UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number: 0-32617
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)
(740) 772-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of April 30, 2002, there were 99,726 shares of class A common stock
outstanding and 299,450 shares of class B common stock outstanding.
HORIZON TELCOM, INC.
FORM 10-Q
FIRST QUARTER REPORT
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001.........................................................................2
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2002 and 2001 (unaudited)...........................................................4
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended
March 31, 2002 and 2001 (unaudited)...........................................................5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 (unaudited)...........................................................6
Notes to the Interim Condensed Consolidated Financial Statements (unaudited) .................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................26
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................................28
Item 2. Changes in Securities and Use of Proceeds....................................................28
Item 3. Defaults Upon Senior Securities..............................................................28
Item 4. Submission of Matters to a Vote of Security Holders..........................................28
Item 5. Other Information............................................................................28
Item 6. Exhibits and Reports on Form 8-K.............................................................43
As used herein and except as the context may otherwise require, "the
Company," "we," "us," "our" or "Horizon Telcom" means, collectively, Horizon
Telcom, Inc., and its subsidiaries: Horizon PCS, Inc., The Chillicothe Telephone
Company, Horizon Technology, Inc. and Horizon Services, Inc. References to
"Horizon PCS" refer to Horizon PCS, Inc., and its subsidiaries Horizon Personal
Communications, Inc. ("HPC") and Bright Personal Communications Services, LLC
("Bright PCS").
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON TELCOM, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of March 31, 2002 and December 31, 2001
- --------------------------------------------------------------------------------
March 31, December 31,
2002 2001
------------------ -----------------
(unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents (includes $105,000,000 on deposit in
accordance with waiver agreement in 2002. See Note 9).............. $ 197,503,933 $ 127,154,227
Restricted cash...................................................... 24,597,222 24,597,222
Accounts receivable - subscriber, less allowance for doubtful
accounts of $2,327,000 as of March 31, 2002 and $2,662,000 as of
December 31, 2001................................................ 17,988,489 15,275,708
Accounts receivable - interexchange carriers, access charge pools
and other, less allowance for doubtful accounts of $209,000 at
March 31, 2002 and $477,000 at December 31, 2001................. 6,737,355 5,691,105
Inventories.......................................................... 4,542,972 6,512,026
Taxes applicable to future years, prepayments, and other............. 4,862,568 2,322,646
------------------ -----------------
Total current assets........................................ 256,232,539 181,552,934
------------------ -----------------
INVESTMENTS:
Securities available-for-sale........................................ 2,511,000 3,537,720
Other investments.................................................... 267,918 227,852
------------------ -----------------
Total investments........................................... 2,778,918 3,765,572
------------------ -----------------
OTHER ASSETS:
Intangibles, net..................................................... 42,225,701 42,840,534
Goodwill, net........................................................ 7,191,180 7,191,180
Restricted cash...................................................... 24,062,500 24,062,500
Unamortized debt issuance costs, prepaid pension costs and other..... 27,904,213 29,223,926
------------------ -----------------
Total other assets.......................................... 101,383,594 103,318,140
------------------ -----------------
PROPERTY, PLANT AND EQUIPMENT, NET........................................ 305,493,462 289,277,220
------------------ -----------------
Total assets.......................................... $ 665,888,513 $ 577,913,866
================== =================
(Continued on next page)
2
HORIZON TELCOM, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Continued)
As of March 31, 2002 and December 31, 2001
- --------------------------------------------------------------------------------
March 31, December 31,
2002 2001
------------------- ------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
CURRENT LIABILITIES:
Lines of credit.................................................... $ 18,400,000 $ 19,167,338
Current maturities of long-term debt............................... 2,000,000 2,000,000
Accounts payable................................................... 9,036,610 9,933,862
Accounts payable - interexchange carriers and access charge pools.. 2,093,952 1,895,452
Payable to Sprint PCS.............................................. 16,892,532 10,244,529
Deferred PCS service revenue....................................... 4,326,977 3,712,734
Accrued taxes...................................................... 4,447,493 4,842,912
Accrued vacation and payroll....................................... 2,121,305 2,441,434
Other accrued liabilities.......................................... 36,041,428 26,542,875
------------------- ------------------
Total current liabilities................................. 95,360,297 80,781,136
------------------- ------------------
LONG-TERM DEBT AND OTHER LIABILITIES:
Deferred Federal income taxes, net................................. 4,283,072 4,632,157
Deferred income.................................................... 13,194,136 13,678,270
Postretirement benefit obligation.................................. 5,970,250 5,756,305
Long-term debt..................................................... 513,410,215 402,055,643
Other long-term liabilities........................................ 1,673,225 2,137,675
------------------- ------------------
Total long-term debt and other liabilities................ 538,530,898 428,260,050
------------------- ------------------
Total liabilities..................................... 633,891,195 509,041,186
------------------- ------------------
CONVERTIBLE PREFERRED STOCK OF SUBSIDIARY............................... 148,205,412 145,349,043
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT):
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
Treasury stock - 36,698 shares at cost............................. (5,504,700) (5,504,700)
Accumulated other comprehensive income, net........................ 1,044,352 1,332,044
Additional paid-in capital......................................... 72,188,904 72,188,904
Deferred stock option compensation................................. (977,742) (1,079,610)
Retained deficit................................................... (184,654,773) (145,108,866)
------------------- ------------------
Total stockholders' equity (deficit)................... (116,208,094) (76,476,363)
------------------- ------------------
Total liabilities and stockholders' equity (deficit).. $ 665,888,513 $ 577,913,866
================== ==================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
HORIZON TELCOM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended March 31,
2002 2001
------------------ ------------------
OPERATING REVENUES:
Wireless Personal Communications Services (PCS) revenue............. $ 45,733,388 $ 18,136,012
PCS equipment sales................................................. 2,375,288 1,075,964
Basic local, long-distance and other landline....................... 4,597,831 4,818,062
Network access...................................................... 4,595,470 5,028,753
Internet access services............................................ 806,828 763,105
Equipment systems sales, information services and other revenues.... 1,298,921 811,522
------------------ ------------------
Total operating revenues................................... 59,407,726 30,633,418
------------------ ------------------
OPERATING EXPENSES:
Cost of goods sold.................................................. 5,092,010 2,339,858
Cost of services (exclusive of items shown separately below)........ 39,492,143 21,515,574
Selling and marketing .............................................. 15,085,457 7,627,200
General and administrative (exclusive of items shown separately
below).......................................................... 12,798,088 7,566,229
Non-cash compensation expense....................................... 101,867 110,272
Depreciation and amortization....................................... 10,120,011 5,134,376
------------------ ------------------
Total operating expenses................................... 82,689,576 44,293,509
------------------ ------------------
OPERATING LOSS........................................................... (23,281,850) (13,660,091)
------------------ ------------------
NONOPERATING INCOME (EXPENSE):
Interest expense, net............................................. (13,203,579) (6,763,402)
Subsidiary preferred stock dividends.............................. (2,856,369) (2,635,623)
Interest income and other, net.................................... 456,436 3,002,539
------------------ ------------------
Total nonoperating income (expense)........................ (15,603,512) (6,396,486)
------------------ ------------------
LOSS BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST.....................
(38,885,362) (20,056,577)
INCOME TAX EXPENSE....................................................... (207,634) (677,905)
MINORITY INTEREST IN LOSS ............................................... -- 983,883
------------------ ------------------
NET LOSS................................................................. $ (39,092,996) $ (19,750,599)
================== ==================
Basic and diluted net loss per share..................................... $ (107.89) $ (55.62)
================= =================
Weighted-average common shares outstanding .............................. 362,336 355,080
================== ==================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
HORIZON TELCOM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Other Comprehensive Income (Loss)
For the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
2002 2001
--------------- --------------
NET LOSS............................................................... $ (39,092,996) $ (19,750,599)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) on hedging activities..................... 389,943 (298,905)
Net unrealized gain (loss) on securities available-for-sale net of
taxes of $349,085.................................................. (677,635) --
--------------- --------------
COMPREHENSIVE INCOME (LOSS)............................................ $ (39,380,688) $ (20,049,504)
=============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
HORIZON TELCOM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
Three Months Ended March 31,
2002 2001
----------------- -----------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES $ (8,349,981) $ (15,259,229)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net.................................................... (26,333,246) (36,023,484)
Purchase of short-term investments........................................... -- (31,976,767)
Proceeds from sale of fixed assets........................................... 1,253,182 --
Proceeds from redemption of RTFC certificates................................ -- 2,895,646
----------------- -----------------
Net cash used in investing activities.................................. (25,080,064) (65,104,605)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt - borrowings, net of repayments............................... 104,232,662 1,200,000
Deferred financing fees and other............................................ -- (36,719)
Treasury stock received as dividend.......................................... -- (4,311)
Dividends paid............................................................... (452,911) (408,342)
----------------- -----------------
Net cash provided by financing activities.............................. 103,779,751 750,628
----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 70,349,706 (79,613,206)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 127,154,227 192,011,997
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 197,503,933 $ 112,398,791
================= =================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002 and December 2001
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 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,
2002 and 2001. All such adjustments are of a normal recurring nature. The
financial information presented herein should be read in conjunction with the
Company's Form 10-K for the year ended December 31, 2001, which includes
information and disclosures not presented herein.
NOTE 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,
very-high digital subscriber line ("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, Pennsylvania, Virginia and West
Virginia, as an affiliate of Sprint PCS.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Note 1 in the Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001, describes the
Company's significant accounting policies in greater detail than presented
herein.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements reflect the
operations of Horizon Telcom, and its subsidiaries, the Chillicothe Telephone
Company ("Chillicothe Telephone"), Horizon PCS, Inc. ("Horizon PCS"), Horizon
Services, Inc. ("Horizon Services"), and Horizon Technology, Inc ("Horizon
Technology," formerly United Communications, Inc.) and 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 generally accepted
accounting principles in the United States have been condensed or omitted
pursuant to such rules and regulations. All material intercompany transactions
and balances have been eliminated in consolidation.
ACCOUNTING FOR RATE REGULATION
Chillicothe Telephone is subject to rate-regulation. SFAS No. 71,
"Accounting for the Effects of Certain Types of Rate Regulation" provides that
rate-regulated public utilities account for revenues and expenses and report
assets and liabilities consistent with the economic effect of the way in which
the regulators establish rates. Chillicothe Telephone follows the accounting and
reporting requirements of SFAS No. 71. As of March 31, 2002, the Company has
recorded regulatory assets and liabilities of approximately $264,000 and
$1,831,000, respectively. As of December 31, 2001, regulatory assets and
liabilities were approximately $331,000 and $481,000, respectively.
