its other officers and
employees and agents and other agents to the fullest extent permitted by law.
Horizon PCS' certificate of incorporation also permits it to secure insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of actions in his or her official capacity.
Horizon PCS intends to enter into agreements to indemnify its directors and
officers in addition to indemnification provided for in its certificate of
incorporation. These agreements will indemnify its directors and officers for
certain expenses, including attorneys' fees, judgments, fines and settlement
amounts incurred by any of these persons in any action or proceeding, including
any action by Horizon PCS or in its right, arising out of that person's services
as a director or officers of Horizon PCS, any subsidiary of Horizon PCS, or any
other company or enterprise to which the person provides services at Horizon
PCS' request. In addition, Horizon PCS has directors' and officers' insurance
91
providing indemnification for certain of its directors, officers and employees
for these types of liabilities. Horizon PCS believes that these provisions,
agreements and insurance are necessary to attract and retain qualified directors
and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of Horizon PCS where indemnification will
be required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for indemnification.
ITEM 13. Financial Statements And Supplementary Data
Our consolidated financial statements, the financial statement schedules
required to be filed with this report and the report of independent public
accountants are set forth on pages 85 through 115 below.
92
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Financial Statements As of
December 31, 2000 and 1999
And For Each of the Three Years in the Period Ended
December 31, 2000
Together With Auditors' Report
93
Report of Independent Public Accountants
To the Board of Directors and Stockholders of Horizon Telcom, INC. AND
SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of HORIZON TELCOM,
INC. (an Ohio corporation) AND SUBSIDIARIES as of December 31, 2000 and 1999,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. 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 auditing standards generally accepted
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 Horizon Telcom, INC.
and Subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule on page 126 is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Columbus, Ohio,
February 16, 2001
94
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As Of December 31, 2000 and 1999
- --------------------------------------------------------------------------------
2000 1999
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 192,011,997 $ 3,790,455
Accounts receivables - subscriber, less allowance for doubtful accounts of
$1,826,000 in 2000 and $911,000 in 1999 4,527,098 1,242,100
Accounts receivable - interexchange carriers and access charge pools, less
allowance for doubtful accounts of $65,000 in 2000 and $67,000 in 1999 3,475,340 2,744,140
Receivables - other 3,327,190 1,414,864
Inventories 6,756,789 4,070,078
Taxes applicable to future years 1,441,811 1,449,127
Prepayments, investments and other 6,349,176 571,516
------------------ -----------------
Total current assets 217,889,401 15,282,280
------------------ -----------------
DEFERRED CHARGES AND OTHER ASSETS:
Unamortized debt expense 14,292,486 233,299
Prepaid pension costs 4,033,370 3,612,753
Intangibles, net 52,879,934 -
Investments 387,169 4,542,813
Other assets 1,041,280 930,385
------------------ -----------------
Total deferred charges and other assets 72,634,239 9,319,250
------------------ -----------------
PROPERTY, PLANT AND EQUIPMENT:
In service 170,960,204 111,297,730
Less - accumulated depreciation (49,027,055) (38,429,223)
------------------ -----------------
Property, plant and equipment in service, net 121,933,149 72,868,507
Construction work in progress 53,608,590 4,243,328
------------------ -----------------
Total property, plant and equipment 175,541,739 77,111,835
------------------ -----------------
Total assets $ 466,065,379 $ 101,713,365
================== =================
(Continued on next page)
95
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
As Of December 31, 2000 and 1999
- --------------------------------------------------------------------------------
2000 1999
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 12,767,338 $ 4,300,000
Current maturities of long-term debt 2,000,000 -
Notes payable - 1,032,000
Accounts payable 13,323,743 1,460,304
Accounts payable - interexchange carriers and access charge pools 1,763,271 1,012,355
Payable to Sprint 4,959,128 -
Accrued taxes 2,960,489 3,211,630
Accrued vacation and payroll 1,788,137 1,098,139
Other accrued liabilities 25,292,702 4,472,833
------------------ ------------------
Total current liabilities 64,854,808 16,587,261
------------------ ------------------
LONG-TERM DEBT AND OTHER LIABILITIES:
Deferred Federal income taxes, net 3,295,462 3,557,248
Deferred income 10,844,378 3,721,837
Postretirement benefit obligation 4,717,774 4,221,902
Notes payable 185,283,104 23,557,965
Senior notes 20,000,000 22,000,000
Other liabilities 264,138 373,400
------------------ ------------------
Total long-term debt and other liabilities 224,404,856 57,432,352
------------------ ------------------
MINORITY INTEREST 983,883 -
CONVERTIBLE PREFERRED STOCK 134,421,881 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - class A, no par value, 200,000 shares authorized, 99,726 shares
issued, stated at $4.25 per share 423,836 423,836
Common stock - class B, no par value, 500,000 shares authorized, 299,301 and
299,178 shares issued in 2000 and 1999, respectively, stated at $4.25 per
share 1,272,029 1,271,506
Additional Paid-in Capital 72,354,113 2,311,801
Deferred compensation (1,503,889) (2,177,897)
Retained earnings (deficit) (24,521,176) 25,864,506
Treasury stock - 43,947 shares at cost (6,624,962) -
----------------- -----------------
Total stockholders' equity 41,399,951 27,693,752
------------------ ------------------
Total liabilities and stockholders' equity $ 466,065,379 $ 101,713,365
================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
96
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
------------------ ----------------- -----------------
OPERATING REVENUES:
Basic local and long-distance service $ 17,543,244 $ 17,103,224 $ 16,759,830
Network access 17,275,754 17,508,729 15,627,492
Internet access services 3,621,025 3,141,282 2,084,410
Equipment systems sales, information services, and paging
services and other revenues 6,388,193 6,733,059 6,266,601
Personal Communications Services revenue 26,110,404 4,319,735 471,141
PCS equipment sales 3,061,022 600,451 308,933
------------------ ----------------- ---------------
Total operating revenues 73,999,642 49,406,480 41,518,407
------------------ ----------------- -----------------
OPERATING EXPENSES:
Cost of goods sold (exclusive of items shown separately below) 10,472,130 3,472,649 1,707,309
Cost of services (exclusive of items shown separately below) 35,290,010 15,129,651 11,360,391
Selling, general and administrative 51,470,120 25,716,562 18,388,869
Non-cash compensation expense 852,718 2,671 -
Depreciation and amortization 13,057,587 9,589,410 8,023,571
------------------ ----------------- -----------------
Total operating expenses 111,142,565 53,910,943 39,480,140
------------------ ----------------- -----------------
OPERATING INCOME (LOSS) (37,142,923) (4,504,463) 2,038,267
------------------ ----------------- -----------------
NONOPERATING INCOME (EXPENSE):
Loss on disposition of Personal Communication Licenses - - (1,716,535)
Gain on sale of PCS assets - 1,387,718 -
Subsidiaries preferred stock dividends (2,782,048) - -
Interest income and other, net 4,734,949 75,091 30,230
Interest expense (12,193,821) (3,598,275) (2,359,049)
------------------ ----------------- -----------------
Total nonoperating income (expense) (10,240,920) (2,135,466) (4,045,354)
------------------ ----------------- -----------------
LOSS BEFORE INCOME TAX BENEFIT (47,383,843) (6,639,929) (2,007,087)
AND MINORITY INTEREST
INCOME TAX BENEFIT 895,576 2,158,831 800,004
MINORITY INTEREST IN LOSS 2,301,344 - -
------------------ ----------------- -----------------
LOSS BEFORE EXTRAORDINARY ITEMS (44,186,923) (4,481,098) (1,207,083)
EXTRAORDINARY LOSS, NET OF TAX (486,323) - -
------------------ ----------------- -----------------
NET LOSS $ (44,673,246) $ (4,481,098) $ (1,207,083)
================== ================= =================
Basic and diluted loss per share before extraordinary item $ (127.62) $ (11.23) $ (3.03)
Basic and diluted loss per share from extraordinary item (1.41) - -
------------------ ----------------- -----------------
Basic and diluted loss per share $ (129.03) $ (11.23) $ (3.03)
================== ================= =================
Weighted average shares outstanding 346,237 398,904 398,904
================== ================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
97
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
class A class B Additional Deferred Retained Total
common common Treasury Paid-in Stock Earnings Stockholders'
stock stock Stock Capital Compensation (Deficit) Equity
----------- ------------ ------------ -------------- -------------- -------------- --------------
Balance, December 31, 1997 $ 423,836 $ 1,271,506 $ - $ 131,233 $ - $ 35,182,715 $ 37,009,290
Dividends - - - - - (1,815,014) (1,815,014)
Net loss - - - - - (1,207,083) (1,207,083)
----------- ------------ ------------ -------------- -------------- -------------- --------------
Balance, December 31, 1998 423,836 1,271,506 - 131,233 - 32,160,618 33,987,193
Dividends - - - - - (1,815,014) (1,815,014)
Deferred stock compensation - - - 2,180,568 (2,180,568) - -
Stock option compensation
expense - - - - 2,671 - 2,671
Net loss - - - - - (4,481,098) (4,481,098)
----------- ------------ ------------ -------------- -------------- -------------- --------------
Balance, December 31, 1999 423,836 1,271,506 - 2,311,801 (2,177,897) 25,864,506 27,693,752
Acquisition of treasury
stock - - (11,835,000) - - - (11,835,000)
Acquisition of Bright - - 4,786,800 44,512,732 - - 49,299,532
Issuance of warrants - - - 33,600,647 - - 33,600,647
Stock issuance costs - - - (234,464) - - (234,464)
Stock option compensation
expense - - - 178,710 674,008 - 852,718
Exercise of stock options - 523 - 6,857 - - 7,380
Stock dividends paid - - 473,100 1,037,666 - (1,529,072) (18,306)
Tax on exchange of stock - - - (3,696,000) - - (3,696,000)
Tax on dividend - - - (363,183) - (4,256,817) (4,620,000)
Dividends paid - - - - - (1,793,038) (1,793,038)
Stock dividends received - - (49,862) - - - (49,862)
Minority interest
adjustment - - - (5,000,653) - 1,866,491 (3,134,162)
Net loss - - - - - (44,673,246) (44,673,246)
----------- ------------ ------------ -------------- -------------- -------------- --------------
Balance, December 31, 2000 $ 423,836 $1,272,029 $(6,624,962) $72,354,113 $(1,503,889) $ (24,521,176) $ 41,399,951
=========== ============ ============ ============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
98
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (44,673,246) $ (4,481,098) $ (1,207,083)
------------------ ------------------ -----------------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities, net of effect of acquisition:
Depreciation and amortization 13,057,587 9,589,410 8,038,493
Deferred Federal income taxes (261,786) (1,216,364) 102,931
Deferred investment tax credits (69,635) (82,036) (98,402)
Extraordinary loss 486,323 - -
Non-cash compensation expense 852,718 2,671 -
Non-cash interest expense 5,635,498 - -
Loss on disposition of Personal Communications Licenses - - 1,716,535
(Gain) loss on disposal of fixed assets 21,277 (5,206,286) 114,907
Non-cash preferred stock dividend of subsidiary 2,782,048 - -
Minority interest in subsidiary (2,301,344) - -
Uncollectible operating revenues 2,487,170 1,136,099 348,562
(Increase) decrease in certain assets:
Accounts receivable (8,387,769) (261,645) (1,693,444)
Inventories (2,707,991) (271,432) (916,297)
Prepaid pension costs (420,617) (720,765) (726,556)
Prepayments, investments and other (2,864,492) (154,586) 122,963
Increase (decrease) in certain liabilities:
Accounts payable 10,529,126 (605,579) (8,753,598)
Deferred income 6,911,554 3,721,837 -
Other accrued liabilities 18,086,085 3,934,096 39,183
Postretirement benefit obligation 495,872 737,838 813,054
Change in other assets and liabilities, net (138,290) (21,231) 359,992
------------------ ------------------ -----------------
Total adjustments 44,193,334 10,582,027 (531,677)
------------------ ------------------ -----------------
Net cash provided by (used in) operating activities (479,912) 6,100,929 (1,738,760)
------------------ ------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (101,491,729) (17,799,773) (15,984,218)
Proceeds from sale of fixed assets 834,000 20,450,000 -
Net cash acquired in acquisition of Bright (Note 2) 4,926,803 - -
Investment in joint venture (1,032,000) (2,068,000) -
------------------ ------------------ -----------------
Net cash provided by (used in) investing activities $ (96,762,926) $ 582,227 $ (15,984,218)
------------------ ------------------ -----------------
(Continued on next page)
99
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes and term loans payable - borrowings, net of repayments
$ 185,321,607 $ (5,641,354) $ 17,953,712
Exercise of stock options 7,380 - -
Issuance of preferred stock 126,500,000 - -
Deferred financing fees (15,410,327) - -
Stock issuance costs (9,161,242) - -
Dividends paid (1,793,038) (1,815,014) (1,815,014)
------------------ ------------------ -----------------
Net cash (used in) provided by financing activities 285,464,380 (7,456,368) 16,138,698
------------------ ------------------ -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
188,221,542 (773,212) (1,584,280)
CASH AND CASH EQUIVALENTS, beginning of year 3,790,455 4,563,667 6,147,947
------------------ ------------------ -----------------
CASH AND CASH EQUIVALENTS, end of year $ 192,011,997 $ 3,790,455 $ 4,563,667
================== ================== =================
Cash paid during the year for:
Interest, net of amounts capitalized $ 4,330,600 $ 3,569,284 $ 3,569,284
Income taxes 9,078,515 3,278,100 3,278,100
NONCASH TRANSACTIONS:
- --------------------
The purchase of the Company's common stock (Note 13) was financed through a
$13,000,000, one year, unsecured 13% senior subordinated promissory note to a
third party lender. The lender converted 100% of the outstanding principal and
interest into Horizon PCS' convertible preferred stock valued at $14,066,611
(Note 11).
The proceeds from the issuance of the discount notes have been allocated to
long-term debt and the value of the warrants ($20,245,000 or $5.32 per share)
has been allocated to additional paid-in capital (Note 8).
Horizon PCS agreed to grant to Sprint PCS warrants to acquire 2,510,460 shares
of Horizon PCS' class A common stock, valued at $13,356,000, in exchange for the
right to service PCS markets in additional areas (Note 14).
During 2000, 1999 and 1998, the Company incurred approximately $1,718,000,
$118,900 and $731,000, respectively, of additional debt related to the purchase
of Rural Telephone Finance Cooperative subordinated capital certificates (Note
5).
During 1999, Horizon PCS had outstanding notes payable totaling $1,032,000
related to the investment in joint venture.
During 1998, the Company returned the majority of its personal communications
licenses to the FCC which eliminated the associated debt of approximately
$10,116,000.
The accompanying notes are an integral part of these consolidated financial
statements.
100
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
------------------------------------------
Business Organization and Principles of Consolidation
-----------------------------------------------------
The accompanying consolidated financial statements reflect the operations
of Horizon Telcom, Inc. (the Company) and its subsidiaries, The Chillicothe
Telephone Company (Chillicothe Telephone), Horizon PCS, Inc. (Horizon PCS),
Horizon Services, Inc. (Services), and United Communications, Inc.
(United). All material intercompany transactions and balances have been
eliminated in consolidation.
On April 26, 2000, Horizon Telcom, Inc. formed Horizon PCS, Inc. On June
27, 2000, Horizon Telcom, Inc. transferred 100% ownership of Horizon
Personal Communications, Inc. (HPC) to Horizon PCS in exchange for
53,806,200 shares of stock of Horizon PCS. This transfer was accounted for
as a reorganization of companies under common control in a manner similar
to a pooling-of-interests in the consolidated financial statements. HPC
will continue to exist and conduct business as a wholly-owned subsidiary of
Horizon PCS.
The Company is a facilities-based telecommunications carrier that provides
a variety of voice and data services to commercial, residential/small
business and local market segments. The Company provides landline telephone
service, VDSL television service, and Internet access services to the
southern Ohio region, principally in and surrounding Chillicothe, Ohio. The
Company also provides PCS operations to a twelve state region in the
Midwest, including Ohio, Indiana, Virginia, and West Virginia, as an
affiliate of Sprint PCS (Note 4).
Estimates
---------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on hand, demand deposits, money
market accounts, and investments in commercial paper with original
maturities of three months or less.
Inventories
-----------
Inventories consist of equipment held for resale, materials and supplies
and installation-related work in progress held by Chillicothe Telephone and
Horizon PCS. Chillicothe Telephone inventories include the cost (determined
by the first-in, first-out method) of equipment to be used in the
installation of telephone systems, as well as costs related to direct sales
orders in process. Horizon PCS inventories consist of handsets and related
accessories which are carried at the lower of cost (determined by the
weighted average method) or market (replacement cost).
101
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
Inventories consist of the following for the years ended December 31, 2000
and 1999:
2000 1999
------------- --------------
Equipment held for resale $ 3,968,704 $ 2,358,518
Materials, supplies and work in progress 2,788,085 1,711,560
------------- --------------
Total inventories $ 6,756,789 $ 4,070,078
============= ==============
Property, Plant and Equipment
-----------------------------
Property, plant and equipment is stated at original cost. Included in the
cost of construction for the Company are items such as direct
payroll-related benefits and interest capitalized during construction.
Property, plant and equipment consists of the following for the years ended
December 31, 2000 and 1999:
2000 1999
----------------- -----------------
Land and building $ 11,324,343 $ 9,689,921
Network assets 128,213,234 80,972,128
Computer and telecommunications equipment 22,577,446 15,494,383
Furniture and office equipment 4,277,098 2,005,648
Vehicles 4,568,083 3,135,650
----------------- -----------------
Total property, plant and equipment in service 170,960,204 111,297,730
Less- accumulated depreciation (49,027,055) (38,429,223)
----------------- -----------------
Property, plant and equipment, net $ 121,933,149 $ 72,868,507
================= =================
During 1999, the Company sold certain PCS equipment, including ancillary
equipment and base stations, to an external third party. The sale resulted
in a gain of approximately $1,388,000, which is included in the Company's
consolidated statement of operations.