7
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002 and December 2001
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MINORITY INTEREST
As part of the acquisition of Bright PCS, the former members of Bright PCS
have approximately an 8% ownership in Horizon PCS. The Company accounts for this
ownership by recording the portion of net income (loss) attributable to the
minority shareholders (a loss of $983,883 for the three months ended March 31,
2001) as minority interest in earnings (loss) in the accompanying condensed
consolidated statements of operations. The minority interest's share in the
Company's losses during 2001 reduced the minority interest's accounting basis to
zero at March 31, 2001. There will be no further allocations to minority
interest until such time as Horizon PCS becomes profitable and any unallocated
losses to minority interest are offset with income in future periods.
DERIVATIVE 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," 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, an item 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.
NET LOSS PER SHARE
The Company computes net loss per common share in accordance with SFAS No.
128, "Earnings per Share" and SAB No. 98. Basic and diluted net loss per share
is computed by dividing net loss, for each period, by the weighted-average
outstanding common shares. No conversion of common stock equivalents (options,
warrants or convertible securities) 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 is the
same for basic and diluted net loss per share calculations for all periods
presented. There are three items that could potentially dilute basic earnings
per share in the future. These items include the common stock options, the stock
purchase warrants and the convertible preferred stock. These items will be
included in the diluted earnings per share calculation when dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses financial accounting and reporting
for all business combinations and requires that all business combinations
entered into subsequent to June 2001 be recorded under the purchase method. This
statement also addresses financial accounting and reporting for goodwill and
other intangible assets acquired in a business combination at acquisition. SFAS
No. 142 addresses financial accounting and reporting for intangible assets
acquired individually or with a group of other assets at acquisition. This
statement also addresses financial accounting and reporting for goodwill and
other intangible assets subsequent to their acquisition.
8
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002 and December 2001
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
These statements were adopted by the Company on January 1, 2002. Goodwill
amortization ceased as of December 31, 2001, and the Company is required to
complete an impairment test of the remaining goodwill balance annually (more
frequently if impairment indicators arise). The Company has not yet determined
the financial impact the adoption of these pronouncements will have on its
financial position or results of operations. As of March 31, 2002, Horizon PCS
has goodwill of approximately $7,191,000, net of accumulated amortization,
related to the acquisition of Bright PCS. The Company will complete the first
step of the impairment test by June 30, 2002, and, if necessary, will complete
the second step by December 31, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirements of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset. The Company will adopt this statement effective January 1,
2003. The adoption is not expected to have a material effect on the Company's
financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets. The statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30. SFAS No. 144 removes goodwill from its scope,
as goodwill is addressed in the impairment test described above under SFAS No.
142. The Company adopted SFAS No. 144 on January 1, 2002. The adoption did not
have a material effect on the Company's financial position, results of
operations or cash flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 2002
presentation.
NOTE 4 - SEGMENT INFORMATION
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 as defined by SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," landline telephone services
and wireless personal communications services. The landline telephone services
segment includes four major revenue streams: basic local service, long-distance
toll, network access services and other related telephone 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.
9
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002 and December 2001
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - SEGMENT INFORMATION (CONTINUED)
The following table includes revenue, intercompany revenues, operating
earnings (loss), depreciation and amortization expense and capital expenditures
for the three months ended March 31, 2002 and 2001, and assets as of March 31,
2002 and December 31, 2001, for each segment and reconciling items necessary to
total to amounts reported in the condensed consolidated financial statements:
Net Revenue
Three Months Ended March 31,
--------------------------------------
2002 2001
--------------- ---------------
Landline telephone services......................... $ 9,193,301 $ 9,846,815
Wireless personal communications services.............. 48,108,676 19,211,976
All other........................................... 2,105,749 1,574,627
--------------- ---------------
Total net revenues.............................. $ 59,407,726 $ 30,633,418
=============== ===============
Intercompany Revenue
Three Months Ended March 31,
--------------------------------------
2002 2001
--------------- ---------------
Landline telephone services........................ $ 401,914 $ 240,758
Wireless personal communications services.......... 101,106 41,681
All other.......................................... 107,317 2,076
---------------- ---------------
Total intercompany revenues.................... $ 610,337 $ 284,515
================ ===============
Operating Earnings (Loss)
Three Months Ended March 31,
--------------------------------------
2002 2001
--------------- ---------------
Landline telephone services........................ $ 3,548,542 $ 4,333,291
Wireless personal communications services.......... (22,789,806) (14,310,477)
All other.......................................... (973,055) (706,858)
Unallocated administrative expenses................ (3,067,531) (2,976,047)
--------------- ---------------
Total operating loss........................... $ (23,281,850) $ (13,660,091)
=============== ===============
10
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002 and December 2001
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - SEGMENT INFORMATION (CONTINUED)
Depreciation and Amortization
Three Months Ended March 31,
--------------------------------------
2002 2001
--------------- ---------------
Landline telephone services....................... $ 1,679,674 $ 1,499,028
Wireless personal communications services......... 7,949,631 3,414,043
All other......................................... 490,706 221,305
---------------- ---------------
Total depreciation and amortization........... $ 10,120,011 $ 5,134,376
================ ===============
Capital Expenditures
Three Months Ended March 31,
--------------------------------------
2002 2001
--------------- ---------------
Landline telephone services....................... $ 2,002,531 $ 2,137,447
Wireless personal communications services......... 23,438,012 32,053,689
All other......................................... 892,703 1,832,348
--------------- ---------------
Total capital expenditures.................... $ 26,333,246 $ 36,023,484
=============== ===============
Assets
--------------------------------------
March 31, December 31,
2002 2001
--------------- ---------------
Landline telephone services....................... $ 89,743,149 $ 90,951,437
Wireless personal communications services......... 569,255,117 480,754,022
All other......................................... 6,890,247 6,208,407
--------------- ---------------
Total assets.................................. $ 665,888,513 $ 577,913,866
=============== ===============
Other business activities of the Company include Internet access services,
equipment systems sales, and other miscellaneous 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 general and administrative expenses which are
incurred at a corporate level. All other assets represent common assets not
identified to an operating segment.
11
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002 and December 2001
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - SEGMENT INFORMATION (CONTINUED)
Net operating revenues by product and services were as follows:
Three Months Ended
March 31,
2002 2001
-------------- -------------
Landline telephone services:
Basic local service................................... $ 3,605,256 $ 3,577,803
Long-distance toll.................................... 309,392 442,039
Network access services............................... 4,595,470 5,028,753
Other related telephone services...................... 683,183 798,220
-------------- -------------
Total landline telephone services................. 9,193,301 9,846,815
-------------- -------------
Wireless personal communications services:
PCS subscriber revenues............................... 34,914,100 12,021,553
PCS roaming revenues.................................. 10,819,288 6,114,459
PCS equipment sales................................... 2,375,288 1,075,964
-------------- -------------
Total wireless personal communications services..... 48,108,676 19,211,976
-------------- -------------
Other:
Internet access services.............................. 806,828 763,105
Equipment systems sales............................... 380,336 263,420
Other miscellaneous revenues.......................... 918,585 548,102
-------------- -------------
Total other....................................... 2,105,749 1,574,627
-------------- -------------
Total operating revenues.......................... $ 59,407,726 $ 30,633,418
============== =============
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at March 31, 2002
and December 31, 2001:
2002 2001
--------------- ---------------
Network assets........................................... $ 223,960,020 $ 220,849,771
Switching equipment...................................... 53,718,806 35,253,986
Land and buildings....................................... 15,473,443 15,223,363
Computer and telecommunications equipment................ 14,662,925 14,292,341
Furniture, vehicles and office equipment................. 11,769,550 12,477,119
--------------- ---------------
Property, plant and equipment in service, at cost..... 319,584,744 298,096,580
Accumulated depreciation................................. (71,281,328) (68,604,457)
--------------- ---------------
Property, plant and equipment in service, net...... 248,303,416 229,492,123
Construction work in progress............................ 57,190,046 59,785,097
--------------- ---------------
Total property, plant and equipment, net....... $ 305,493,462 $ 289,277,220
=============== ===============
The Company capitalized interest of approximately $2,118,000 and $1,604,000
for the three months ended March 31, 2002 and 2001, respectively.
12
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002 and December 2001
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT
The components of long-term debt outstanding at March 31, 2002, and
December 31, 2001, are as follows:
Interest Rate at
March 31, 2002 2002 2001
-------------- --------------- ---------------
Senior notes........................... 13.75% $ 175,000,000 $ 175,000,000
Discount notes, net of discount........ 14.00% 165,410,215 159,055,643
Secured credit facility-Term B......... 6.30% 50,000,000 50,000,000
Secured credit facility-Term A......... 5.75% 105,000,000 --
1998 Senior Notes...................... 6.62% 12,000,000 12,000,000
1993 Senior Notes...................... 6.72% 6,000,000 6,000,000
--------------- ---------------
Total long-term debt............... $ 513,410,215 $ 402,055,643
=============== ===============
As of March 31 2002, Horizon PCS had an additional $95.0 million available
for borrowing under its secured credit facility in the form of a line of credit
at a variable interest rate of 5.78%.
In connection with Horizon PCS' December 2001, offering of $175,000,000 of
senior notes due in 2011, approximately $48,660,000 of the offering proceeds
were placed in an escrow account to be used toward the first four semi-annual
interest payments due under the terms of the notes. The first two interest
payments have been classified as short-term.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and various equipment under several
operating leases. In addition, Horizon PCS has a tower lease agreement with a
third party whereby it leases towers for substantially all its cell sites. The
tower leases are operating leases with a term of five to ten years with three
consecutive five-year renewal option periods. In addition, Horizon PCS receives
a site development fee from the tower lessor for certain tower sites which the
lessor constructs on behalf of Horizon PCS.
Horizon PCS also leases space for its retail stores. At March 31, 2002,
Horizon PCS leased all 39 stores operating throughout its territories.
CONSTRUCTION EXPENDITURES
Construction expenditures for the year ended December 31, 2002, are
estimated to be between approximately $70,000,000 and $85,000,000. The majority
of the estimated expenditures are for the build-out and upgrade of the PCS
network.
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, cash flows or financial condition.
13
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002 and December 2001
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ALLIANCES NETWORK AGREEMENTS
The Alliances are two independent PCS providers offering service under the
NTELOS brand name. In August 1999, Horizon PCS entered into a network services
agreement with the Alliances for 13 of its markets in Virginia and West
Virginia. The initial term is through June 8, 2008, with four automatic ten-year
renewals. This agreement was amended in the third quarter of 2001. Under the
amended agreement, Horizon PCS is obligated to pay fixed minimum monthly fees
until December 2003, at a lower rate per minute than the prior agreement. Usage
in excess of the monthly minute allowance is charged at a set rate per minute.
Under the amendment, the Alliances are obligated to make certain upgrades
to their network (3G technology) and the Alliances agreed with Sprint PCS to
modify their network to cause Sprint PCS to be in compliance with the Federal
Communications Commission's ("FCC") construction requirements for PCS networks.
Horizon PCS is responsible for completion of the network modification if the
Alliances fail to comply.
NOTE 8 - GOODWILL AND INTANGIBLE ASSETS
The Company adopted SFAS No. 142 on January 1, 2002 (Note 3). As a result
of the adoption, goodwill amortization ceased as of December 31, 2001, and the
Company is required to complete an impairment test of the remaining goodwill
balance annually (or more frequently if impairment indicators arise). The
following discusses the Company's goodwill and intangible assets presented on
the condensed consolidated balance sheets.
During 2000, Horizon PCS agreed to grant to Sprint PCS warrants to acquire
2,510,460 shares of Horizon PCS class A common stock in exchange for the right
to service PCS markets in additional areas. By September 30, 2000, Sprint PCS
had substantially completed its obligations under the agreement and Horizon PCS
completed the required purchase of certain Sprint PCS assets. Horizon PCS valued
the warrants and recorded an intangible asset of approximately $13,356,000. 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 through June 2018. Accumulated amortization at March 31, 2002, was
approximately $1,129,000.
During 1999 Horizon PCS entered into a joint venture agreement through the
purchase of 25.6% of Bright PCS. On June 27, 2000, the Company acquired the
remaining 74.4% of Bright PCS. The total purchase price was approximately
$49,300,000 and was treated as a purchase method acquisition for accounting
purposes. In conjunction with this transaction, Horizon PCS also acquired the
Bright PCS management agreement with Sprint PCS and, with it, the right to
operate using Sprint PCS licenses in Bright PCS' markets. Horizon PCS has
recognized an intangible asset totaling approximately $33,000,000 related to
this licensing agreement which is being amortized over 20 years, the initial
term of the underlying management agreement, resulting in annual amortization
expense of $1,707,000 through October 2019. Accumulated amortization at March
31, 2002, was approximately $3,001,000.
The purchase price exceeded the fair market value of the net assets
acquired by approximately $7,778,000. The resulting goodwill was amortized on a
straight-line basis over 20 years until December 31, 2001. At March 31, 2002,
the remaining unamortized balance of goodwill was approximately $7,191,000.
14
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002 and December 2001
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
The following pro forma disclosure reconciles net loss available to common
stockholders, as presented on the accompanying condensed consolidated statements
of operations, excluding the effect of goodwill amortization:
Three Months Ended March 31,
2002 2001
------------------ ------------------
Reported net loss.............................. $ (39,092,996) $ (19,750,599)
Goodwill amortization.......................... -- 97,221
------------------ ------------------
Adjusted net loss............................ $ (39,092,996) $ (19,653,378)
================== ==================
Basic and diluted net loss per share........... $ (107.89) $ (55.62)
Goodwill amortization.......................... -- 0.27
------------------ ------------------
Adjusted basic and diluted net loss per share $ (107.89) $ (55.35)
=================== ==================
NOTE 9 - SECURED CREDIT FACILITY COVENANTS
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. Horizon PCS did not meet the covenant for EBITDA for the
first quarter of 2002. As a result of higher than expected gross and net
additions to Horizon PCS subscribers for the quarter, Horizon PCS incurred
additional expenses to add those customers. Although the Horizon PCS ultimately
benefits from the revenues generated by new subscribers, Horizon PCS incurs
one-time expenses associated with new subscribers, including commissions,
handset subsidies, set up costs for the network and marketing expenses. As a
result, these new subscriber costs negatively affect Horizon PCS's EBITDA in the
short-term during the period of the addition of new subscribers, which led to
non-compliance with the EBITDA covenant for the first quarter of 2002.
On May 9, 2002, Horizon PCS entered into a waiver agreement with its
lending group waiving this non-compliance with the covenant through June 15,
2002. Horizon PCS also agreed that until June 15, 2002, the Horizon PCS would
not borrow funds under the $95,000,000 facility so long as cash and cash
equivalents (excluding restricted cash) exceeds $10,000,000 and that Horizon PCS
would maintain the $105,000,000 in loan proceeds recently received from the
lending group in a separate account. Horizon PCS is currently in negotiations
with the bank group to obtain amendments to the covenants. Horizon PCS
anticipates finalizing these amendments by June 15, 2002.
The failure to comply with the covenant was an event of default under the
secured credit facility, and will give the lender the right to pursue remedies
if Horizon PCS is unable to agree on the amendment by June 15, 2002. These
remedies could include acceleration of amounts due under the facility. If the
lender elected to accelerate the indebtedness under the facility, this would
also represent a default under the indentures of Horizon PCS' senior notes and
discount notes. One option available to Horizon PCS would be to prepay the
indebtedness under the secured credit facility, together with prepayment fees.
If Horizon PCS prepaid the facility prior to acceleration, the Company would
avoid default under the indentures for the senior notes and discount notes. In
the event of such a prepayment, Horizon PCS believes that it could obtain
replacement financing to the extent necessary to fund its business plan. There
can be no assurance, however, that Horizon PCS could obtain adequate or timely
replacement financing on acceptable terms, or at all.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion reflects the operations of Horizon Telcom, Inc. and its
subsidiaries, The Chillicothe Telephone Company, Horizon PCS, Inc., Horizon
Services, Inc., and Horizon Technology, Inc. This discussion and analysis should
be read in conjunction with the consolidated financial statements and the
related notes.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), which can be identified by the use of
forward-looking terminology such as: "may," "might," "could," "would,"
"believe," "expect," "intend," "plan," "seek," "anticipate," "estimate,"
"project" or "continue" or the negative thereof or other variations thereon or
comparable terminology. All statements other than statements of historical fact
included in this quarterly report on Form 10-Q, including without limitation,
the statements under "ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation" and under "ITEM 5. Other Information" and
elsewhere herein regarding our financial position and liquidity are
forward-looking statements. These forward-looking statements also include, but
are not limited to:
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;
o actions of our competitors;
o estimates of current and future population for our markets;
o forecasts of growth in the number of consumers and businesses using
communication services;
o statements regarding our plans for and costs of the build-out of our
PCS network;
o statements regarding our anticipated revenues, expense levels,
liquidity and capital resources and projections of when we will launch
commercial PCS and achieve break-even or positive operating cash flow;
and
o the anticipated impact of recent accounting pronouncements.
Although we believe the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance such expectations will prove
to have been correct. Important factors with respect to any such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially from our expectations (Cautionary Statements), are
disclosed in this quarterly report on Form 10-Q, including, without limitation,
in conjunction with the forward-looking statements included in this quarterly
report on Form 10-Q. Important factors that could cause actual results to differ
materially from those in the forward-looking statements included herein include,
but are not limited to:
o our potential need for additional capital or the need for refinancing
existing indebtedness;
o our dependence on our affiliation with Sprint PCS and our dependence
on Sprint PCS' back office services;
16
o the need to successfully complete the build-out of our portion of the
Sprint PCS network on our anticipated schedule;
o changes or advances in technology;
o competition in the industry and markets in which we operate;
o changes in government regulation; and
o general economic and business conditions.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
Cautionary Statements. See "Item 5. Other Information" for further information
regarding several of these risks and uncertainties.
OVERVIEW
Horizon Telcom operates primarily within two operating segments: landline
telephone services and wireless personal communications services. See Note 3 of
"Notes to Interim Condensed Consolidated Financial Statements" for additional
financial information regarding Horizon Telcom's operating segments. At March
31, 2002, Chillicothe Telephone serviced 39,030 access lines in Chillicothe,
Ohio and the surrounding area. Horizon Technology provided Internet service to
15,020 customers through its bright.net Internet service. At March 31, 2002,
Horizon PCS had launched service covering approximately 7.2 million residents,
or approximately 71% of the total population in its territory, and managed
approximately 222,700 customers.
HISTORY AND BACKGROUND
Horizon Telcom is a holding company, which, in addition to its 58.1% common
stock ownership of Horizon PCS (on a fully-diluted basis), owns 100% of
Chillicothe Telephone, a local telephone company in service for 106 years.
Horizon Telcom also owns 100% of Horizon Services, which provides administrative
services to Horizon PCS and other Horizon Telcom affiliates, and 100% of Horizon
Technology, a separate long-distance and Internet services business. Prior to
providing PCS service, one of Horizon PCS' subsidiaries operated a DirecTV
affiliate. We sold that business in 1996. We also launched our Internet services
business in 1995.
Horizon Telcom provides a variety of voice and data services to commercial,
residential/small business and local market segments. Horizon Telcom provides
landline telephone service, VDSL 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.
RESULTS OF OPERATION
The landline telephone services operating segment consists of basic local
and long-distance toll, network access services and other telephone service
revenue.
IntraLATA, (Local Access and Transport Area) (i.e., the area of southern
Ohio, including Columbus originally covered by area code 614), basic local
exchange and 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.
17
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. Other revenue includes directory advertising
related to a telephone directory published annually.
The wireless personal communications services operating segment consists of
PCS subscriber revenues and roaming revenues. PCS subscriber revenues consist
primarily of monthly service fees and other charges billed to customers for
Sprint PCS service in our territory under a variety of service plans. Roaming
revenues consist of Sprint PCS roaming and non-Sprint PCS roaming. 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 general and administrative expenses.
PCS equipment revenues consist of digital handsets and accessories sold to
customers in our territory through our directly-owned channels.
Other revenues include Internet access services, equipment systems sales
and information 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 systems sales and other revenues consist of sales made by Chillicothe
Telephone to various businesses or other residential customers for equipment
used on the telephone system.