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121. Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value,
less costs to sell. At December 31, 2000 and 1999, the Company had no
impaired assets.
Depreciation
------------
Chillicothe Telephone provides for depreciation under the straight-line
method using rates based on the estimated service lives of the various
classes of property. The provisions were equivalent to an annual rate of
approximately 7.1% and 6.9% of the average depreciable property cost for
2000 and 1999, respectively.
102
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
In 1996, the Public Utilities Commission of Ohio (PUCO) approved
Chillicothe Telephone's application to increase annual depreciation rates
and to amortize an estimated depreciation reserve deficiency of
approximately $4,600,000 over a five year period beginning January 1, 1996.
Amortization of the depreciation reserve deficiency was approximately
$740,000, $798,000 and $732,000 during 2000, 1999 and 1998, respectively.
This deficiency was fully amortized as of December 31, 2000.
In 1998, Chillicothe Telephone retired its 1210 digital switch upon
completion of the conversion to a new EWSD digital switch. In 1998, the
PUCO approved the Company's application to amortize the remaining
undepreciated cost of the 1210 digital switch of approximately $1,344,000
over a five year period beginning April 1, 1998. Amortization of the switch
was approximately $269,000, $267,000 and $208,000 in 2000, 1999 and 1998,
respectively. The remaining unamortized balance was approximately $598,000
and $867,000 as of December 31, 2000 and 1999, respectively, and is
included in other assets on the accompanying consolidated balance sheet.
Horizon PCS, Services and United Communications provide for depreciation
and amortization under the straight-line method based on the estimated
service lives of the various classes of property. Estimated useful lives
are as follows:
Years
-----------
Network assets 5-15
Furniture and office equipment 5
Computer equipment 3-5
Vehicles 5
Debt Issuance Costs
-------------------
In connection with the issuance of long-term debt discussed in Note 8, the
Company has incurred a total of $14,331,000 in deferred financing costs in
2000. These debt issuance costs are amortized using the effective interest
method over the term of the underlying obligation, ranging from eight to
ten years. For the years ended December 31, 2000, 1999 and 1998, $726,000,
$23,000 and $20,000 of amortization on debt issuance costs were included in
interest expense.
Revenue Recognition
-------------------
Chillicothe Telephone is an independent local exchange carrier that
provides local telephone service within ten local exchanges, servicing
approximately 37,800 customers.
Chillicothe Telephone follows an access charge system as ordered by the FCC
and the PUCO in 1984. The access charge methodology provides a means
whereby local exchange carriers, including Chillicothe Telephone, provide
their customers access to the facilities of the long-distance carriers and
charge long-distance carriers for interconnection to local facilities.
The PUCO issued an Opinion and Order effective January 1, 1988 for
reporting intraLATA toll revenues. This methodology is defined as the
Originating Responsibility Plan with a Secondary Carrier Option (ORP-SCO).
This plan calls for one or more primary carriers in each LATA with other
local exchange carriers acting as secondary carriers. The secondary
carriers provide the primary carrier with access to local facilities and
are compensated based upon applicable intraLATA access charge tariffs.
Chillicothe Telephone is a primary carrier. IntraLATA toll revenue is
103
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
reflected in basic and long-distance service revenue on the accompanying
consolidated statements of operations, and is recognized as such services
are provided. Estimated unbilled amounts are accrued at the end of each
month.
Chillicothe Telephone recognizes revenue for billing and collection
services performed on behalf of certain interexchange carriers. Chillicothe
Telephone is reimbursed for this service based on the number of messages
billed on behalf of the interexchange carrier. The revenues from this
service are recognized in the same period that the services are provided.
Chillicothe Telephone also recognizes advertising revenues from its
telephone directory. Telephone directory customers sign an annual contract
which is billed in twelve equal installments. The revenue derived from
directory advertising is recognized equally over the twelve month period of
the directory. These items are recorded in other revenues on the
accompanying consolidated statements of operations.
Chillicothe Telephone recognizes revenues on the completed contract basis
for the installation of telecommunication and other related equipment.
These revenues are reported as equipment system sales on the accompanying
statement of operations. Maintenance revenues are recognized over the life
of the contract, and recorded as other revenues on the accompanying
statement of operations.
Horizon PCS is a non-regulated entity that provides wireless personal
communications services (Note 4). Horizon PCS sells handsets and
accessories which are recorded at the time of the sale as equipment
revenue. After the handset has been purchased, the subscriber purchases a
service package which is recognized monthly as service is provided and is
included as Personal Communications Service revenue. Roaming revenue is
recorded when Sprint PCS subscribers, other Sprint PCS affiliate
subscribers and non-Sprint PCS subscribers roam onto Horizon PCS' network.
Horizon PCS began charging activation fees in 2000. The accounting policy
for the recognition of activation fee revenue is to record the revenue over
the periods such revenue is earned in accordance with the current
interpretations of SEC Staff Accounting Bulletin No. 101 (SAB 101), Revenue
Recognition in Financial Statements. Accordingly, activation fee revenue
and direct customer activation expense has been deferred and will be
recorded over the average life for those customers (36 months) that are
assessed an activation fee. As of December 31, 2000, the Company has
recognized approximately $47,000 of activation fee revenue and has deferred
$393,000 of activation fee revenue and direct customer activation expense.
An affiliation fee of 8% of collected personal communications service
revenues from Sprint PCS subscribers based in the Company's territory,
excluding outbound roaming, and from non-Sprint PCS subscribers who roam
onto the Company's network, is accrued as services are provided and
remitted to Sprint PCS and recorded as cost of service. Revenues generated
from the sale of handsets and accessories, inbound and outbound Sprint PCS
roaming fees, and from roaming services provided to Sprint PCS customers
who are not based in the Company's territory are not subject to the 8%
affiliation fee.
Certain of the personal communications equipment sales are made through
independent distributors under agreements allowing the right of return on
merchandise not sold by the distributors. The Company defers recognition of
such sales until the merchandise is sold by the distributors.
United Communications is an FCC licensed radio common carrier that provides
primarily Internet access services and wireless transmission service
relating to mobile telephones and analog and digital paging services in the
state of Ohio, as well as reselling long-distance services. Revenues on
equipment sales are recognized at the time of sale. Revenues for the
Internet and paging service are recognized monthly as service is rendered.
In December 2000, United Communications sold the assets of its paging
business to an unrelated third party and recognized a loss of approximately
$230,000.
104
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
Minority Interest
-----------------
As part of the acquisition of Bright Personal Communication Services, LLC
(Bright) (Note 2), the former members of Bright have a 7.974% ownership in
Horizon PCS. The Company accounts for this ownership by recording the
portion of net income (loss) attributable to the minority shareholders
($2,301,344 loss in 2000) as minority interest in earnings (loss) in the
accompanying consolidated statement of operations. Minority interest in the
underlying equity of Horizon PCS is $983,883 as of December 31, 2000.
Advertising Costs
-----------------
Costs related to advertising and other promotional expenditures are
expensed as incurred. Advertising costs totaled approximately $4,645,000,
$1,207,000 and $636,000 for the years ended December 31, 2000, 1999, and
1998, respectively.
Stock Based Compensation
------------------------
The Company accounts for compensation cost associated with its stock
compensation plans for employees in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees. The Company applies SFAS No. 123,
Accounting for Stock Based Compensation and related interpretations, for
options granted to non-employees.
Federal Income Taxes
--------------------
The Company accounts for income taxes pursuant to the requirements of SFAS
No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax
assets and liabilities are determined based on differences between the
financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Deferred tax assets and
liabilities are adjusted for future changes in tax rates.
Investment tax credits have been deferred and are being amortized over the
estimated service lives of the related property.
Concentration of Credit Risk
----------------------------
The Company maintains cash and cash equivalents in an account with a
financial institution in excess of the amount insured by the Federal
Deposit Insurance Corporation. The financial institution is one of the
largest banks in the United States and management does not believe there is
significant credit risk associated with deposits in excess of federally
insured amounts.
Further, the Company maintains accounts with nationally recognized
investment managers. Such deposits are not insured by the Federal Deposit
Insurance Corporation. Management does not believe there is significant
credit risk associated with these uninsured deposits.
Other financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. The
risk is limited due to the large number of customers comprising the
Company's customer base.
Deferred Income
---------------
During 2000, Horizon PCS received approximately $7,200,000 of site bonuses
from SBA, which constructs towers leased by Horizon PCS. Horizon PCS has
entered into ten year leases of these towers and therefore recognizes the
105
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
site bonus over the life of the respective lease. The amortization of the
site bonus is recorded as a reduction to lease expense. For the year ended
December 31, 2000, Horizon PCS had reduced lease expense by approximately
$320,000 related to amortization of the site bonus.
In October 1999, the Company sold all of its towers, including both
in-service property and construction work in progress, to an external third
party. The towers were then leased back by Horizon PCS (Note 16). The gain
on the sale of the towers was $3,817,269. Since this transaction is
classified as a sale-leaseback, the gain was deferred and is being
recognized over the ten-year term of the operating lease. Amortization of
the gain recognized during 2000 and 1999 totaled approximately $381,000 and
$95,000, respectively, and is offsetting the related lease expense.
Comprehensive Loss
------------------
There were no differences between net loss and comprehensive loss, as the
Company had no transactions or items that would require inclusion in other
comprehensive income as defined by SFAS No. 130, Reporting Comprehensive
Income.
Net Loss per Share
------------------
The Company computes net loss per common share in accordance with SFAS No.
128, Earnings per Share and SEC Staff Accounting Bulletin No. 98. Basic and
diluted loss per share is computed by dividing loss, for each period, by
the weighted-average outstanding common shares. No conversion of common
stock equivalents (stock options granted by the Company, Note 15) has been
assumed in the calculations since the effect would be antidilutive. As a
result, the number of weighted-average outstanding common shares as well as
the amount of net loss per share are the same for basic and diluted net
loss per share calculations for all periods presented. As further discussed
in Notes 11, 14 and 15, Horizon PCS has issued stock options, stock
purchase warrants and convertible preferred stock, which may impact
minority interest and the related earnings or loss of the Company.
Issued Accounting Pronouncements
--------------------------------
On July 8, 1999, the Financial Accounting Standards Board (FASB) issued
SFAS No. 137, Deferral of the Effective Date of SFAS 133. SFAS No. 137
defers the effective date of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities, to all
fiscal quarters of all fiscal years beginning after June 15, 2000. The
adoption did not have a material effect on the Company's consolidated
results of operations, financial position, or cash flows.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform with the 2000
presentation.
(2) Acquisitions
------------
During 1999 Horizon PCS entered into a joint venture agreement through the
purchase of 25.6% of Bright Personal Communications Services, LLC (Bright).
The investment was accounted for under the equity method. The joint venture
was established in October 1999 to provide personal communications services
in Ohio, Indiana, and Michigan.
106
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
On June 27, 2000, Horizon PCS acquired the remaining 74.4% of Bright in
exchange for approximately 8% of Horizon PCS' class B common stock
(4,678,800 shares valued at approximately $34,000,000) and approximately
40% of the Horizon Telcom, Inc. common stock owned by Horizon PCS (31,912
shares valued at $15,300,000) (Note 13).
This acquisition was treated as a purchase for accounting purposes. The
consolidated statement of operations includes the results of Bright from
June 28, 2000.
In conjunction with this transaction, Horizon PCS also acquired the Bright
management agreement with Sprint PCS and, with it, the right to operate
using Sprint PCS licenses in Bright's markets. Horizon PCS has recognized
an intangible asset totaling $33,000,000 related to this licensing
agreement which will be amortized over 20 years, the initial term of the
underlying management agreement. Amortization commenced in June 2000.
Amortization expense for the year ended December 31, 2000 is $867,672.
The purchase price, as preliminarily allocated, exceeds the fair market
value of the net assets acquired by approximately $7,778,000. The resulting
goodwill will be amortized on a straight-line basis over 20 years.
Amortization commenced in June 2000. Amortization expense for the year
ended December 31, 2000 is $197,685.
The preliminary purchase price allocation of the fair value of assets
acquired and liabilities assumed is summarized below:
Working capital $ 2,072,000
Property and equipment 6,328,000
Sprint PCS licenses 33,000,000
Goodwill 7,777,752
Other assets 122,000
The following unaudited pro forma summary presents the net revenues, net
loss and loss per share from the combination of the Company and Bright, as
if the acquisition had occurred at the beginning of the 2000 and 1999
fiscal years. The pro forma information is provided for information
purposes only. It is based on historical information and does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of the future results of operations of the combined
enterprise:
Year Ended December 31,
---------------------------------------
2000 1999
----------------- -----------------
Net revenue $ 73,492,525 $ 49,333,479
Net loss (44,774,980) (4,603,448)
Basic and diluted per share (123.32) (11.54)
Prior to acquisition, Bright had not commenced revenue-generating
operations and was paying a management fee to its investor, Horizon PCS.
The management fee recognized by Horizon PCS in the period prior to the
acquisition date is included in net revenue. In the pro forma disclosure
above, this management fee revenue is fully eliminated.
107
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
(3) Segment Information
-------------------
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires companies to
define and report financial and descriptive information about its operating
segments. The Company is organized around the differences in the products
and services it offers. Under this organizational structure, the Company
operates in two reportable business segments: landline telephone services
and wireless personal communications services. The landline telephone
services segment includes three major revenue streams: basic local service,
long-distance service and network access services. The wireless personal
communications services segment also includes three major revenue streams:
PCS subscriber revenues, PCS roaming revenues and PCS equipment sales.
The Company evaluates the performance of the segments based on operating
earnings before the allocation of administrative expenses. Information
about interest income and expense, and income taxes is not provided on a
segment level. The accounting policies of the segments are the same as
described in the summary of significant accounting policies. Corporate
assets represent assets maintained by services for the benefit of all
segments.
The following table includes revenue, operating earnings, capital
expenditures and depreciation and amortization expense for the fiscal years
ended December 31, 2000, 1999 and 1998 and assets as of December 31, 2000
and 1999 for each segment and reconciling items necessary to total to
amounts reported in the financial statements:
Net Revenues
-------------------------------------------------------
2000 1999 1998
---------------- ---------------- ---------------
Landline telephone services $ 34,818,998 $ 34,611,953 $ 32,387,322
Personal communications services 29,171,426 4,920,186 780,074
All other 10,009,218 9,874,341 8,351,011
---------------- ---------------- ---------------
Total net revenue (external customers) $ 73,999,642 $ 49,406,480 $ 41,518,407
================ ================ ===============
Intercompany Revenues
-------------------------------------------------------
2000 1999 1998
---------------- ---------------- ---------------
Landline telephone services $ 644,321 $ 545,813 $ 817,824
Personal communications services 21,348 11,059 2,746
All other 15,261 11,670 14,084
---------------- ---------------- ---------------
Total intercompany revenue $ 680,930 $ 568,542 $ 834,654
================ ================ ===============
Operating Earnings (Loss)
-------------------------------------------------------
2000 1999 1998
---------------- ---------------- ---------------
Landline telephone services $ 13,155,621 $ 15,407,749 $ 14,310,518
Personal communications services (40,724,467) (12,850,711) (7,920,304)
All other 1,548,800 1,724,587 2,174,226
Unallocated administrative expenses (11,122,877) (8,786,088) (6,526,173)
---------------- ---------------- ---------------
Total operating earnings (loss) $ (37,142,923) $ (4,504,463) $ 2,038,267
================ ================ ===============
108
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
Depreciation and Amortization
-------------------------------------------------------
2000 1999 1998
---------------- ---------------- ---------------
Landline telephone services $ 6,313,846 $ 6,046,874 $ 5,634,296
Personal communications services 6,134,458 2,532,982 1,686,089
All other 609,283 1,009,554 703,186
---------------- ---------------- ---------------
Total depreciation and amortization $ 13,057,587 $ 9,589,410 $ 8,023,571
================ ================ ===============
Capital Expenditures
-------------------------------------------------------
2000 1999 1998
---------------- ---------------- ---------------
Landline telephone services $ 14,032,169 $ 8,803,298 $ 6,904,271
Personal communications services 83,562,958 8,640,456 8,397,182
All other 3,896,602 356,019 682,765
---------------- ---------------- ---------------
Total capital expenditures $101,491,729 $ 17,799,773 $ 15,984,218
================ ================ ===============
Assets
-----------------------------------
2000 1999
---------------- ----------------
Landline telephone services $ 70,991,973 $ 62,432,630
Personal communications services 385,060,550 32,878,756
All other 4,711,189 1,804,237
Corporate 5,301,667 4,597,742
---------------- ----------------
Total assets $ 466,065,379 $ 101,713,365
================ ================
Other business activities of the Company include Internet access services,
equipment systems sales, information services and other revenues which do
not meet the definition of a reportable segment under SFAS No. 131. Amounts
related to these business activities are included above under "All other."
Unallocated administrative expenses and corporate assets represent amounts
not identified to an operating segment.