The following table sets forth a breakdown of our revenues by type:
For the Three Months Ended March 31,
(Dollars in thousands, except PCS ARPU) 2002 2001
-------------------- ----------------------
Amount % Amount %
------------- ------ ------------- -------
Landline telephone services......................... $ 9,193 15% $ 9,847 32%
Personal communications equipment and service....... 48,109 81% 19,212 63%
Other revenues...................................... 2,106 4% 1,574 5%
------------ -----------
Total revenues............................. $ 59,408 $ 30,633
============ ===========
PCS ARPU including roaming (1)...................... $ 74 $ 80
PCS ARPU excluding roaming (1)...................... 56 53
- ---------------
(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 subscribers for that month. "PCS ARPU including roaming," is ARPU
with Sprint PCS roaming and travel and non-Sprint PCS roaming and travel.
"PCS ARPU excluding roaming," excludes Sprint PCS roaming and non-Sprint
PCS roaming.
18
THREE MONTHS ENDED MARCH 31, 2002, COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
OPERATING REVENUES
LANDLINE TELEPHONE SERVICES
The following table sets forth the revenue components of the landline
telephone services segment for the three months ended March 31:
2002 2001 $ change % change
----------- ---------- ----------- ----------
(Dollars in thousands)
Basic local, long-distance and other landline. $ 4,598 $ 4,818 $ (220) (5%)
Network access ............................... 4,595 5,029 (434) (9%)
Long-distance service revenue decreased for the three months ended March
31, 2002, 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. The
decrease in network access was attributable to decreased minutes of use on our
network.
WIRELESS PERSONAL COMMUNICATIONS SERVICES
The following table sets forth the revenue components of the wireless
personal communications services segment for the three months ended March 31:
2002 2001 $ change % change
----------- ---------- ----------- ---------
(Dollars in thousands) PCS service revenues:
Subscriber revenues........................ $ 34,914 $ 12,021 $ 22,893 190%
Roaming revenues........................... 10,819 6,115 4,704 77%
PCS equipment revenues........................ 2,376 1,076 1,300 121%
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 approximately $22.9 million for the three months ended March
31, 2002. We managed approximately 222,700 customers at March 31, 2002, compared
to approximately 84,700 at March 31, 2001. We believe our customer base has
grown because we have launched additional markets and increased our sales force.
PCS ARPU excluding roaming increased for the three months ended March 31, 2002
compared to the three months ended March 31, 2001, to $56 from $53, primarily as
a result of increased minutes of use by our PCS customers. As our PCS customers
exceed their allotted plan minutes, they incur additional charges for their
usage.
Roaming revenues increased $4.7 million in the first quarter of 2002
compared to the same period in 2001. This increase resulted from launching
additional markets over the past year, including markets covering major
interstate highways. ARPU including roaming decreased from $80 to $74 for the
three months ended March 31, 2001, and March 31, 2002, respectively. This
decrease primarily resulted from the continued decease in Sprint PCS roaming
rate.
On April 27, 2001, Sprint PCS and its affiliates announced an agreement on
a new Sprint PCS roaming rate; the receivable and payable roaming rate decreased
from $0.20 per minute to $0.15 per minute effective June 1, 2001, and decreased
further to $0.12 per minute effective October 1, 2001. The Sprint PCS roaming
rate changed to $0.10 per minute on January 1, 2002. After 2002, the rate will
be changed to "a fair and reasonable return" which has not yet been determined.
This decrease in the rate will reduce our revenue and expense per minute, but we
anticipate this rate reduction will be offset by volume increases from the
continued build-out of our network and subscriber growth, resulting in greater
overall roaming revenue and expense in the future.
19
PCS equipment revenues consist of handsets and accessories sold to
customers. Equipment revenues for the three months ended March 31, 2002 were
approximately $2.4 million, compared to $1.1 million for the three months ended
March 31, 2001, an increase of $1.3 million. The increase in equipment revenues
is the result of our increase in the number of handsets sold, somewhat offset by
a lower price per unit.
OTHER REVENUES
The following table sets forth the revenue components of the other revenues
segment for the three months ended March 31:
2002 2001 $ change % change
------------- ------------ ----------- ------------
(Dollars in thousands)
Internet access services...................... $ 807 $ 763 $ 44 6%
Equipment systems, information services, and
other revenues........................... 1,299 811 488 60%
Other revenues were impacted by increased VDSL revenue as we continue to
build our customer base, and by increased revenues from our bright.net Internet
services
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, 2002, was
$5.1 million, compared to $2.3 million for the three months ended March 31,
2002, an increase of $2.8 million. The increase in the cost of goods sold is the
result of the growth in our wireless customers (we sold approximately 15,000
handsets through our direct sales channels during the three months ended March
31, 2002, compared to approximately 7,000 during the same period in 2001),
partially offset by the decreasing per 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.
Cost of services. Cost of services for Chillicothe Telephone and Horizon
Technology 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
service. Cost of services for Horizon PCS includes costs associated with
operating its network including site rent, utilities, maintenance, engineering
personnel and other expenses related to operations. Cost of services also
includes interconnection expenses, customer care, Sprint charges, Sprint PCS
roaming fees and non-Sprint PCS roaming fees. Horizon PCS pays Sprint PCS
roaming fees 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. In the third quarter of 2001,
Horizon PCS negotiated an amendment to its agreement with the Alliances and a
related amendment to its Sprint PCS agreements. Under the Alliances amendment,
Horizon PCS is obligated to pay a fixed minimum monthly fee for a stated minimum
period. Horizon PCS expects to incur lower overall fees under this agreement at
expected usage levels as compared to the previous agreement that was based on a
per minute fee. The Alliances are also obligated to upgrade their networks to
provide 3G technology. In connection with this amendment, the Alliances have
agreed with Sprint PCS to modify their networks to cause Sprint PCS to be in
compliance with the FCC's construction requirements for PCS networks. Horizon
PCS would be responsible for completion of the network modification if the
Alliances fail to comply.
Cost of services for the three months ended March 31, 2002, was
approximately $39.5 million, compared to approximately $21.5 million for the
three months ended March 31, 2001, an increase of approximately $18.0 million.
Of the increase, approximately $17.8 million was related to Horizon PCS, while
Chillicothe Telephone and Horizon Technology were essentially flat, increasing
$200,000.
20
Horizon PCS' increase in cost of services reflects the increase in Sprint
PCS roaming expense and long distance charges of approximately $5.5 million and
the increase in costs incurred under our network services agreement with the
Alliances of approximately $2.9 million, both as a result of our subscriber
growth during 2001 and the first quarter of 2002. Additionally, at March 31,
2001, Horizon PCS' network covered approximately 5.2 million people. At March
31, 2002, our network covered approximately 7.2 million people. As a result,
cost of service in 2002 was higher than 2001 due to the increase in network
operations, including tower lease expense, circuit costs and payroll expense, of
approximately $4.9 million. Growth in our customer base resulted in increased
customer care, activations and billing expense of approximately $3.6 million and
other variable expenses, including switching and national platform expenses, of
approximately $900,000.
Selling and marketing expenses. Selling and marketing expenses consist of
costs associated with operating Horizon PCS' 39 retail stores, including
marketing, advertising, payroll and sales commissions. Selling and marketing
expense also includes salaries and commissions paid to our sales representatives
and sales support personnel, commissions paid to national and local third party
distribution channels and subsidies on handsets sold by third parties for which
we do not record revenue, and expenses related to Chillicothe Telephone and
Horizon Technology marketing and advertising programs.
Selling and marketing expenses rose to $15.1 million for the three months
ended March 31, 2002 compared to $7.6 million for the same period in 2001, an
increase of $7.5 million. Horizon PCS' increase was $7.6 million, while
Chillicothe Telephone and Horizon Technology were essentially flat, decreasing
by $100,000.
Horizon PCS' increase reflects the increase in the costs of operating 39
retail stores in 2002 compared to 17 at the end of the first quarter of 2001.
The costs include marketing and advertising in our sales territory of
approximately $4.7 million, the increase in subsidies on handsets sold by third
parties of approximately $1.7 million and the increase in commissions paid to
third parties of approximately $1.2 million. We expect selling and marketing
expense to increase in the aggregate as we expand our coverage, launch
additional stores and add customers.
General and administrative expenses. General and administrative costs
include the costs related to corporate support functions. These include finance
functions, billing and collections, accounting services, computer access and
administration, executive, supervisory, consulting, customer relations, human
resources and other administrative services. The Sprint PCS management fee is
also included in general and administrative expenses.
General and administrative expenses rose by $5.2 million to $12.8 million
for the three months ended March 31, 2002, compared to the same period last
year. Horizon PCS' increase was $4.6 million which reflects an increase in the
provision of uncollectible accounts of $2.8 million, an increase in the Sprint
PCS management fee of $1.7 million as a result of higher subscriber revenues in
2002 and an increase in other general expenses $100,000. Chillicothe Telephone
and Horizon Technology's general and administrative expenses increased by
$600,000 primarily due to additional payroll expenses.
Non-cash compensation expense. For the three months ended March 31, 2002
and 2001, we recorded stock-based compensation expense of approximately $102,000
and $110,000, respectively. This compensation expense is the amortization of the
value of 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 for these options is approximately $413,000 for the
full year 2002, $389,000 in 2003, $193,000 in 2004 and $71,000 in 2005.
Depreciation and amortization expense. Depreciation and amortization
expenses increased by $5.0 million to a total of $10.1 million in 2002. The
increase reflects the continuing construction of our PCS network as well as
capital additions for VDSL and other telephone services. In addition, since our
acquisition of Bright PCS was accounted for as a purchase transaction,
amortization has increased as a result of amortizing the related intangible
assets. Amortization expense of the intangible asset was $427,000 during the
three months ended March 31, 2002 and 2001. Related goodwill amortization was
$97,000 for the first quarter of 2001. Goodwill amortization ceased as of
December 31, 2001, with the adoption of SFAS No. 142. See "Recent Accounting
Pronouncements" below.
21
Amortization expense also includes amortization of an intangible asset
recorded in September 2000, related to the new markets granted to us by Sprint
PCS. We agreed to grant warrants to purchase shares of Horizon PCS' common stock
to Sprint PCS in exchange for the right to provide service in additional
markets. The warrants will be issued to Sprint PCS at the earlier of an initial
public offering of Horizon PCS' common stock or July 31, 2003. The intangible
asset is being amortized over the remaining term of the Sprint PCS management
agreement, resulting in $752,000 of amortization expense per year. Amortization
expense related to this intangible asset was approximately, $188,000 for each of
the three months ended March 31, 2002 and 2001.
Interest expense, net. Interest expense for the three months ended March
31, 2002, was approximately $13.2 million, compared to approximately $6.8
million for the three months ended March 31, 2001. The increase in interest
expense was a result of our additional debt outstanding during the three months
ended March 31, 2002, compared to the same period in 2001.
As a result of a lower interest rate environment in 2002 compared to the
first quarter of 2001, interest expense on Chillicothe Telephone's line of
credit decreased approximately $122,000 for the three months ended March 31,
2002. Chillicothe Telephone's line of credit accrues interest on the outstanding
balance at a variable rate tied to LIBOR (3.44% at of March 31, 2002 based on
LIBOR plus 155-basis points) and is due and payable every ninety days. The
outstanding balance on the line of credit at March 31, 2002, was $18.4 million
compared to $14.0 million at March 31, 2001. At March 31, 2002, the balance on
Chillicothe Telephone's term loans was $20.0 million including current
maturities and the weighted average rate was 6.66%.
Interest on Horizon PCS' outstanding balance of the secured credit facility
accrues at LIBOR plus a specified margin. On June 29, 2001, Horizon PCS agreed
to several changes in the secured credit facility including a 25-basis point
increase in the margin on the base interest rate. At March 31, 2001, $50.0
million was outstanding under the secured credit facility. Horizon PCS borrowed
an additional $105.0 million on March 22, 2002, which was required under the
terms of the secured credit facility. At March 31, 2002, the interest rate on
the $105.0 million term loan A borrowed under the secured credit facility was
5.75%, while the interest rate on the $50.0 million term loan B was 6.30%.
Interest expense on the secured credit facility was approximately $1.2 million
and approximately $1.3 million during the three months ended March 31, 2002 and
2001, respectively.
During 2001, Horizon PCS entered into interest rate swap agreements,
effectively fixing the interest rate on $50.0 million borrowed under its
variable-rate secured credit facility. Horizon PCS recognized a loss of $34,000
during the first quarter of 2002 in the statement of operations related to the
ineffectiveness of a portion of the hedge.
Horizon PCS accrues interest at a rate of 14.00% annually on the discount
notes issued in September 2000 and will pay interest semi-annually in cash
beginning in October 2005. Unaccreted interest expense on the discount notes was
approximately $129.6 million at March 31, 2002. Interest expense on the discount
notes was approximately $6.4 million and $5.5 million during the three months
ended March 31, 2002 and 2001, respectively.
On June 15, 2002, Horizon PCS will begin making semi-annual interest
payments on our senior notes issued in December 2001, at an annual rate of
13.75%. Interest expense accrued on the senior notes was approximately $6.0
million during the three months ended March 31, 2002. Under the terms of the
senior notes, cash to cover the first four semi-annual interest payments was
placed in an escrow account.
Interest expense also includes approximately $600,000 and $200,000 during
the three months ended March 31, 2002 and 2001, respectively, of amortization
from the deferred financing fees related to our secured credit facility, our
discount notes and our senior notes. Also contributing to the increase in
interest expense during the three months ended March 31, 2002, was approximately
$600,000 in commitment fees we paid on the unused portion of our secured credit
facility.
Capitalized interest during the three months ended March 31, 2002 and 2001,
was approximately $2.1 million and $1.6 million, respectively. We expect our
interest expense to increase in the future as we borrow under our secured credit
facility to fund our network build-out and operating losses.
22
Subsidiary preferred stock dividends. Horizon PCS' convertible preferred
stock pays a stock dividend at the rate of 7.5% annually, payable semi-annually,
commencing May 1, 2001. The dividends are paid with additional shares of
convertible preferred stock. Through May 1, 2002, Horizon PCS had issued an
additional 3,245,134 shares of convertible preferred stock in payments of all
stock dividends through April 30, 2002, including 1,060,201 shares that were
issued on May 1, 2002.
Interest income and other, net. Interest income and other for the three
months ended March 31, 2002, was approximately $456,000 compared to
approximately $3.0 million in 2001 and consisted primarily of interest income,
partially offset by a loss on disposal of Horizon PCS assets. This decrease was
due primarily to a lower average balance of cash investments during the first
quarter of 2002 as compared to the same period in 2001 and due to a lower
short-term interest rate environment in 2002.
During the three months ended March 31, 2002, Horizon PCS incurred a loss
of approximately $286,000 related to the sale of corporate-owned vehicles. The
sale resulted in proceeds of approximately $1.3 million. The vehicles were
subsequently leased back from the purchaser.
Income tax expense. Income tax expense for the three months ended March 31,
2002, was approximately $208,000 compared to approximately $678,000 in 2001.
Before 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 Horizon PCS convertible preferred stock in September
2000, Horizon PCS is not able to participate in the tax sharing agreement with
its parent nor is Horizon Telcom 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. Horizon PCS is unable to recognize any tax
benefits from its net operating losses until it generates taxable income. Thus,
Horizon PCS filed a separate Federal income tax return for the short period
after the deconsolidation through December 31, 2000 and will file a separate
return for all subsequent periods.
Minority interest in loss. As part of the acquisition of Bright PCS, the
former members of Bright PCS have approximately an 8% 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 loss attributable to the minority shareholders
as minority interest in loss in the accompanying condensed consolidated
statements of operations. 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.
Other comprehensive income (loss). During the first quarter of 2002, the
Company recorded an unrealized loss, net of associated tax, of $700,000 on its
investment in marketable securities classified as available-for-sale. This
investment can fluctuate in value.
Also during the first quarter of 2001, Horizon PCS entered into a two-year
interest rate swap effectively fixing $25.0 million of its term loan borrowed
under the secured credit facility at a rate of 9.4%. In the third quarter of
2001, Horizon PCS entered into a two-year interest rate swap effectively fixing
an additional $25.0 million of our term loan borrowed under the secured credit
facility of 7.65%. We do not expect the effect of these swaps to have a material
impact to interest expense for the remainder of their lives. Horizon PCS
recovered approximately $390,000 of previously unrealized losses in other
comprehensive income during the first quarter of 2002 and recognized
approximately $34,000 of loss in the statement of operations due to the
ineffectiveness of the hedge.
LIQUIDITY AND CAPITAL RESOURCES
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 it did not own at that time. Horizon PCS also entered into several
major financing transactions in September 2000 and December 2001.
23
At March 31, 2002, we had cash and cash equivalents of approximately $197.5
million and working capital of approximately $162.5 million. At December 31,
2001, we had cash and cash equivalents of approximately $127.2 million and
working capital of approximately $100.8 million. The increase in cash and cash
equivalents of approximately $70.3 million is attributable to the $105.0 million
draw on Horizon PCS' secured credit facility offset by the funding of our loss
from continuing operations of approximately $39.1 million (this loss also
includes certain non-cash charges) and funding our capital expenditures of
approximately $26.3 million for the three months ended March 31, 2002.
Net cash used in operating activities was approximately $8.3 million for
the three months ended March 31, 2002. This reflects the continuing use of cash
for our operations to build our Horizon PCS customer base, including but not
limited to providing service in our markets and the costs of acquiring a new
customer. For the three months ended March 31, 2002, our cost per gross
additional customer was approximately $342.
Net cash used in investing activities was approximately $25.1 million for
the three months ended March 31, 2002, reflecting the continuing build-out of
the Horizon PCS network as well as the deployment of capital necessary to offer
VDSL service. At March 31, 2002, we operated approximately 700 cell sites in our
PCS network (an additional 494 cell sites were operated by the Alliances in our
territories). This represents an addition of approximately 96 sites during the
three months ended March 31, 2002 and 380 sites since March 31, 2001. In
addition to the sites, we have increased the number of switching stations in our
territory and have increased our number of retail stores from 38 at the end of
2001, to 39 at March 31, 2002. We will incur additional capital expenditures as
we complete the build-out of our network, including the launch of additional PCS
retail stores, completing additional cell sites and expanding capacity at our
switches as needed. We are also upgrading our network to provide 3G (third
generation) wireless service which will increase voice capacity and allow for
higher-speed data transmission.
Net cash provided by financing activities for the three months ended March
31, 2002, was approximately $103.8 million consisting primarily of the March
2002 draw on Horizon PCS term loan A required under the secured credit facility,
offset by approximately an $800,000 payment on Chillicothe Telephone's line of
credit and dividends paid to common stockholders of $452,911.
At March 31, 2002, Horizon PCS had approximately $95.0 million available to
be borrowed on the line of credit under the secured credit facility. We
anticipate that existing cash and available borrowings under Horizon PCS'
secured credit facility will be adequate to fund the network build-out,
anticipated operating losses and working capital requirements until Horizon PCS
achieves positive EBITDA which we expect to occur in the third quarter of 2003.
For the year ended December 31, 2002, we anticipate our annual funding
needs will be approximately $155.0 million, of which approximately $70.0 million
to $85.0 million will be used for capital expenditures; 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. The funds required to build out the network
and to fund operating losses, working capital needs and other capital
requirements may vary materially from our estimates and additional funds may be
needed as a result of unforeseen delays, cost overruns, unanticipated expenses,
regulatory changes, engineering design changes and required technological
upgrades and other technological risks.
Other future cash expenditures that may require additional borrowings
include:
o expanding the coverage within our existing operating markets or
improving call quality with fill-in coverage;
o opening additional retail stores, beyond our current plan of 50
stores;
o mergers or acquisitions of other Sprint PCS affiliates or other
compatible PCS carriers
24
o the grant to us by Sprint PCS of additional markets under our Sprint
PCS agreements; and/or
o expanding our network, if economically justifiable, by exercising our
right to build our own network in our markets which are covered by our
network services agreement with the Alliances under the terms of that
amended agreement.
Horizon PCS' inability to obtain any necessary additional funding to
complete the wireless network build-out and upgrade, may result in a termination
of Horizon PCS' Sprint PCS agreement. We will no longer be able to offer Sprint
PCS products and services. In this event, Sprint PCS may purchase Horizon PCS'
operating assets or capital stock under terms defined by the management
agreements. Also, any delays in our build-out may result in penalties under our
Sprint PCS agreements, as amended.
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. Horizon PCS did not meet the covenant for EBITDA for the
first quarter of 2002. As a result of higher than expected gross and net
additions to Horizon PCS subscribers for the quarter, Horizon PCS incurred
additional expenses to add those customers. Although Horizon PCS ultimately
benefit from the revenues generated by new subscribers, Horizon PCS incurs
one-time expenses associated with new subscribers, including commissions,
handset subsidies, set up costs for the network and marketing expenses. As a
result, these new subscriber costs negatively affect EBITDA in the short-term
during the period of the addition of new subscribers, which led to
non-compliance with the EBITDA covenant for the first quarter of 2002.