109
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
Net operating revenues by product and services were as follows:
2000 1999 1998
---------------- ---------------- ---------------
Basic local services $ 14,413,686 $ 13,807,521 $ 12,464,548
Long-distance services 3,129,558 3,295,703 4,295,282
Network access services 17,275,754 17,508,729 15,627,492
---------------- ---------------- ---------------
Total landline telephone services 34,818,998 34,611,953 32,387,322
---------------- ---------------- ---------------
PCS subscriber revenues 17,702,302 3,677,773 452,954
PCS roaming revenues 8,408,102 641,962 18,187
PCS equipment sales 3,061,022 600,451 308,933
---------------- ---------------- ---------------
Total wireless personal
communication services 29,171,426 4,920,186 780,074
---------------- ---------------- ---------------
Internet access services 3,621,025 3,141,282 2,084,410
Equipment systems sales 1,482,693 1,905,541 1,654,681
Information Services 1,172,366 1,227,311 1,115,169
Other 3,733,134 3,600,207 3,496,751
---------------- ---------------- ---------------
Total Other 10,009,218 9,874,341 8,351,011
---------------- ---------------- ---------------
Total Operating Revenues $ 73,999,642 $ 49,406,480 $ 41,518,407
================ ================ ===============
(4) Personal Communications Services (PCS)
--------------------------------------
In October 1996, the FCC conditionally granted Horizon PCS licenses to
provide personal communications services in various parts of Ohio, West
Virginia and Kentucky (a total of five licenses). The FCC financed the
licenses. According to FCC rules, the licenses were conditional upon the
full and timely payment of the licenses cost. The licenses were subject to
a requirement that Horizon PCS constructs and operates facilities that
offer coverage to a defined population within the relevant license areas
within a defined period. Horizon PCS began the engineering and design phase
in 1996 and began the construction of the personal communications network
in early 1997. Horizon PCS began providing digital, wireless personal
communications services in August 1997.
In 1997, the FCC offered four options to certain PCS license holders to
change the payment terms of the FCC financed debt. These options were:
continuing with the current installment plan (status quo); return half of
the spectrum from any or all of the licenses in exchange for a
proportionate reduction in debt (disaggregation); turning in all licenses
in exchange for total debt forgiveness (amnesty); or prepay for as many
licenses as Horizon PCS can afford at face value while returning other
licenses in exchange for debt forgiveness (prepayment).
During 1998, Horizon PCS elected to return all of the spectrum from four
licenses and half of the spectrum from the fifth license. As a result of
returning the spectrum to the FCC, Horizon PCS recognized a loss of
approximately $1,700,000. The loss primarily represents the write-off of
capitalized license bid costs and certain spectrum clearance costs, as well
as the write-down of the license retained by Horizon PCS to its recoverable
value.
In connection with the return of the spectrum, Horizon PCS entered into
management agreements with Sprint PCS, the PCS group of Sprint Corporation,
during 1998. These agreements provide Horizon PCS with the exclusive right
110
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
to build, own, and manage a wireless voice and data services network in
markets located in Ohio, West Virginia, Kentucky, Virginia, Tennessee, and
Maryland under the Sprint PCS brand. Horizon PCS is required to build out
the wireless network according to Sprint PCS specifications. The term of
the agreements is 20 years with three successive 10-year renewal periods
unless terminated by either party under provisions outlined in the
management agreements. The management agreements commenced in June 1998,
but payments of the management fee did not commence until Horizon PCS
converted to a fully branded Sprint PCS affiliate in October 1999. The
management agreements included indemnification clauses between Horizon PCS
and Sprint PCS to indemnify each party against claims arising from
violations of laws or the management agreements, other than liabilities
resulting from negligence or willful misconduct of the party seeking to be
indemnified.
In May 2000, Horizon PCS expanded its management agreement with Sprint PCS.
This allows Horizon PCS to have the exclusive right to build, own and
manage a wireless voice and data services network in markets located in
Pennsylvania, New York, Ohio and New Jersey.
The Sprint PCS agreements require Horizon PCS to interface with the Sprint
PCS wireless network by building Horizon PCS' network to operate on PCS
frequencies licensed to Sprint PCS in the 1900 MHz range. Under the Sprint
PCS agreements, Horizon PCS has agreed to:
o construct and manage a network in Horizon PCS' territory in
compliance with Sprint PCS' PCS licenses and the terms of the
management agreement;
o distribute, during the term of the management agreement, Sprint
PCS' PCS products and services;
o conduct advertising and promotion activities in Horizon PCS'
territory; and
o manage that portion of Sprint PCS' customer base assigned to
Horizon PCS' territory.
The management agreement specifies the terms of the Sprint PCS affiliation,
including the required network build-out plan. Horizon PCS has agreed to
operate its network to provide for a seamless handoff of a call initiated
in its territory to a neighboring Sprint PCS network. The Sprint PCS
management agreements require Horizon PCS to complete specified portions of
its markets by specified dates.
Horizon PCS must comply with Sprint PCS' program requirements for technical
standards, customer service standards, national and regional distribution
and national accounts programs to the extent that Sprint PCS meets these
requirements.
A failure to meet the build-out requirements for any of Horizon PCS'
markets, or to meet Sprint PCS' technical requirements, would constitute a
breach of the Sprint PCS agreements that could lead to their termination if
not cured within a cure period of 30 to 180 days, depending on the nature
of the breach. If Sprint PCS terminates these agreements, Horizon PCS will
no longer be able to offer Sprint PCS products and services. Additionally,
Sprint PCS may purchase Horizon PCS' operating assets or capital stock for
72% of the entire business value. Horizon PCS is currently in compliance
with these requirements or has obtained appropriate waivers from Sprint.
Expense related to the management fees charged under the agreement was
approximately $1,302,000 and $130,000 for the years ended December 31, 2000
and 1999, respectively. The management fee is determined as 8% of certain
collected personal communications services revenues (Note 1).
111
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
(5) Investments
-----------
The Company's long-term investments include the following:
2000 1999
-------------- ------------
Bright Personal Communications Services, LLC $ - 3,057,680
Illuminet 250,000 250,000
RTFC subordinated capital certificates - 1,177,898
Miscellaneous investments 137,169 57,235
-------------- ------------
$ 387,169 $ 4,542,813
============== ============
As of December 31, 1999 the Company had an investment in Bright. The
Company bought out the other members during 2000 (Note 2).
The Company holds $250,000 of the common stock in Illuminet, formerly USTN
Holdings, Inc., resulting in a 0.46% interest accounted for under the cost
method.
As part of the term loan facility for the construction of the personal
communications network (Note 8), the Company was required to purchase Rural
Telephone Finance Cooperative's (RTFC, the lender) subordinated capital
certificates with each draw on the loan. These certificates, totaling
approximately $2,895,000 as of December 31, 2000, will be redeemed by the
lender in 2001 and are recorded in prepayments, investments and other in
the accompanying consolidated balance sheet. The Company believes the
carrying value of this investment approximates fair market value.
(6) Lines of Credit
---------------
During 2000, Chillicothe Telephone entered into an agreement with a bank
for a line of credit that provides maximum borrowings of $15,000,000,
payable on demand. Interest accrues on the outstanding balance at a
fluctuating rate tied to the LIBOR rate (8.3% as of December 31, 2000) and
is due and payable monthly. The outstanding balance at December 31, 2000
was $12,767,338. The line of credit contains a covenant requiring minimum
tangible net worth. As of December 31, 2000, Chillicothe Telephone was in
compliance with the covenant.
During 1998, the Company entered into a revolving line of credit agreement
with a bank that provides for maximum borrowings of up to $10,000,000,
payable upon demand. The total outstanding balance as of December 31, 1999
was $4,300,000. Interest accrued at a rate determined by the bank on each
draw (7.6% at December 31, 1999) and was payable quarterly. This line of
credit was terminated when the line of credit above was originated.
The Company had a line of credit agreement with a bank that provided for
maximum borrowings of up to $4,000,000, payable upon demand. There was no
outstanding balance as of December 31, 1999. This line of credit was
terminated when the line of credit above was originated.
On September 26, 2000, Horizon PCS entered into a $95,000,000 line of
credit that expires on September 30, 2008 as part of its senior secured
credit facility agreement (Note 8). As of December 31, 2000, Horizon PCS
had not borrowed on this line of credit. Horizon PCS pays an annual
commitment fee of 1.375% of the unused line at the end of each quarter.
Horizon PCS incurred $306,000 for the line of credit commitment fee for the
year ended December 31, 2000.
112
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
In May 2000, the Company entered into a $5,000,000 general corporate line
of credit with a bank, the proceeds of which were used for financing of
construction expenditures. Interest was at the bank's standard line of
credit rate plus 100 basis points and was payable quarterly beginning in
the first quarter after the initial advance. In September 2000, this line
of credit was fully repaid and terminated with the proceeds from the
financing described in Note 8 below.
In March 2000, the Company entered into a $5,000,000 interim revolving line
of credit with a bank, the proceeds of which were used for general working
capital purposes. Interest was at the bank's prevailing prime rate plus 150
basis points and was payable quarterly, beginning in the first quarter
after the initial advance. In September 2000, this line of credit was fully
repaid and terminated with the proceeds from the financing described in
Note 8 below.
(7) Short-Term Note Payable
-----------------------
In February 2000, Horizon PCS purchased 78,900 shares of Horizon Telcom,
Inc. common stock from an external shareholder. This purchase was financed
through a $13,000,000, one year, unsecured 13% senior subordinated
promissory note to a third party lender. The lender converted 100% of the
outstanding principal and unpaid interest into Horizon PCS' convertible
preferred stock on September 26, 2000, as part of Horizon PCS' financing
activities (Note 8). The value converted into convertible preferred stock
was $14,066,611 (Note 11).
(8) Long-Term Debt
--------------
Scheduled maturities of long-term debt and long-term senior notes payable
are as follows:
Year Amount
----------------------------- -----------------
2001 $ 2,000,000
2002 2,000,000
2003 2,000,000
2004 2,375,000
2005 2,500,000
Thereafter 196,408,104
-----------------
207,283,104
Less: current maturities (2,000,000)
-----------------
$ 205,283,104
=================
The components of long-term debt outstanding at December 31, 2000 and 1999
are as follows:
2000 1999
---------------- -----------------
Accreted senior discount notes $135,283,104 $
-
Senior secured credit facility 50,000,000
-
Term loan payable - 23,557,965
Senior notes payable 20,000,000 22,000,000
-------------- -----------------
Total $205,283,104 $ 45,557,965
============== =================
113
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
On September 26, 2000, Horizon PCS received $149,680,050 from the issuance
of $295,000,000 of senior discount notes due 2010. The notes accrete in
value until October 1, 2005 at a rate of 14% compounded semi-annually. Cash
interest on the notes will become payable on April 1 and October 1 of each
year, beginning on April 1, 2006. The senior discount notes include
warrants to purchase 3,805,500 shares of Horizon PCS' class A common stock.
The warrants represent the right to purchase an aggregate of approximately
4.0% of the issued and outstanding common stock of Horizon PCS on a fully
diluted basis, assuming the exercise of all outstanding options and
warrants to purchase common stock and the conversion into shares of class A
common stock of the convertible preferred stock (Note 11).
The proceeds from the issuance of the discount notes were allocated to
long-term debt and the value of the warrants ($20,245,000 or $5.32 per
share) was allocated to additional paid-in capital. The fair value of the
warrants was estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
expected yield of 0.0%, a risk free interest rate of 6.5%, expected life of
10 years (equal to the term of the warrants) and a volatility of 95%.
On September 26, 2000, and concurrent with the sale of the convertible
preferred stock (Note 11) and the senior discount notes described above,
Horizon PCS entered into a senior secured credit agreement with a financial
institution to provide an aggregate commitment, subject to certain
conditions, of up to $250,000,000 (including a $95,000,000 line of credit
described in Note 6). The credit facility bears interest at various
floating rates, which approximate one to six month LIBOR rates plus 3.5% -
4.0% (approximately 9.7% - 10.6% at December 31, 2000). At December 31,
2000, the outstanding balance on the senior secured credit agreement was
$50,000,000. Horizon PCS pays a commitment fee of 1.375% on the unused
portion of the $250,000,000 facility. Horizon PCS incurred a total of
$680,000 of commitment fee expense for the year ended December 31, 2000.
In connection with the acquisition of Bright, Horizon PCS assumed a
ten-year secured term loan totaling $35,400,000. The note was
collateralized by the equipment. In September 2000, this note was fully
repaid and terminated with the proceeds from the financing described above.
In May 2000, the Company entered into a $40,500,000 term loan facility with
a financial institution to purchase certain PCS equipment to construct
Horizon PCS' personal communications network. Maximum advances on the note
totaled $38,475,000. This loan was secured by equipment, collateral
assignments of Horizon PCS' tower leases, and pledges of Horizon PCS stock
and ownership interests in Bright. In September 2000, this loan was fully
repaid and terminated with the proceeds from the financing described above.
In December 1998, Horizon PCS issued notes payable totaling $10,000,000 to
finance the build-out of the personal communications network and repay
short-term debt. The note was collateralized by the equipment purchased.
This note was repaid during 1999 with proceeds from the sale of the
Company's PCS towers (Note 1).
In June 1998, Chillicothe Telephone issued Senior Notes (1998 Senior Notes)
of $11,000,000 and $1,000,000 to insurance companies. Annual principal
payments of $1,200,000 begin in 2009 and continue until 2018. The interest
rate on the outstanding balance at December 31, 2000 and 1999 was 6.62%.
The 1998 Senior Notes contain various financial covenants, the most
restrictive covenants being the minimum net worth requirement, the
limitation of funded debt requirement, and the restricted intercompany
payments and investment requirements. As of December 31, 2000, the Company
was in compliance with such covenants.
In November 1993, Chillicothe Telephone issued Senior Notes (1993 Senior
Notes) of $6,000,000 and $4,000,000 to insurance companies. Annual
principal payments of $2,000,000 begin in 2001 and continue until 2005. The
interest rate on the outstanding balance at December 31, 2000 and 1999 was
114
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
6.72%. The 1993 Senior Notes contain various financial covenants, the most
restrictive covenants being the minimum net worth requirement, the
limitations on funded debt requirement, and the restricted intercompany
payments and investment requirements. As of December 31, 2000, the Company
was in compliance with such covenants.
In August 1997, Horizon PCS entered into a term loan facility with a bank
to purchase certain equipment to construct Horizon PCS' personal
communications network. The note was collateralized by the same equipment.
In addition, certain obligations under this loan had been guaranteed by a
third party vendor. Maximum advances on the note total $23,557,965. As of
December 31, 1999, the total outstanding balance was $23,557,965. In
September 2000, this note was fully repaid and terminated with the proceeds
from the senior secured credit agreement discussed above.
In October 1996, the FCC granted Horizon PCS personal communications
services licenses. The licenses were financed through the FCC. The total
amount financed was $10,115,618 at December 31, 1997. The total debt was
eliminated during 1999 when Horizon PCS returned the licenses to the FCC
(Note 4).
In October 1994, the Company issued notes payable totaling $500,000 to
purchase United Communications. The notes matured at $100,000 per year
beginning in 1995. The final payment on this note was made in 1999.
(9) Federal Income Taxes
--------------------
The Company's Federal income tax expense (benefit) consists of:
Year Ended December 31,
-------------------------------------------------------
2000 1999 1998
----------------- --------------- --------------
Current payable $ (564,155) $(1,593,268) $ (883,803)
Deferred taxes (261,786) (483,527) 182,202
Investment tax credit (69,635) (82,036) (98,403)
----------------- --------------- --------------
(895,576) (2,158,831) (800,004)
Extraordinary loss:
Current payable (261,863) - -
----------------- --------------- --------------
Total tax benefit $ (1,157,439) $(2,158,831) $ (800,004)
================= =============== ==============
115
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
The Company's Federal income tax benefit is computed as follows:
Year Ended December 31,
------------------------------------------------------
2000 1999 1998
----------------- --------------- --------------
Tax at statutory rate applied to pretax book loss $ (15,493,399) $(2,356,633) $ (682,409)
Increase (decrease) in tax from:
Investment tax credits (69,635) (82,036) (98,403)
Change in valuation allowance 2,385,097 237,519 -
Non-deductible goodwill amortization 302,968 - -
Tax on interest on warrants 177,210 - -
Stock option compensation 171,571 - -
Tax on excess loss account 11,463,395 - -
Other, net 167,217 42,319 (19,192)
----------------- --------------- --------------
Total tax benefit $ (895,576) $(2,158,831) $ (800,004)
================= =============== ==============
Deferred income taxes result from temporary differences between the
financial reporting and tax basis amounts of existing assets and
liabilities. The source of these differences and tax effect of each are as
follows:
2000 1999 1998
--------------- -------------- ---------------
Deferred income tax assets:
Uncollectible accounts $ 601,944 $ 332,577 $ 256,843
Vacation 416,915 280,670 272,767
Pensions and other retirement benefits 895,820 712,061 465,006
Personal Communication Services Licenses and
start-up costs 654,293 381,276 476,387
Net operating loss carryforward - 903,292 -
Deferred gain on sale of fixed assets 1,415,488 1,016,036 -
Deferred income 2,479,716 - -
Interest expense on senior discount notes 1,880,148 - -
Other 389,513 256,459 -
--------------- -------------- ---------------
Total deferred income tax assets $ 8,733,837 $ 3,882,371 $ 1,471,003
=============== ============== ===============
Deferred income tax liabilities:
Property differences $(8,821,255) $(6,826,487) $(5,871,315)
Other (585,428) (375,613) (373,300)
--------------- -------------- ---------------
Total deferred income tax liabilities $(9,406,683) $(7,202,100) $(6,244,615)
=============== ============== ===============
Deferred income taxes, net $ (672,846) $(3,319,729) $(4,773,612)
Less: valuation allowance (2,622,616) (237,519) -
--------------- -------------- ---------------
Total deferred income taxes, net $(3,295,462) $(3,557,248) $(4,773,612)
=============== ============== ===============
116
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
Until September 26, 2000, Horizon PCS was included in the consolidated
federal income tax return of the Horizon Telcom affiliated group. Horizon
PCS provided for federal income taxes on a pro-rata basis, consistent with
a consolidated tax sharing agreement. As a result of the sale of the
convertible preferred stock, Horizon PCS will not be able to participate in
the tax sharing agreement nor the filing of a consolidated federal income
tax return with the Horizon Telcom affiliated group. Thus, Horizon PCS will
file a separate federal income tax return for the period after
deconsolidation through December 31, 2000, and for all subsequent periods.