On May 9, 2002, Horizon PCS entered into a waiver agreement with its
lending group waiving this non-compliance with the covenant through June 15,
2002. Horizon PCS also agreed that until June 15, 2002, they would not borrow
funds under its $95.0 million facility so long as their cash and cash
equivalents (excluding restricted cash) exceeds $10.0 million and that they
would maintain the $105.0 million in loan proceeds recently received from the
lending group in a separate account. Horizon PCS is currently in negotiations
with the bank group to obtain amendments to the covenants. Horizon PCS
anticipates finalizing these amendments by June 15, 2002.
The failure to comply with the covenant was an event of default under
Horizon PCS' secured credit facility, and will give the lender the right to
pursue remedies if Horizon PCS is unable to agree on the amendment by June 15,
2002. These remedies could include acceleration of amounts due under the
facility. If the lender elected to accelerate the indebtedness under the
facility, this would also represent a default under the indentures of Horizon
PCS' senior notes and discount notes. One option available to Horizon PCS would
be to prepay the indebtedness under the secured credit facility, together with
prepayment fees. If Horizon PCS prepaid the facility prior to acceleration, they
would avoid default under the indentures for their senior notes and discount
notes. In the event of such a prepayment, we believe that they could obtain
replacement financing to the extent necessary to fund their business plan. There
can be no assurance, however, that Horizon PCS could obtain adequate or timely
replacement financing on acceptable terms or at all.
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
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.
25
INFLATION
We believe that inflation has not had an adverse effect on our results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for all business combinations and requires
that all business combinations entered into subsequent to June 2001 be recorded
under the purchase method. This statement also addresses financial accounting
and reporting for goodwill and other intangible assets acquired in a business
combination at acquisition. SFAS No. 142 addresses financial accounting and
reporting for intangible assets acquired individually or with a group of other
assets at acquisition. This statement also addresses financial accounting and
reporting for goodwill and other intangible assets subsequent to their
acquisition.
These statements were adopted by the Company on January 1, 2002. Goodwill
amortization ceased as of December 31, 2001 and the Company will be required to
complete an impairment test of the remaining goodwill balance annually (more
frequently if impairment indicators arise). The Company has not yet determined
the financial impact the adoption of these pronouncements will have on its
financial position or results of operations. As of March 31, 2002, the Company
has goodwill of approximately $7,191,000, net of accumulated amortization,
related to the acquisition of Bright PCS. The Company will complete the first
step of the impairment test by June 30, 2002, and, if necessary, will complete
the second step by December 31, 2002.
In June, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirements of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset. The Company will adopt this statement effective January 1,
2003. The adoption is not expected to have a material effect on the Company's
financial position results of operations or cash flows.
In August, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets. The statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30. SFAS No. 144 removes goodwill from its scope,
as goodwill will be addressed in the impairment test described above under SFAS
No. 142. The Company adopted SFAS No. 144 on January 1, 2002. The adoption did
not have a material effect on the Company's financial position, results of
operations or cash flows.
ITEM 3. 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' secured credit
facility and any future floating rate financing requirements.
26
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:
(Dollars in millions) Years Ending December 31,
-------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter
----------- ------------ ------------ ------------ ------------ -----------
Horizon PCS:
- ------------
Secured credit facility,
due 2008..................... $ 155.0 $ 155.0 $ 155.0 $ 155.0 $ 155.0 $ 155.0
Variable interest rate (1) 5.92% 5.92% 5.92% 5.92% 5.92% 5.92%
Principal payments........ $ - $ - $ 0.4 $ 0.5 $ 0.5 $ 153.6
Discount notes, due 2010 (2)... $ 186.3 $ 217.5 $ 253.1 $ 283.7 $ 286.1 $ 295.0
Fixed interest rate....... 14.00% 14.00% 14.00% 14.00% 14.00% 14.00%
Principal payments........ $ - $ - $ - $ - $ - $ 295.0
Senior notes, due 2011......... $ 175.0 $ 175.0 $ 175.0 $ 175.0 $ 175.0 $ 175.0
Fixed interest rate....... 13.75% 13.75% 13.75% 13.75% 13.75% 13.75%
Principal payments........ $ - $ - $ - $ - $ - $ 175.0
Chillicothe Telephone:
1998 Senior Notes, due 2018.... $ 12.0 $ 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, due 2005.... $ 6.0 $ 4.0 $ 2.0 $ - $ - $ -
Fixed interest rate ...... 6.72% 6.72% 6.72% - - -
Principal payments........ $ 2.0 $ 2.0 $ 2.0 $ 2.0 $ - $ -
- -------------------
(1) Interest rate on the secured credit facility equals the London Interbank
Offered Rate ("LIBOR") plus a margin that varies from 375 to 425 basis
points. At March 31, 2002, $50.0 million was effectively fixed at 8.5%
through an interest rate swap discussed below. The interest rate is assumed
to equal 5.92% for all periods ($50.0 million tranche at 6.25% and $105.0
million tranche at 5.75%).
(2) Face value of the discount notes is $295.0 million. End of year balances
presented here are net of the discount and assume accretion of the discount
as interest expense at an annual rate of 14.00%.
In the normal course of business, our operations are exposed to interest
rate risk on our secured credit facility. Our primary interest rate risk
exposure relates to (i) the interest rate on our financing, (ii) our ability to
refinance our fixed-rate discount and senior notes at maturity at market rates,
and (iii) the impact of interest rate movements on our ability to meet interest
expense requirements and meet financial covenants under our debt instruments.
We manage the interest rate risk on our 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 a two-year interest rate swap, effectively
fixing $25.0 million of our term loan borrowed under the secured credit facility
at a rate of 9.4%. In the third quarter of 2001, we entered into another
two-year interest rate swap effectively fixing another $25.0 million of our term
loan borrowed under the secured credit facility at 7.65%.
Since our swap interest rates are currently greater than the market
interest rates on our underlying debt, our results from operations currently
reflect a higher interest expense than had we not hedged our position. 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. We are exposed to market risk on our
long-term debt related to the current market value of interest rates compared to
our fixed and variable-rate debt. As of March 31, 2002, approximately 84% of our
long-term debt is fixed-rate or is variable-rate that has been swapped under
fixed-rate hedges, thus reducing our exposure to interest rate risk. A 100-basis
point increase in interest rates would increase our interest expense
approximately $1.1 million and it would also have an impact on the market value
of our debt.
27
If we do not renew our swaps, or, if we do not hedge incremental
variable-rate borrowings under our secured credit facility, of which we have
$95.0 million available at March 31, 2002, we will increase our interest rate
risk which could have a material impact on our future earnings.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. Horizon PCS did not meet the covenant for EBITDA for the
first quarter of 2002. As a result of higher than expected gross and net
additions to Horizon PCS subscribers for the quarter, Horizon PCS incurred
additional expenses to add those customers. Although Horizon PCS ultimately
benefits from the revenues generated by new subscribers, they incur one-time
expenses associated with new subscribers, including commissions, handset
subsidies, set up costs for the network and marketing expenses. As a result,
these new subscriber costs negatively affect EBITDA in the short-term during the
period of the addition of new subscribers, which led to non-compliance with the
EBITDA covenant for the first quarter of 2002.
On May 9, 2002, Horizon PCS entered into a waiver agreement with its
lending group waiving this non-compliance with the covenant through June 15,
2002. We also agreed that until June 15, 2002, we would not borrow funds under
our $95.0 million facility so long as its cash and cash equivalents (excluding
restricted cash) exceeds $10.0 million and that they would maintain the $105.0
million in loan proceeds recently received from the lending group in a separate
account. Horizon PCS is currently in negotiations with the bank group to obtain
amendments to the covenants. Horizon PCS anticipates finalizing these amendments
by June 15, 2002.
The failure to comply with the covenant was an event of default under
Horizon PCS' secured credit facility, and will give the lender the right to
pursue remedies if they are unable to agree on the amendment by June 15, 2002.
These remedies could include acceleration of amounts due under the facility. If
the lender elected to accelerate the indebtedness under the facility, this would
also represent a default under the indentures of Horizon PCS' senior notes and
discount notes. One option available to Horizon PCS would be to prepay the
indebtedness under the secured credit facility, together with prepayment fees.
If Horizon PCS prepaid the facility prior to acceleration, they would avoid
default under the indentures for their senior notes and discount notes. In the
event of such a prepayment, we believe that Horizon PCS could obtain replacement
financing to the extent necessary to fund its business plan. There can be no
assurance, however, that Horizon PCS could obtain adequate or timely replacement
financing on acceptable terms or at all.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
28
ITEM 5. OTHER INFORMATION
RISK FACTORS
RISKS RELATED TO CHILLICOTHE TELEPHONE, LONG DISTANCE AND INTERNET BUSINESS
The information set forth under this heading describes risk factors
relating to the business of our wholly-owned subsidiaries the Chillicothe
Telephone Company, Horizon Technology and Horizon Services. References under
this heading to "we," "us" and "our" are to those subsidiaries.
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.
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:
29
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
12% of the Company's total revenues for the year ended December 31, 2001,
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. 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.
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 2002.
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.
30
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.
RISKS RELATED TO HORIZON PCS, OUR WIRELESS PERSONAL COMMUNICATIONS SERVICES
BUSINESS
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 2004
while we continue to construct our network and grow our customer base. 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 FAIL TO COMPLETE THE BUILD-OUT OF OUR NETWORK, SPRINT PCS MAY TERMINATE
THE SPRINT PCS AGREEMENTS AND 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 and operate the portion of the
Sprint PCS network located in our territory in accordance with Sprint PCS'
technical specifications and coverage requirements. The agreements also require
us to provide minimum network coverage to the population within each of the
markets which make up our territory by specified dates.
Under our original Sprint PCS agreements, we were required to complete the
build-out in several of our markets in Pennsylvania and New York by December 31,
2000. Sprint PCS and HPC agreed to an amendment of the build-out requirements,
which extended the dates by which we were to launch coverage in several markets.
The amended Sprint PCS agreement provides for monetary penalties to be paid by
us if coverage is not launched by these extended contract dates. The amounts of
the penalties range from $16,500 to $602,000 for each shortfall depending on the
market and length of 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 stock.