The Company's consolidated income tax benefit for the year was $1,157,439.
This benefit was primarily a result of the Company's net loss offset by the
recognition by Horizon PCS of an excess loss account on the deconsolidation
from the Horizon Telcom affiliated group and valuation reserves established
against deferred tax assets of Horizon PCS.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some or all of the assets will not
be realized. Management considers, among other things, the scheduled
reversal of deferred tax assets and liabilities and estimates of future
taxable income in making this assessment. The Company has provided a
valuation allowance of $2,622,616 and $237,519 as of December 31, 2000 and
1999, respectively, against the deferred tax assets of Horizon PCS.
In connection with Horizon PCS' acquisition of Bright PCS (Note 2), a tax
of $3,696,000 was generated based on the excess of the fair value of the
Company's stock over Horizon PCS' cost basis in the stock. The tax on the
exchange of the stock was charged directly to equity and not recorded as
income tax expense.
Horizon PCS also generated a tax of $4,620,000 on the stock dividend of 10%
of the Horizon Telcom stock held by Horizon PCS (Note 13). The tax on the
stock dividend was charged directly to equity and not recorded as income
tax expense.
As a result of Horizon PCS' deconsolidation from the Horizon Telcom
affiliated group for tax purposes, the consolidated financial statements
will not reflect the tax benefit of future operating losses of Horizon PCS
until such time as its operations become profitable.
(10) Pension Plans and Other Retirements Benefits
--------------------------------------------
In December 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This Statement revises
employers' disclosures about pension and other postretirement benefit plans
but does not change the measurement or recognition of costs associated with
those plans. It standardizes the disclosure requirements, eliminates
certain disclosures and requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis. SFAS No. 132 supersedes the disclosure requirements of
SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
The pension and postretirement plans discussed below are maintained by
Horizon Telcom, Inc. Each subsidiary is charged for each plan based on its
employee participation in the respective plans.
Horizon Telcom, Inc. has two trusteed pension plans covering certain
salaried and hourly employees. The Company's funding policy is to be in
compliance with the Employee Retirement Income Security Act guidelines. The
plans' assets consist primarily of investments in common stocks, bonds,
notes, cash equivalents and life insurance policies.
117
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
In addition, Horizon Telcom, Inc. provides coverage of postretirement
medical, prescription drug, telephone service, and life insurance benefits
to eligible retirees whose status, at retirement from active employment,
qualifies for postretirement benefits. Coverage of postretirement benefits
is also provided to totally and permanently disabled active employees whose
status, at disablement, qualifies for postretirement benefits as a retiree
from active employment (retired disabled). Horizon Telcom, Inc. also
provides coverage of postretirement dental and vision benefits to certain
"enhanced" retirees. No future retirees will receive coverage of
postretirement dental and vision benefits.
Certain eligible retirees are required to contribute toward the cost of
coverage under the postretirement health care and telephone service
benefits plans. No contribution is required for coverage under the
postretirement life insurance benefits plan.
The funding status of Horizon Telcom, Inc.'s consolidated Plans as of
December 31, 2000 and 1999 is as follows:
Pension Benefits Other Benefits
------------------------- ------------------------
2000 1999 2000 1999
----------- ---------- ---------- -----------
(in thousands)
Change in benefit obligation
Benefit obligation, beginning of year $11,783 $12,284 $7,747 $8,598
Service cost 343 346 163 234
Interest cost 1,015 898 399 480
Actuarial (gain) or loss 1,426 (1,212) (2,495) (1,358)
Benefits paid (620) (533) (190) (207)
Change in Plan provisions 288 - - -
----------- ---------- ---------- -----------
Benefit obligation, end of year 14,235 11,783 5,624 7,747
----------- ---------- ---------- -----------
Change in plan assets
Fair value of plan assets, beginning of year 18,146 18,432 - -
Actual return on plan assets 1,839 190 - -
Employer contributions 15 57 190 207
Benefits paid (620) (533) (190) (207)
----------- ---------- ---------- -----------
Fair value of plan assets, end of year 19,380 18,146 - -
----------- ---------- ---------- -----------
Funded status 5,145 6,363 (5,624) (7,747)
Unrecognized transition obligation (35) (35) 3,224 3,455
Unrecognized prior service cost 1,136 921 - -
Unrecognized actuarial (gain) or loss (2,213) (3,636) (2,318) 70
----------- ---------- ---------- -----------
Prepaid (accrued) benefit cost $ 4,033 $ 3,613 $ (4,718) $ (4,222)
=========== ========== ========== ===========
Weighted average assumption at December 31:
Discount rate 7.5% 8.0% 7.75% 6.75%
Expected return on plan assets 10.0 10.0 - -
Rate of compensation increase 4.0 4.5 - -
The assumed medical benefit cost trend rate used in measuring the
accumulated postretirement benefit obligation was 7% in 2000, 1999 and
1998, declining gradually to 5% for the under age 65 retirees and their
spouses and 6.5% in 2000, 1999 and 1998, declining gradually to 5% for the
over age 65 retirees and their spouses. The assumed dental and vision
benefit cost trend rates used in measuring the accumulated postretirement
benefit obligation were 6% in 2000, 1999 and 1998, declining gradually to
118
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
5% for retirees and their spouses. The telephone service benefit cost trend
rate for retirees and their spouses was estimated at 5% for all future
years in 2000, 1999 and 1998.
Pension Benefits Other Benefits
--------------------------------- -----------------------------------
2000 1999 1998 2000 1999 1998
----------- ----------- -------- ---------- --------- ----------
(in thousands)
Components of net periodic benefit cost
Service cost $ 343 $ 346 $ 317 $ 163 $ 234 $ 259
Interest cost 1,015 898 838 399 480 541
Expected return on plan assets (1,785) (1,812) (1,560) - - -
Amortization of transition obligation - - - 230 230 230
Amortization of prior service cost 73 73 73 - - -
Recognized net actuarial gain (loss) (50) (154) (132) (128) - 38
----------- ---------- -------- ----------- ----------- -----------
Net periodic benefit cost $ (404) $ (649) $ (464) $ 664 $ 944 $ 1,068
=========== ========== ======== =========== =========== ===========
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change
in assumed health care cost trend rates would have the following effects
(in thousands):
1-Percentage-Point 1-Percentage
Increase Point Decrease
----------------- -----------------
Effect on total of service and interest cost
components $ 102 $ (81)
Effect on postretirement benefit obligation 881 (716)
Horizon Telcom, Inc. also has two defined contribution plans covering
eligible Chillicothe Telephone and Services salaried and hourly employees.
Horizon PCS employees were eligible to participate in Horizon Telcom's plan
in 1999 and 1998. The plans provide for participants to defer up to 19% of
their annual compensation as contributions to the plans. Horizon Telcom,
Inc. matches a participant's contributions equal to 25% of each
participant's salary deferral up to a maximum of 1% of a participant's
compensation.
The Company's contributions to these plans were approximately $87,900,
$82,400 and $73,000 for 2000, 1999 and 1998, respectively, and are included
in selling, general and administrative expense of the Company.
In May 1999, Horizon PCS adopted a defined contribution plan covering
certain eligible employees of Horizon PCS. The plan provides for
participants to defer up to 15% of the annual compensation, as defined
under the plan, as contributions to the plan. Horizon PCS has the option,
at the direction of the Board of Directors, to make a matching contribution
to the plan. A matching contribution of approximately $61,000 was made
during 1999.
(11) Convertible Preferred Stock
--------------------------
Horizon PCS has authorized 175,000,000 shares of convertible preferred
stock at $0.0001 par value. On September 26, 2000, an investor group led by
Apollo Management purchased $126,500,000 of Horizon PCS' convertible
preferred stock (23,476,683 shares) in a private placement. Concurrent with
the closing, holders of the $14,100,000 short-term convertible note
converted the principal and unpaid interest into the same convertible
preferred stock (2,610,554 shares) purchased by the investor group. Horizon
119
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
PCS has the right, under certain circumstances, to redeem $80,300,000 of
the convertible preferred stock on or before April 30, 2001 at 107% of the
original issue price. Holders of the convertible preferred stock have the
option to convert their shares (on a share for share basis) into class A
common stock of Horizon PCS at any time. In addition, the convertible
preferred stock converts automatically into shares upon the completion of a
public offering of common class A stock by Horizon PCS meeting specified
criteria or upon the occurrence of certain business combination
transactions. The convertible preferred stock pays a 7.5% stock dividend
semi-annually, commencing April 30, 2001. The dividends are payable in
additional preferred stock.
If Horizon PCS has not completed either (i) a public offering of its class
A common stock in which Horizon PCS receives at least $50,000,000 or (ii) a
merger or consolidation with a publicly listed company that has a market
capitalization of at least $100,000,000, in each case by the fifth
anniversary of the date that Horizon PCS issued the convertible preferred
stock, the investor group may request that Horizon PCS repurchase all of
their shares of convertible preferred stock at fair market value, as
determined by three investment banking institutions. If the investor group
requests that Horizon PCS repurchase their convertible preferred stock and
Horizon PCS declines, Horizon PCS will be required to auction itself. If no
bona fide offer is received upon an auction, the repurchase right of the
investor group expires. If, however, a bona fide offer is received upon the
auction, Horizon PCS must sell or the dividend rate on the convertible
preferred stock will increase from 7.5% to 18.0% and Horizon PCS will be
required to re-auction itself annually until the convertible preferred
stock is repurchased. Horizon PCS' new senior secured credit facility and
the senior discount notes prohibit Horizon PCS from repurchasing any
convertible preferred stock.
Holders of Horizon PCS' convertible preferred stock are entitled to vote on
all matters on an as-converted basis. In addition, the vote of at least a
majority of the outstanding shares of convertible preferred stock, voting
as a single class, shall be necessary for effecting or validating
significant corporate actions specified in the certificate of
incorporation.
Horizon PCS has agreed that until the conversion of the preferred stock,
Horizon PCS will adhere to certain restrictive covenants. Among other
restrictions, the most significant covenants relate to capital expenditures
and asset sales, restricted payments, additional debt incurrence, and
equity issuance. As of December 31, 2000, Horizon PCS was in compliance
with the covenants under the agreement.
(12) Common Stock
------------
In October 1999, the Company converted all of the issued and outstanding
shares of its common stock into class A common stock, without par value.
Additionally, the Company authorized a new class B common stock, consisting
of 500,000 authorized shares, at no par value.
In December 1999, the Company declared a stock split which distributed
three shares of class B common stock for each share of class A common stock
issued and outstanding at the time of the declaration. This resulted in the
issuance of 299,178 shares of class B common stock. Prior year financial
statements and loss per share data have been adjusted to reflect the above
change in shares.
Each holder of class A common stock is entitled to one vote per share.
Holders of class B common stock have no voting rights. Both classes of
common stock have equal dividend rights.
120
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
(13) Treasury Stock
--------------
In February 2000, Horizon PCS purchased 78,900 shares of common stock of
the Company from the Company's largest unaffiliated shareholder for
$11,835,000. This represented approximately a 19.78% interest in the
Company. Horizon PCS exchanged 40% of the shares owned (31,912 shares) as
consideration for the acquisition of Bright (Note 2). This transaction
reduced the treasury stock to 11.78%.
On September 26, 2000, Horizon PCS distributed 10% of its 11.78% ownership
of the Company in the form of a dividend, payable pro rata to the
shareholders of record on September 26, 2000. As a result of this dividend
and the remaining 2% held by Horizon PCS, the Company has 10,993 shares of
class A and 32,954 shares of class B common stock held as treasury shares
at December 31, 2000.
(14) Sprint Warrants
---------------
Horizon PCS agreed to grant to Sprint PCS warrants to acquire 2,510,460
shares of its class A common stock in exchange for the right to service PCS
markets in additional areas. By September 30, 2000, Sprint had
substantially completed its obligations under the agreement and Horizon PCS
had completed the required purchase of certain Sprint Assets. Horizon PCS
valued the warrants and recorded an intangible asset of approximately
$13,356,000 (based on a share price of $5.32 per share, valued using the
Black-Scholes pricing model using an expected dividend yield of 0.0%, a
risk-free interest rate of 6.5%, expected life of 10 years and a volatility
of 95%). The intangible asset is being amortized over the remaining term of
the Sprint PCS management agreement, resulting in approximately $752,000 of
amortization expense per year. Amortization expense for the year ended
December 31, 2000 was approximately $188,000.
The warrants will be issued to Sprint at the earlier of an initial public
offering of Horizon PCS' common stock or July 31, 2003. If the warrants are
issued in conjunction with an initial public offering of Horizon PCS'
common stock, the exercise price will be equal to the initial public
offering price per share. If there is not an initial public offering, the
exercise price will be the lower of a per share private valuation as of
July 31, 2003 or the price per share of the most recent negotiated private
placement of Horizon PCS' equity securities.
(15) Incentive Stock Plan
--------------------
In November 1999, the Company adopted the 1999 Stock Option Plan (the
Plan). The Plan is intended to provide officers and other employees of the
Company and any of its related corporations with opportunities to purchase
stock pursuant to the grant of options (incentive stock options).
Additionally, the Plan is intended to provide directors, officers and
employees of, and service providers to, the Company and any of its related
corporations with opportunities to purchase stock pursuant to the grant of
options (nonqualified stock options).
The Company may grant options for up to 10,000 shares of class B common
stock. An option's maximum term is ten years. Options vest based on the
terms of each individual agreement, currently over fours years from
issuance. In November 1999, the Company issued 950 options related to class
B common stock at an exercise price of $60 per share.
In November 1999, Horizon PCS adopted the 1999 Stock Option Plan which was
amended in June 2000 and renamed the 2000 stock Option Plan (Horizon PCS'
Plan). The plan is intended to provide officers and other employees of
Horizon PCS and any of its related corporations with opportunities to
purchase stock pursuant to the grant of options (incentive stock options).
Additionally, Horizon PCS' Plan is intended to provide directors, officers
and employees of, and service providers to, Horizon PCS and any of its
related corporations with opportunities to purchase stock pursuant to the
grant of options (nonqualified stock options).
121
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
Horizon PCS may grant options for up to 7,500,000 shares of class A common
stock and 4,196,884 shares of class B common stock. The exercise price of
each option is not to be less than the market price of Horizon PCS' stock
on the date of grant and an option's maximum term is ten years. Options
vest based on the terms of each individual agreement, currently over four
or six years from issuance.
On November 17, 1999, Horizon PCS issued 4,196,884 options related to class
B common stock at an exercise price of $0.12 per share. During 2000,
Horizon PCS issued 116,971 options related to class A common stock at an
exercise price of $5.88 per share.
The Company applies APB Opinion 25 and related Interpretations in
accounting for the plans with respect to employees. The Company applies
SFAS No. 123 and related Interpretations in accounting for stock options
granted to nonemployees. Pursuant to this, the Company will recognize
approximately $2,180,000 in compensation expense over the period of the
options (through 2005). The accompanying consolidated financial statements
reflect a non-cash compensation charge of approximately $853,000 for the
year ended December 31, 2000.
Had compensation cost for both plans been determined based on the fair
value at the grant dates consistent with the method of SFAS No. 123, the
Company's net loss available to common shareholders and losses per common
share would have been increased to the pro forma amounts indicated below:
2000 1999
----------------- --------------
Net loss
As reported $ (44,673,246) $ (4,481,098)
Pro forma (45,407,163) (4,519,366)
Basic and diluted loss per share
As reported $ (129.03) $ (11.23)
Pro forma (131.14) (11.33)
For the purpose of the SFAS No. 123 disclosure, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with an assumption of a risk-free interest rate of
6.5% and 5.5% for 2000 and 1999 options, respectively, for the Company and
Horizon PCS and a dividend yield of 3.1% for the Company. Horizon PCS
options also include a 95% volatility factor.
122
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
A summary of the status of both the Company's and Horizon PCS' plans as of
December 31, 2000 and changes during the year ended on that date is
presented below:
Horizon Telcom, Inc. Horizon PCS, Inc.
--------------------------- ----------------------------
Weighted-Average Weighted-Average
Exercise Exercise
Shares Price Shares Price
---------- ---------------- ------------- ----------------
Outstanding December 31, 1998 - $ - - $ -
Granted 950 60.00 4,196,884 0.12
Exercised - - - -
Forfeited - - - -
---------- ------------- ------------- -------------
Outstanding December 31, 1999 950 $ 60.00 4,196,884 $ 0.12
Granted - - 116,971 5.88
Exercised (123) 60.00 - -
Forfeited - - - -
---------- ------------- ------------- -------------
Outstanding December 31, 2000 827 $ 60.00 4,313,855 $ 0.28
========== ============= ============= =============
Options exercisable at year-end 295 1,166,250
Weighted-average fair value of
options granted during the year N/A $ 4.75
(16) Commitments and Contingencies
-----------------------------
Operating Leases
----------------
The Company leases office space and various equipment under several
operating leases. In October 1999, Horizon PCS signed a tower lease
agreement whereby it will lease the towers for substantially all of Horizon
PCS' cell sites. The leases are operating leases with a term of five to ten
years with three consecutive five-year renewal option periods. In addition,
Horizon PCS will receive a site development fee from the tower lessor for
certain tower sites which the lessor constructs on behalf of Horizon PCS.