31
Under the amended Sprint PCS agreement, portions of the New York, Sunbury,
Williamsport, Oil City, Dubois, Erie, Meadville, Sharon, Olean, Jamestown,
Scranton, State College, Stroudsburg, Allentown and Pottsville markets were
required to be completed and launched by October 31, 2001. Although we have
launched service in portions of each of these markets, we have not completed all
of the build-out requirements. We notified Sprint PCS in November 2001 that it
is our position that the reasons for the delay constitute events of "force
majeure" as described in the Sprint PCS agreements and that, consequently, no
monetary penalties or other remedies would be applicable. The delay has been
primarily caused due to delays in obtaining the required backhaul services from
local exchange carriers and zoning and other approvals from governmental
authorities. On January 30, 2002, Sprint PCS notified us that, as a result of
these force majeure events, it does not consider our build-out delay to be a
breach of the Sprint PCS agreement. We have agreed to continue to use
commercially reasonable efforts to reach build-out completion by either June 30,
2002 (for most of the affected markets) or April 30, 2002 (for two of these
markets). By April 30, 2002, we materially completed these two markets. However,
we continue to experience events of force majeure in most of these markets.
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. A failure to meet our build-out
requirements for any of our 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 the applicable cure period. If
Sprint PCS terminates these agreements, we will no longer be able to offer
Sprint PCS products and services.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR LONG-TERM DEBT OBLIGATIONS.
As of March 31, 2002, Horizon PCS' total debt outstanding was $625.0
million, comprised of $155.0 million borrowed under its secured credit facility,
$175.0 million due under its senior notes issued in December 2001 and $295.0
million represented by its discount notes (which are reported on the balance
sheet at March 31, 2002, net of a discount of approximately $129.6 million).
Our substantial debt will have a number of important consequences,
including the following:
o we may not have sufficient funds to pay interest on, and principal of,
our debt;
o we have to dedicate a substantial portion of any positive 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 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;
o due to the liens on substantially all of our assets and the pledges of
equity ownership of our subsidiaries that secure our secured credit
facility, our lenders may control our assets upon a default;
o our debt increases our vulnerability to general adverse economic and
industry conditions;
o our debt limits our flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate; and
o our debt places us at a competitive disadvantage compared to our
competitors that have less debt.
32
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness, and to
fund our network build-out, anticipated operating losses and working capital
requirements will depend on our ability to generate cash in the future. This, to
a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
We cannot be certain that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us under our
secured credit facility in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness, including the notes on or before maturity. We
may not be able to refinance any of our indebtedness on commercially reasonable
terms, or at all.
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 secured credit
facility, Sprint PCS has the right to purchase our obligations under that
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", as defined by the
agreement. 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 the fair market value of our wireless
business valued on a going concern basis as determined by an independent
appraiser and assumes that we own the FCC licenses in our territory. 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 Horizon PCS or its operating
assets to a number of identified and 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 price a buyer may be willing to pay
for Horizon PCS or its business and may operate to reduce the Entire Business
Value of Horizon PCS.
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 Sprint PCS owns the FCC licenses which we use in our territory, 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 by us 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 our 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' networks, 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
33
Sprint PCS nor any other PCS provider offers service in every area of the United
States. Sprint PCS has entered 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, in varying degrees, to the economic,
administrative, logistical, regulatory and other risks described in this
document. Sprint PCS' and its other affiliates' PCS operations may not be
successful, which in turn could adversely affect our ability to generate
revenues.
WE ARE DEPENDENT UPON SPRINT PCS' BACK OFFICE SERVICES AND ITS THIRD-PARTY
VENDORS' BACK OFFICE SYSTEMS. PROBLEMS WITH THESE SYSTEMS, OR TERMINATION OF
THESE ARRANGEMENTS, COULD DISRUPT OUR BUSINESS AND POSSIBLY INCREASE OUR COSTS.
Because Sprint PCS now provides our back office systems such as billing,
customer care and collections, 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, Sprint (long distance) and Qwest 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 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 HORIZON PCS 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 secured credit facility provides for aggregate borrowings of $250.0
million of which $155.0 million was borrowed as of March 31, 2002. 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 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 secured credit facility.
34
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. Horizon PCS did not meet the covenant for EBITDA for the
first quarter of 2002. As a result of higher than expected gross and net
additions to Horizon PCS subscribers for the quarter, Horizon PCS incurred
additional expenses to add those customers. Although Horizon PCS ultimately
benefits from the revenues generated by new subscribers, Horizon PCS incur
one-time expenses associated with new subscribers, including commissions,
handset subsidies, set up costs for the network and marketing expenses. As a
result, these new subscriber costs negatively affect Horizon PCS' EBITDA in the
short-term during the period of the addition of new subscribers which led to
non-compliance with the EBITDA covenant for the first quarter of 2002.
On May 9, 2002, Horizon PCS entered into a waiver agreement with its
lending group waiving this non-compliance with the covenant through June 15,
2002. Horizon PCS also agreed that until June 15, 2002, they would not borrow
funds under their $95.0 million facility so long as cash and cash equivalents
(excluding restricted cash) exceeds $10.0 million and that we maintain the
$105.0 million in loan proceeds recently received from the lending group in a
separate account. Horizon PCS is in negotiations with the bank group to obtain
amendments to the covenants. Horizon PCS anticipates finalizing these amendments
by June 15, 2002.
The failure to comply with the covenant will be an event of default under
Horizon PCS' secured credit facility, and will give the lender the right to
pursue remedies if Horizon PCS is unable to agree on the amendment by June 15,
2002. These remedies could include acceleration of amounts due under the
facility. If the lender elected to accelerate the indebtedness under the
facility, this would also represent a default under the indentures of Horizon
PCS' senior notes and discount notes. One option available to Horizon PCS would
be to prepay the indebtedness under the secured credit facility, together with
prepayment fees. If Horizon PCS prepaid the facility prior to acceleration, they
would avoid default under the indentures for their senior notes and discount
notes. In the event of such a prepayment, we believe that Horizon PCS could
obtain replacement financing to the extent necessary to fund its business plan.
There can be no assurance, however, that we could obtain adequate or timely
replacement financing on acceptable terms or at all.
MATERIAL RESTRICTIONS IN OUR DEBT INSTRUMENTS MAY MAKE IT DIFFICULT TO OBTAIN
ADDITIONAL FINANCING OR TAKE OTHER NECESSARY ACTIONS TO REACT TO CHANGES IN OUR
BUSINESS.
The indenture governing the senior notes contains various covenants that
limit our ability to engage in a variety of transactions. In addition, the
indenture governing our discount notes and the secured credit agreement both
impose additional material operating and financial restrictions on us. These
restrictions, subject to ordinary course of business exceptions, 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.
In addition, our secured credit facility requires us to maintain certain
ratios, including:
o leverage ratios;
o an interest coverage ratio; and
35
o a fixed charges ratio,
and to satisfy certain tests, including tests relating to:
o minimum covered population;
o minimum number of PCS subscribers in our territory; and
o minimum total revenues.
o minimum EBITDA.
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 secured credit facility may
prevent the Company and the guarantors of the senior notes and the discount
notes from paying those notes or the guarantees of those notes.
THE TERMS OF THE CONVERTIBLE PREFERRED STOCK MAY AFFECT OUR FINANCIAL RESULTS.
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 in 2005.
If we become subject to the repurchase right or change of control
redemption requirements under the convertible preferred stock while our secured
credit facility, our discount notes or the senior notes are outstanding, we will
be required to seek the consent of the lenders under our secured credit
facility, the holders of the discount notes and the holders of the senior notes
to repurchase or redeem the convertible preferred stock, or attempt to refinance
the secured credit facility, the discount notes and the senior notes. If we fail
to obtain these consents, there will be an event of default under the terms
governing our secured credit facility. 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 indentures governing the
discount notes and the senior notes.
IF WE BREACH OUR AGREEMENT WITH SBA COMMUNICATIONS CORP. ("SBA"), OR IT
OTHERWISE TERMINATES ITS AGREEMENT WITH US, OUR RIGHT TO PROVIDE WIRELESS
SERVICE FROM MOST 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 cell sites.
36
WE MAY HAVE DIFFICULTY IN OBTAINING INFRASTRUCTURE EQUIPMENT AND HANDSETS, 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 or upgrade 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. 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 manufacturers of specific types
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.
IF THE WEST VIRGINIA PCS ALLIANCE AND VIRGINIA PCS ALLIANCE 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.
West Virginia PCS Alliance and Virginia PCS Alliance, which we refer to as
the Alliances, are two related, independent PCS providers whose network is
managed by NTELOS. 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
the markets where we 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 substantial
costs associated with doing so.
SPRINT PCS' VENDOR DISCOUNTS MAY BE DISCONTINUED, WHICH COULD INCREASE OUR
EQUIPMENT COSTS AND REQUIRE MORE CAPITAL THAN WE HAD PROJECTED TO BUILD-OUT OR
UPGRADE 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 network
build-out.
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 AFFECTING OUR RELATIONSHIPS WITH OUR CUSTOMERS, INCREASE OUR EXPENSES
OR 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 may price its national plans based on its own objectives
and may set price levels and customer credit policies that may not be
economically sufficient for our business;
o Sprint PCS may increase the prices we pay for our back office
services; and
o Sprint or Sprint PCS may make decisions that adversely affect our use
of the Sprint and Sprint PCS brand names, products or services.
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
37
strategies by competitors. In each market, we compete with at least two cellular
providers that have had their infrastructure in place and have been operational
for a number of years. They may have significantly greater financial and
technical resources than we do, they could offer attractive pricing options and
they may have a wider variety of handset options. We expect existing cellular
providers will continue to upgrade their systems and provide expanded digital
services to compete with the Sprint PCS products and services 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.
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.
WE MAY NOT BE ABLE TO OFFER COMPETITIVE ROAMING CAPABILITY, WHICH COULD IMPAIR
OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.
We rely on agreements with competitors to provide automatic roaming
capability to our PCS customers in many of the areas of the United States not
covered by the Sprint PCS network, which primarily serves metropolitan areas.
Some competitors may be able to offer coverage in areas not served by the Sprint
PCS network or may be able to offer roaming rates that are lower than those
offered by Sprint PCS and its affiliates. Some of our competitors are seeking to
reduce access to their networks through actions pending with the FCC. Moreover,
the engineering standard for the dominant air interface upon which PCS customers
roam is currently being considered for elimination by the FCC as part of a
streamlining proceeding. If the FCC eliminates this standard, our Sprint PCS
customers may have difficulty roaming in some 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 CDMA technology, which is the digital wireless
communications technology selected by Sprint PCS for its network. CDMA 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 was decreased from $0.20 per minute before
June 1, 2001, to $0.15 per minute effective June 1, 2001, and further decreased
to $0.12 per minute effective October 1, 2001. The Sprint PCS roaming rate was
changed to $0.10 per minute in 2002. After 2002, the rate will be changed to "a
fair and reasonable return," which has not yet been determined. As a result, we
may receive less Sprint PCS roaming revenue in the aggregate, than we previously
anticipated or we may have to pay more Sprint PCS roaming fees in the aggregate
than we anticipate. Furthermore, we do not expect to receive substantial
non-Sprint PCS roaming revenue.