Future minimum operating lease payments are as follows:
Year Amount
----------------------------------------- ----------------
2001 $ 8,487,497
2002 7,714,020
2003 6,807,868
2004 6,490,053
2005 4,117,407
Thereafter 12,618,605
----------------
Future operating lease obligations $ 46,235,450
================
123
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
Rental expenses for all operating leases were approximately $5,539,500,
$2,525,500 and $1,480,700 for the years ended December 31, 2000, 1999, and
1998, respectively.
Legal Matters
-------------
The Company is party to legal claims arising in the normal course of
business. Although the ultimate outcome of the claims cannot be ascertained
at this time, it is the opinion of management that none of these matters,
when resolved, will have a material adverse impact on the Company's results
of operations or financial condition.
Vendor Agreement
----------------
In August 1999, Horizon PCS entered into a wholesale network services
agreement with a third-party vendor. The initial term is through June 8,
2008 with four automatic ten-year renewals. The monthly billings under the
agreement are based on usage. No minimum usage is required under the
agreement.
Construction Expenditures
-------------------------
Construction expenditures in 2001 are estimated to be $138,000,000. The
majority of the estimated expenditures are for the build-out of the PCS
Network (Note 4). The Company expects to finance construction primarily
through available cash on hand at December 31, 2000 and additional external
financing.
(17) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
SFAS No. 107 requires disclosure of the fair value of all financial
instruments. For purposes of this disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. Fair value may be based on quoted market prices for the
same or similar financial instruments or on valuation techniques such as
the present value of estimated future cash flows using a discount rate
commensurate with the risks involved.
The estimates of fair value required under SFAS No. 107 require the
application of broad assumptions and estimates. Accordingly, any actual
exchange of such financial instruments could occur at values significantly
different from the amounts disclosed. As cash and temporary cash
investments, current receivables, current payables, and certain other
short-term financial instruments are all short term in nature, their
carrying amount approximates fair value. The fair value of the senior
secured notes, set forth below, was estimated using discounted cash flow
analyses based on current incremental borrowing rates for similar types of
borrowing arrangements. The senior secured credit facility is based on
market-driven rates and, therefore, its carrying value approximates fair
value. The senior discount notes were issued late in the year and
approximate market as of December 31, 2000.
Fair Value Recorded Value
------------------- --------------------
2000 $ 21,187,000 $ 22,000,000
1999 20,286,000 22,000,000
124
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
And for each of the three years in the period ended December 31, 2000
- -------------------------------------------------------------------------------
(18) Extraordinary Loss
------------------
As a result of the September 26, 2000 financings described earlier, the
Company retired long term debt payable to financial institutions. As a
result of this debt extinguishment, the Company expensed the unamortized
portion of the related financing costs as well as fees associated with the
debt extinguishments. These fees and expenses amounted to approximately
$748,000 and are shown on the consolidated statement of operations net of a
tax benefit of approximately $262,000.
(19) Subsequent Events
-----------------
In February 2001, the Company decided, subject to certain conditions, to
distribute the remaining shares of Horizon Telcom stock held as treasury
stock by Horizon PCS (7,249 shares with a book value of $1,120,262) to
employees of Horizon PCS. Distribution of the stock is subject to approval
by the Board of Directors of the plan of distribution, the amount of award
to be granted to each employee and a possible financing plan related to the
tax withholdings.
On March 16, 2001, Chillicothe Telephone increased its line of credit from
$15,000,000 to $30,000,000.
125
HORIZON TELCOM, INC.
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
Balance at
Beginning of Charged to Balance at
Description Period Expense Deductions(1) End of Period
- ----------------------------------------------- ----------------- -------------- --------------- ----------------
(Dollars in Thousands)
Accounts Receivable - Subscribers
Year Ended December 31, 1998
Allowance for doubtful accounts $ 599 $ 349 $ (285) $ 663
============== ============= ============= ================
Year Ended December 31, 1999
Allowance for doubtful accounts 663 781 (533) 911
============== ============= ============= ================
Year Ended December 31, 2000
Allowance for doubtful accounts 911 1,891 (976) 1,826
============== ============= ============= ================
Accounts Receivable - Other
Year Ended December 31, 1998
Allowance for doubtful accounts $ 50 $ -- $ -- $ 50
============== ============= ============= ================
Year Ended December 31, 1999
Allowance for doubtful accounts 50 20 (3) 67
============== ============= ============= ================
Year Ended December 31, 2000
Allowance for doubtful accounts 67 0 (2) 65
============== ============= ============= ================
- -----------------
(1) Represents amounts written off during the period less recoveries of amounts
previously written off.
126
HORIZON TELCOM, INC. AND SUBSIDIARIES
Condensed Consolidated Financial Statements As Of
March 31, 2001 (unaudited) and December 31, 2000
And For the Three Months Ended
March 31, 2001 and 2000 (unaudited)
127
HORIZON TELCOM, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As Of March 31, 2001 and December 31, 2000
- --------------------------------------------------------------------------------
March 31, December 31,
2001 2000
------------------ -----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 112,398,791 $ 192,011,997
Accounts receivables, less allowance for doubtful accounts of $2,149,000 and
$1,891,000 at March 31, 2001 and December 31, 2000 12,727,511 11,329,628
Inventories 6,230,002 6,756,789
Prepayments, investments and other 36,013,381 7,790,987
------------------ -----------------
Total current assets 167,369,685 217,889,401
------------------ -----------------
DEFERRED CHARGES AND OTHER ASSETS:
Intangibles, net 52,167,879 52,879,934
Unamortized debt expense and other assets 19,894,609 19,754,305
------------------ -----------------
Total deferred charges and other assets 72,062,488 72,634,239
------------------ -----------------
PROPERTY, PLANT AND EQUIPMENT:
In service 200,620,130 170,960,204
Less - accumulated depreciation (53,250,440) (49,027,055)
------------------ -----------------
Property, plant and equipment in service, net 147,369,690 121,933,149
Construction work in progress 61,057,878 53,608,590
------------------ -----------------
Total property, plant and equipment 208,427,568 175,541,739
------------------ -----------------
Total assets $ 447,859,741 $ 466,065,379
================== =================
(Continued on next page)
128
HORIZON TELCOM, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Continued)
As Of March 31, 2001 and December 31, 2000
- --------------------------------------------------------------------------------
March 31, December 31,
2001 2000
------------------ ------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 13,967,338 $ 12,767,338
Current maturities of long-term debt 2,000,000 2,000,000
Accounts payable and other accrued liabilities 42,619,847 50,087,470
------------------ ------------------
Total current liabilities 58,587,185 64,854,808
------------------ ------------------
LONG-TERM DEBT AND OTHER LIABILITIES:
Notes Payable 190,823,365 185,283,104
Senior Notes 20,000,000 20,000,000
Deferred income and other liabilities 20,346,262 19,121,752
------------------ ------------------
Total long-term debt and other liabilities 231,169,627 224,404,856
MINORITY INTEREST - 983,883
CONVERTIBLE PREFERRED STOCK 137,054,862 134,421,881
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - class A, no par value, 200,000 shares authorized, 99,726 shares
issued, stated at $4.25 per share 423,836 423,836
Common stock - class B, no par value, 500,000 shares authorized, 299,301 shares
issued, stated at $4.25 per share 1,272,029 1,272,029
Additional Paid-in Capital 72,354,113 72,354,113
Accumulated Other Comprehensive Income (298,905) -
Deferred compensation (1,393,617) (1,503,889)
Treasury stock - 43,956 and 43,947 shares at March 31, 2001
and December 31, 2000, respectively, at cost (6,629,272) (6,624,962)
Retained deficit (44,680,117) (24,521,176)
----------------- -----------------
Total stockholders' equity 21,048,067 41,399,951
------------------ ------------------
Total liabilities and stockholders' equity $ 447,859,741 $ 466,065,379
================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
129
HORIZON TELCOM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2001 and March 31, 2000
(unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
--------------------------------------
2001 2000
------------------ ------------------
OPERATING REVENUES:
Basic local and long-distance service $ 4,194,079 $ 4,450,002
Network access 5,028,753 4,829,000
Internet access services 765,181 957,608
Equipment systems sales, information services, and other
revenues 1,433,429 1,456,862
Personal Communications Services revenue 18,136,012 2,991,699
PCS equipment sales 1,075,964 618,628
------------------ ------------------
Total operating revenues 30,633,418 15,303,799
------------------ ------------------
OPERATING EXPENSES:
Cost of goods sold (exclusive of items shown separately below) 2,339,858 1,806,194
Cost of services (exclusive of items shown separately below) 19,253,161 5,873,821
Selling, general and administrative 17,455,842 8,020,528
Non-cash compensation expense 110,272 262,817
Depreciation and amortization 5,134,376 2,521,065
------------------ ------------------
Total operating expenses 44,293,509 18,484,425
------------------ ------------------
OPERATING LOSS (13,660,091) (3,180,626)
------------------ ------------------
NONOPERATING INCOME (EXPENSE):
Subsidiaries preferred stock dividends (2,635,623) -
Interest income and other, net 3,002,539 354,642
Interest expense (6,763,402) (1,191,508)
------------------ ------------------
Total nonoperating income (expense) (6,396,486) (836,866)
------------------ ------------------
LOSS BEFORE INCOME TAX EXPENSE (20,056,577) (4,017,492)
INCOME TAX (EXPENSE) BENEFIT (677,905) 100,152
MINORITY INTEREST IN LOSS 983,883 -
------------------ ------------------
NET LOSS $ (19,750,599) $ (3,917,340)
================== ==================
Basic and diluted loss per share $ (55.62) $ (11.31)
================== ==================
Weighted average shares outstanding 355,080 346,304
================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
130
HORIZON TELCOM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2001 and 2000
(unaudited)
- --------------------------------------------------------------------------------
Three Months Ended March 31,
--------------------------------------
2001 2000
------------------ ------------------
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (15,259,229) $ 734,909
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (36,023,484) (3,058,986)
Investment in joint venture - (1,032,000)
Purchase of short term investments (31,976,767) -
Proceeds from sale of fixed assets - 700,000
Proceeds from return of investments in RTFC subordinated
capital certificates 2,895,646 -
------------------ ------------------
Net cash used in investing activities (65,104,605) (3,390,986)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes Payable - borrowing 1,200,000 4,700,000
Deferred Financing fees and other (36,720) (774,100)
Treasury Stock received as a dividend (4,310) -
Dividends paid (408,342) (458,740)
------------------ ------------------
Net cash provided by financing activities 750,628 3,467,160
------------------ ------------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (79,613,206) 811,083
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 192,011,997 3,791,455
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 112,398,791 $ 4,602,538
================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
131
HORIZON TELCOM, INC. AND SUBSIDIARES
Notes to Interim Condensed Consolidated Financial Statement
March 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
(1) General
-------
The results of operations for the interim periods shown are not necessarily
indicative of the results to be expected for the fiscal year. In the
opinion of Management, the information contained herein reflects all
adjustments necessary to make a fair statement of the results for the three
months ended March 31, 2001 and 2000. All such adjustments are of a normal
recurring nature.
(2) Organization and Business Operations
------------------------------------
The Company is a facilities-based telecommunications carrier that provides
a variety of voice and data services to commercial, residential/small
business and local market segments. The Company provides landline telephone
service, VDSL television service, and Internet access services to the
southern Ohio region, principally in and surrounding Chillicothe, Ohio. The
Company also provides PCS operations to a twelve state region in the
Midwest, including Ohio, Indiana, Virginia, Pennsylvania, Tennessee and
West Virginia, as an affiliate of Sprint PCS.
On April 26, 2000, Horizon Telcom, Inc. formed Horizon PCS, Inc. On June
27, 2000, Horizon Telcom, Inc. transferred 100% ownership of Horizon
Personal Communications, Inc. to Horizon PCS in exchange for 53,806,200
shares of stock of Horizon PCS. This transfer was accounted for as a
reorganization of companies under common control in a manner similar to a
pooling-of-interests in the consolidated financial statements. Horizon
Personal Communications will continue to exist and conduct business as a
wholly-owned subsidiary of Horizon PCS.
The accompanying condensed consolidated financial statements reflect the
operations of Horizon Telcom, Inc. (the Company) and its subsidiaries, The
Chillicothe Telephone Company (Chillicothe Telephone), Horizon PCS, Inc.
(Horizon PCS), Horizon Services, Inc. (Services), and United
Communications, Inc. (United). All material intercompany transactions and
balances have been eliminated in consolidation.
(3) Summary of Significant Accounting Policies
------------------------------------------
Note 1 to the Notes to the Consolidated Financial Statements in the
Company's December 31, 2000 Financial Statements summarizes the Company's
significant accounting policies.
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to such rules and
regulations.
Net Loss per Share
------------------
The Company computes net loss per common share in accordance with SFAS No.
128, Earnings per Share and SEC Staff Accounting Bulletin No. 98. Basic and
diluted loss per share is computed by dividing loss, for each period, by
the weighted-average outstanding common shares. No conversion of common
stock equivalents (stock options granted by the Company) has been assumed
in the calculations since the effect would be antidilutive. As a result,
the number of weighted-average outstanding common shares as well as the
amount of net loss per share are the same for basic and diluted net loss
per share calculations for all periods presented. Horizon PCS has issued
stock options, stock purchase warrants and convertible preferred stock,
which may impact minority interest and the related earnings or loss of the
Company.
132
HORIZON TELCOM, INC. AND SUBSIDIARES
Notes to Interim Condensed Consolidated Financial Statement
March 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
Financial Instruments
---------------------
The Company's policies do not permit the use of derivative financial
instruments for speculative purposes. The Company uses interest rate swaps
to manage interest rate risk. The net amount paid or received on interest
rate swaps is recognized as an adjustment to interest expense.
The Company has adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133), as amended by SFAS No. 138,
Accounting for Derivative Instruments and Certain Hedging Activities. These
statements established accounting and reporting standards for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as an asset or liability measured at fair value. Depending on
the intended use of the derivative, changes in its fair value will be
reported in the period of change as either a component of earnings or a
component of other comprehensive income. Pursuant to the derivative
criteria established by SFAS No. 133, items with exposure to variability in
expected future cash flows that is attributable to a particular risk is
considered a cash flow hedge. The exposure may be associated with an
existing recognized asset or liability such as future interest payments on
variable-rate debt. As of March 31, 2001, Horizon PCS entered into an
interest rate swap with a notional amount of $25,000,000. The swap has been
designated as a hedge of a portion of the future variable interest cash
flows expected to be paid on borrowings under its Senior Secured Credit
Facilities. Horizon PCS recorded an unrealized loss of approximately
$299,000 in other comprehensive income associated with the change in the
fair value of the swap.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform with the 2001
presentation.
(4) Acquisitions
------------
During 1999 Horizon PCS entered into a joint venture agreement through the
purchase of 25.6% of Bright Personal Communications Services, LLC (Bright).
The investment was accounted for under the equity method. The joint venture
was established in October 1999 to provide personal communications services
in Ohio, Indiana, and Michigan.
On June 27, 2000, Horizon PCS acquired the remaining 74.4% of Bright in
exchange for approximately 8% of Horizon PCS' class B common stock
(4,678,800 shares valued at approximately $34,000,000) and approximately
40% of the Horizon Telcom, Inc. common stock owned by Horizon PCS (31,912
shares valued at $15,300,000).
This acquisition was treated as a purchase for accounting purposes. The
condensed consolidated statement of operations includes the results of
Bright from June 28, 2000.
In conjunction with this transaction, Horizon PCS also acquired the Bright
management agreement with Sprint PCS and, with it, the right to operate
using Sprint PCS licenses in Bright's markets. Horizon PCS has recognized
an intangible asset totaling $33,000,000 related to this licensing
agreement which will be amortized over 20 years, the initial term of the
underlying management agreement. Amortization commenced in June 2000.
Amortization expense for the three months ended March 31, 2001 is
approximately $427,000.
The purchase price, as preliminarily allocated, exceeds the fair market
value of the net assets acquired by approximately $7,778,000. The resulting
goodwill will be amortized on a straight-line basis over 20 years.
Amortization commenced in June 2000. Amortization expense for the three
months ended March 31, 2001 is approximately $97,000.
133
HORIZON TELCOM, INC. AND SUBSIDIARES
Notes to Interim Condensed Consolidated Financial Statement
March 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
The preliminary purchase price allocation of the fair value of assets
acquired and liabilities assumed is summarized below:
Working capital $ 2,072,000
Property and equipment 6,328,000
Sprint PCS licenses 33,000,000
Goodwill 7,777,752
Other assets 122,000
The following unaudited pro forma summary presents the net revenues, net
loss and loss per share from the combination of the Company and Bright, as
if the acquisition had occurred at the beginning of the 2000 fiscal year.
The pro forma information is provided for information purposes only. It is
based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of the
future results of operations of the combined enterprise:
Three Months
Ended March 31,
2000
-----------------
Net revenue $ 14,796,682
Net loss (4,244,804)
Basic and diluted loss per share (10.64)
Prior to acquisition, Bright had not commenced revenue-generating
operations and was paying a management fee to its investor, Horizon PCS.
The management fee recognized by Horizon PCS in the period prior to the
acquisition date is included in net revenue. In the pro forma disclosure
above, this management fee revenue is fully eliminated.
(5) Segment Information
-------------------
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires companies to
define and report financial and descriptive information about its operating
segments. The Company is organized around the differences in products and
services it offers. Under this organizational structure, the Company
operates in two reportable business segments: landline telephone services
and wireless personal communications services. The landline telephone
services segment includes three major revenue streams: basic local service,
long-distance service and network access services. The wireless personal
communications services segment includes three major revenue streams: PCS
subscriber revenues, PCS roaming revenues and PCS equipment sales.
The Company evaluates the performance of the segments based on operating
earnings before the allocation of administrative expenses. Information
about interest income and expense, and income taxes is not provided on a
segment level. The accounting policies of the segments are the same as
described in the summary of significant accounting policies. Corporate
assets represent assets maintained by services for the benefit of all
segments.
The following table includes revenue, operating earnings, capital
expenditures and depreciation and amortization expense for the three months
ended March 31, 2001 and 2000 and assets as of March 31, 2001 and December
31, 2000 for each segment and reconciling items necessary to total to
amounts reported in the financial statements:
134
HORIZON TELCOM, INC. AND SUBSIDIARES
Notes to Interim Condensed Consolidated Financial Statement
March 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
Net Revenues
------------------------------------
2001 2000
---------------- ----------------
Landline telephone services $ 9,222,832 $ 9,279,002
Personal communications services 19,211,976 3,610,327
All other 2,198,610 2,414,470
---------------- ----------------
Total net revenue (external customers) $ 30,633,418 $ 15,303,799
================ ================
Intercompany Revenues
------------------------------------
2001 2000
---------------- ----------------
Landline telephone services $ 240,758 $ 155,616
Personal communications services 41,680 4,806
All other 2,076 4,450
---------------- ----------------
Total net revenue (external customers) $ 284,514 $ 164,872
================ ================
Operating Earnings (Loss)
------------------------------------
2001 2000
---------------- ----------------
Landline telephone services $ 3,774,762 $ 3,629,210
Personal communications services (14,446,395) (5,132,633)
All other 11,133 674,068
Unallocated administrative expenses (2,999,591) (2,351,271)
---------------- ----------------
Total operating earnings (loss) $ (13,660,091) $ (3,180,626)
================ ================
Depreciation and Amortization
------------------------------------
2001 2000
---------------- ----------------
Landline telephone services $ 1,499,027 $ 1,552,122
Personal communications services 3,414,043 878,970
All other 221,306 89,973
---------------- ----------------
Total depreciation and amortization $ 5,134,376 $ 2,521,065
================ ================
135
HORIZON TELCOM, INC. AND SUBSIDIARES
Notes to Interim Condensed Consolidated Financial Statement
March 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
Capital Expenditures
------------------------------------
2001 2000
---------------- ----------------
Landline telephone services $ 2,717,122 $ 2,281,010
Personal communications services 32,053,689 769,070
All other 1,252,673 8,906
---------------- ----------------
Total capital expenditures $ 36,023,484 $ 3,058,986
================ ================
Assets
-----------------------------------
2001 2000
---------------- ----------------
Landline telephone services $ 74,271,002 $ 70,991,973
Personal communications services 362,445,386 385,060,550
All other 7,044,753 4,711,189
Corporate 4,098,600 5,301,667
---------------- ----------------
Total assets $ 447,859,741 $ 466,065,379
================ ================
Other business activities of the company include Internet access services,
equipment systems sales, information services and other revenues which do
not meet the definition of a reportable segment under SFAS No. 131. Amounts
related to these business activities are included above under "All other."
Unallocated administrative expenses represent selling, general and
administrative expenses which are incurred at a corporate level. Corporate
assets represents common assets not identified to an operating segment.
136
HORIZON TELCOM, INC. AND SUBSIDIARES
Notes to Interim Condensed Consolidated Financial Statement
March 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
Net operating revenues by product and services were as follows:
For the three months ended March
31,
------------------------------------
2001 2000
---------------- ----------------
Basic local service $ 3,577,803 $ 3,564,657
Long-distance service 616,276 885,345
Network access 5,028,753 4,829,000
---------------- ----------------
Total landline telephone services 9,222,832 9,279,002
PCS subscriber revenues 12,021,553 2,430,271
PCS roaming revenues 6,114,459 561,428
PCS equipment sales 1,075,964 618,628
---------------- ----------------
Total personal communications services 19,211,976 3,610,327
Internet access services 765,181 957,608
Equipment system sales 263,420 329,212
Information services 267,233 289,004
All other 902,776 838,646
---------------- ----------------
Total other 2,198,610 2,414,470
---------------- ----------------
Total operating revenue $ 30,633,418 $ 15,303,799
================ ================
(6) Comprehensive Income
--------------------
The Company's comprehensive income (loss) consists of net loss and net
unrealized loss on derivative instruments (interest rate swap), as follows:
For the three months ended
March 31,
--------------------------------------
2001 2000
---------------- ----------------
Net loss $ (19,750,599) $ (3,917,340)
Net unrealized loss on derivative instruments (298,905) -
---------------- ----------------
Total comprehensive income $ (20,049,504) $ (3,917,340)
================ ================
(7) Investments
-----------
At March 31, 2001, the Company held approximately $31,977,000 of short-term
investments with maturities greater than three months but less than twelve
months
(8) Commitments and Contingencies
-----------------------------
Operating Leases
----------------
The Company leases office space and various equipment under several
operating leases. In October 1999, Horizon PCS signed a tower lease
agreement whereby it will lease the towers for substantially all of Horizon
PCS' cell sites. The leases are operating leases with a term of five to ten
137
HORIZON TELCOM, INC. AND SUBSIDIARES
Notes to Interim Condensed Consolidated Financial Statement
March 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
years with three consecutive five-year renewal option periods. In addition,
Horizon PCS will receive a site development fee from the tower lessor for
certain tower sites which the lessor constructs on behalf of Horizon PCS.
Such fees are deferred and amortized over the life of the related lease.
Legal Matters
-------------
The Company is party to legal claims arising in the normal course of
business. Although the ultimate outcome of the claims cannot be ascertained
at this time, it is the opinion of management that none of these matters,
when resolved, will have a material adverse impact on the Company's results
of operations or financial condition.
Vendor Agreement
----------------
In August 1999, Horizon PCS entered into a wholesale network services
agreement with a third-party vendor. The initial term is through June 8,
2008 with four automatic ten-year renewals. The monthly billings under the
agreement are based on usage. No minimum usage is required under the
agreement.
Construction Expenditures
-------------------------
Construction expenditures in 2001 are estimated to be $138,000,000. The
majority of the estimated expenditures are for the build-out of the PCS
Network . The Company expects to finance construction primarily through
available cash on hand at March 31, 2001 and additional external financing.
Guarantees
----------
Horizon PCS' senior discount notes are guaranteed by Horizon PCS' existing
subsidiaries, Horizon Personal Communications, Inc. and Bright Personal
Communications Services, LLC, and will be guaranteed by all of Horizon PCS'
future domestic restricted subsidiaries. Horizon PCS has no independent
assets or operations. The guarantees are general unsecured obligations.
Each guarantor fully and unconditionally guarantees, jointly and severally,
on a senior subordinated basis, the full and punctual payment of principal
of, and premium and liquidated damages, if any, and interest on the senior
discount notes when due. If Horizon PCS creates or acquires unrestricted
subsidiaries and foreign restricted subsidiaries, these subsidiaries need
not be guarantors. The ability of holders of the senior discount notes to
receive payment on the guarantees is subordinated in right of payment to
all senior debt, including all obligations under Horizon PCS' senior
secured credit facility.
138
BRIGHT PERSONAL COMMUNICATIONS, LLC
Financial Statements As of December 31, 1999
And The Related Statements of Operation, Members'
Capital And Cash Flows For The Period From
Inception (October 12, 1999) to December 31, 1999
Together With Auditors' Report
139
Report of Independent Public Accountants
To the Board of Managers and Members of
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC:
We have audited the accompanying balance sheet of BRIGHT PERSONAL COMMUNICATIONS
SERVICES, LLC (an Ohio limited liability company in the development stage) as of
December 31, 1999 and the related statements of operations, members' capital and
cash flows for the period from inception (October 12, 1999) to December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BRIGHT PERSONAL COMMUNICATIONS
SERVICES, LLC as of December 31, 1999 and the results of its operations and its
cash flows for the period from inception (October 12, 1999) to December 31, 1999
in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Columbus, Ohio
March 2, 2000
140
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Balance Sheet
As Of December 31, 1999
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................ $ 8,365,769
Receivables.............................................................. 61,949
Notes receivable from members............................................ 2,958,665
Prepayments and other.................................................... 34,902
-------------------
Total current assets.............................................. 11,421,285
-------------------
DEFERRED CHARGES AND OTHER ASSETS
Deferred financing costs................................................. 77,880
-------------------
Total deferred charges and other assets.......................... 77,880
-------------------
PROPERTY AND EQUIPMENT
Construction work in progress............................................ 511,415
-------------------
Total property and equipment..................................... 511,415
-------------------
Total assets..................................................... $ 12,010,580
===================
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable......................................................... $ 46,150
-------------------
Total liabilities................................................ 46,150
-------------------
Members' Capital
Capital contributions (12,130 voting units issued and outstanding)....... 12,130,000
Deficit accumulated during the development stage......................... (165,570)
-------------------
Total members' capital........................................... 11,964,430
-------------------
Total liabilities and members' capital........... $ 12,010,580
===================
The accompanying notes to financial statements are an integral part of this
balance sheet.
141
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Statement of Operations
For The Period From Inception (October 12, 1999) To December 31, 1999
- --------------------------------------------------------------------------------
OPERATING REVENUES
Personal Communications Service revenue ................................. $ --
-----------------
Total operating revenues.......................................... --
-----------------
PREOPERATING EXPENSES
Preoperating expenses.................................................... 253,254
-----------------
Total preoperating expenses...................................... 253,354
-----------------
PREOPERATING LOSS.......................................................... (253,254)
-----------------
NONOPERATING INCOME
Interest income .................................................. 87,684
-----------------
Total nonoperating income......................................... 87,684
-----------------
NET LOSS................................................................... $(165,570)
=================
The accompanying notes to financial statements are an integral part of this
financial statement.
142
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Statement of Members' Capital
For The Period From Inception (October 12, 1999) To December 31, 1999
- --------------------------------------------------------------------------------
DEFICIT
ACCUMULATED
VOTING DURING THE
UNITS CAPITAL DEVELOPMENT
ISSUED CONTRIBUTIONS STAGE TOTAL
-------------- ------------------ ----------------- -----------------
BALANCE, October 12, 1999........... -- $ -- $ -- $ --
Units issued...................... 12,130 12,130,000 -- 12,130,000
Net loss ......................... -- -- (165,570) (165,570)
-------------- ------------------ ----------------- -----------------
BALANCE, December 31, 1999.......... 12,130 $ 12,130,000 $(165,570) $ 11,964,430
============== ================== ================= =================
The accompanying notes to financial statements are an integral part of this
financial statement.
143
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT STAGE COMPANY)
Statement of Cash Flows
For The Period From Inception (October 12, 1999) To December 31, 1999
- --------------------------------------------------------------------------------
CASH FLOWS FROM PREOPERATING ACTIVITIES:
Net loss ....................................................................... $ (165,570)
-----------------
Adjustments to reconcile net loss to net cash used in
Preoperating activities:
Changes in certain assets and liabilities:
Increase in receivables ................................................... (61,949)
Increase in prepayments and other ......................................... (34,902)
Increase in accounts payable............................................... 46,150
-----------------
Cash flows used in preoperating activities.............................. (216,271)
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net........................................ (477,800)
-----------------
Cash flows used in investing activities................................. (477,800)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' equity contributions................................................... 9,137,720
Deferred financing fees......................................................... (77,880)
-----------------
Cash flows provided by financing activities............................. 9,059,840
-----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................................... 8,365,769
CASH AND CASH EQUIVALENTS, beginning of period.................................... --
-----------------
CASH AND CASH EQUIVALENTS, end of period.......................................... $8,365,769
=================
NONCASH TRANSACTIONS:
- --------------------
A member received voting units in exchange for property purchased and
contributed to the Company totaling approximately $33,600.
As of December 31, 1999, the Company had outstanding notes receivable from
members totaling $2,958,665 relating to initial capital contributions.
The accompanying notes to financial statements are an integral part of this
financial statement.
144
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Notes to Financial Statements
December 31, 1999
- --------------------------------------------------------------------------------
(1) Organization And Risks Of Development-Stage Enterprises
-------------------------------------------------------
Bright Personal Communications Services, LLC (the Company or Bright) was
formed as an Ohio limited liability company on October 12, 1999. The
Company is in the development stage and its principal business activity
will be to provide personal communications services (PCS).
The Company has two classes of member units, voting and nonvoting. As of
December 31, 1999, 12,130 voting units at a stated value of $1,000 per unit
were issued to twenty-two members. Members holding nonvoting units have no
rights to vote or consent on any matter that requires a vote or consent by
members. As of December 31, 1999, no nonvoting units have been issued.
Profits, losses and cash flows are allocated to members based on ownership
percentage, as set forth in the Operating Agreement between the Company and
its members (the "Operating Agreement").
The Company entered into a Management Agreement with Sprint PCS, the PCS
group of Sprint Corporation (the "Management Agreement"). Under this
agreement, the Company will be given the exclusive right to build, own and
manage a wireless voice and data services network in markets located in
Ohio, Michigan and Indiana under the Sprint PCS brand. Bright is required
to build out the wireless network according to Sprint PCS specifications.
The Company will be charged a fee under this agreement based on a
percentage of collected revenue. The term of the Management Agreement is 20
years with three successive 10-year renewal periods. The Management
Agreement is subject to a requirement that the Company construct and
operate facilities that offer coverage to a defined population as well as
maintain specific operational and performance standards. The Company began
the engineering and design phase in 1999 and expects to complete the
construction of the personal communications network in 2000.
The Company entered into a Services Agreement with Horizon Personal
Communications, Inc., one of its members, during 1999. Pursuant to the
Services Agreement, this member provides management and administrative
services to the Company for a fee of $25,000 per month plus a percentage of
monthly gross service revenue. The Company also agreed to compensate this
member for certain services provided in connection with the normal
operations of the Company, including use of the member's network, customer
activation, customer care and billing. Based on the Services Agreement,
payment is to be made either in cash or reflected as a capital contribution
resulting in the issuance of additional voting units.
The Company has yet to generate revenue from providing services and has no
assurance of future revenues. Further, during the period required to build
its network, the Company will require additional funds. The success of the
Company's future operations is primarily dependent upon its ability to
obtain adequate financing and secure appropriate tower sites and to
build-out its PCS network and conduct future operations. Thus, the
inability to obtain adequate financing or delays and unanticipated costs in
obtaining sites and completing construction could significantly affect the
Company's ability to conduct future operations.
145
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Notes to Financial Statements
December 31, 1999
- --------------------------------------------------------------------------------
(2) Summary Of Significant Accounting Policies
------------------------------------------
Basis Of Presentation And Use Of Estimates
------------------------------------------
The Company uses the accrual basis of accounting. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash And Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of three months or less to be
cash equivalents. Included as a cash equivalent is $8,012,928 of commercial
paper.
Property And Equipment
----------------------
Property and equipment is stated at original cost. Included in the cost of
construction for the Company will be items such as direct payroll-related
benefits and interest capitalized during construction.
Depreciation
------------
The Company will provide for depreciation under the straight-line method
using rates based on the estimated service lives of the various classes of
property.
Estimated useful lives will be as follows:
YEARS
Network assets ...................................... 5-15
Furniture and office equipment....................... 5
Computer equipment................................... 3-5
Vehicles............................................. 5
Revenue Recognition
-------------------
The Company sells handsets and accessories which are recorded at the time
of the sale as equipment revenue. After the handset has been purchased, the
subscriber purchases a service package which is recognized monthly as
service is provided and is included as service revenue. These two items are
not commingled and sold as one.
Under the management agreement, a management fee calculated as 8% of
collected personal communications service revenues from Sprint PCS
subscribers based in the Company's territory, excluding outbound roaming,
and from non-Sprint PCS subscribers who roam onto the Company's network,
will be accrued as services are provided and remitted to Sprint PCS and
recorded as selling, general and administrative expense. The management fee
is for the use of Sprint PCS's licenses and trademarks. Revenues generated
from the sale of handsets and accessories, inbound and outbound Sprint PCS
roaming fees, and from roaming services provided to Sprint PCS customers
who are not based in the Company's territory are not subject to the 8%
146
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Notes to Financial Statements
December 31, 1999
- --------------------------------------------------------------------------------
affiliation fee. The Company will recognize revenues on personal
communications handsets and accessories at the time of the sale. We do not
add additional charges for the Sprint management fee and we are not billing
any revenues on behalf of Sprint.
Income Taxes
------------
The Company is organized as a limited partnership for Federal income tax
purposes. Consequently, the Company is not taxable as an entity under the
Internal Revenue Code. Therefore, no provision for Federal or State income
taxes has been provided. Revenues and expenses recognized by the Company
for tax reporting purposes are allocated to the individual equity members
based on the Operating Agreement, for inclusion in their individual income
tax returns.
Concentration Of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of notes receivable. All
notes receivable amounts were fully collected by February 2000.
Issued Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which establishes accounting and reporting standards for
derivative instruments and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at fair value.
SFAS 137, issued August 1999, postpones the mandatory effective date of
SFAS 133 for one year to January 1, 2001. The Company has not determined
the effects of this change on its financial position or results of
operations.