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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. These roaming issues may cause us to suffer a reduction in our revenues
and number of customers.
PARTS OF OUR TERRITORIES HAVE LIMITED LICENSED SPECTRUM, WHICH MAY ADVERSELY
AFFECT THE QUALITY OF OUR SERVICE.
In the majority of our markets, Sprint PCS has licenses covering 20 MHz 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. 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 the imposition of
fines on Sprint PCS by the FCC or the revocation or forfeiture of the Sprint PCS
licenses for our territory, which would prohibit us from providing service in
our markets.
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 be certain 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.
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WE MAY NEED MORE CAPITAL THAN WE CURRENTLY ANTICIPATE TO COMPLETE THE BUILD-OUT
AND UPGRADE OF OUR NETWORK, AND A DELAY OR FAILURE TO OBTAIN ADDITIONAL CAPITAL
COULD DECREASE 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 find
it necessary or desirable 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 or on terms acceptable to us or within limitations
permitted under our existing debt covenants. Failure to obtain additional
financing, should the need for it develop, could result in the delay or
abandonment of our development and expansion plans, and we may be unable to fund
our ongoing operations.
BECAUSE SPRINT PCS HAS RECENTLY REQUIRED US TO UPGRADE OUR NETWORK TO PROVIDE
"THIRD GENERATION" TECHNOLOGY, WE WILL FACE ADDITIONAL CAPITAL EXPENSES.
The wireless industry is seeking to implement new "third generation," or
"3G," technology. Sprint PCS has recently selected a version of 3G technology
for its own networks and required us to upgrade our network to provide those
services. We currently estimate this network upgrade will cost approximately $35
million, but actual costs could exceed this estimate. The current deadline for
completion of our 3G upgrade is June 30, 2002. If we fail to meet the upgrade
deadline, we will be in breach of our Sprint PCS agreements. If other wireless
carriers implement their 3G upgrades on a more rapid timetable, or on a more
cost efficient basis, or on a more advanced technology basis, we will likely
suffer competitive disadvantages in our markets. While there are potential
advantages with 3G technology, such as increased network capacity and additional
capabilities for wireless data applications, the technology has not been proven
in the marketplace and has the risks inherent in other technological
innovations.
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 we have
a plan in place to implement appropriate controls to minimize the effect to us
of fraudulent usage, our efforts may not be successful.
EXPANDING OUR TERRITORY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
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;
40
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.
THE SPRINT PCS AGREEMENTS AND OUR HORIZON PCS RESTATED CERTIFICATE OF
INCORPORATION INCLUDE PROVISIONS THAT MAY DISCOURAGE, DELAY OR RESTRICT ANY SALE
OF OUR OPERATING ASSETS OR COMMON STOCK TO THE POSSIBLE DETRIMENT OF OUR
NOTEHOLDERS.
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 restated certificate of incorporation could also
operate to discourage, delay or make more difficult a change in control of
Horizon PCS. For example, our Horizon PCS restated 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 restated certificate of incorporation could discourage any sale of
Horizon PCS' operating assets or common stock.
HORIZON PCS WILL NOT BE ABLE TO RECEIVE THE TAX BENEFIT OF FUTURE LOSSES UNTIL
WE BEGIN TO GENERATE TAXABLE INCOME.
From Horizon PCS' inception until September 2000, we were included in the
consolidated Federal income tax return of Horizon Telcom, Inc. which owns a
majority of our outstanding common stock. Under Horizon PCS' 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 Horizon PCS' taxable operating losses being used to offset
consolidated taxable income. As a result of the sale of convertible preferred
stock in September 2000, Horizon PCS is 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 generates
taxable income.
HORIZON TELCOM WILL BE ABLE TO CONTROL THE OUTCOME OF SIGNIFICANT MATTERS
PRESENTED TO STOCKHOLDERS AS A RESULT OF ITS OWNERSHIP POSITION, WHICH COULD
POTENTIALLY IMPAIR OUR ATTRACTIVENESS AS A TAKEOVER TARGET.
Horizon Telcom beneficially owns approximately 58.1% of our outstanding
common stock on fully diluted basis as of March 31, 2002. In addition, the
shares held by Horizon Telcom are class B shares, which have ten votes per
share. The class A shares have only one vote per share. As a result, Horizon
Telcom holds approximately 84.5% of the voting power on a fully diluted basis at
March 31, 2002. Horizon Telcom will have the voting power to control the
election of Horizon PCS' board of directors and it will be able to cause
amendments to Horizon PCS' restated certificate of incorporation or Horizon PCS
restated bylaws. Horizon Telcom also may be able to cause changes in Horizon
PCS' business without seeking the approval of any other party. These changes may
not be to the advantage of Horizon PCS or in the best interest of its other
stockholders or the holders of its notes. For example, Horizon Telcom will have
the power to prevent, delay or cause a change in control of Horizon PCS and
could take other actions that might be favorable to Horizon Telcom, but not
necessarily to other Horizon PCS stockholders. This may have the effect of
delaying or preventing a change in control. In addition, Horizon Telcom is
controlled by members of the McKell family, who collectively own approximately
60.6% of the voting interests of Horizon Telcom. Therefore, the McKell family,
acting as a group, may be able to exercise indirect control over Horizon PCS.
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HORIZON PCS MAY FACE CONFLICTS OF INTEREST WITH HORIZON TELCOM WHICH MAY HARM
ITS BUSINESS.
Conflicts of interest may arise between Horizon PCS and Horizon Telcom, or
its other affiliates, in areas relating to past, ongoing and future
relationships, including:
o corporate opportunities;
o tax and intellectual property matters;
o potential acquisitions;
o financing transactions, sales or other dispositions by Horizon Telcom
of shares of Horizon PCS common stock held by it; and
o the exercise by Horizon Telcom of its ability to control Horizon PCS
management and affairs.
Horizon Telcom controls approximately 84.5% of the voting power of Horizon
PCS shares on a fully diluted basis. Horizon Telcom is engaged in a diverse
range of telecommunications-related businesses, such as local telephone services
and Internet services, and these businesses may have interests that conflict or
compete in some manner with Horizon PCS' business. Horizon Telcom is under no
obligation to share any future business opportunities available to it with
Horizon PCS, unless Delaware law requires it to do so. Any conflicts that may
arise between Horizon PCS and Horizon Telcom or any of its affiliates or any
loss of corporate opportunity to Horizon Telcom that may otherwise be available
to Horizon PCS may impact its financial condition or results of operations
because these conflicts of interest or losses of corporate opportunities could
result in a loss of customers and, therefore, business. Because Horizon Telcom
will be able to control the outcome of most conflicts upon which stockholders
could vote and because it will have the voting power to control Horizon PCS'
board of directors, conflicts may not be resolved in its favor.
PRESENT AND FUTURE TRANSACTIONS WITH HORIZON TELCOM MAY BE ON TERMS WHICH ARE
NOT AS FAVORABLE AS COULD BE OBTAINED FROM THIRD PARTIES.
In the past, Horizon PCS has entered into transactions with Horizon Telcom
including the leasing of towers by Horizon Telcom to Horizon PCS and the
advancing of cash to Horizon PCS to finance its operations. In addition, Horizon
Services, a subsidiary of Horizon Telcom provides administrative services to
Horizon PCS including finance and accounting services, computer access and human
resources. Although these transactions were on terms that we believe are fair,
because Horizon Telcom currently owns 58.1% of Horizon PCS' outstanding common
stock on a fully diluted basis, third-parties with which Horizon PCS wishes to
enter into agreements or the marketplace in general may not perceive these
transactions with Horizon Telcom to be fair. In addition, because Horizon Telcom
has the power to control Horizon PCS' board of directors, Horizon PCS may not be
able to renew these agreements on terms favorable to Horizon PCS.
HORIZON PCS MAY EXPERIENCE A HIGH RATE OF CUSTOMER TURNOVER, WHICH WOULD
INCREASE ITS COSTS OF OPERATIONS AND REDUCE OUR REVENUE AND PROSPECTS FOR
GROWTH.
Horizon PCS' strategy to minimize customer turnover, commonly known as
churn, may not be successful. 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;
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o reliability issues such as blocked calls, dropped calls and handset
problems;
o non-use of phones;
o change of employment;
o a lack of affordability;
o price competition;
o Sprint PCS' customer credit policies;
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 the
handsets purchased 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
THE FOURTH 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 generally poor holiday shopping season.
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 Federal Aviation Administration 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.1* Articles of Incorporation of Horizon Telcom, Inc.
3.2* Bylaws of Incorporation of Horizon Telcom, Inc.
4.1* Form of Stock Certificate
10.40.3 Waiver Agreement dated May 9, 2002 by and among Horizon Personal
Communications, Inc. (the "Company"), Bright Personal Communications
Services, LLC, an Ohio limited liability company ("Bright") (each of
the Company and Bright, individually a "Borrower" and collectively,
the "Borrowers"), Horizon PCS, Inc., a Delaware corporation (the
"Parent"), those Subsidiaries of the Parent listed on the signature
pages hereto (together with the Parent, individually a "Guarantor" and
collectively the "Guarantors"; the Guarantors, together with the
Borrowers, individually a "Credit Party" and collectively the "Credit
Parties"), the lenders party hereto (the "Lenders"), First Union
National Bank, as Administrative Agent (the "Administrative Agent"),
Westdeutsche Landesbank Girozentrale, as Syndication Agent and
Arranger (the "Syndication Agent"), and Fortis Capital Corp., as
Documentation Agent (the "Documentation Agent") (incorporated by
reference to Exhibit 10.40.3 of Form 10-Q of Horizon PCS, Inc. for
quarter ending March 31, 2002 filed on May 15, 2002).
- -----------------------
* Incorporated by reference to the exhibit with the same number previously
filed by the Registrant on Form 10 (Reg. No. 0-32617)
(B) Reports on Form 8-K
1. There were no Reports on Form 8-K filed by the Registrant during
the first quarter of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON TELCOM, INC.
(Registrant)
Date: May 14, 2002 By: /s/ Thomas McKell
-------------------------------------
Thomas McKell
Chief Executive Officer
Date: May 14, 2002 By: /s/ Peter M. Holland
-------------------------------------
Peter M. Holland
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
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