(3) Operating Leases
----------------
The Company leases a storefront under an operating lease. Rental expense
for this operating lease was $4,214 for the period from inception (October
12, 1999) to December 31, 1999. Future minimum operating lease payments are
as follows:
YEAR AMOUNT
2000.................................................. $ 39,589
2001.................................................. 44,484
2002.................................................. 45,818
2003.................................................. 47,193
2004.................................................. 44,558
Thereafter............................................ --
-----------------
Future operating lease obligation .................... $221,642
=================
(4) Unit Option Plan
----------------
The Operating Agreement provides for the issuance of nonvoting member units
pursuant to the Unit Option Plan (the Plan). The Plan provides for options
to be granted to any employee, member or manager of the Company as
determined by the Management Committee. The aggregate number of nonvoting
units available for issue under the Plan equals 10% of the total number of
voting units committed as of September 15, 1999 (1,198 units). If any
option granted under the Plan expires or is terminated for any reason
without being exercised, the units subject to the options will become
available for granting under the Plan. As of December 31, 1999, no options
have been granted.
147
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Notes to Financial Statements
December 31, 1999
- --------------------------------------------------------------------------------
(5) Disclosures About Fair Value Of Financial Instruments
-----------------------------------------------------
The carrying amounts of current assets and current liabilities approximate
their fair market value because of the immediate or short-term maturity of
these financial instruments.
(6) Construction Expenditures
-------------------------
Construction expenditures in 2000 are estimated to be $27,000,000. The
majority of the estimated expenditures are for the build-out of the
personal communications services network (Note 1). The Company expects to
finance construction primarily through the use of the members' equity
contributions and external financing.
(7) Financing Arrangements
----------------------
In December 1999, the Company signed a letter of commitment with a
financial institution to finance the purchase of certain equipment for the
construction the Company's personal communications network. The note is
expected to be a 10-year secured term loan in the amount of $35,400,000.
The note will be collateralized by the equipment. As of December 31, 1999,
the Company had incurred approximately $78,000 in financing fees, which are
included in deferred charges on the accompanying balance sheet.
(8) Related Parties
---------------
Expense related to management services provided pursuant to the Services
Agreement for the period from inception (October 12, 1999) to December 31,
1999 totaled $75,000.
The Company has non-interest bearing receivables from several members
relating to the initial capital contributions. The initial capital
contribution, based on the Operating Agreement, is payable in six equal
monthly installments beginning in September 1999 and ending in February
2000. At December 31, 1999, the outstanding balance was $2,958,665. These
amounts were fully collected in February 2000.
(9) Limitation Of Liability
-----------------------
Pursuant to the Operating Agreement, each member's liability is limited to
those liabilities attributable to such member's gross negligence,
fraudulent conduct, willful misconduct or bad faith or to a continuing
material breach of the Operating Agreement. In addition, members are not
liable for the debts, obligations or liabilities of the other members.
148
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Condensed Balance Sheets
As Of March 31, 2000 And December 31, 1999
- --------------------------------------------------------------------------------
March 31, December 31,
2000 1999
-------------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................... $ 9,377,190 $ 8,365,769
Receivables........................................ 61,458 61,949
Notes receivable from members...................... -- 2,958,665
Prepayments and other.............................. 29,775 34,902
-------------------- ----------------
Total current assets...................... 9,468,423 11,421,285
-------------------- ----------------
DEFERRED CHARGES AND OTHER ASSETS
Deferred financing costs........................... 77,880 77,880
-------------------- ----------------
Total deferred charges and other assets.... 77,880 77,880
-------------------- ----------------
PROPERTY AND EQUIPMENT
In service......................................... 4,000 --
Less -- Accumulated depreciation................... (67) --
-------------------- ----------------
Property and equipment, net..................... 3,933 --
Construction work in progress................... 2,856,215 511,415
-------------------- ----------------
Total property and equipment, net.......... 2,860,148 511,415
-------------------- ----------------
Total assets............................... $12,406,451 $12,010,580
==================== ================
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable................................... $ 459,193 $ 46,150
-------------------- ----------------
Total liabilities.......................... 459,193 46,150
-------------------- ----------------
Members' Capital
Capital contributions (12,130 voting units issued and
outstanding).................................... 12,130,000 12,130,000
Deficit accumulated during the development stage... (182,742) (165,570)
-------------------- ----------------
Total members' capital..................... 11,947,258 11,964,430
-------------------- ----------------
Total liabilities and members' capital..... $12,406,451 $12,010,580
==================== ================
The accompanying notes to financial statements are an integral part of these
balance sheets.
149
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Condensed Statement Of Operations
For The Three Months Ended March 31, 2000 And
For The Period From Inception (October 12, 1999) To March 31, 2000
(Unaudited)
- --------------------------------------------------------------------------------
For The Period
From Inception
For The Three (October 12, 1999)
Months Ended To
March 31, 2000 March 31,2000
-------------------- --------------------
OPERATING REVENUES
Personal Communications Service revenue..................... $ -- $ --
-------------------- --------------------
Total operating revenues............................ -- --
-------------------- --------------------
PREOPERATING EXPENSES
Preoperating expenses....................................... 161,795 415,049
-------------------- --------------------
Total preoperating expenses......................... 161,795 415,049
-------------------- --------------------
PREOPERATING LOSS............................................. (161,795) (415,049)
-------------------- --------------------
NONOPERATING INCOME
Interest income............................................. 144,623 232,307
-------------------- --------------------
Total nonoperating income........................... 144,623 232,307
-------------------- --------------------
NET LOSS...................................................... $ (17,172) $ (182,742)
==================== ====================
The accompanying notes to financial statements are an integral part of this
financial statement.
150
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Condensed Statement Of Members' Capital
For The Period From Inception (October 12, 1999) To March 31, 2000
- --------------------------------------------------------------------------------
Deficit
Accumulated
Voting During The
Units Capital Development
Issued Contributions Stage Total
-------------- ---------------- ----------------- ---------------
BALANCE, October 12, 1999................... -- $ -- $ -- $ --
Units issued.............................. 12,130 12,130,000 -- 12,130,000
Net loss.................................. -- -- (165,570) (165,570)
-------------- ---------------- ----------------- ---------------
BALANCE, December 31, 1999.................. 12,130 $12,130,000 $(165,570) $11,964,430
Net loss (unaudited)...................... -- -- (17,172) (17,172)
-------------- ---------------- ----------------- ---------------
BALANCE, March 31, 2000 (unaudited)......... 12,130 $12,130,000 $(182,742) $11,947,258
============== ================ ================= ===============
The accompanying notes to financial statements are an integral part of this
financial statement.
151
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Condensed Statement Of Cash Flows
For The Three Months Ended March 31, 2000 And
For The Period From Inception (October 12, 1999) To March 31, 2000
(Unaudited)
- --------------------------------------------------------------------------------
For the Period
From Inception
For The Three (October 12,
Months Ended 1999) To
March 31, 2000 March 31, 2000
----------------- ------------------
NET CASH FLOWS PROVIDED BY PREOPERATING ACTIVITIES................ $ 401,556 $ 185,285
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net....................... (2,348,800) (2,826,600)
----------------- ------------------
Cash flows used in investing activities................. (2,348,800) (2,826,600)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' equity contributions................................... -- 9,137,720
Collection of notes receivable relating to members' equity
contributions................................................. 2,958,665 2,958,665
Deferred financing fees......................................... -- (77,880)
----------------- ------------------
Cash flows provided by financing activities.............. 2,958,665 12,018,505
----------------- ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,011,421 9,377,190
CASH AND CASH EQUIVALENTS, beginning of period.................... 8,365,769 --
----------------- ------------------
CASH AND CASH EQUIVALENTS, end of period.......................... $ 9,377,190 $ 9,377,190
================= ==================
The accompanying notes to financial statements are an integral part of this
financial statement.
152
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Notes To Interim Condensed Financial Statements
March 31, 2000
(Unaudited)
- --------------------------------------------------------------------------------
(1) General
-------
The results of operations for the interim period shown are not necessarily
indicative of the results to be expected for the fiscal year. In the
opinion of Management, the information contained herein reflects all
adjustments necessary to make a fair statement of the results for the three
months ended March 31, 2000. All such adjustments are of a normal recurring
nature. The financial statements also reflect the results of operations,
cash flows and members' capital from inception (October 12, 1999) through
March 31, 2000.
(2) Organization And Risks Of Development-Stage Enterprises
-------------------------------------------------------
Bright Personal Communications Services, LLC (the "Company" or "Bright")
was formed as an Ohio limited liability company on October 12, 1999. The
Company is in the development stage and its principal business activity
will be to provide personal communications services ("PCS").
The Company has two classes of member units, voting and nonvoting. As of
March 31, 2000 and December 31, 1999, 12,130 voting units at a stated value
of $1,000 per unit were issued to twenty-two members. Members holding
nonvoting units have no rights to vote or consent on any matter that
requires a vote or consent by members. As of March 31, 2000, no nonvoting
units have been issued.
Profits, losses and cash flows are allocated to members based on ownership
percentage, as set forth in the Operating Agreement between the Company and
its members (the "Operating Agreement").
The Company entered into a Management Agreement with Sprint PCS, the PCS
group of Sprint Corporation (the "Management Agreement"). Under this
agreement, the Company will be given the exclusive right to build, own and
manage a wireless voice and data services network in markets located in
Ohio, Michigan and Indiana, under the Sprint PCS brand. Bright is required
to build out the wireless network according to Sprint PCS specifications.
The Company will be charged a fee under this agreement based on a
percentage of collected revenue. The term of the Management Agreement is 20
years with three successive 10-year renewal periods. The Management
Agreement is subject to a requirement that the Company construct and
operate facilities that offer coverage to a defined population as well as
maintain specific operational and performance standards. The Company began
the engineering and design phase in 1999 and expects to complete the
construction of the personal communications network in 2000.
The Company entered into a Services Agreement with one of its members
during 1999. Pursuant to the Services Agreement, this member provides
management and administrative services to the Company for a fee of $25,000
per month plus a percentage of monthly gross service revenue. The Company
also agreed to compensate this member for certain services provided in
connection with the normal operations of the Company, including use of the
member's network, customer activation, customer care and billing. Based on
the Services Agreement, payment is to be made either in cash or reflected
as a capital contribution resulting in the issuance of additional voting
units.
The Company has yet to generate revenue from providing services and has no
assurance of future revenues. Further, during the period required to build
its network, the Company will require additional funds. The success of the
Company's future operations is primarily dependent upon its ability to
obtain adequate financing and secure appropriate tower sites and to
build-out its PCS network and conduct future operations. Thus, the
inability to obtain adequate financing or delays and unanticipated costs in
obtaining sites and completing construction could significantly affect the
Company's ability to conduct future operations.
153
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Notes To Interim Condensed Financial Statements
March 31, 2000
(Unaudited)
- --------------------------------------------------------------------------------
(3) Summary Of Significant Accounting Policies
------------------------------------------
Note 2 to the Notes to Financial Statements in the Company's December 31,
1999 Financial Statements summarize the Company's significant accounting
policies.
(4) Income Taxes
------------
The Company is organized as a limited partnership for Federal income tax
purposes. Consequently, the Company is not taxable as an entity under the
Internal Revenue Code. Therefore, no provision for Federal or State income
taxes has been provided. Revenues and expenses recognized by the Company
for tax reporting purposes are allocated to the individual equity members
based on the Operating Agreement, for inclusion in their individual income
tax returns.
(5) Commitments And Contingencies
-----------------------------
Construction Expenditures
-------------------------
Construction expenditures in 2000 are estimated to be $35,400,000. The
majority of the estimated expenditures are for the build-out of the
personal communications services network. The Company expects to finance
construction primarily through the use of the members' equity contributions
and external financing.
(6) Unit Option Plan
----------------
The Operating Agreement provides for the issuance of nonvoting member units
pursuant to the Unit Option Plan (the Plan). The Plan provides for options
to be granted to any employee, member or manager of the Company as
determined by the Management Committee. The aggregate number of nonvoting
units available for issue under the Plan equals 10% of the total number of
voting units committed as of September 15, 1999 (1,198 units). If any
option granted under the Plan expires or is terminated for any reason
without being exercised, the units subject to the options will become
available for granting under the Plan. As of March 31, 2000, no options
have been granted.
(7) Financing Arrangements
----------------------
In December 1999, the Company signed a letter of commitment with a
financial institution to finance the purchase of certain equipment for the
construction the Company's personal communications network. The note is
expected to be a 10-year secured term loan in the amount of $35,400,000.
The note will be collateralized by the equipment. As of December 31, 1999,
the Company had incurred approximately $78,000 in financing fees, which are
included in deferred charges on the accompanying balance sheet. As
discussed in Note 10, the loan agreement was finalized in May 2000.
(8) Related Parties
---------------
Expense related to management services provided pursuant to the Services
Agreement for the three months ended March 31, 2000 totaled $75,000. In
addition, as of March 31, 2000, the Company paid approximately $179,000 to
a member related to its network build-out.
The Company had non-interest bearing receivables from several members
relating to the initial capital contributions. The initial capital
contribution, based on the Operating Agreement, was payable in six equal
monthly installments beginning in September 1999 and ending in February
2000. At December 31, 1999, the outstanding balance was $2,958,665. These
amounts were fully collected by February 2000.
154
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Notes To Interim Condensed Financial Statements
March 31, 2000
(Unaudited)
- --------------------------------------------------------------------------------
(9) Limitation Of Liability
-----------------------
Pursuant to the Operating Agreement, each member's liability is limited to
those liabilities attributable to such member's gross negligence,
fraudulent conduct, willful misconduct or bad faith or to a continuing
material breach of the Operating Agreement. In addition, members are not
liable for the debts, obligations or liabilities of the other members.
(10) Subsequent Events
-----------------
In April 2000, certain of the members owning 74.4% of the Company entered
into an agreement to exchange their ownership of the Company for an 8%
ownership of Horizon PCS, Inc. ("HPCS") and an 8% ownership of Horizon
Telcom, Inc. (HPCS' parent). Prior to this transaction, Horizon PCS,
through its wholly-owned subsidiary Horizon Personal Communications, Inc.,
owned the remaining 25.6% of the Company. After this transaction, HPCS,
with Horizon Personal Communications, Inc., owns 100% of the Company.
In May 2000, the Company finalized a loan agreement with a financial
institution for a 10-year secured term loan in the amount of $35,407,000.
Interest is at the financial institution's variable rate plus 100 basis
points and will be payable quarterly. Quarterly principal payments begin in
2004 at a fixed percentage of the outstanding balance and continue through
2009.
155
HORIZON TELCOM, INC.
PRO FORMA FINANCIAL STATEMENT
The unaudited pro forma statement of operations of Horizon Telcom, Inc.
("Horizon Telcom") for the year ended December 31, 2000 (the "Pro Forma
Statement of Operations"), gives effect to the acquisition of the remaining 74%
of the equity of Bright Personal Communications Services, LLC ("Bright PCS")
which was not already owned. The historical balance sheet as of December 31,
2000 reflects this transaction.
The unaudited pro forma adjustments are based upon available information
and certain assumptions that management believes are reasonable. The Pro Forma
Statement of Operations does not purport to be indicative of the results that
would have actually been obtained had such transaction been completed as of the
assumed dated and for the period presented, or which may be obtained in the
future. The Pro Forma Statement of Operations is presented on a consolidated
basis.
The Pro Forma Statement of Operations for the year ended December 31, 2000
has been derived from the audited consolidated financial statements of Horizon
Telcom included elsewhere herein, adjusted to give effect to the item above as
if it had occurred on January 1, 2000.
The Pro Forma Financial Statement and the accompanying notes should be read
in conjunction with the financial statements of Horizon Telcom, together with
the related notes thereto, included elsewhere herein.
156
HORIZON TELCOM, INC.
Pro Forma Statement Of Operations
For The Year Ended December 31, 2000
- --------------------------------------------------------------------------------
Historical
Horizon Historical Pro Forma
Telcom Bright PCS Adjustments Combined
------------ ------------- ------------- -------------
(Dollars in thousands)
Net operating revenues $ 74,000 $ - $ (507) (1) $ 73,493
Cost of services and goods sold 45,762 8 (360) (1) 45,410
Selling, general and administrative expenses 51,470 367 (147) (1) 51,690
Non-cash compensation expense 853 - - 853
Depreciation and amortization expense 13,058 2 1,002 (2) 14,062
------------ ------------- ------------- -------------
Total operating expenses 111,143 377 495 112,015
------------ ------------- ------------- -------------
Operating loss (37,143) (377) (1,002) (1) (38,522)
Interest expense (12,194) - - (12,194)
Non-operating income, net 1,953 265 28 (3) 2,246
------------ ------------- ------------- -------------
Loss before income tax benefit (47,384) (112) (974) (48,470)
Income tax benefit 896 - - 896
Minority interest 2,301 - 984 (4) 3,285
------------ ------------- ------------- -------------
Loss from continuing operations $ (44,187) $ (112) $ 10 $ (44,289)
============ ============= ============= =============
Loss per share:
Basic and diluted loss per share from
continuing operations $ (127.62) $ (123.20)
============ =============
Weighted average shares outstanding 346,237 359,491
============ =============
See Footnotes to Pro Forma Financial Statement
157
Footnotes To Pro Forma Financial Statement
- --------------------------------------------------------------------------------
For the purposes of determining the pro forma effect of the transaction
described above on our consolidated statement of operations for the year ended
December 31, 2000, the following adjustments have been made (in thousands,
except share and per share data):
1. Represents the elimination of intercompany activity between Horizon PCS
and Bright PCS relating to the management fees and network usage costs paid to
Horizon PCS.
Management fees.............................. $148
Network build-out fees..................... 360
2. Represents an adjustment to reflect a full year of amortization of
goodwill and other intangible assets recorded from the Bright PCS acquisition
consisting of goodwill and licenses in the amount of $40,778. The goodwill and
other intangibles acquired are amortized over a period of 20 years, which is the
initial term of Bright PCS' management agreement with Sprint PCS.
3. Represents the elimination of Horizon PCS' 25.6% of Bright PCS' net loss
previously recorded as other income and expense.
4. Represents the allocation of net loss to minority interest for a full
year.
5. Basic and diluted losses per share were calculated as loss from
continuing operations divided by the weighted average number of common shares
outstanding. Because the Company had a net loss as of December 31, 2000, the
effect on loss per share of all options was antidilutive.
158
ITEM 14. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None.
ITEM 15. Financial Statements and Exhibits
(a) Documents filed as part of this report
(1) Financial Statements: The following financial statements are
included in this Report as set forth in Item 13:
Horizon Telcom, Inc. and Subsidiaries:
o Report of Independent Public Accountants
o Consolidated balance sheets as of December 31, 2000 and 1999
o Consolidated statements of operations for the years ended
December 31, 2000, 1999 and 1998
o Consolidated statements of stockholders' equity for the years
ended December 31, 2000, 1999 and 1998
o Consolidated statements of cash flows for the years ended
December 31, 2000, 1999 and 1998
o Notes to consolidated financial statements for the years ended
December 31, 2000, 1999 and 1998
o Condensed Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000
o Condensed Consolidated Statement of Operations for the Three
Months Ended March 31, 2001 and 2000 (unaudited)
o Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2001 and 2000 (unaudited)
o Notes to Interim Condensed Consolidated Financial Statements
March 31, 2001 (unaudited)
Bright Personal Communications Services, LLC (A Development-Stage
Company):
o Report of Independent Public Accountants
o Balance Sheet as of December 31, 1999
o Statement of Operations for the Period from Inception (October
12, 1999) to December 31, 1999
o Statement of Members' Capital for the Period from Inception
(October 12, 1999) to December 31, 1999
159
o Statement of Cash Flows for the Period from Inception (October
12, 1999) to December 31, 1999
o Notes to Financial Statements December 31, 1999
o Condensed Balance Sheets as of March 31, 2000 (unaudited) and
December 31, 1999
o Condensed Statement of Operations for the Three Months Ended
March 31, 2000 and for the Period from Inception (October 12,
1999) to March 31, 2000 (unaudited)
o Condensed Statement of Members' Capital for the Period from
Inception (October 12, 1999) to March 31, 2000 (unaudited)
o Condensed Statement of Cash Flows for the Three Months Ended
March 31, 2000 and for the Period from Inception (October 12,
1999) to March 31, 2000 (unaudited)
o Notes to Interim Condensed Financial Statements March 31, 2000
(unaudited)
Horizon Telecom, Inc. and Subsidiaries:
o Pro Forma Financial Statement
o Pro Forma Statement of Operations for the Year Ended December 31,
2000
o Footnotes to Pro Forma Financial Statement
(2) Consolidated Financial Statement Schedules: Schedule II -
Valuation and Qualifying Accounts is included immediately after
notes to consolidated financial statements. All other financial
statement schedules are not applicable.
(b) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1** Articles of Incorporation of Horizon Telcom, Inc.
3.2** Code of Regulations of Horizon Telcom, Inc.
4.2* Indenture dated as of September 26, 2000 between Horizon
PCS, Inc., Horizon Personal Communications, Inc. Bright
Personal Communications Services, LLC and Wells Fargo Bank
Minnesota, National Association.
4.3* A/B Exchange Registration Rights Agreement made as of
September 26, 2000 by and among Horizon PCS, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation and
First Union Securities, Inc.
4.4* Form of Registered Note (included in Exhibit 4.2).
4.5* Note Guarantee of Horizon Personal Communications, Inc.
4.6* Note Guarantee of Bright Personal Communications Services,
LLC.
160
10.1* Form of Employment Agreement, dated September 26, 2000, by
and between Horizon PCS, Inc. and William A. McKell.
10.2* Form of Employment Agreement, dated September 26, 2000, by
and between Horizon PCS, Inc. and Peter M. Holland.
10.3*+ Sprint PCS Management Agreement between Sprint Spectrum,
L.P., SprintCom, Inc. and Horizon Personal Communications,
Inc., dated June 8, 1998.
10.3.1***+Addendum V to Sprint PCS Management Agreement with Horizon
PCS, Inc. as of June 1, 2001.
10.4* Sprint PCS Services Agreement between Sprint Spectrum L.P.
and Horizon Personal Communications, Inc., dated June 8,
1998.
10.5* Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.6* Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.7*+ Sprint PCS Management Agreement between Wirelessco, L.P.,
SprintCom, Inc., Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.8* Sprint PCS Services Agreement between Sprint Spectrum, L.P.
and Bright Personal Communications Services, LLC, dated
October 13, 1999.
10.9* Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.10* Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.19*+ Network Services Agreement by and between West Virginia PCS
Alliance, L.C., Virginia PCS Alliance, L.C. and Horizon
Personal Communications, Inc., dated August 12, 1999.
10.21*+ PCS CDMA Product Supply Contract by and between Motorola,
Inc. and Horizon Personal Communications, Inc.
10.25* Horizon PCS, Inc. 2000 Stock Option Plan.
10.25.1** Horizon Telcom, Inc. 1999 Stock Option Plan.
10.26*+ Site Development Agreement by and between Horizon Personal
Communications, Inc. and SBA Towers, Inc., dated August 17,
1999.
10.27*+ Master Site Agreement by and between SBA Towers, Inc. and
Horizon Personal Communications, Inc., dated July 1999.
161
10.28*+ Master Design Build Agreement by and between Horizon
Personal Communications, Inc. and SBA Towers, Inc., dated
August 17, 1999.
10.29*+ Master Site Agreement by and between SBA Towers, Inc. and
Bright Personal Communications Services, LLC, dated October
1, 1999.
10.30*+ Master Design Build Agreement by and between Bright Personal
Communications Services, LLC and SBA Towers, Inc., dated
October 1, 1999.
10.31* Services Agreement, dated May 1, 2000, between Horizon
Personal Communications, Inc. and Horizon Services, Inc.
10.32* Lease Agreement, dated May 1, 2000 between The Chillicothe
Telephone Company and Horizon Personal Communications, Inc.
10.33* Services Agreement, dated May 1, 2000 between Horizon
Personal Communications, Inc. and United Communications,
Inc.
10.34** Form of Horizon PCS, Inc. Indemnification Agreement.
10.35* Amended and Restated Tax Allocation Agreement dated May 1,
2000 by and among Horizon Telcom, Inc., The Chillicothe
Telephone Company, Horizon Personal Communications, Inc.,
United Communications, Inc., Horizon Services, Inc., and
Horizon PCS, Inc.
10.35.1* First Amendment to the Amended and Restated Tax Allocation
Agreement dated as of September 26, 2000 by and among
Horizon Telcom, Inc., The Chillicothe Telephone Company,
Horizon Personal Communications, Inc., United
Communications, Inc., Horizon Services, Inc., and Horizon
PCS, Inc.
10.37* Securities Purchase Agreement dated September 26, 2000 by
and among Horizon PCS, Inc., Apollo Investment Fund IV,
L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund, II,
L.P. and First Union Capital Partners, LLC.
10.38* Investors Rights and Voting Agreement dated September 26,
2000 by and among Horizon PCS, Inc., Apollo Investment Fund
IV, L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P. and First Union Capital Partners, LLC.
10.39* Registration Rights Agreement dated September 26, 2000 by
and among Horizon PCS, Inc., Apollo Investment Fund IV,
L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P. and First Union Capital Partners, LLC.
10.40* Credit Agreement, dated as of September 26, 2000, by and
among Horizon Personal Communications, Inc., and Bright
Personal Communications Services, LLC, Horizon PCS, Inc.
(the "Parent") and certain Subsidiaries of the Parent, the
several banks and other financial institutions as may from
time to time become parties to this Agreement, First Union
National Bank, as Administrative Agent, Westdeutsche
Landesbank Girozentrale, as Syndication Agent and Arranger
and Fortis Capital Corp., as Documentation Agent.
10.40.1* First Amendment to Credit Agreement and Assignment, dated
November 20, 2000, by and among Horizon Personal
Communications, Inc. and Bright Personal Communications
Services, LLC, Horizon PCS, Inc. (the "Parent") and certain
162
Subsidiaries of the Parent, Existing Lenders, New Lenders,
First Union National Bank, as Administrative Agent,
Westdeutsche Landesbank Girozentrale, as Syndication Agent
and Arranger, and Fortis Capital Corp., as Documentation
Agent.
10.41* Warrant Agreement dated as of September 26, 2000 between
Horizon PCS, Inc. and Wells Fargo Bank Minnesota, National
Association.
10.42* Warrant Registration Rights Agreement made as of September
26, 2000 by and among Horizon PCS, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation and First Union
Securities, Inc.
10.43** Note Purchase Agreement dated November 1, 1993 by and among
The Chillicothe Telephone Company, Northern Life Insurance
Company and Northwestern National Life Insurance Company.
10.43.1** Amendment dated as of January 1, 1997 by and among The
Chillicothe Telephone Company, Northern Life Insurance
Company and Northwestern National Life Insurance Company.
10.44** Note Purchase Agreement dated as of June 1, 1998 by and
among The Chillicothe Telephone Company, American United
Life Insurance Company, and the State Life Insurance
Company.
10.44.1** First Amendment to Note Purchase Agreement dated as of April
1, 1999 by and among The Chillicothe Telephone Company,
American United Life Insurance Company, and the State Life
Insurance Company.
10.45** Business Loan Agreement dated as of March 16, 2001 between
The Chillicothe Telephone Company and the Huntington
National Bank.
21** Subsidiaries of the Company.
---------------------
* Incorporated by reference to the Exhibit of the same number
filed with the Registration Statement on Form S-4 of Horizon
PCS, Inc. (File No. 333-51238).
** Previously filed.
*** Filed herewith.
+ The Registrant requested confidential treatment for certain
portions of this exhibit pursuant to Rule 406 of the
Securities Act of 1933, as amended, in connection with the
previously filed Registration Statement on Form S-1 of the
Registrant (File No. 333-37516), except Exhibit 10.3.1 for
which confidential treatment has been requested under Rule
24b-2 of the Securities Exchange Act of 1924 in connection
with this filing.
(c) Financial statement schedules
See Item 15 (a)(2).
163
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 1 to its registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
HORIZON TELCOM, INC.
By /s/ Thomas McKell
-----------------------------------------
Thomas McKell
President and Chief
Executive Officer
Date: June 25, 2001
By /s/ Peter M. Holland
-----------------------------------------
Peter M. Holland
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
Date: June 25, 2001
164
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
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3.1** Articles of Incorporation of Horizon Telcom, Inc.
3.2** Code of Regulations of Horizon Telcom, Inc.
4.2* Indenture dated as of September 26, 2000 between Horizon
PCS, Inc., Horizon Personal Communications, Inc. Bright
Personal Communications Services, LLC and Wells Fargo Bank
Minnesota, National Association.
4.3* A/B Exchange Registration Rights Agreement made as of
September 26, 2000 by and among Horizon PCS, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation and
First Union Securities, Inc.
4.4* Form of Registered Note (included in Exhibit 4.2).
4.5* Note Guarantee of Horizon Personal Communications, Inc.
4.6* Note Guarantee of Bright Personal Communications Services,
LLC.
10.1* Form of Employment Agreement, dated September 26, 2000, by
and between Horizon PCS, Inc. and William A. McKell.
10.2* Form of Employment Agreement, dated September 26, 2000, by
and between Horizon PCS, Inc. and Peter M. Holland.
10.3*+ Sprint PCS Management Agreement between Sprint Spectrum,
L.P., SprintCom, Inc. and Horizon Personal Communications,
Inc., dated June 8, 1998.
10.3.1***+Addendum V to Sprint PCS Management Agreement with Horizon
PCS, Inc. as of June 1, 2001.
10.4* Sprint PCS Services Agreement between Sprint Spectrum L.P.
and Horizon Personal Communications, Inc., dated June 8,
1998.
10.5* Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.6* Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.7*+ Sprint PCS Management Agreement between Wirelessco, L.P.,
SprintCom, Inc., Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
165
10.8* Sprint PCS Services Agreement between Sprint Spectrum, L.P.
and Bright Personal Communications Services, LLC, dated
October 13, 1999.
10.9* Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.10* Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.19*+ Network Services Agreement by and between West Virginia PCS
Alliance, L.C., Virginia PCS Alliance, L.C. and Horizon
Personal Communications, Inc., dated August 12, 1999.
10.21*+ PCS CDMA Product Supply Contract by and between Motorola,
Inc. and Horizon Personal Communications, Inc.
10.25* Horizon PCS, Inc. 2000 Stock Option Plan.
10.25.1** Horizon Telcom, Inc. 1999 Stock Option Plan.
10.26*+ Site Development Agreement by and between Horizon Personal
Communications, Inc. and SBA Towers, Inc., dated August 17,
1999.
10.27*+ Master Site Agreement by and between SBA Towers, Inc. and
Horizon Personal Communications, Inc., dated July 1999.
10.28*+ Master Design Build Agreement by and between Horizon
Personal Communications, Inc. and SBA Towers, Inc., dated
August 17, 1999.
10.29*+ Master Site Agreement by and between SBA Towers, Inc. and
Bright Personal Communications Services, LLC, dated October
1, 1999.
10.30*+ Master Design Build Agreement by and between Bright Personal
Communications Services, LLC and SBA Towers, Inc., dated
October 1, 1999.
10.31* Services Agreement, dated May 1, 2000, between Horizon
Personal Communications, Inc. and Horizon Services, Inc.
10.32* Lease Agreement, dated May 1, 2000 between The Chillicothe
Telephone Company and Horizon Personal Communications, Inc.
10.33* Services Agreement, dated May 1, 2000 between Horizon
Personal Communications, Inc. and United Communications,
Inc.
166
10.34** Form of Horizon PCS, Inc. Indemnification Agreement.
10.35* Amended and Restated Tax Allocation Agreement dated May 1,
2000 by and among Horizon Telcom, Inc., The Chillicothe
Telephone Company, Horizon Personal Communications, Inc.,
United Communications, Inc., Horizon Services, Inc., and
Horizon PCS, Inc.
10.35.1* First Amendment to the Amended and Restated Tax Allocation
Agreement dated as of September 26, 2000 by and among
Horizon Telcom, Inc., The Chillicothe Telephone Company,
Horizon Personal Communications, Inc., United
Communications, Inc., Horizon Services, Inc., and Horizon
PCS, Inc.
10.37* Securities Purchase Agreement dated September 26, 2000 by
and among Horizon PCS, Inc., Apollo Investment Fund IV,
L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund, II,
L.P. and First Union Capital Partners, LLC.
10.38* Investors Rights and Voting Agreement dated September 26,
2000 by and among Horizon PCS, Inc., Apollo Investment Fund
IV, L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P. and First Union Capital Partners, LLC.
10.39* Registration Rights Agreement dated September 26, 2000 by
and among Horizon PCS, Inc., Apollo Investment Fund IV,
L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P. and First Union Capital Partners, LLC.
10.40* Credit Agreement, dated as of September 26, 2000, by and
among Horizon Personal Communications, Inc., and Bright
Personal Communications Services, LLC, Horizon PCS, Inc.
(the "Parent") and certain Subsidiaries of the Parent, the
several banks and other financial institutions as may from
time to time become parties to this Agreement, First Union
National Bank, as Administrative Agent, Westdeutsche
Landesbank Girozentrale, as Syndication Agent and Arranger
and Fortis Capital Corp., as Documentation Agent.
10.40.1* First Amendment to Credit Agreement and Assignment, dated
November 20, 2000, by and among Horizon Personal
Communications, Inc. and Bright Personal Communications
Services, LLC, Horizon PCS, Inc. (the "Parent") and certain
Subsidiaries of the Parent, Existing Lenders, New Lenders,
First Union National Bank, as Administrative Agent,
Westdeutsche Landesbank Girozentrale, as Syndication Agent
and Arranger, and Fortis Capital Corp., as Documentation
Agent.
10.41* Warrant Agreement dated as of September 26, 2000 between
Horizon PCS, Inc. and Wells Fargo Bank Minnesota, National
Association.
10.42* Warrant Registration Rights Agreement made as of September
26, 2000 by and among Horizon PCS, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation and First Union
Securities, Inc.
167
10.43** Note Purchase Agreement dated November 1, 1993 by and among
The Chillicothe Telephone Company, Northern Life Insurance
Company and Northwestern National Life Insurance Company.
10.43.1** Amendment dated as of January 1, 1997 by and among The
Chillicothe Telephone Company, Northern Life Insurance
Company and Northwestern National Life Insurance Company.
10.44** Note Purchase Agreement dated as of June 1, 1998 by and
among The Chillicothe Telephone Company, American United
Life Insurance Company, and the State Life Insurance
Company.
10.44.1** First Amendment to Note Purchase Agreement dated as of April
1, 1999 by and among The Chillicothe Telephone Company,
American United Life Insurance Company, and the State Life
Insurance Company.
10.45** Business Loan Agreement dated as of March 16, 2001 between
The Chillicothe Telephone Company and the Huntington
National Bank.
21** Subsidiaries of the Company.
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* Incorporated by reference to the Exhibit of the same number
filed with the Registration Statement on Form S-4 of Horizon
PCS, Inc. (File No. 333-51238).
** Previously filed.
*** Filed herewith.
+ The Registrant requested confidential treatment for certain
portions of this exhibit pursuant to Rule 406 of the
Securities Act of 1933, as amended, in connection with the
previously filed Registration Statement on Form S-1 of the
Registrant (File No. 333-37516), except Exhibit 10.3.1 for
which confidential treatment has been requested under Rule
24b-2 of the Securities Exchange Act of 1924 in connection
with this filing.
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